Monday, October 25, 2010

The Fragile Chinese Communist Party

In our piece “Why Are the Chinese So Afraid of Liu Xia-bao” Yuri YarimAgaev and I argued that the Chinese one-party monopoly is much more fragile than people think. The granting of the Nobel Peace Prize to a Chinese dissident, we argued, was a serious blow that could lead to ripple effects by emboldening others to speak out. This has already begun: Although the event has attracted remarkably little attention, more than five hundred prominent Chinese, almost all of them party members, signed an open letter demanding the end of censorship of the media and internet as a violation of Article 35 of the Chinese constitution. Many of the signers are retired party officials, whose positions are sufficiently elevated that they can be reprimanded only by the Politburo itself. Even more sensational, among the initiators of the open letter are the former head of Mao’s chancellery, the former editor of the People’s Daily, the former head of the central propaganda department, and the former president of the Beijing University for Politics and Law. More people signed their open letter than signed Liu Xia-bao’s Charter 08. At a minimum, this open letter tells us that there are indeed splits between reformers and hardliners in the leadership of the Chinese communist party, which faces a substantial turnover in leadership. If this is the case, China could be nearing a milestone similar to the USSR in March of 1985 when the Soviet Communist Party elected its first reform General Secretary, Mikhail Gorbachev.

Thursday, October 7, 2010

Comment on Michael Warren: Why Germany’s Unemployment Rate is Lower

Michael Warren in his article “Why Germany’s Unemployment Rate is Lower” concludes that Germany’s practice of Kurzarbeit (“short work”) is a primary factor behind Germany’s shrinking unemployment rate. On this, see:

Kurzarbeit has been a part of German labor legislation since the days of Bismarck and the Weimer Republic. It was used on a massive scale in Eastern Germany after reunification, but its use as a counter-cyclical measure in 2008 and 2009 was unprecedented. Some 1.5 million German workers were on Kurzarbeit in this period. The number is currently about 800,000. If all Kurzarbeiter had been unemployed, Germany unemployment rate would almost have doubled.

We can contrast Germany’s Kurzarbeit with the implicit wage contract model used with negative effects by the U.S. auto and steel industries. With Kurzarbeit, a cyclical downturn means a reduction in work hours. Workers continued to be paid their regular hourly wage, but earn less because of the fewer hours. The lower earnings are subsidized around 60 percent by unemployment insurance and other subsidies. In the U.S. implicit wage contract model, cyclical downturns mean layoffs. Laid off workers do not seek other jobs because they are paid well above market wages, and it is better for them to wait to be recalled. Moreover, they receive unemployment benefits to cushion the income loss of the layoff. In both cases, employers benefit by not losing skilled workers who would have to be replaced with costly job searches and training during the upturn.

The Germans are learning that Kurzarbeit is not a panacea. Like U.S. unemployment insurance, it subsidizes not working and makes it more attractive. Like in the United States, political pressure results in extensions of benefits; so that Kurzarbeit threatens to become a permanent feature of the labor market even during upturns. Evidence of this is the fact that Kurzarbeit has spread into economic branches that were not affected by the downturn.

I would venture that Kurzarbeit is only one of several factors that explain the falling German unemployment rate. Other factors that could be equally as important are the growing use of Leiharbeiter (rent-a-workers) and the pretence that employees are independent contractors. Leiarbeiter are “rented” from intermediaries and can be hired and fired at will. Sham independent contractors (a prime example is truck drivers who “lease” their truck from their employer) fall outside of Germany’s strict and cumbersome rules on employee firing.

Why is it that Germany, with its Sozialstaat, has become so innovative in making its labor market more flexible? The German economy relies on export markets and is located next to cheap labor markets in the East. If German firms cannot compete with lower wage markets, firms and jobs leave Germany. There is therefore incredible pressure to find innovative ways to compete in export markets. Formal German labor market rules not only impose huge social benefits costs on employers. They make it very difficult to lay off or fire workers during downturns. For this reason, German companies are reluctant to hire new employees into jobs governed by these rules. Were it not for Kurzarbeit, Leiharbeit, and independent contracting, German unemployment would today be higher than those of the United States.

Germany is, in effect, becoming a dual labor market in which a shrinking number enjoy the vast benefits of the Sozialstaat and a growing number are working in highly competitive labor markets.

In addition to other responsibilities, the author is a Research Professor at the German Institute for Economic Research, Berlin.

Wednesday, October 6, 2010

Yes, Putin Fired Luzhkov

Some observers have written that Russian President Dmitry Medvedev was responsible for the September 28 firing of Moscow Mayor Yury Luzhkov. They interpret it as a bold move on Medvedev’s part to assert himself and lay the foundations for his presidential campaign in 2012.

I still stick to my original interpretation: Luzhkov was fired to remove the most viable alternative to Putin’s return to presidential power. Luzhkov was fired by Medvedev for the simple reason that only the Russian President has the authority to remove regional leaders. Putin assumed this ant-democratic authority during his presidency, and it is now being exercised by his proxy, Medvedev.

There is one simple reason why Medvedev will not be the President of Russia in 2012. He is not a member of the KGB club that runs Russia today. Putin installed former KGB officers in the key positions of government and industry to create a “KGB state.” In Russia, all changes at the top mean a reshuffling of positions of wealth and power. If Medvedev were to become president, a “purge” would occur. Medvedev would put his people in place and Putin’s KGB clan would be the losers. They will not allow this to happen.

The only interesting question is the timing of the Luzhkov firing. He was able to remain in this position so long because he was popular among Muscovites. He might be corrupt but he got things done. The summer forest fires around Moscow dented his image as an efficient administrator. His popularity rating had sunk to thirty six percent by summer’s end. The timing was right for his removal and Putin moved swiftly.

Although Luzhkov vowed to fight on, his actions after his firing are telling. He resigned from United Russia, a party he helped found, and he is complaining loudly about the sorry state of Russian politics, without really doing anything. These actions underscore the complete monopoly of power of the Kremlin.