What the Varieties of Capitalism framework does and does not tell us about the troubles of the Big Three

By Vera Šćepanović, CEU PhD Candidate, Political Science

Now that the heat of debates over the US auto industry bail-out has somewhat subsided, here are a few belated thoughts in response to the earlier post “What does Varieties of Capitalism have to say about the bailout of the U.S. auto industry?” (by Kristin Makszin). There’s always something suspicious when a theory comes together so smoothly. Indeed, according to the Varieties of Capitalism (VoC) framework, automobile industry should not have existed in the US at all. To the extent the theory relies on sector-specific properties in the division of labour it envisages between coordinated and liberal market economies (skill specificity, pace of innovation, investment time horizons etc.), a mature manufacturing industry does not sit well with a dynamic liberal market environment which ought to support radical innovation, easily transferable workers’ skills and is characterised by a volatile investment environment.

Now, the demise of Detroit looks like a final victory for the theory, especially since the US Big Three seemed to display exactly the characteristics of a firm embedded in a coordinated market environment: close relations with the trade unions, long-term support of the workforce (instead of the supposedly typical adversarial labour relations and flexible fire and hire policies), and little display of radical innovation (e.g. few “greener” cars). And we know from the VoC that complementarities between the national institutional environment and firm operations are the key to success. If the complementarities fail, somebody is bound to suffer. The debate still rages whether it will be the firm or the national institutional environment.

But the question is, why did the Big Three let themselves be tricked into this trap, why did the companies that have been through the thick and thin of the international markets for the last hundred years fail to see what a handful of academics understood so clearly?

(And the Japanese, don’t forget them. The well-justified worries over Detroit seem to have made everybody forget about “the rest” of the US auto industry – 2008 was a bad year for the carmakers all around, but apart from that for all we know the East Asian transplants in the US have all been rather alive and well. Which sort of spoils the possibilities for sectoral generalisations. True, they found a different way to make cars – the one that calls for fewer skilled workers, no unions and more adversarial labour relations. All that means for the VoC framework is that the I-make-machines-you-make-chips division of labour between CMEs and LMEs may have been a tad too rough if usefully illustrative shorthand.)

The answer, I suspect, lies in the incompleteness of the framework, which is essentially that of a production model. There’s one way in which the stubborn clinging of the Big Three to their big expensive cars and big expensive workforce makes sense, and that’s if we conceive of it as a giant, if restricted, Fordist scheme to secure the market. Which only makes sense if we believe that these multinational juggernauts are that dependent on the US market. Surprisingly enough, that really seems to be the case.

Contributions of North American and rest-of-the-world operations to GM’s global net profit, 1960-2007 (compiled from annual reports, based on Bruno Jetin:2004)

In the example of GM, the foreign operations provided a small if positive contribution to its global profits since the 1960s, and when they plunged with the advent of the two oil crises the gains on the national market were more than enough to offset the losses. It was only at the end of this period that GM started to pursue more aggressive expansion in the foreign markets which paid off during the general recession of the early 1990s, but already since the mid-1990s the national (US) operations started to regain primacy, while the international front appeared was on the retreat. Only since 2005 the contraction of the US market and the success of GM’s Chinese operations have been changing the picture a little. Still, in 2007 GM sold 4.5 million cars in the US, which is only a few less than in all of the other countries of the world put together. The situation is very similar with Ford (see the graph below). Simply, the US carmakers have always relied heavily on their home markets, and the strategy has paid off. Then in 2005 something went amiss (probably with the beginning of the oil price hikes) and the three years since have been too little to make a significant turnaround. The question is, what kind of a turnaround should it be?

Contributions of North American and rest-of-the-world operations to Ford’s global net profit, 1960-2007 (compiled from annual reports, based on Bruno Jetin:2004

The VoC and the concerned observers suggest one direction with several routes: get rid of the overpaid workers (which would imply endangering the market potential even further); get rid of the costs of supporting workers’ purchasing power while keeping the market afloat (presumably by somehow transforming the national institutional environment to externalise the costs of provision of healthcare, unemployment benefits and pensions); or innovate and move into new markets (start making green, hybrid etc. cars). The problem with the first two is that they may take time and be socially difficult to execute. The problem with the latter deserves some elaboration.

The financial crisis of 2008 caused an awful drop of the car sales in the US across all market segments. The small car segment suffered the least (only – 1.1%, as compared to the -18% in the industry), but the small car segment in the US market represents only about 15% of the overall sales (as compared to West European market where the market share of the equivalent segment is 27%). The fact that the US manufacturers choose to focus on the bigger, more expensive and less fuel-efficient cars is therefore the function of their dependence on the US market with its peculiar characteristics (which, incidentally, may also have limited their success internationally, given the different preferences in other markets, and has also made them more vulnerable to the downturn which took a greater toll on the large and luxury segments). Forcing the Big Three to rethink their production strategy and start making smaller, fuel-efficient cars or innovate in the direction of hybrid and electric cars in exchange for the bailout will only work if there is a market to sell them. And taking a cue for Toyota’s decision to delay the production of its Prius hybrid in the US indefinitely, one suspects that the times are not propitious.

This is all not to say that the Big Three are not ripe for restructuring or that the humanity is not in a dire need of a cleaner solution for transportation. But the two may not go together as smoothly as we would like to think they should. The Varieties of Capitalism is a story of how every wheel of the system comes together like clockwork, but we just might be seeing them grind each other to halt.

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Who loses in the economic crisis?

By Katka Svickova

As the crisis progresses from the financial into the real economy and starts hurting the businesses as well as their staff, what is a better defense of an individual against its vagaries: his or her brain- or muscular power?

At the moment, we do not yet have a clear picture about how badly hit in terms of real production cuts and subsequent unemployment the Central European economies really are and will be by the global financial crisis. Yet there are already a few signs of who is affected...

In the Czech Republic, especially the trouble of the car and car part manufacturing sectors are put into spotlight. Skoda Auto, the Czech Republic's largest car manufacturer and a subsidiary of Volkswagen since 1991, has cut down production. The Czech Automotive Industry Association predicts that nearly 10 percent of the country's auto workers, or around 10,000 people, could lose their jobs within six months. So far, however, the redundancies started with contractual manual workers, partially „imported“ from countries like Vietnam and Mongolia to overcome bottlenecks on the domestic labor market. Also in the case of the glass, textile and logistics branches, the unemployment hit predominantly manual workers. In the whole Czech economy, up to 40 000 more redundancies are expected in 2009. Conversely, Slovakia, called also the Detroit of Europe, has not yet heard of any mass lay-offs by the automotive investors or in any other economic sectors.

At the same time, reading these forecasts, one should not forget that the seasonally adjusted unemployment rate in the Czech Republic was 4,4 % in October 2008 (Eurostat) – one of the lowest in the EU. Besides lay-offs, there are also many vacant positions on the labor market (albeit their number is lower than a few months ago). Qualified and skilled IT workers and engineers are still in high demand.

Also in Hungary, which was hit very hard by the financial crisis, the real economy started to feel the pain. National Labour Service (AFSZ) reported that there were 420 000 job-seekers in October 2008 whereby their number increased by 21 000 in a single month. As of February, further 14 000 employees could lose their jobs besides the already announced lay-off plans. Firms cutting their staff are for example Laird Technologies (electronics component manufacturer), Suzuki, Foxconn (manufacturer of spare parts for mobile phones), Videoton or General Electrics. In all, the crisis is felt most in the construction, automobile, electronics, IT and equipment manufacturing, tourism, hotels and processing industries.

Hungarian government plans to linder the effects of the crisis on workers by creating jobs in public work programs: in 2008, 25,000-30,000 poor and jobless Hungarians had temporary work and further 50,000-90,000 jobs should be created. This indicates a message about the skill level of workers made redundant – these public work programs can be hardly dominated by highly-skilled positions. Moreover, engineers, IT graduates and other tertiary educated workers are still demanded by employers.

Polish economy is also bracing for lay-offs in its glass, steel, chemical, automotive and electronics branches. At the same time, exporters in Poland were threatening to lay off staff already in summer 2008 (so before the economic crisis). According to forecasts, the unemployment may exceed 10 % - but this is hardly a steep jump compared to 9,6 % in June 2008. One of the sources of increased unemployment is going to be, according to expectations, a return of a part of the large Polish emigrant workers pool from Western Europe.

In all, at this stage, it seems that the adverse development in the real economy has not yet bitten the well-educated core of the labor force in Central Europe. Rather, it will probably lead to tuning down of the outcries about the scarcity of welders, metal turners and other manual professions, and the need for more young people to learn these professions.

In the end, therefore, the cloud of unemployment might have a silver lining: a clear message to the policy makers as well as individuals that investment into people´s brains has good and stable returns. Moreover, this kind of investment may not vanish into thin air so easily, like the billions sunk in sub-prime financial investments did.

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Russians are strangling Europe

By: Karel Hirman, Slovak energy policy expert

[Original published in Slovak on 7.1.2009, translated by Andrej Nosko. Translated and republished with the permission of the author.]

Picture by: Shooty. [Text: "So that you don't forget, who is the boss here"]

January 2009 marks the end of 40-years-long fair and mutually beneficial energy cooperation between Moscow and Europe. From now on, European customers must be well aware that the Russian partner is not only trading with them, but his priority is promotion of geopolitical interests of the Kremlin. Vladimir Putin, already in March 2000 declared, that "Our work (meaning the export of oil and gas) will be driven by our geo-strategic interests!" Since then, in a targeted and very effective way, the Kremlin uses energy cooperation and the supply of raw materials for the promotion of its foreign policy interests. Brezhnev's doctrine of limited political and [national] security sovereignty for Eastern Europe was replaced by Putin's doctrine of limited energy sovereignty.


The argument that it is primarily a trade dispute between inadequately paying Ukraine, and tough Russia is ultimately wrong and misleading. Regular followers of these issues known, that these tensions have always been present between Ukraine and Russia. But it is only since February 2004, when Gazprom for the first time deliberately disrupted gas supplies to Belarus, as well as a further transit to Poland and Germany, that switching off gas and oil pipelines has become a regular Russian practice. This has nothing to do with civilized business, because the question of price and the letter of the agreement is always a matter of agreement of both parties, and the third parties cannot suffer due to this. THE KREMLIN AND GAZPROM VERY WELL KNOW THAT WHENEVER THEY CLOSE VALVES TO UKRAINE OR BELARUS, THEY ARE CLOSING THEM FOR EUROPE AS WELL. The subsequent Russian "P.R." aerobics about how evil Ukrainians steal transited gas are spiteful, because in the given technological circumstances, Ukrainians simply do not have enough gas to power their transit compressors, and at the same time to balance their pipeline system. Targeted and repeated discrediting of Ukraine as a reliable transit country for gas and oil, should compel the Europeans to swiftly agree, and primarily to foot, the huge and unnecessary bills for the construction of new pipelines through the Baltic and Black Sea.

Are today's events surprising? For a considerable part of the EU they certainly are. European leaders, particularly those from key countries such as Germany, France and Italy, often prefer narrow commercial interests over international security interests of not only their EU partners, but even of their own citizens.

The real shock is experienced by those countries and governments that still have not done anything for the diversification of gas and oil, and remained totally dependent on the Russian supplies. All Slovak governments, and managements of SPP [Slovak Gas Company] up to date, have failed in this area. Let me be personal. For the past ten years, I have repeatedly emphasized the gravity of this situation in my various articles, analyses, as well as numerous speeches at various conferences, and personal meetings with various politicians.
For years, I have been frustrated over the fact that almost none of them considered this a problem. I was disappointed that representatives of investors repeated phrases about the reliability of Russian supplies, while they knew that the absolute priority of their domestic companies has always been diversification of supplies so that no supplier could blackmail them.

The responsibility for the situation in which we had to declare the emergency, and a real energy crisis is around the corner, is not borne only by Gazprom, but also by all responsible in Bratislava, because they were not properly prepared for this situation.
The hard lesson for citizens and businesses is, that not artificially low domestic prices should be the priority, but fair prices reflecting the highest possible reliability and continuity of supply from abroad.
What's the use of low price, if the pipe is empty? The case of diversification is similar to insurance. It is costly, but if my life, property or business is to be ensured against unexpected events and unfair partners it's a necessary expense. This is one but not the only reason why we have to urgently review the reality of our recently approved energy security strategy.

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Anti-crisis policies in knowledge-intensive economies

By Ugo Pagano, visiting professor at Central European University. web.me.com/ugopagano

A long period of neo-liberal academic dominance is coming to an end. Unfortunately, it is being wiped out by a difficult economic crisis and not by an end of the inertia of cross-citations-based academia. Some “old theories” (which were academic pariahs until a couple of months ago) offer the main intellectual framework for anti-crisis policies. Re-considering past theories and policies is certainly a very useful re-starting point. However, policy suggestions should not ignore how much the economy has changed since the thirties. At that time, the main focus of policies stimulating aggregate demand was on traditional infrastructures, like bridges, roads etc. In a modern knowledge-intensive economy, the focus should be different. Policies should exploit the new opportunities that contemporary economies offer for Keynesian-type measures.


The knowledge-intensive economy is characterized by an unprecedented share of privately owned knowledge (or, in other words, by widespread monopoly rights on intellectual assets). While global institutions (WTO and the related TRIPs agreements) have made private intellectual property more profitable, no global institution has increased the convenience of public intellectual property. The present (and, even more, the missing) institutions of the global economy have made it convenient to over-privatize knowledge and over-monopolize the economy by an intensive web of intellectual property rights (IPR).
Intellectual private property rights (IPR) can be a cause of economic stagnation. Monopoly prices restrict production. The drive to acquire monopolies may initially stimulate investments but, after a while, the stimulus is increasingly offset by the fear that the use of new knowledge may be blocked by monopolies on pre-existing complementary knowledge (the so called anti-commons tragedy). Moreover, IPR involve asymmetric arrangements for rich and poor countries. While developing countries export their commodities in competitive conditions, many firms of the first world countries can sell knowledge-intensive goods under the monopoly shield granted by IPR. Although being sold as a necessary ingredient of free trade, IPRs offer stronger protection than the strongest protectionist tariffs. They grant total protection not only for the home market but also everywhere else in the World. Similarly to high tariffs, they can make the economic crisis only worse.

The present institutions of the knowledge-intensive economy are likely to become one of the causes of a prolonged stagnation. However, the knowledge-intensive economy offers great opportunities for more effective Keynesian policies. Instead of being used to nationalize inefficiently the assets of firms producing private goods, Keynesian policies could be used to decrease the monopolization of knowledge and to transfer efficiently knowledge from the private to the public sphere. The WTO, which has made intellectual private property more convenient, should be balanced by the institution of a strong WRO (World Research Organization) which helps to make intellectual public property feasible whenever it can better foster development. Countries should acknowledge that knowledge is a non-rival good which should be treated as the most precious and specific global common of humankind. In Jefferson’s vivid image, knowledge is like the flame of candle: lightening one more candle is not diminishing the flame of the other candles. By contrast, allowing others to contribute to the fire increases the shining of each candle!
Anti-crisis policies should include the funding of public research infrastructures.
This funding should be coordinated at supranational level to avoid the free riding problems among countries, which are presently fettering the development of investments in public research.
More important, in the present crisis, the funding can immediately take the shape of a public acquisition of well-established IPRs from private firms. The effects of this policy would go well beyond those entailed by many current anti-crisis measures:
In the first place the funding does not involve a nationalization of the firm or the use of taxpayers money without any counterpart. By contrast, while the IPR is paid at its private value, it is transferred in the public arena where it has a greater public good value and decreases costs for many producers.
Secondly, financial support is granted to firms who have proved to be innovative. A powerful stimulus for new investments is given to the most efficient firms. On the one hand, these firms receive fresh funds but, on the hand, having sold the old intellectual property rights, they face tough competition. Therefore, they have an urgency to invest in the production of new intellectual assets, which boosts aggregate demand.
Thirdly a monopoly price for the asset is replaced by the lower competitive price, which has again a positive effect on aggregate demand.
Finally, the “anti-commons” problem is eased; everyone can now invest in new knowledge with the awareness that complementary pre-existing knowledge is less likely to be owned by other firms. The policy decreases the costs of future risky transactions necessary to use the fruits of innovation. While the immediate funding goes to incumbent innovative firms, which may often belong to the richer countries, the increase of the knowledge freely available to everyone has widespread beneficial effects and contributes to the overall development of the world economy.
The multiplicative effects, which we have indicated, are stronger than those traditionally associated with standard Keynesian policies: their total effects are more powerful both on aggregate demand and on the level efficiency of the economy. An investment “super-multiplier” can be made to work in knowledge-intensive economies

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On Roma minority in East-Central Europe: From Political Correctedness to Balanced Employment Activation Approach

by Lucia Kurekova

Roma minority is among the most populous and the most problematic in the East-Central European countries (CEE). In spite of various work activation attempts and welfare tightening efforts implemented by the CEE governments in the near past, Roma population has largely remained out of the labor force. This has been so in spite of buoyant labor markets and vast labor shortages which were troubling domestic and foreign-owned employers. Logically, in the situation of high labor demand caused both by successful and rampant economic growth as well as by high rates of out-migration of human capital from CEE to the UK and Ireland, one would expect improved possibilities of employment even for those alienated from the labor markets during the periods prior to the EU accession, such as Roma.


While Roma are certainly among the disadvantaged (largely due to their educational and skill levels) and discouraged (not looking for work) workers, hard data about the extent and the character of their joblessness are scarce. Quantitative information about Roma in CEE which would be comparable to the majority population is nearly non-existent. This is so largely due to the push for political correctedness among the EU and other international authorities on the Roma issue which has in turn illegitimized the inquiries on Roma ethnicity in survey questions. Equally scarce is the estimation of the possible impact of various policies and labor market developments on Roma social inclusion or exclusion.

To fill the gap in data about their Roma citizens and to understand better the forms and channels of Roma labor market exclusion, the Czech government together with the World Bank carried a unique research project in order to estimate how Roma fare in the Czech labor market and to determine labor market barriers in their complexity. The Czech Roma World Bank study in my view breaks down a number of stereotypes, re-iterates some of the hunches which have not yet been robustly empirically confirmed, offers a complex assessment of the problem and – most importantly - a series of rather provocative policy recommendations.

On the basis of comprehensive survey carried out in the marginalized localities and targeted at the Roma, the Report finds – perhaps unsurprisingly – that Roma living in marginalized communities in the Czech Republic continue to face severe and multiple forms of labor market exclusion. The empirical findings put forward nuanced evidence on the multifaceted nature of Roma labor market marginalization. Starting with pointing out that Roma situation surpasses the categories of employment versus unemployment and moves to the arena of discouragement (not searching for work), the survey confirms that Roma suffer from low educational attainment. Leaving aside the reasons for this outcome, it has been found that majority of the Roma lack even basic functional and numerical literacy which in effect makes them absolutely unsuitable for the knowledge-biased new employment opportunities emerging in the CEE economies. These facts are complemented by strong gender and generational aspects to Roma labor market exclusion. While a good share of Roma men are employed (mostly in precarious and casual jobs), this is hardly the case for Roma women. Most strikingly, the survey results have revealed a strong generational dimension of the problem – there is a mounting evidence of the worsening of educational attainment and a significant downward mobility among Roma raised during transition.

Drawing Roma into education and into employment – the goals that the governments in the region have been trying to follow – scores again as a clear first-hand solution to the problem: the level of educational attainment, acquired skills and previous on-the-job experience predict well the success of Roma on the Czech labor market. In the Czech case, literacy and numeracy skills increase the probability of employment by a factor of two. If we seem to know where the solutions lie, the question emerges why have the attempts seen only very limited success so far?

The World Bank suggests that the culprit should be sought in (lack of) the quality and targetedness of the policy interventions aimed at Roma. To be precise, the limitations stem from the fact that the policies and approaches aimed at employment activation and labor market inclusion have not been sufficiently aimed at Roma. The policies have failed to recognize multifaceted nature of their distance from the labor market (lack of skills, welfare trap, heavy indebtedness, mismatch between jobs and skills, other labor market barriers) and to individualize the employment services. Welfare adjustments and public works program have not proven effective in providing longer-term solutions and bringing Roma out of poverty trap into labor market. The World Bank calls for a more balanced policy activation approach based not only on the responsibilities of job seekers but also on enhanced performance of the Labor Offices which need to focus on client profiling, integration of services in order to address multiple disadvantages, more culturally sensitive provisions and the introduction of performance measurement and evaluation of public servants. The policy adjustments further call for an enlarged partnership with private and NGO sectors and the enhanced focus on the next generation of Roma youth.

The fact that the recommendations coincide both in timing and in content with the basic principles and interests of the EU structural funds allocation is very good news for the CEE governments.

Reference:
Czech Republic: Improving Employment Chances of the Roma. Report No. 46120 CZ, The World Bank. October 2008.

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What does Varieties of Capitalism have to say about the bailout of the U.S. auto industry?

By Kristin Makszin

The different perspectives on whether or not to bailout the U.S. auto industry vary according to the alleged cause of the ‘crisis’ for the auto industry. Was this crisis caused by recent economic events (i.e. financial crisis, fall in consumption), bad decisions by the big three company leadership over time (producing SUVs, not fuel efficient automobiles), burdens of health and pension commitments to retired auto workers (a result of organized labor), political decisions, unstable oil prices, …?



Obviously there are multiple reasons why the auto companies are in the situation that they are currently in. But the problems in the U.S. auto industry are not new. Arguably, the current challenges are a continuation of a thirty year story – or perhaps an even longer one. The many events on this thirty year time line suggest that the U.S. auto industry is fragile. Which raises the question: can it be saved? And what would it take to save it?

Analysis of the current situation of the U.S. auto industry emphasizes the importance of the political and economic institutions that form the context in which businesses are embedded. Auto production began to move away from Detroit (to other countries and even other parts of the USA)—many argue—because of the high level of organization of auto workers in Detroit. But the decline of the auto industry in Detroit was also assisted by shifts in the global economy that allowed car production to increase in other parts of the world (the U.S.A. lost its comparative advantage in car production). Further the big three auto producers (GM, Chrysler, Ford) fell behind in the newest and most important innovation: greener cars. The reason that the U.S. auto industries fell behind in the ‘greening’ process could be blamed on the decisions of company executives, the American consumer, U.S. foreign policy, … But it is clear that NOW is time for the auto industry to innovate and the big three are already behind.

According to the Varieties of Capitalism (VoC) framework, the U.S. economy relies on complementarities between deregulated labor markets, innovative product markets, competitive relationships between firms, a financial system where firms raise money from equity markets, and an educational system promoting general skills. The auto industry seems to be the exception to the liberal market economy framework. The strength of labor is impossible to ignore, thanks to the United Auto Workers. It would be hard to describe anything that happened in Detroit in the last 30 years as a part of innovative product markets. The big three have formed a ‘cooperative’ relationship in begging for the bailout. From a Varieties of Capitalism perspective, it does not seem surprising that the U.S. auto industry could not survive without the complementary institutions. Now that the equity-based financing is not sufficient and the executives of the big three (and many others in Detroit) argue that government funding should be used to keep these business alive-- because they are "too big" to fail.

Some Republican Senators (among others) have suggested that part of the bail out should demand pay cuts from the United Auto Workers and that innovation should be forced towards a more environmentally friendly car. Interestingly, the Republican Senators are addressing two other dimensions of the auto industry that seem to be mismatched with the liberal market economy capitalism that is predominate in the USA. But, from the lens of the varieties of capitalism framework, it is clear that the bailout package (even with all potential additional stipulations) would be incapable of making the auto industry work in the absence of complementary institutions. So perhaps it is time for Schumpeterian ‘creative destruction’ in Detroit.

From the streets of Detroit, the need for a bailout for the auto industry is clear. Too many lives and companies depend on it. If the big three are allowed to go bankrupt, Detroit will suffer and there will likely be strong ripple effects. But it seems clear at this point, a short term bailout is not enough. Drastic changes will be needed if the auto industry will survive in Detroit. If the big three stand a chance, they must use the advantages of their (supposed) institutional context to be the leaders in innovation towards greener cars. But it might already be too late. The only thing that seems certain for Detroit is that everything will change. Either the big three automakers will face real reform or they will continue their slow descent until U.S. auto production is only a memory.

The effects of this for Detroit are clear. But what will this mean for automakers in Europe and Asia?

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Nationalization of energy companies (Slovakia not Venezuela this time)

By Andrej Nosko

That Mr. Hugo Chavez, Venezuelan president, is not too 'fond' of foreign investors is no secret, but that he has a zealous follower in the fastest growing economy of the EU, Slovak Republic, is not that well known. Slovak Prime-minister, Robert Fico is recently gaining attention for his plans of restoring full state control, and ownership over (49% of) previously privatized assets as his way of winning (?) the price war against the partly state-owned gas supplier. The previous government of Mikulas Dzurinda (and Finance Minister Ivan Miklos), has succeeded in putting Slovakia on the global investor map, and provided solid basis for the current economic growth. In 2002, this government has also sold 49% 0f Slovak gas company, SPP - previously integrated (now legally unbundled) to the Slovak Gas Holding B.V., a consortium of Gaz de France and E.ON Ruhrgas. The remaining 51% of SPP's shares are held by the Slovak National Property Fund.

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"Our relations are and will be special Dmitry Anatolyevich"
"You have nothing to do with it"

"Bad, bad capitalists are responsible for the rising prices of gas"
"And Miklos"
"And Dzurinda"

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Prime minister Fico, who in line with his political philosophy, has vocally opposed any and all privatization, is now, at least verbally, trying to get hold of the previously privatized assets, and calls for limiting the scope of private entrepreneurship in the country. Be it in the health care, pension, or energy sector. In this post I focus on the case of gas company SPP (although the story of Transpetrol deserves some interest as well). The current Slovak government doesn't believe in markets, and especially not in those in energy sector, and would like to dictate prices, and conduct social welfare policy by digging into the private pockets of foreign investors. To the calls, that prices of gas are into large extent dictated by Russian Gazprom, and SPP has to reflect rising prices on the wolrd markets Fico remains silent. When asked why Fico's government does not negotiate better prices of gas for Slovakia, he only replies that they would be stupid to do so if there are foreign co-owners to cover the costs of subsidizing the prices as well. The above cartoon says it all.

There are following options signalled by Mr. Fico to his co-owners of energy sector companies:

1. either the private companies succumb to the political decisions (sometimes conveyed via the energy regulator) to keep their prices artificially low, conduct investments as Fico's government wishes, or


2. their assets will be nationalized (threats to, SPP, Enel (EN: subscription required) article in SK), or
   
3. the government changes the law in such a way to get the company to do what they want, or


4. they sell their share back to the government (at the price they bought it for 6 years ago)
   

"Independent" regulator as a means of social policy
The story is not new. Chairman Fico, has been opposing the privatization since it was on the agenda. This is not incongruent with his party line. Since his party SMER got into the government, Fico has been struggling to gain control over the 'monopolies,' and the economy as a whole. The 'independent' regulatory body URSO (Regulatory Office for Network Industries), cannot be any longer seen as independent. To illustrate this point, we can quote the chairman of the regulatory board Jozef Holjencik, and his reaction to the alleged using of the regulator to promote social policy: "simply, it was interest of the state to protect them [households and small companies]. We respect that." That the work of the Slovak regulator is under political pressure was recently pointed out also by Blahoslav Němeček from the Czech regulatory authority during a recent conference in Bratislava.

Fight against 'the bad, bad capitalists' as a political marketing
Fico, was using the anti-capitalist rhetoric of class struggle against the corporations to get elected, and has never approved of the privatization (although very much needed for financing of the economic reforms (he did not approve of those either)). The price war (leaving the question whether he actually means it or its just a strategy of political marketing) of the government and the foreign investors in SPP has had so far three phases:

1. Verbal threats of nationalization (August 2008)
   
2. Attempts to change the conditions of privatization contract via change of legislation
   
3. Concurrent Buy-back offer and change of Business Code (November 2008)
   

First the Prime minister has stepped up his attacks on the company during the summer, when he remarked: "We are loosing our patience. I would like to remind all foreign owners of energy monopolies, that we have Artcile 20 of the Slovak Constitution, which says that in the public interest, a thing (sic!) can be expropriated." (leading constitutional lawyers have since questioned the possibility of appropriation of shares as having no basis in the costitution) Meanwhile, the prices of gas imported from Russia have risen, following the general increase of prices on the global markets (prices of gas follow prices of oil with a time delay of few months). Therefore, SPP has continued filing requests for permission of price increases from the regulator. In November, during an extraordinary session, Fico's government changed the law no. 513/1991 Col. (Commercial Law) in order to change the internal functioning of the company to affect how the decisions inside the company are made.

Although the foreign investors have minority of shares, at the time of privatization, they were given managerial control over the company - an element that has been a thorn in Fico's side since then - he has attempted to change the business law in order to change the conditions of the privatization contract, since that hasn't work out; he has threatened to expropriate the company, or offered an unrealistic buy-back at previous price (TA3, Téma dňa, 17.10.2008, 19h55) and finally succeeded in changing of the law (TA3, Téma dňa 04.11.2008, 19h55). Previously, an application for price increases to the URSO was a decision of the management. Now the general assembly of all stakeholders has to vote on the decision - thus state (with its 51% of shares) can block such decision.

Mr. Fico's argumentation is quite surprising, according to him (Téma dňa, 17.10.2008, 19h55), companies should follow the political decision of the government, or sell their shares back to the state at the original value (of 2002). Nonetheless, when the reporter asked him how this operation would be financed, prime minister only replied that he, "cannot say how this would be done, since they would do it in a similar way as buying back of Transpetrol (from Yukos Finance), but he cannot share details, in order not to threaten the Transpetrol buy back operation."
It is also important to remind in this context, what will happen according to Russian media (article in Russian, article in Slovak), after Slovak government buys back shares of Transpetrol from Yukos. If the Russian media is better informed, they might be handed to Russia, I have observed this eventuality already at the end of the previous post.

Absolutely surprising is how prime minister Fico, suggests to the co-owners of SPP to cross-subsidize the sales of gas. Pointing out the fact that SPP group is generating profit, nonetheless, he is indirectly hinting that SPP should subsidize the prices for households from the income from the transit-generated profits. The logic of this might be surprising to those in the EU, that are well versed in the Energy legislation. Slovak prime minister, although aware of this, is trying to push SPP to figure out how to bypass the anti cross-subsidization legislation in order to lower the prices for households. In the context, when the chairman of the regulatory board of URSO Jozef Holjencik also thinks that unbundling doesn't solve anything and only leads to higher prices (sic!), this comes at no suprise.

Finally, when a journalist asked, why state doesn't use its dividends (from the 51% shares) to cover for the protection of households, and to conduct the social policy directly, Fico only responded: why should only state cover for the costs of the household subsidies, [...] and if there is a 49% foreign shareholder, [...] they [state] are not stupid to cover it. (sic!)

Read more on Nationalization of energy companies (Slovakia not Venezuela this time)