It’s a pity that Russia has not made much progress in the last decade. Seven years ago I published an article on Russia where I compared Putin’s reforms to building a Potemkin village. If published today, the article would still be an accurate description of Russia. At that time, my points seemed perhaps too harsh as Putin had served as the president for three years and Russia was in the middle of economic recovery. However, the recent special report on Russia by the Financial Times makes similar points.

Putin’s social contract for delivering increasing living standards in exchange for political passivity is no longer working. This outcome is not surprising given that the contract is based on something so volatile as the price of oil. No wonder that the Kremlin has decided to engage in the expansive interpretation of continental shelf and seeks opportunities for oil production in the Arctic.

Most importantly, citizens do not think that economy is improving and middle-class savings have been exhausted. Some experts argue that Russia looks more and more like the Soviet Union and point out similarities with the Brezhnev era. Sure, the GDP and real incomes doubled in the last decade. But this achievement had little to do with good governance and economic reforms. The growth relied on oil exports which created complacency and reluctance to carry out both economic and political reforms. Money from oil exports was used to buy political support and keep “semi-feudal” governance structures in place.

As the Financial Times points out “Kremlinology” is back in fashion as experts are looking for clues whether Putin or Medvedev will run for the president in 2012. Something as important as the choice of next president is characterized as a decision between two people. In this context, the description of governance process as a semi-feudal would be understatement. It is simply feudal.

The debt crisis suggests that not much has changed in Greece since the first performance of the Oresteia in Athens in 458 BC. Similarly to the Oresteia, there are no good choices available. Whatever path is chosen, politicians will be tormented by the Furies making it impossible to have a peace of mind. You will be damned if you do, damned if you don’t. Greece is cursed.

The choices are complex and difficult because it is not a temporary crisis of liquidity but that of solvency. Throughout the last decades Greece has not been able to raise sufficient government revenue to match its growing expenditure. The constant gap between expenditure and revenue was exacerbated by the financial crisis. As Dr. George Pagoulatos, Associate Professor of Politics at Department of International and European Economic Studies of Athens University of Economics and Business, pointed out in his presentation on March 24 at Harvard University: “This is crisis of our own doing.”

According to Dr. Pagoulatos, Greece lived through “the decade of complacency” after the euro entry in 2001. There was rapid credit extension because interest rates were lowered and it was cheaper to borrow. This concealed structural weaknesses of the economy. GDP growth relied on consumption which was fuelled by bank credit. Dr. Pagoulatos argued that this is really a crisis of Greek economic model.

The nature of crisis shows that Greece has operated like a huge socialist enterprise under what Hungarian economist Janos Kornai called “soft budget constraint”. The decision-makers have not had incentives to impose financial discipline because government was always able to issue more bonds with low interest rates in order to finance its debt. There seems to have been implicit assumption that if the situation turns worse, then assistance can be given by fellow eurozone governments. Dr. Pagoulatos pointed out that there is no rationality in budget process of many Greek government agencies. For example, public hospitals have accounting problems and do not submit balance sheets to government. Similar problems exist in local governments. The situation is made worse by wide-spread corruption.

The key to understanding the crisis and offering solutions is to figure out how to change incentive structure of and institutional constraints faced by Greek decision-makers. Dr. Pagoulatos argued that “Greece was not adequately monitored and sanctioned by the EU and the Greek government did not receive enough pressure from the EU.” This sounds like blaming murders in the House of Atreus as characterized by the Oresteia on the Trojan War. There might be indirect connection but this is not a cause of the tragedy.

Certainly, EU governments should have enlightened self-interest to assist Greece. Many of their financial institutions hold Greek government bonds. Greece is a small country but its crisis may have contagion effects on other EU countries. For instance, the Asian financial crisis in 1997 started in Thailand and spread from there to larger economies such as Indonesia and South Korea. However, at the same time EU governments must not create moral hazard and keep in mind that the whole Greek economy needs fundamental restructuring.

Most importantly, many macroeconomic analyses of the crisis ignore basic political economy. The root cause of the crisis stems from the nature of Greek interest groups. These groups are militant and narrow-minded demanding fulfillment of their pockets without any consideration of the consequences of their actions on overall economy. Greek politicians have found it easier to cave in. They have raised public sector wages, created more jobs in public sector and increased benefits. No wonder that government increased wages and pensions by 10.5 percent in 2009 – even if signs of the crisis were hard to ignore at that time.

It is hard to imagine that IMF and EU can impose conditionality, which would fundamentally alter this existing political economy equilibrium. Hence, the change has to come within Greece. The internal devaluation by cutting wages by 20 % or more could bring about “Creative Destruction” and get the Greek economy out of death spiral. The Oresteia is untypical tragedy because Athena intervenes and the play ends on a happy note. Why shouldn’t the Greek economic tragedy have a happy ending?

Is the Left taking over Germany? Is Germany becoming more isolationist? Is the country returning to the 18th Century provincialism? According to Jacob Heilbrunn’s article in the National Interest, the answer is affirmative to all these questions. However, I find this beautifully written characterization of modern-day Germany puzzling. This perspective seems to be suggesting that Germany is almost about to become another Italy – except with better mass market car production. Let me point out some points about the beauty of Germany capitalism.

Free market supporting Free Democrats gained seats in the 2009 parliamentary elections. Center-right Christian democrats did much better than their former coalition partner Social Democratic Party. The results of last elections show a strong support the center-right political agenda despite of the financial crisis. The success of the extreme left party Die Linke stems from the weakness of Social Democrats and populism of Die Linke’s leaders such as Oscar Lafontaine (who retired in January).

Opinion polls suggest that more Germans see capitalism as the best possible system than Americans, Brits, Australians, Canadians and of course, French, Italians and Spanish do. The Economist (February 13) issue shows that less than 10 % of Germans agree that capitalism is fatally flawed and a different economic system is needed. Roughly 13 % of Americans and 42 % of French agree with this statement.

The recent Economist survey suggests that Germany has become more Anglo-Saxon in its economic policy reforms. In this context, Rammstein’s song “Amerika ist Wunderbar” should be seen as a sincere statement – not sarcastic one. The government has reformed some elements social welfare system and it looks in much better shape than other continental European countries. Germany has been much more successful than the US and UK in implementing conservative fiscal policy and is a strong supporter at European Central Bank of sound monetary policies.

As far as isolationism is concerned, German politicians have sent troops to Balkans and Afghanistan despite of wide-spread pacifism at home. They may be reluctant to commit more troops (they are already third largest contributor) to Afghanistan and making more straightforward contribution by lifting the limits for engagement. Similarly, German politicians may be reluctant to bailout Greece but it is not clear why this reluctance to help other countries in the middle of debt-crisis has to be seen as a sign of isolationism. If we factor in historical, constitutional and political economy factors for the limited military engagement and the reluctance for bailout, then it is hardly a sign of German isolationism.

Most importantly, Germany is more engaged with the world through international trade than almost any other country. Even if the country is no longer the largest exporter in the world (the place was recently taken by China), it is the second largest exporter. Germany has managed to bring down real wages which has boosted the competiveness. As many small and medium sized firms are becoming more and more involved in international markets, it is difficult to argue that the country is moving towards greater isolationism.

The success of export-driven model has led to another type of criticism that Germany is not increasing its consumer spending and investments. Higher consumer spending and investments would increase demand in Germany for imports. This would allow Germany to export more as markets in its partner countries would expand. This criticism is offered from a particular macroeconomic perspective and it may have merit in the world of stylized economic models. As a matter of political economy, it is difficult to see how politicians could pull it off in the country that relies on the principles of fiscal conservatism and social equality. Lowering taxes requires cuts in government budget which would decrease social spending. Tax cuts without spending cuts would increase budget deficit.

All of this is not to say that Germany does not have any problems – certainly there are many such as rigid educational system, high unemployment in some regions and among some groups, too generous welfare state and so on. However, there is certainly more hope for Germany’s future than some commentators suggest. Fiat lux!

Conventional wisdom suggests that the Internet enhances democracy. Estonian as well as other policy-makers keep following this wisdom by making investments into public initiatives aiming at engaging citizens online. The proof seems to be in the pudding. In the last four elections people have been able to submit their vote online and percentage of voters using this opportunity has increased constantly in Estonia. There is even a correlation between increased participation and votes submitted online in the last municipal elections. But we should not fall for the fallacy of electoralism – tendency to focus on elections while ignoring other political realities. Elections are necessary but certainly not sufficient prerequisites of democracy. Hence, we should look a bigger picture how the Internet affects democracy.

Matthew Hindman’s recent book The Myth of Digital Democracy (Princeton University Press 2008) is great help for policy-makers in understanding the interactions between the Internet and democracy. I just published a review of his book in the Journal of Politics (Volume 72, Issue 1, January 2010). The following discussion is based on this review. Hindman provides comprehensive and methodologically vigorous research supported by extensive and detailed data. The data is based on the United States but should be relevant for policy-makers in other parts of the world as well. The findings are compelling enough to be taken seriously by researchers with diverse specializations as well as policy-makers with different persuasions, as Hindman covers a wide array: online campaigning, blogging, link structure, traffic and search and other issues are tackled in the book.

Without much theorizing on his part, the author lets the data speak for itself. He demonstrates that the Internet has not increased political mobilization and has not significantly broadened political discourse. These findings certainly challenge conventional wisdom on the democratizing power of the Internet. For instance, media reports tend to characterize online politics as being dominated by young people and used by politicians as a means to engage new generations. Hindman points out that while 43 percent of all World Wide Web traffic is generated by eighteen to thirty-four year olds, they only account for 32 percent of visits to news sites and 22 percent of visits to political sites.

The significance of his contribution comes out best in the discussion on link structure, traffic and search of political websites. Hindman establishes how so-called Googlearchy (referring to “the rule of the most heavily linked” web sites) shapes the role of political websites. This makes the link structure of the Internet a fundamental element in understanding online political activity. In collaboration with Kostas Tsioutsiouliklis and Judy Johnson, Hindman used computer science techniques to explore millions of political web pages and found that “a small set of hypersuccessful sites receives most of the links”. Substantial overlap between search results of leading search engines such as Yahoo and Google contributes to the winners-take-all patterns of online politics. This keeps public attention highly centralized. While search engines may provide opportunities for finding new sources of information, they also make it easier to visit known web sites. Most importantly, political websites are visited by an insignificant percentage of all web users: just slightly more than 0.1 percent of overall web traffic.

Extensive data in the book provides plenty of opportunities for expanding on some unexplored issues. For instance, Hindman points out some evidence for supporting the view that political websites are essentially online political echo chambers. This means that people with set ideological beliefs will visit certain websites in order to confirm their opinions rather than to seek out alternative explanations. However, the findings are not conclusive. Many political websites send or receive only trivial amount of traffic across ideological lines. Such political polarization is not the case for at least twelve of top 50 political sites, as a significant amount of traffic flows over to websites presenting competing viewpoints. Nevertheless, Hindman’s The Myth of Digital Democracy profoundly challenges the conventional wisdom about the democratizing effect of the Internet. Policy-makers should ignore this book at their own peril.

“Cui Bono” as defined by the eternally comprehensive Wikipedia:

“To whose benefit?”, literally “as a benefit to whom?” – is a Latin adage that is used either to suggest a hidden motive or to indicate that the party responsible for something may not be who it appears at first to be.

For the authors of this blog “cui bono?” is also a question that’s remarkably unavoidable when discussing the economic aspects of public policy or questions of political economy more generally. While we never pretend to have an answer to this humble two-word question we believe it’s a question worth asking more often than not and our sometimes specualtive answers are worth sharing with our readers.

The Cui Bono blog will be written mostly in Estonian with an occasional post in English for people outside Estonia who are interested in what classical liberal minded Estonians are writing about. Occasionally there will be posts in English that will provide an alternative point of view for questions that concern Estonia and Estonians for our non-Estonian followers.  There are three people – Paul, Meelis, Jüri – writing the blog and you can read more about them on the authors page.

There are already about 10 posts in Estonian as we officially launch the blog. Paul had the honor of the inaugural post with a short piece concerning the schizophrenic editorials of the Estonian leading business newspaper followed by a post, where Meelis points out the difficulties of predicting economic growth and the (un)reliability of forecasts.

Jüri touched on the absolute limits of economic growth, while Meelis looked at the history of economic growth and in a following post on the Nobel memorial prize winner Elinor Ostrom he discussed property rights as they pertain to her work.

In his second post Paul looked at the almost mythic aspects of deflation through an Austrian lens while Jüri offered up a post with an alternative vision of how to organize and finance health care.

In connection with municipal elections in Estonia Meelis had a post on how rational voters actually are that was inspired by public choice insights, which in turn was followed by a post from Jüri on stories and narratives and how they shape our understanding of such economic question as alternative cost.

Finally, Meelis asks, “what’s in a name” and goes on to discuss the confusion, history, and the seemingly tragic question of what geographic region should be called Macedonia.

All of the mentioned posts are in Estonian, but you’ll find in them quotes in English as well as links to external sites, articles or papers that are also in English.

We’ve also provided a special RSS feed for our English posts, which should make following Cui Bono blog a simple matter of adding us to your favorite RSS aggregator.