Central Europe Review - Sam Vaknin: Scavengers and Predators

The economies of Central and Eastern Europe (CEE) are divided into scavengers and predators, the former being parasitic economies that feed off the latter. The relationship is often not that of symbiosis, where two parties maintain a mutually beneficial co-existence. Here, one economy feeds off others in a way that is harmful, even detrimental, to the hosts. But this interaction—however undesirable—is the region's only hope.

Scavengers

The typology of scavenger economies reveals their sources of sustenance:

Conjunctural economies

These economies feed off historical or economic conjunctures or crises. They position themselves as a bridge between warring or conflicting parties. Switzerland rendered this service to Nazi Germany (1933-1945), Macedonia and Greece to Serbia (1992 to the present), Cyprus aided and abetted Russia (1987 to the present), and now, Montenegro acts the part for both Serbia and Kosovo.

These economies consist of smuggling, siege-breaking, contraband, arms trade and illegal immigration. They benefit economically by violating both international and domestic laws and by providing international outcasts and rogues with alternative routes of supply, and with goods and services.

Criminal economies

These economies are infiltrated by criminal gangs or suffused with criminal behaviour. Such infiltration occurs in two phases: a properly criminal phase and then a money laundering one.

In the first phase, criminal activities yield income and result in wealth accumulation. In the second, the money thus generated is laundered and legitimized. It is invested in legal, above-board activities. The economy of the USA during the 19th century and in the years of prohibition was partly criminal. It is reminiscent of the Russian economy in the 1990s, permeated by criminal conduct as it is. Russians often compare their stage of capitalist evolution to the American "Wild West."

Piggyback service economies

These are economies, which provide predator economies with services. These services are aimed at re-establishing economic equilibrium in the host (predator) economies. Tax shelters are a fine example of this variety. In many countries taxes are way too high and result in the misallocation of economic resources. Tax shelters offer a way of re-establishing the economic balance and re-instating a regime of efficient allocation of resources.

These economies could be regarded as external appendages, shock absorbers and regulators of their host economies. They feed off market failures, market imbalances, arbitrage opportunities, shortages and inefficiencies. Many post-Communist countries have either made the provision of such services a part of their economic life or are about to do so. Free-trade zones, off-shore havens, off-shore banking and transhipment ports proliferate from Macedonia to Archangelsk.

Aid economies

Economies that derive most of their vitality from aid granted them by donor countries, multilateral aid agencies and NGOs. Many of the economies in transition belong to this class. Up to 15 percent of their GDP is in the form of handouts, soft loans and technical assistance. Rescheduling is another species of financial subsidy and virtually all CEE countries have benefited from it. The dependence thus formed can easily deteriorate into addiction. The economic players in such economies engage mostly in lobbying and in political maneuvering—rather than in production.

Derivative or satellite economies

These are economies, which are absolutely dependent upon or very closely correlated with other economies. This is either because they conduct most of their trade with these economies, or because they are a (marginal) member of a powerful regional club (or aspire to become one), or because they are under the economic (or geopolitical or military) umbrella of a regional power or superpower.

Another variant is the single-commodity or single-goods or single-service economies. Russia, for instance, is heavily dependent on proceeds from the sale of its energy products. Most Montenegrins derive their livelihood, directly or indirectly, from smuggling, bootlegging and illegal immigration. Drugs are a major "export" earner in Macedonia and Albania.

Copycat economies

These are economies that are based on illegal copying and emulation of intellectual property: patents, brand names, designs, industrial processes, other forms of innovation, copyrighted material, etc. Both Bulgaria and Russia are meccas of piracy. Though prosperous for a time, these economies are dependent on and subject to the vicissitudes of business cycles.

They are capital sensitive and inherently unstable, with no real long-term prospects if they fail to generate their own intellectual property. They reflect the volatility of the markets for their goods and are overly exposed to trade risks, international legislation and imports. Usually, they specialize in narrow segments of manufacturing that only increases the precariousness of their situation.

Predators

The predator economies can also be classified:

Generators of intellectual property

These are economies that encourage and emphasize innovation and progress. They reward innovators, entrepreneurs, non-conformism and conflict. They spew out patents, designs, brands, copyrighted material and other forms of packaged human creativity. They derive most of their income from licensing and royalties and constitute one of the engines driving globalization.

Still, these economies are too poor to support the complementary manufacturing and marketing activities. Their natural counterparts are the "Industrial Bases." Within the former Eastern Bloc, Russia, Poland, Hungary and Slovenia are, to a limited extent, such generators.

Industrial bases

These are economies that make use of the intellectual property generated by the former type within industrial processes. They do not copy the intellectual property as it is. Rather, they add to it important elements of adaptation to niche markets, image creation, market positioning, packaging, technical literature, combining it with other products or services, designing and implementing the whole production process, market (demand) creation, improvement upon the originals and value added services.

These contributions are so extensive that the end products or services can no longer to be identified with the originals, which serve as mere triggers. Again, Poland, Hungary, Slovenia and, to a lesser extent, Croatia come to mind.

Consumer-oriented economies

These are Third Wave (Alvin Toffler's term), service-, information- and knowledge-driven economies. The over-riding set of values is consumer-oriented. Wealth formation and accumulation are secondary. The primary activities are concerned with fostering markets and maintaining them. These "weightless" economies concentrate on intangibles: advertising, packaging, marketing, sales promotion, education, entertainment, servicing, dissemination of information, knowledge formation, trading, trading in symbolic assets (mainly financial), spiritual pursuits and other economic activities that enhance the consumer's welfare (pharmaceuticals, for instance).

These economies are also likely to sport a largish public sector, most of it service-oriented. No national economy in CEE qualifies as "consumer-oriented," though there are pockets of consumer-oriented entrepreneurship within each one.

Trader economies

These economies are equivalent to the cardiovascular system. They provide the channels through which goods and services are exchanged. They do this by trading or assuming risks, by providing physical transportation and telecommunications, and by maintaining an appropriately educated manpower to support all these activities. These economies are highly dependent on the general health of international trade.

Many of the CEE economies are trader economies. The openness ratio (trade divided by GDP) of most CEE countries is higher than that of the G7 countries. Macedonia, for instance, has a GDP of USD 3.6 billion and exports and imports of around USD 2 billion. These are the official figures, however, and probably another USD 0.5 billion in trade goes unreported. Additionally, it has one of the lowest weighted customs rates in the world. Openness to trade is an official policy, actively pursued.

These economies are predatory in the sense that they engage in zero-sum games. A contract gained by a Slovenian company is a contract lost by a Croatian one. Luckily, in this last decade, the economic cake tended to grow and the sum of zero-sum games was more welfare to all involved.

These vibrant economies—the hope of this benighted and blighted region—are justly described as "engines" because they pull all other (scavenger) economies with them. But they are not likely to do so forever.

Their governments have, however, assimilated the lessons of the 1930s. Protectionism is bad for everyone involved—especially for economic engines. Openness to trade, protection of property rights and functioning institutions increase both the number and the scope of markets.

Sam Vaknin, 16 October 2000

The author is General Manager of Capital Markets Institute Ltd, a consultancy firm with operations in Macedonia and Russia. He is an Economic Advisor to the Government of Macedonia.

DISCLAIMER: The views presented in this article represent only the personal opinions and judgements of the author.

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