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By Victor A. Canto, La Jolla Economics (Guest Contributor)

The mobility of goods, services and factors of production lead to economic integration. The convergence of prices for different commodities induces a common response across the world’s economies. Barriers such as tax rate regulation and transportation costs prevent the full mobility of some of the local factors of production. As a result, divergences in the growth path and responses are usually attributed to localized effects due to differences in economic policies enacted by national governments.

Armed with this insight, we can then analyze the impact of economic shocks whether they are man-made (i.e. economic policy changes) or caused by nature. For example, we know that Chile’s people are clearly worse off in the quake’s aftermath. We also know that Chile will rebuild. While the people in the region are rebuilding their wealth, their savings will increase. Employment opportunities will increase and capital will flow into the region to finance short run consumption and the rebuilding efforts. So that part of Chile will experience faster growth in the short run, a trade deficit and a capital inflow. The natural disaster, while undesirable, allows the region to rebuild and build better and more efficient buildings. The improved infrastructure should increase the region’s comparative advantage in the long run.

The previous example illustrates the impact of an isolated shock. However, these are not the only ones. In some cases we have global effects that affect the overall economy. Some argue that global warming is one. But in the context of the integrated economy, we want to focus on a more pedestrian issue, policy coordination. Whether it is deliberate or inadvertent, similarities in economic policy lead to similarities in economic shocks, and thus similarities in economic responses. Looking around at the world economies, one can make a strong argument that the policies of western developed nations are fairly similar and it should not be surprising that they have had similar experiences during the recent global recession. This is one case where integration and similarity of economic policies made the propagation or contagion of economic disturbances inevitable. Our focus is how different countries react as they try to emerge from the crisis. As long as there is integration, the global price signal induces a common response. However, to the extent that the integration is not complete, domestic policy changes have a differential impact across economies. The impact will be felt on the least mobile factors of these economies.

In the process of identifying the winners and losers, we can also get a sense of where the policy initiatives are going, and based on historical relationships we can then make inferences about the path of the economy. Countries adopting pro-growth policies see their immobile factors outperforming their counterparts in countries not adopting pro-growth policies. The portfolio strategy is simple. Overweight those countries with improving economic policies. Also, in order to insure that we pick up the impact on the immobile factors, it may be best to buy the small cap companies in those countries. That way we increase the likelihood of picking up the local factor.

Europe: Budget Deficits and Fiscal Policy

In the previous section we argued that similarities in policies lead to similarities in economic responses across countries. The prevalence of a Keynesian orientation in the economic policies of these countries explains, to a large extent, the economic response during the present crisis. While we can debate the source of the debacle, which most attribute to easy credit policy and lax banking regulations, the point is that the symptoms were a common occurrence in many of the western world’s developed economies, as well as for the new Europeans. The exceptions in the developed world were countries such as Australia and Canada where loans were either full recourse loans and/or the interest on mortgages was not deductible. Other exceptions included, in large part, the Asian economies and part of the non-European emerging markets. These economies did not buy yield. Yet the Keynesian influence did induce a common policy response to the crisis.

Naturally, as the economy slowed down, government spending increased in an attempt to stimulate the economy and arrest the economic slowdown. In turn, given the progressive nature of the tax code in most of these countries, the slowdown resulted in a proportionate decline in revenues, well in excess of the economic downturn, the net result being an increase in the budget deficit across the nations of the globe. In the press there have been some discussions to whether the increase in the deficit is a cyclical effect or a structural component resulting from a rent seeking society focused on income redistribution.

The cyclical component of the deficit should go the other way once the economy recovers, with the need to increase spending in safety net programs declining and revenues surging faster than the rate of economic growth. Over the cycle, these effects will wash out. A persistent deficit over the cycle is evidence of a structural deficit. The question is how did they get there? Was it lack of revenues or excessive spending? This is a very important point. For if the problem is lack of revenues, we know that the solution is to increase revenues. However, if it is excessive spending, the solution is to reduce spending. Clearly some of the redistributionists who view the government as the instrument of redistribution and social engineering would always argue that the issue is a lack of revenues. When against the wall, these people would then frame the problem as a deficit problem. If, as we believe, the problem is one of spending, then reducing the deficit oftentimes leads to smaller spending cuts and higher tax increases than would be optimal. This is exactly the approach the Obama administration took when it appointed a deficit commission.

The Size of the Public Sector: One issue that concerns us and that has been reported in the press is whether politicians are taking advantage of the recent crisis in order to expand the scope of the public sector. Another issue is whether they will succeed. And the third and final issue is whether that is a feasible outcome.

Looking at a cross-section of different countries and determining their stage of income redistribution and government intervention, we can make inferences about the likely effect on countries that are moving in that direction, as well as countries that are moving in the opposite direction. Working backwards, we are going to focus first on some of the states that in our opinion are approaching the “not feasible” region.

During the last few weeks we have been making a parallel between California and Greece. These are two economies on the brink of failure and may be the poster children for the end game of the spending spiral process. In Greece, the public sector’s share of GDP exceeds 50% and public sector employees are paid 14 months worth of salaries per calendar year in addition to their vacation time. In California, once one adds state and local spending and overlays the state tax rates on top of the federal government, a strong case can be made that California is rapidly approaching Greece’s fiscal and economic situation. The push for a greater public sector comes from both the top and the bottom. At the top, we have the direct provision of services that could be easily provided by the private sector. That tends to increase the government’s share of the economy. In so far as the government implements ambitious social programs (such as income redistribution), the provision of public services, the power of taxation and regulation allow the government an incredible ability to control the economy and redistribute income. As we have mentioned before, the desire to redistribute income more often than not tends to reduce incentives to produce, work and invest. So the government has to make some judgment calls as to how much they are willing to sacrifice one of these goals at the expense of the other. Nudging the government in different directions are the special interest groups.

In California and other states, the public employees unions have been very successful in pushing their agendas to the benefit of their members resulting in bottom up increases in government spending. A recent Wall Street Journal editorial documents this point. They point out that in 2008 almost half of the state and local expenditures went towards the pay and benefits of public workers. They also estimate that for every $1 of pay and benefits a private employee earned, a state and local government worker received $1.45. A Bureau of Labor Statistics (BLS) study shows that the 45% premium is the result of an approximately one third higher salary and benefits that are about 70% higher than those of the private sector. The final point is that the benefit gap is accounted for by unionized public employees. Non-union public employees benefits are similar to those in the private sector. Also, many states allow for double dipping of pension and retirement benefits. If one takes into consideration that public employees rarely get fired, the data clearly suggests that the union strength may have something to do with the salary differential, and not necessarily with the skill level of the employees. A survey by the Bureau of Economic Analysis (BEA) shows that the pay gap between public and private employees is widest in states that have the biggest budget deficits and that the majority of these states with budget deficits would not have a deficit if they were paying private sector salaries and benefits to their public workers. One interpretation for these results is that the unions have been very effective in redistributing income to their members. In fact, this illustrates why the political process has a bias towards higher spending as a share of GDP. The question is whether there is a limit to how large the government can be in relation to the economy. We believe that California and Greece are testing the limits. If that is the case, we can use their experiences to gauge the downside of the policies currently being enacted in many parts of the world. Clearly continental Europe is much closer to Greece and California than is the U.S. The latter is a country that seems to be embarking on a path that could eventually lead to a European type of state, the big danger being that if spending overshoots, it could even culminate in a situation similar to that of Greece and/or California.

Revenues and Credit Risks: The problem many of the western economies face is that in order to increase the public sector, they need to raise tax rates in order to collect more revenue. Unfortunately, as rates go up, incentives to save and invest and locate in the state will also diminish. As people leave, the tax base shrinks and it reaches a point where higher rates will not yield higher revenues. At that point, we see investors worrying about these economies’ ability to pay. That in turn leads to a rise in credit risk and an increase in the yield of these government’s obligations. Now the narrower the political/economic jurisdiction, the worse the problem becomes. For example, as people flee Greece or California, bonds of the stronger economies could see a yield improvement, widening the yield gap between the two sets of economies.

People worried about Greece have seen during the last few weeks a rise in the yield differential between Greece and other states’ obligations. But that is not all, as these bonds become illiquid, funds needing to generate liquidity may sell those of similar risk levels. The process easily degenerates into a contagion where there is a flight away from this segment of the market and eventually the region. Now if the regional governments such as the EU and the federal governments worry about the narrower jurisdictions, i.e. the states and/or member countries, it is possible that federal governments may bail out the states. That will add to federal obligations and increase the credit risk of the union. Two distinct implications emerge from this: One is that the higher yields will make the federal obligations less attractive relative to corporate bonds. The second point is that concerns about the economy and the likely remedy used to solve the deterioration of credit will result in a weaker currency, even if there are no inflation worries. The exchange rate will reflect the yield/credit risk differential. If, as we believe, the spending and fiscal situations are fueling the rising credit risk, it behooves investors to shift away from these instruments.

Using the most recent numbers for the U.S., we know that taking an average of the top 6% in Adjusted Gross Income (AGI), they account for 6% of the taxable income and 10% of the revenue per every 1%. Since California has about 10,000,000 taxpaying units, we can argue that if the right 1% leaves the state, we will lose 10% of the state tax income revenues. This data can be used to answer a simple question of whether California and Greece have reached the point where a tax rate increase will not yield more revenue. The numbers we just presented suggests that is not a far fetched idea. Our analysis suggests that raising revenue is not the solution. These economies need to reduce the size of the public sector. Whether the Greeks have the will to do so remains to be seen, the political strikes suggest that the public sector employees will go down fighting. We hope the Greek government does not cave to the strikes. Here in California, the situation is different. The unions were responsible for the demise of the Schwarzenegger administration. They defeated his initiatives and that killed his will to fight. He caved in and California’s fate was sealed.

Spending cuts are the only way out, both here and abroad. Needless to say, different countries face country specific issues. Yet a common theme emerges across these economies—public sector employees are at the center of every crisis. Portugal’s attraction was that it was the low cost producer in Europe. It now has competition from China and a restructuring is in order. The public employee unions complain that they bear the burden of the belt-tightening when the government overspends. But they don’t say that the government overspends by increasing the size of the public sector and the salary of the public sector employees. If they get the benefits, it is only fair that they shoulder the adjustment. The only way Portugal and some of the other PIIGS can remain attractive and low cost producers is by lowering their tax rate.

Last year Ireland looked a lot like Greece. The financial crisis coincided with a housing bust that left Ireland’s banks in terrible shape and like other countries the government bailed them out. But in Ireland, we go a step further. In order to deal with its deficit of about 12% of GDP, it adopted an austerity package. Ireland is winning praise from financial markets for quickly taking harsh measures. It quickly reduced the salaries of public sector employees, enacted across the board tax increases, while at the same time refusing to raise their 12.5% corporate tax rate, the lowest in Europe. In spite of all these vicissitudes, the Irish still favor remaining in the Euro Zone. Many people believe, rightfully so, that the EMU allowed them to borrow at low rates and that helped fuel Irish growth. Nevertheless, the harsh measures have made life a bit more difficult in the short run and especially so for public servants. Yet despite the discontent among public workers and threat of strikes, the ruling party has pushed through the measures and hopefully the Irish will recover faster than the other PIIGS.

Spain’s decentralized government structure makes the task of deficit reduction a bit more difficult than in other European countries. The central government directly controls less than a third of public spending and can only set broad guidelines for the regional and municipal governments that control the rest. Regional governments actually control the biggest portion of spending—36% of the total in 2008—and have a long history of rapidly increasing their spending and budget deficits. Responsible for basic services like health and education, they have borne the brunt of absorbing the millions of immigrants who have arrived in recent years to take advantage of Spain's formerly buoyant economy. The collapse of a decade long housing boom has pitched the wider economy into a deep recession, sent tax revenues plummeting and social-welfare costs soaring.

The question is whether these and other economies like California have reached the point where an increase in tax rates will not result in higher tax revenues. If so, the state will have no other choice but to reduce spending. The Spanish central and regional governments face the same choice the other PIIGS face: Raise taxes or cut spending. If they choose wisely and cut spending, they will recover much faster than if they choose poorly and raise taxes. If they decide to cut spending and forgo tax rate increases, the longer term outlook for these economies will be quite bullish. The event will mark the beginning of a virtuous cycle of prosperity. The lower tax rates will attract people to the state and more people will, in turn, lead to higher output and tax revenues. In the meantime, we remain bearish on the PIIGS and California.

Moving on, let’s focus on the original EU countries on the continent. These original members were in fact looking for a free lunch when the euro was launched. They hoped the common currency and free mobility across the member countries would usher in an era of modernization and deregulation. Unfortunately, the welfare state proved to be quite resilient and its disincentives were evident. Unemployment rate was much higher than that of other developed countries, and so were welfare expenditures. Now in the face of stagnation, the Europeans face a big choice of how to free labor markets and trim welfare expenditures. That is a tough task; Dirigistes have long believed that capitalism should be tempered by generous state benefits and strong labor protection. Sound familiar? That is the direction the U.S. is going. We don’t know what the future will bring. Will we end up like Europe with a major bout of Euroescelrosis or will we end up like Greece and/or California?

The Euro Zone’s economic malaise and the attempt to deal with it are resulting in an economic divergence and that, in turn, is creating political tension across the member countries. The countries able to muster the political will to make the necessary changes are the ones we should consider overweighting in our portfolio. However, the list would not include the U.K. There the political parties are now becoming new Labor and new Labor light. Add to that the troubles with their financial system and we don’t see how the U.K. outperforms over the next couple of years.

The Future of the Euro and EU: The financial difficulties of Greece and other EU members have led to some speculation about the future of the euro and the EU. For some, Greece’s troubles highlight the benefits of an independent currency. These people believe that a deliberate devaluation would alter the terms of trade. We don’t believe that. A deliberate devaluation only results in a higher inflation rate. The job of the central bank is to maintain price stability. Clearly the economic slowdown in the continent has reduced the attractiveness of joining the EU. Yet, the candidate countries should not underestimate the benefits of free mobility within the union and of a well managed currency. And the European Central Bank (ECB) has done that, its mandate is a 2% inflation target and over the years it has been right on target.

As we have pointed out a monetary union does not address the fiscal side of the equation. That is up to the member countries. Yet as we have written before, the increased mobility of factors of production and goods and services will magnify the policy differences across borders. On the other hand, we have the case of Iceland, whose prospects are diminished for the reasons already mentioned and the fact that Iceland’s residents in a referendum rejected a plan to repay the UK and the Netherland’s residents some $5.3 billion these countries lost in the collapse of an Icelandic Internet bank.

Fudging the Numbers: It is ironic that after the bursting of the financial bubble, governments argued that we lack the regulation and enforcing capabilities to insure that businesses did not fudge the numbers and misguide investors. While these governments and politicians continue with their self-righteousness, it is interesting to know that while the governments were reforming and regulating the private sector in order to insure that malfeasance and accounting gimmicks would not be used to fool investors, these same individuals had the institutions they led doing the same thing— cooking the books. Who regulates the regulators? Does anyone, other than the voters?

The fraud perpetuated on the voters, the country’s shareholders, is undisputable. Let’s review the Euro Zone. Recall that members and aspiring members had to agree to fiscal rules that capped the countries’ annual budget deficit to 3% of GDP and limited the overall public debt to 60% of GDP. Yet the same people who criticized private companies for cooking the books were doing that and then some during the same time. Let’s focus on Greece for the time being. We now know that a recent examination of Greece’s budget reports to the EU shows that Greece hasn’t met the deficit rule in any year except 2006. Since 2007, the country has revised upward its deficit figures every single year. The most recent episode was late last year when Greece revised its initial budget deficit estimate of 3.7% to 13% of GDP. A slight forecast error? But that is not all. We now know that Greece has not been within 30 percentage points of its debt ceiling. Finally, Greece used derivatives to help mask the size of its debt and deficit numbers. Yet we fault the derivative issuer not the country.

Greece is not an isolated case. Leading up to the adoption of the euro, recall that many of the countries privatized state companies, selling mobile-phone spectrum, etc. These one time sales helped 11 of the 12 countries make the 3% deficit goal for 1997. Spain, France and Portugal—three of the original 11 countries that qualified based on the 1997 data, later revised their deficit figures above 3%. Of the 12 original members, all but Belgium, Luxembourg and Finland have violated the deficit rule at least once. If a private company CEO had adopted some of the accounting gimmicks of the EU members, they would have gone to jail. Come to think of it, during the accounting scandal on Wall Street some CEOs went to jail.

Asia/Pacific

In the Asia/Pacific region, the key developed economies are at a crossroads. The key economies were not as affected by the financial crisis as the western economies. Japan continues to pursue a Keynesian type of economic agenda with little or no success. Low inflation, slow growth and high unemployment remain the end result of the current Japanese policies. The only exception was the years of the Koizumi administrations. It is amazing that the Japanese have repudiated the legacy of the one administration that had some success in reactivating and improving the overall economy. At this pace, not even the rising tide of China will be able to lift Japan out of the doldrums. That and the fact that banks were reluctant to lend and get involved in certain activities saved Japan from another banking crisis. The slow process of cleaning the balance sheets helped them this time around.

Australia is another country whose treatment of the real estate sector in terms of recourse and deductibility of interest rates, whether inadvertently or by design, shielded the banking system from the meltdown experienced elsewhere in the western world. Unlike other developed nations and much like Brazil, Australia’s economy is perfectly positioned to take advantage of China. It has everything that China needs and it has better investor protection. In a way, Australia could be viewed as a China play. Unfortunately, the current Prime Minister is a firm believer in global warming. He signed the Kyoto agreement his first day in office. He has failed twice to push a cap and trade plan, he has proposed to fix and/or take over the public hospital system from the states, as well as promising to build a national broadband internet network. He campaigned on world changing ideas that the voters are now questioning. Sounds familiar? We believe that similar policies will elicit similar responses across economies. We are not too bullish about the policy initiatives in the U.S., and neither are we about these initiatives in Australia.

Emerging Markets

In many ways the issues in the rest of the world are different to those of the western developed economies and, as such, they offer a great deal of diversification as well as the opportunity of much higher returns than those that could be obtained in the developed world.

For some time we have been arguing that the optimistic scenario about the world economy requires that a country takes over the economic leadership of the world and lifts the rest of the world along with it. Our example here is the U.S. during the Reagan administration. It emerged from a global recession to lead the world, its trade deficit amounted to a net demand increase for the rest of the world’s goods and services. The Reagan policies created millions of jobs not only in the U.S. but also in the rest of the world. Later on, as these policies were emulated and propagated around the world, prosperity was spread to almost all parts of the world, with the one major exception being Japan.

So if the world is going to recovered in a manner similar to that of the 1980s, who is going to take the role of the U.S.? Based on the arguments presented here, it is not the U.S. or Europe. This leaves us with Asia and the rest of the emerging market countries. That is why we are long term bullish in these two regions of the world. One key player in this scenario will be China. However, in order to become the leader that the world needs, China will have to become more inward looking. While importing raw materials for re-export as finished goods may increase the well being of the raw material producers, it may not be enough to bring the rest of the world along. Just like the U.S. in the 1980s, China would have to transform itself and become more consumption oriented. Only then will it carry the rest of the world on its back. Is China ready for this? Who knows but there is evidence that things are changing in that direction.

One piece of evidence in support of this hypothesis can be found in the tourist industry, where a resurgence in tourism in Asia is helping drive economic recoveries while at the same time demonstrating the growing power of regional consumers. As the regions looks more inwards, the growth in consumer spending has been driving growth across Asia. In particular, big ticket items are a key. Last year, the Chinese bought more cars than Americans, a great piece of evidence of a shift in spending.

Our thesis could very well be playing out as we speak. Unfortunately the process will be a tricky one, for the central government will have to let go of much of what it controls and allow markets to function better within the country. On a more mundane level, as the government level of intervention recedes, a simple upcoming test will be how to exit from its stimulus program. Contrary to most of the financial press, we give the Chinese good marks for their handling of the exchange rate policy and credit policy. The fixed rate has increased the economy’s transparency and kept the inflation rate in check. While it is true that the capital inflows and accumulations of reserves under a strict fixed exchange rate system would have led to a tremendous expansion of the quantity of money and credit created by the banking system, the Chinese have made effective use of the reserve requirement to manage the credit creation of the banking system. So far they have done a much better job than the western economies. Whether that is evidence of their economic savvy or strict control of the economy, we cannot tell from the information at hand.

The future path of the Chinese economy depends on what is driving their success. We will find out in due course. Economic progress will force the Chinese to be much clearer in their intentions. It will become increasingly more difficult for the Chinese to “guide” the economy in its subtle and not so subtle ways. Resistance to censorship and other forms of control is growing. The resolution of Google’s dispute with China is one of those markers that will signal which way the Chinese are going to go. Another marker will be found in the domestic economy. As competition for the local market intensifies, will government policies become more or less friendly to foreigners? Will they enact and enforce local content rules, create “National Champions” and continue their haphazard legal system and regulation? How China handles these issues will determine the economic success not only of their economy, but also of the world economy.

One important point to make is that openness does not mean that the country would lose its backbone. China is right to talk tough to the U.S. when it is on the right side of the issue as we believe is the case with the fixed exchange rate. The exchange rate is just a mechanism that allows the Chinese to outsource its monetary policy and gain economic transparency as it makes its currency as good as the dollar. We don’t believe that deliberate devaluations affect the balance of trade, so we don’t buy the argument that the Chinese are unfairly undervaluing their currency. We believe they are being quite smart and they will let their currency float as U.S. inflation rises over the next few years.

Moving to other regions of the world, Latin America continues to be a high variance region jolted by natural and political disaster. Recently, we saw two earthquakes devastate two different countries in the region, Haiti and Chile. While some people attribute the Haitian devastation to their lax building codes, the fact is that part of the U.S. embassy was affected. Should they not have built the embassy to U.S. standards? One explanation for the differences in destruction between Haiti and Chile is that Haiti had not had an earthquake of that magnitude in 200 years. Given the low probability of such an event, it made sense to focus on other natural disasters as far as building codes were concerned. Hurricanes are a more pressing need in the region, while in Chile earthquakes are a more common occurrence. Even after accounting for these differences, the state of the economy and its organization matters a great deal. Chile is not a failed state, it is a vibrant democracy and its public institutions function properly, as the recent disaster showed. We believe that with the rebuilding efforts, Chile will bounce back stronger and better than before. Hopefully the new president will continue his campaign pledge of increased economic efficiency within a market economy. Chile’s institutions and natural endowments make the country a desirable investment for a global portfolio. Brazil is another country that we are quite bullish on. As we have already mentioned, Brazil has everything that China needs and offers better protection for shareholders and investors. Add to this the recent oil discoveries and Brazil is poised to become an economic powerhouse in years to come. In the mean time, the China play is a good reason to be bullish on Brazil. Just think of the need for water in China and how much water China saves indirectly when it imports soybeans form Brazil.

Lula, Brazil’s president, in spite of his leftist past as a union leader, has been a model president as far as respecting the democratic process goes. On foreign policy, he is moving in what some may consider an undesirable direction. That may be attributable to Brazil’s desire to be a player in the world stage. Lula has hosted Iran’s president and is quite friendly with the Castro brothers. In fact, he has faced a lot of criticism at home and abroad for defending Cuba’s right to imprison political opponents while dismissing the plight of the protesters. He sided with the Obama administration in trying to reinstate Manuel Zelaya to power. And after they failed, these two countries are trying to force the new Honduran government to allow Zelaya to return. But that is not all. The U.S., in a vindictive move, has rescinded U.S. visas for many of the politicians that did not acquiesce to the U.S. mandate. Moving to other countries in the Southern Cone, we find Argentina’s president sidestepping stiff congressional resistance to using foreign reserves for debt payments. Christina Kirchner issued a decree sifting part of the central bank reserves to the treasury.

In Venezuela, Hugo Chavez continues to defy the U.S. and continues his Bolivarian revolution. The results of the socialist and redistribution scheme combined with the world recession have taken their toll on the country. However, Chavez continues to be defiant and rather than look for much needed funding from either the IMF or the U.S., he has chosen China as his source of financing. The loans fit into China’s strategy of securing natural resources for its economy. It has reconfigured some of its state run refineries to handle more of the cheaper heavy crude that Venezuela produces.

Russia, like other actual and aspiring superpowers, is attempting to expand their sphere of influence and natural resources and/or technology is one of the ways. The election in the Ukraine of President Victor Yanukovych is a welcome sign for the Russians. Yanukovych has promised to reverse the policies of his predecessor. In return for gas-price relief, the Ukrainian leader has said that Russia would be offered a role in managing the country’s lucrative pipelines that carry gas from Russia to Europe. The EU has essentially said that Ukraine cannot play both sides and will have to choose between a free trade agreement with the EU and a customs union with Russian, Belarus and Kazakhstan. The choice will reveal how much power Russia can wield in the region. The issue is whether Russia will deal with the different parties in a democratic manner or in the old autocratic ways. Given the results and behavior during recent elections, the Kremlin seems to be signaling that the centralized system built by Putin over the last decade needs to be made more flexible, but at the same time the Kremlin needs to retain control. So any changes will be essentially cosmetic and will not signal a change in a true democratic direction.

Disclosure: None

Source: Global Economy: Similar Policies Lead to Similar Shocks, Responses