Monday, 31 March 2014

Graph of the week: Who did better than their parents?

From the NPR blog (HT: ASI) comes a very interesting graph as an answer to an unusual question: who had richer parents, doctors or artists? Or to be more precise they were trying to figure out the link between household income during childhood and job choice during adulthood. 

They used the data from a BLS survey tracking 12,000 people from 1979 when they were in between 14 and 22 years of age, to see how they did in life.

Looking at the graph below, the data shows all the professions that did better or much better than their parents. Some of these are expected: computer programmers, engineers, lawyers, managers, CEOs, auditors and accountants, financial analysts, media and communication workers, etc. However many are very surprising: police officers and firefighters, nurses (both very high up), truck drivers, heavy equipment operators, mechanics and repairmen, teachers and finally factory assembly workers, farmers, and construction workers! However take this with a pinch of salt - farmers or factory assembly workers may live only marginally better than their parents but it's not like they had a hard job beating them to it (they didn't have much to start with - the graph below this one illustrates this). 

In a graphic form the table above looks even more interesting:

Again careful with this one - correlation does not imply causality! On first sight this suggests that those who lived in richer families earned more money later on. I would say this has more to do with career choice then family background. 

Compare the extreme two categories from the first table: designers, musicians and artists with doctors, dentists and surgeons and with CEOs. They both came from relatively well off families. In fact artists had an even better starting position than most other occupations (short of only lawyers and judges and financial analysts). This could simply point out that some people made a bad decision with their careers, while others made very good ones: policemen and firemen vs waiters, janitors and machinists; childcare workers vs nurses and teachers; secretaries vs accountants; artists and librarians vs doctors and lawyers. Of course, these occupations are not substitutes for each other, but they can paint a clear picture of which occupations are dying, so if you're choosing to study in one of those areas you're molding your own destiny. People who end up as waiters or janitors didn't really have much of an option. But those who did, who came from relatively well off families and made a choice to study humanities - we can't really expect to feel sorry for them, do we? Don't get me wrong, I'm not against studying humanities or the arts (recall an earlier text of mine on the topic), however, if the demand for such jobs is low, the supply should adjust accordingly. 

Thursday, 27 March 2014

Measuring crony capitalism?

Well, it seems this too has become possible. The Economist decided to introduce an index of crony capitalism, where the index depicts billionaire wealth as % of GDP, however adjusted for sectors that have a higher probability of being "crony". I'm a bit skeptical towards such a measure. 

Before we go into more detail, read this short intro on rent-seeking from the article: 
"Inventing a better widget, tastier snack or snazzier computer program is one thing. But many of today’s tycoons are accused of making fortunes by “rent-seeking”: grabbing a bigger slice of the pie rather than making the pie bigger. In technical terms, an economic rent is the difference between what people are paid and what they would have to be paid for their labour, capital, land (or any other inputs into production) to remain in their current use. In a world of perfect competition, rent would not exist. Common examples of rent-seeking (which may or may not be illegal) include forming cartels and lobbying for rules that benefit a firm at the expense of competitors and customers.
Class warriors and free-market devotees alike are worrying about rent-seeking. American libertarians fear an elite has rigged their country’s economy; plenty of ordinary Joes reckon the government and Federal Reserve care more about Wall Street than Main Street. Many hedge-fund managers sniff that China is a house of cards built by indebted cronies."
And I agree. Becoming rich via innovation is one thing, but becoming rich via rent-seeking and asking for favors from the government is a completely different ballpark. The first should be encouraged as much as possible, while the second should be prevented at any cost. Unfortunately those who have the power to prevent cronyism and rent-seeking are very often the same ones who encourage it - politicians in power. Public choice theory explains very precisely why this is so. 

So how was the index for measuring cronyism assembled? They got the idea from several Indian economists and used Forbes data on world's billionaires who are more involved in rent-heavy industries. These industries are the following: casino business; coal, palm oil and timber; defense industry, infrastructure and pipelines; oil, gas and energy; banking industry (both investment and commercial); ports and airports; real estate and construction; steel, metal and commodities; utilities and telecommunications.

A brilliant list! Every single industry that depends highly on government support (I'm thinking of the biggest companies in such industries, mainly monopolies and cartels), many of which couldn't survive without political favoritism - think of defense, airports, steel, utilities, energy, and more recently investment banking after bailouts. It's not that the companies in such industries are corrupt, but they are certainly more prone to rent-seeking. All of these industries employ many lobbyists to get what they want from their governments, at least in democracies such as the US. In less democratic societies, you don't need lobbyists - people like Carlos Slim apply different methods to get what they want, making corruption rampant in such societies. 

I would add to this the drug industry as well. The war on drugs is another huge source of cronyism fueling vast money laundering schemes and police and political corruption. It is essentially a large rent-seeking business. However, I understand the exclusion - it's very hard to measure the wealth of drug lords.

They take the relative measure of the cronyism where they compare the rent-seekers' wealth to the country's GDP. They only take the 23 countries, so these are not the top 23, it's the entire sample.

It is obvious that developing countries experience much bigger problems with cronyism. Their high growth in the pre-crisis decades was build mostly on the rise of crony sectors (natural resource boom, construction boom) where a minority of the well-connected businessmen and politicians took most of the benefits. Recall this story from an earlier text of mine analyzing the protests in Brazil, Turkey, and the like. It's far from surprising that Russia tops the list. Their oligarchs created during the transition in the 90s are a prime example of cronyism and state capitalism. Putin didn't do much to stop this, he just switched their power to himself. It's no surprise to see Ukraine and Mexico close to the top either.

What is surprising to me are Hong Kong and Singapore. It seems that despite their efficient governments and institutional strength (the rankings are in the white square on the right), their billionaires are mostly from crony sectors. This probably has to do with size of their economies (scarce land boosts property values), or perhaps the fact that both of them are major international ports transferring a lot of traffic. In a proper econometric analysis one would certainly control for such factors.  

Contrary to expectations China scores pretty well. The explanation is that most of the banks and natural resource industries are owned by the state, which biases their crony figures downwards. 

On the other hand, the US has also done well on the index, having most of its billionaires coming from the IT industry, retail and many other real sectors of the economy. Contrary to popular belief not a lot of investment bankers or financiers are up there. This is something I've pointed out in one of my older texts on the blog

However in making the index they were very aware of its shortcomings: (1) not all cronies make their wealth public (the drug lord problem), (2) some sectors they characterized as rent-seeking may be more open to competition in certain countries, and vice versa - some open industries may be more subject to rent-seeking, and (3) only the wealth of billionaires is accounted for. Cronyies may not be billionaires, they can be multimillionaires - it's still rent-seeking and it's still huge. Hence my initial skepticism towards the idea of trying to measure it. I would say it was a decent effort, I certainly like the approach used, but the picture could well be much different. Now there's a good idea for future research efforts - how to measure cronyism more precisely.

Sunday, 23 March 2014

Week links (5)

After a short break, the week links are back.

1. Cowen: "Modeling Vladimir Putin", Marginal Revolution blog - of all the texts analyzing Putin's reaction of the Crimea situation, I find this one to be the most interesting.
"Putin lives in a world where power is so much the calculus — instrumentally, emotionally and otherwise — that traditional means-ends relationships are not easy to define. Power very often is the exercise of means for their own sake and means and ends thus meld and merge. Our rational choice constructs may mislead us and cause us to see pointless irrationality when in fact power is being consumed as both means and end. It is hard for we peons to grasp the emotional resonance that power has for Putin and for some of his Russian cronies. They grew up in the KGB, watched their world collapse, tyrannized to rise to top power, while we sit on pillows and watch ESPN."
2. Last week was budget week in the UK. Osborne delivered a new budget focused on a welcomed savings and pensions reform. The 10p tax rate for savers has been abolished, while all restrictions on pensioners' access to their pensions have been removed (thus ending the requirement to buy an annuity), cutting their 55p tax rate. This is surely a move in a welcomed direction. It was also a budget that aimed at helping businesses by cutting their energy costs and via an export-boost scheme. The taxation policies are also likely to be beneficial. Various duties were cut on beer, fuel and energy, while the personal allowance was increased. On the other hand there's been a cap on the rise of welfare benefits for the next five years. There were a couple of blunders as well, where the Help to Buy scheme has been extended in addition to some other short-sighted stimuli policies. See all of the most important measures listed here

The UK economy is foretasted to grow at 2.7% this year, however the productivity decline is still puzzling. The budget deficit is still an enormous 6.6% for this year, with a predicted deficit of 5.5% next year. However with most indicators pointing at the right direction, optimism has been restored within the coalition government, and the only thing preventing them from securing another mandate in 2015 (when growth is still predicted to be above 2%), is the Scottish referendum (possibly). 

3. Of the recent Yellen Fed coverage (see my comment here), these were some of the most interesting comments, ranging from praise to criticism over her being too clear: Financial Times, John Cassidy at the New Yorker, Felix Simon at Seeking Alpha blog, Reuters, Time magazine, WSJ (with a particularly detailed coverage), etc.

4. Back to inequality and poverty: apparently many of the poor Americans aren't actually poor at all according to a new Brookings paper
"About one-third of American households – around 38 million – live hand-to-mouth, although a majority of them are not technically poor because they have assets, albeit illiquid ones, and they respond to stimulus policies in much the same way as those with no assets."
Does this mean Romney's assessment of the 47% living on welfare was correct after all?

Thursday, 20 March 2014

Graph of the week: When will the Fed raise interest rates?

New Fed Chairwomen Janet Yellen held her first FOMC meeting this week where the committee members (7 members of the board plus 5 out of 12 Reserve bank presidents) gave their usual predictions on when the Fed could increase its target rate (federal funds rate) for the first time since December 2008 (it has been stuck at around 0.25% for the past 5 years). Investors in particular always listen closely to these meetings hoping to decipher a clear signal from the Fed on the long term expectations of the target rate. 

Source: WSJ
The conclusions from the meeting this week is that interest rate increases could start in the first half of 2015, or to be more precise around 6 months after the bond tapering program ends. Usually it was hard to get a concrete number from a Fed Chairman. Greenspan once said: "Since I have become a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said." However even though the statement said that rates are to remain near zero for a "considerable time" Yellen actually gave a number, defining considerable time as "probably around six months". For many investors this is as clear a signal as it gets. 

Anyway, as can be seen from the graph above the majority of the FOMC members will opt for a steady increase, where the rate is likely to still be below 1% in 2015, only to raise above it sometime in 2016. In the long run, naturally, they all expect a rate of around 3-4%. 

What kind of a signal is this for investors? The immediate market reaction was negative: interest rate expectations went up, while stocks fell. But this is all expected, as was expected that the Fed stimulus would eventually end.

On yesterday's meeting the Fed didn't link its interest rate and stimuli plans on any unemployment (or inflation) thresholds, as they did before. As you may or may not remember since the end of 2012 the Fed linked short term rates (and the bond tapering program) to the unemployment rate (it wasn't going to announce an increase of the target rate until unemployment fell to 6.5%). Since this is likely to happen sooner rather than later (in February the US unemployment rate was 6.7%), the end of the bond tapering program is expected, and so is the raise in interest rates. The investors will adjust to this information soon and I don't expect it to cause many problems. Even in the short run. 

In other projections they made, they expect economic growth to be around 3% this year, and slightly higher in 2015. Unemployment is predicted to go below 6% in 2015 (however, I doubt the E-P ratio will bounce back any time soon, as the economy is clearly on a new, lower, equilibrium output path). Inflation is still expected to be lower than 2% this year, between 1.4% and 1.6%. So the economy is recovering on a relatively stable growth trajectory, meaning that the FOMC announcements are absolutely realistic. Monetary policy was never intended to solve the US structural issues anyway. 

Wednesday, 12 March 2014

What happened to our dream of democracy? Part 3: Why democracy will eventually win, as always

In the third part of the series of essays on democracy, I continue upon the conclusions of the second text in evaluating the weaknesses and strengths of democracies.

Alternatives to democracy 

The attacks and criticisms on democracy and capitalism are all too familiar. Despite all its flaws, some of which desperately need to be fixed, the Western model of democracy has triumphed so many times in history. As I've pointed out in one of my earlier posts, it was well documented that prominent Western economists back in the 60-ies and 70-ies made predictions on when the Soviet Union is to overtake the United States as the world's leading economic superpower. The most notable of them, Nobel prize winner Paul Sameulson, only a few years before the collapse of the Soviet Union claimed that Russia would overtake the US somewhere between 2002 and 2012.

We can go even further back in time to the 1920s and 1930s when many nations in Europe envisioned their democratic and capitalist system as deeply flawed and in desperate need for change. The process of radical change commenced as the socialist Italy and Germany descended into Nazism and fascism. Russia on the other hand descended into the other extreme - communism (but only ideologically, in economic terms all of these rest upon the idea of collectivism and state nationalization, which is why Hayek concludes that these systems are essentially the same). As the regimes of Mussolini and Hitler crumbled under the anti-fascist movement merely a decade later, it took some time before the isolated central planning model of Russia and its satellite countries dissolved.

China on the other hand is a different story. Under Mao Zedong, China was the prime example of failure of the central planning model which almost completely destroyed the country. Mao wanted China to catch up with the western world in terms of economic power. He wanted to show China's strength to the world so he ordered unrealistic production quotas and exports (to match those of the UK at the time), leaving less resources for domestic consumption, which literally resulted in starvation. Many who opposed or failed to meet their quotas were killed. Many died of hunger. Coupled with the Cultural Revolution (aimed at fulfilling his utopian ideas), his regime killed around 45 milion people (some say even more - close to 80 million).

Not until one of Mao's successors, Deng Xiaoping and his pro-market reforms (his most famous quote being: "It doesn't matter whether it's a white cat or a black, a cat that catches mice is a good cat."), did China stared to embark on the road to greater prosperity. It took them 30 years to recover from Mao's socialist utopia.

Critics of democracy look at China today and say this is the system we should embrace. A mix taking the best from both systems - so-called state capitalism. However, state capitalism is, as I've pointed out in the previous text, probably the worst form of capitalism - characterized by deep cronyism, elitism, rising inequality and worst of all lack of political freedom. Furthermore China's shadow banking system is huge, as are its malinvestments, its credit boom is alarming, all as a result of its economy being ran by target-oriented socialists creating wrong incentives in the economy.

So even though today we can look back and claim that none of the regimes mentioned above (communism, fascism, various forms of authoritarianism) ever proved a real threat to democracy, at the time they were being imposed they were an extremely credible threat, especially in the countries that implemented them. The same story is with China today. Many feel we should emulate this system, which seems much more fair and successful than our own, but tend to completely overlook the biggest problems this system is facing, and its inherently unjust nature.

Competition and the trial and error process

So how come democracy keeps winning? Democracies have a multitude of hidden strengths from which an authoritarian regime ultimately always fails. Democracies, as well as capitalism itself, strive on the idea of competition. And competition and selection of different alternatives implies more creative solutions when it comes to dealing with challenges. Sure this sometimes implies poor judgments being made and dubious outcomes arising as a result (some of which I covered in the previous post), but as the market system, democracy too relies on trial and error. Thinking of the nature of our society, we all strive on this system. It teaches us not to repeat the same mistakes of the past (this is one of the underlying ideas behind the European project - never again to allow a war on the continent - so far it's extremely successful in this, as the EU seems to be the last place on Earth where a war might take place).

This is why democracies appear to be more fragile than they actually are - they are characterized by a complex decision-making process, which need not always yield the best possible outcomes immediately. Where one can see a sign of weakness (gridlocks, slow responsiveness, negative political selection), this may just be a short-term response of the system to some earlier made errors. When too much of these errors pile up, they congest the system (corruption, cronyism, vote-buying and the consequential sovereign debt crisis) and signal to the electorate that things need to be changed. It will take time before the electorate recognizes the correct set of ideas and people to solve these piled up errors, but at one point they will be solved. At least within a democracy voters are given this option. In the process, other errors will surely be made, but due to even closer scrutiny and transparency from the electorate, the process will inevitably end in a success. As it did in fact many times before, despite striking opposition and doomsday prophets. 

The key to a successful democracy, reached by a series of trial and error processes in Western history, is to erect institutions which will limit political power. Democracy mustn't turn into a tyranny of the majority. This is why political freedoms are crucial and why institutions which enable transparency and scrutiny are essential in ensuring a long-run survival of a democracy. Particularly for a country new to the idea. Many new democracies get preoccupied with elections and fail to design institutions that prevent some of democracy's main failures. They fail to establish a good constitutional democracy with an emphasis on the rule of law. This is a typical reason for failure of consolidation. Their trail-and-error process is arguably going to be much longer, particularly if new democracies quickly descend back into authoritarianism (which is very possible - recall the iron law of oligarchy). When long-lasting democracies exhibit signs of failure their trial and error process is quicker and such countries will resolve their structural problems relatively faster, despite the seemingly congested system they currently have to face.

In its recently published essay on democracy the Economist mentioned a series of positive examples of how democracies can successfully find solutions to some of its mounting problems: 
"Governments can exercise self-restraint in several different ways. They can put on a golden straitjacket by adopting tight fiscal rules—as the Swedes have done by pledging to balance their budget over the economic cycle. They can introduce “sunset clauses” that force politicians to renew laws every ten years, say. They can ask non-partisan commissions to propose long-term reforms. The Swedes rescued their pension system from collapse when an independent commission suggested pragmatic reforms including greater use of private pensions, and linking the retirement age to life-expectancy. Chile has been particularly successful at managing the combination of the volatility of the copper market and populist pressure to spend the surplus in good times. It has introduced strict rules to ensure that it runs a surplus over the economic cycle, and appointed a commission of experts to determine how to cope with economic volatility. 
...technocracy and direct democracy can keep each other in check: independent budget commissions can assess the cost and feasibility of local ballot initiatives, for example. Several places are making progress towards getting this mixture right. The most encouraging example is California. Its system of direct democracy allowed its citizens to vote for contradictory policies, such as higher spending and lower taxes, while closed primaries and gerrymandered districts institutionalised extremism. But over the past five years California has introduced a series of reforms ... The state has introduced a “Think Long” committee to counteract the short-term tendencies of ballot initiatives. It has introduced open primaries and handed power to redraw boundaries to an independent commission. And it has succeeded in balancing its budget..."

Which brings me back to the initial point I wanted to make in this series of texts: it's much easier to change a faulty system when you have the possibility to do so. In a democracy the people do have an option to change an unjust and corrupt system, and they often do so. Recall the great victories for liberty during the Civil Rights movement or the emancipation of women, both of which signaled an end to a long run of unfair and unequal societies. 

This simply shows that those periods were times of 'error', and it took a long time to get it right. It took more than a hundred years from Lincoln's abolition of slavery for the African Americans in the US South to gain equal rights. Think about the inequality and social mobility problems they've experienced, basically up until the 80-ies. The trial and error process is very long, sometimes it may seem to be too long, but eventually it will triumph. This is the biggest advantage democracies have over any other system of governance. Which is exactly why they will always be successful in fixing their problems. 

Friday, 7 March 2014

What happened to our dream of democracy? Part 2: Democracy's critics

In the first part of the series of texts on democracy I focused on the problem of democratic consolidation as one of the major criticisms directed at democracy as a system. Many suffer under the perception that some countries simply aren't fit to have a Western-type democracy. They have been too long embedded in an authoritarian system and cannot seem to shake some of its negative mentality. The people in such countries persistently yearn for strong leaders (when they lack one), call for nationalization of private companies in times of crises, and in general call for a more firm state control over the economy, not realizing that the major problem of such countries is state inefficiency, rather than market inefficiency. 

On the other hand, the critics claim, the Western-type model of democracy isn't all that great either. The recent global crisis (along with the rise of China) has exposed all its problems; dysfunctionality and political gridlocks that only worsen the crisis have become a standard in the US and Europe. Government bank bailouts and rapid accumulation of debt stroke a huge blow to the positive perception of Western democracy and capitalism itself. Many Western intellectuals changed their tune as well, calling for "state capitalism" (which is arguably the worst type of capitalism), and boasting China as the new leading world superpower. There was supposed to be a change in the existing world order. This will all end soon. China is suffering from its own problems of having to deal with a huge shadow banking sector and enormous malinvestment. The problem of political freedom in state capitalism is becoming an even bigger burden for these countries (Russia, Ukraine, Argentina, Turkey, Brazil, Venezuela, etc.) and is biggest reason behind mass anti-government protests and resentment in the population. Political freedom (political inclussivness) is the key element of sustainable democracies. It is the crucial necessary assumption that creates scope for higher economic inclusinvess. This is why the West will, after all, prevail. 

Inequality in democracies (vol 2)

Regardless of all the banter, on average democracies are still richer than non-democracies (including those with state capitalism), have higher living standards, are better educated, and in some cases have lower inequality (although this isn't entirely conclusive). Mass protests in non-democracies (or semi-democracies) all have one thing in common - a clear goal: the fight for more political freedom and the fight against government corruption. The protesters are fighting for a better democracy, a system without political or corporate state capture, a system without constrains on free speech, and most importantly a system without such high levels of inequality. 

In fact, the central recent issue with democracies also revolves around inequality (and to some extent social mobility). Particularly after the crisis. As I've written before this too can be, in part, attributed to the negative outcomes of the political process in democracies. Various interest groups dominate the political process in biasing the budgetary expenditures towards their preferred goals; politicians themselves engage in direct or indirect vote buying (either through gerrymandering or by giving direct concessions to their support groups); budget-maximizing bureaucrats also add to the rise in government spending which isn't targeted towards the general population (recall Niskanen's bureaucracy model); political campaigns are financed heavily by the corporate sector desiring favorable legislation, etc. All of this signals a poor image of the Western-type democracy. It has failed to become fully robust to cronyism. There's only a handful of countries that are able to withstand the pressure of cronyism (albeit not perfectly) and maintain an efficient democracy. Scandinavian countries are a good example. 

The type of democracy infected by cronyism also needs changes. However it seems this would be far more likely in a system with high levels of political freedom. Changing the corrupt political system is always going to be a hard, daunting and long-lasting process, but with higher public scrutiny and calls for bigger transparency of the political process, it is far more likely to image this happening in the West, rather than in state capitalism semi-democracies. 

Political gridlocks

The problems of political gridlocks are doing no favors to democracies. Unelected technocratic governments failed to solve the long term problems of countries where they were imposed. They lacked the political legitimacy to fully implement the necessary reforms. Italy is a case in point here, where the electoral process was brought to the utmost absurd when an anti-establishment comedian got 25% of the votes in the last general election. Italy has faced three unelected Prime Ministers since then (each doing a decent job however). Such political gridlocks often result in unstable coalitions and logrolling, very often against the best interest of the voters. 

The US political gridlock back in August 2011 almost caused the end of the Eurozone a few months later. Such is the strength of negative reinforcement in modern economies. Their further gridlocks over the fiscal cliff did spread panic, but less than before as the markets accommodated to the possibility of such scenarios.  

On the other hand Italy was always known as a country prone to political instability and parliamentary quarrels, while in the US the Dems and the Reps are more polarized than ever on account of Obamacare and are stopping at nothing to undermine each other in Congress. But this far from justifies the failure of democracy in these cases. 

Furthermore, even when the election process works and doesn't deliver gridlocks, it can still yield negative outcomes such as the abrupt rise of extremist parties in Europe (which is true not only in the so-called periphery but in the UK, France, Holland or Finland as well).

Is there any hope left?

So basically, even if you somehow surpass an inefficient electoral process , it can still deliver faulty results. It can give power to corrupt or extremist candidates (the problem of selection into politics), it can result in cronyism and rising interest group power linking up with rising inequality, and it can often prove to be very inefficient in making quick decisions (think of the many negotiations back in 2011 between EU's leaders on solving the Eurozone crisis - their slow responsiveness almost ended the euro). 

There is still hope however. All these deficiencies can be solved by applying strong political will from those in power. This however faces further problems: (1) if selection into politics is negative than how can we expect to elect someone who will be competent enough to pull the series of necessary institutional reforms? and (2) we're actually expecting from the politicians to undermine their own power. 

This is where political inclusinvess and political freedom comes in. Even though politicians can do a lot in securing their electoral victories through vote-buying and gerrymandering, it will be hard for them to continue doing so indefinitely. Particularly if the momentum for change is strong enough. As Victor Hugo once wrote: "There is nothing more powerful than an idea whose time has come."

More on this in the forthcoming text. 

Saturday, 1 March 2014

What happened to our dream of democracy? Part 1: Ukrainian revolution

Ukraine has been the center of worldwide attention in the past weeks (and still is), following a long run of anti-government protests. The protests started as a peaceful rally back in November 2013 to end Russia's influence over Ukraine (the trigger was the Ukrainian President Yanukovich's refusal to sign a free trade agreement with the EU and chose Russia's help instead). The initial student protesters were calling for a more EU-oriented Ukraine. In essence one can say these protesters were fighting FOR democracy, or to be even more precise for a BETTER democracy.

This isn't the full story around Ukraine however. Lots of things went out of hand particularly last month and even though some kept their initial goals of a pro-European Ukraine, many other, darker things also surfaced. And interestingly enough, Ukraine has been one of the prime examples of a split-country. The political science terminology often uses the term Two Ukraines, similar to the story of Two Polands. This divide is, however, geographical even more than ideological (see map). 
It's not to hard to imagine that in Ukraine there's a lot of people who are pro-Russian as well as those who are pro-European. Many don't share the image of the EU being the convergence machine it was designed to be. They don't consider a democracy to be the best system out there. Recall an earlier text of mine on European values and see for yourself the split in Ukraine over the perception of democracy. Furthermore, issues such as having a strong, authoritarian leader and high state involvement in the economy are reasons for concern in the Ukraine over what kind of a system they are hoping to ensure. Obviously the western pattern of a democracy doesn't fit into the optimal scenario. Why so pessimistic? Simple, this already happened in Ukraine during the Orange revolution in 2004 when the people went to the streets to oust Yanukovich, only to re-elect him back into office in 2010. Things are different now, say many, and I agree. Yanukovich certainly won't be heading back into office ever again. However looking at the pattern of protests in autocratic or semi-autocratic regimes it's hard to see how things might improve.

Look at the failed attempts of Egypt's democratic consolidation? Or the entire Arab spring for that matter. Many countries look to achieve the Western type of a democracy, but these things take time. A lot more time than the current voters are prepared to wait for. Which is exactly why the initial democratic consolidation is so fragile and often ends in disarray (more on this in the forthcoming texts). 

The iron law of oligarchy 

The bottom line is that autocratic or semi-autocratic regimes get replaced first by anarchy and then by a woeful inability to consolidate the young democracy. According to Acemoglu and Robinson this reeks of a typical 'iron law of oligarchy' - where one tyranny is simply being replaced by another.

Democratic consolidations fail when they fail to create institutions to limit political power. Protests and revolutions are a natural reaction to years of extractive institutions in which the ruling elites had no or little constrains on their power. In other words they had strong incentives of expropriation and wealth extraction. An elite overthrown by a revolution is replaced by a new one often continuing to cause even worse havoc than before thus strengthening the iron law of oligarchy. Countries such as Sierra Leone, Guatemala, Ethiopia, Zimbabwe, Uzbekistan, Columbia, Argentina, Egypt all seemed to be trapped by this perpetuating negative feedback loop. It's happening to Ukraine as well.

The fragility of a young democracy 

A great recent essay in the Economist on the problems facing democracies holds a cautious view; on one hand, Western democracies (most of them) suffer from rising inequality, high debt levels and problems of dysfunctionality, while on the other hand in the developing world it's getting harder and harder to consolidate them. This all further adds to the problem of democracy's fragility as a system.

In one point the critics are right - democracies do seem fragile and unsustainable, particularly in the developing world. Which is exactly the reason why a strong democracy needs strong institutions. Institutions that limit the extractive political and corporate power and ensure a functioning rule of law and constitutional order. This is much easier said than done. It's hard to ask for limiting political and crony power when those who hold on to power are the only ones able to change it. This leads to a paradox - a democracy, the so-called rule of the people, is unable to take power away from those who hold it. The principles (voters) are unable to control their agents (politicians). Sometimes this goes too far and the result is a revolution which overthrows the current ruling elite. But institutions are still weak, so it's easy for the new group to rise to power and again maintain a firm hold over it, implying that the democratic system has failed. Think again of Ukraine. They overthrew Yanukovich during the Orange revolution in 2004 - a good example of democracy at work (even though Yanukovich refused to step down after electoral defeat - hence the revolution). Yushchenko, the new President promised a lot but delivered very little, so he too was ousted (punished) in the next elections (he got around 5% of the vote in the 2010 elections) - another good example of the democratic process at work. In this democratic process Yanukovich won again (narrowly against Yulia Tymoshenko, and with many accusations of fraud in the run-off elections). In the aftermath, Yanukovich imprisoned his main opponent Tymoshenko on charges on corruption and embezzlement (she was released last month mainly thanks to the pressure from the protesters). And this is perhaps the key issue with democracies - very often controversial candidates can secure their firm hold on power riding on a legitimate electoral process. The elections don't even have to be rigged (just look at Erdogan in Turkey). All it takes is to build a big enough, faithful, support group (or groups) to whom you need to keep giving and promising concessions. A great new book from Bueno de Mesquita and Smith "The Dictator's Handbook" provides the full story. The problem is self-perpetuating and it is easy to see how young democracies find it very hard to set up a proper set of institutions. Economic theory says such democracies suffer from state capture

In the following texts I will look at some of the more in depth reasons of why democracies are loosing their allure.