How much state in the economy?

Transcription

How much state
in the economy?
A selection of essays by
Horst Köhler, Leszek Balcerowicz, András Inotai, James Shikwati,
Ivan Mikloš, James Jones, Yih-teen Lee, Jože Damijan, Witold Orłowski
Introduction by
Witold Gadomski
Published by the Central and Eastern Europe Development Institute
(CEED Institute) Warsaw 2015
© CENTRAL AND EASTERN EUROPE DEVELOPMENT INSTITUTE 2015
www.ceedinstitute.org
No reproduction of any part of this report may take place without the written
permission of the CEED Institute
Authors:
Leszek Balcerowicz
Jože Damijan
Witold Gadomski
András Inotai
James Jones
Horst Köhler
Kazimierz Krupa and Jakub Krupa
Yih-teen Lee
Ivan Mikloš
Witold Orłowski
James Shikwati
Coordinated by:
Justyna Kobos
Eliza Głowacka-Szprot
To quote this publication:
How much state in the economy,
Central and Eastern Europe Development Institute, Warsaw 2015
The CEED Institute, founded by Dr. Jan Kulczyk in 2010, is a think-tank
whose aim is to promote the achievements and economic potential
the CEE countries. Our ambition is to support business initiatives,
as well as debates on indispensable reforms in the region, including measures
to boost sustainable growth and innovative capacities. The objective of the CEED
Institute is the dissemination of ideas and projects on how best to improve
efficiency and competitiveness of the CEE region.
CEED Institute
Krucza 24/26, 00-526 Warsaw, Poland
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How much state in the economy?
Table of contents
Foreword
7
8
10
Lech Wałęsa
Zdeněk Bakala
Sándor Demján
13
Witold Gadomski
Too much or too little of the state
21
Are we smarter now?
Introduction
The survey
Conclusions from the survey on the role of the state in the economy,
conducted for the CEED Institute among students of economic faculties.
Essays
33
37
41
47
51
55
59
65
71
Leszek Balcerowicz
An analytical approach to the role of state in the economy
Horst Köhler
The role of the state in the economy
Ivan Mikloš
Euro, strategic industries, privatization, nationalization
and national champions
James Shikwati
The African context: how much state in the economy?
James L. Jones, Jr.
A time for responsible arrangement of the global world
Yih-teen Lee
The concept of state and its role in Chinese culture
András Inotai
The role of the state in the 21st century
Jože P. Damijan
Too much government in the wrong place and too little
government where it is needed
Witold M.Orłowski
How much state is needed in the Polish economy?
3
Foreword
5
Time to establish the global
world responsibly
Lech Wałęsa
Historical leader of Solidarity
movement (1980-1989), Nobel
Peace Prize Laureate (1983),
the President of Poland
(1990-1995) and CEED Institute
Ambassador.
Following a turbulent time of transformation and intensive
change to the administrative system and of economic change in
Poland and in the other former communist bloc countries, the time
has come for calm systematic development, for making a daily effort
to improve each little bit of our reality and create better
opportunities for future generations. We should not take this hardwon freedom for granted. We need to continually reinforce and
nurture that freedom, even in the face of new challenges and
dangers not encountered in the preglobal age. This is even more
reason why, in a world without borders, broad international
cooperation has to be forged with tried and tested, and new,
partners. The global world demands global cooperation, and global
solidarity!
Twenty-five years after the huge transformations, let us
look with pride and contentment at the collective achievements
that led to a leap forward for civilization in Poland and the entire
region. With determination, but also with hope, we look to tomorrow
– I firmly believe that tomorrow will be our day as well, and is ours
even now! Improvements are needed in many fields, and this
includes the entire capitalist system. For years I have been saying
that capitalism is not an ideal system and that it will not survive this
century in its current form. There must be more solidarity in
capitalism, more openness to other people, respect for other
people’s rights and dignity. Not only businesspeople, but those in
power, trade unions, and each one of us as well, have a vital role to
play in improving the imperfections, so that in every workplace one
can see a place for him/herself, feel partly responsible for its fate,
and collectively improve their surroundings. I dream of a capitalism
created as a community of economic communities based on
solidarity, cooperation, equal opportunities, and mutual respect.
I see that in many places more and more importance is being
attached to the after all indispensable social aspect of the economy.
I believe that we will all take this collective path. Only then will the
coming years be a time of courageous and responsible organization
of our world.
I dream of a capitalism
created as a community
of economic communities
based on solidarity,
cooperation, equal
opportunities, and mutual
respect.
7
21st century – a century
of different dynamism
Zdeněk Bakala
Czech entrepreneur,
Member of the Programme Board
CEED Institute.
In the 1990s, when I was setting up my first companies, the
state and governments were not only in apparent retreat but also out
of fashion. The West was still fully riding the ideological wave of the
free market reforms made by Margaret Thatcher and Ronald
Reagan, while the former communist East was doing this in practice:
privatization and deregulation was the slogan of the day. But it was
not only an ideological swing or reaction to the failing socialist
policies of the 1970s. It was also supported by expert impartial
institutions such as the IMF and World Bank, which introduced the
so-called Washington consensus: price liberalization, capital flow
liberalization, deregulation – these were not only the slogans but the
policies of the day.
This century is dominated by a different dynamism, which
became more intense after 2008. The state is back in full swing and
plays a decisive role again. First this is due to the fact that economies
with a strong state are getting stronger and more important in
a global game - like China. Sovereign wealth created by these
countries (but also by oil emirates, Russia and Norway, etc.) are
becoming a more and more important source of FDIs, etc.
To some people this leads to the notion that with a strong
state China can be challenged only by the US with an equally strong
state – a state with strong visions and strategic policies and tough
counter policies. It also has to do with nationalism and rebirth of
nationalist competition. In the 1990s the world was dominated by
trade liberalization and growth of the service sector, these days lot
of countries, including the UK and the US, are discussing and even
introducing policies of reindustrialization.
The state is strong in areas
where it should be weak
and weak in areas where
it should be strong.
This was a reference to the
Czech Republic in 1997,
but it can be said about
many countries and many
states even now.
Whereas in the 1990s pension reforms and privately
controlled pension funds were in fashion, these days private funds
are in retreat and private pension systems are being taken back by
states or nationalized. This happened in Poland and Hungary, and in
the Czech Republic the system was not even introduced. Still ten
years ago preparations were being made for privatization of publicly
run hospitals. Now the scheme has been scrapped and no one is
even talking about it. For instance, the dominant electricity provider
in the Czech Republic, CEZ, is still only partially privatized and no
final plans are in the pipeline.
In 2008 governments had to take over (at least temporarily)
the banks and since then the role of the state in banking has been
much stronger. The state is inventing more and more regulations
and dictates the size of the banking sector. Liberalization of international trade has all but stopped.
8
Threats of terrorism serve as an apology for the state
controlling and intervening in private electronic communication, the
Internet and social networking. Support of alternative sources of
energy by governments is creating whole new artificial branches of
the economy. In the US, the policy of energy self-sufficiency is
reshaping the energy market.
Energy security and demand for geographical diversification of resources is also increasing the role of the state, because
without the state no one has the resources to invest in the new major
pipelines and terminals. Also, for a period of time, everyone was
hoping that Russia was on the way to becoming an open market
economy, but now that trend has been reversed and Russia is again
heading in the direction of state-dominated capitalism.
A growing imbalance in income, which is a global phenomenon, is also creating pressure for the state to do something
about it. There is a clear demand for an increase in defence
spending, but with increased defence spending, the role of the state
will also increase. Some of the trends which lead to an increased role
of the state are inevitable, especially some of those which are
related to security and defence. I recall President Vaclav Havel, who
said in his Rudolfinum speech in 1997, that „the state is strong in
areas where it should be weak and weak in areas where it should be
strong“. This was a reference to the Czech Republic in 1997, but it
can be said about many countries and many states even now.
A good state is one which guarantees simple, solid rules,
which are understandable to everybody, a good state does not
change these rules and its institutions very often, and a good state
guarantees impersonal rule of law and a sound judicial system.
The state should provide a good educational system and ensure
equality not in income but opportunities. In those states where
those conditions are fulfilled, there is prosperity, low unemployment
and peace and businesses are flourishing. Or does anyone know any
examples to the contrary?
9
The potential of Central
and Eastern Europe
Sándor Demján
Hungarian entrepreneur,
Member of the Programme Board
CEED Institute.
As a leading businessman and the President of the
Hungarian Entrepreneurs’ and Employers’ Organization (VOSZ)
I always paid special attention to the development of economic and
cultural ties among the countries of the region. I am still convinced
that there is a huge growth potential in these countries and the
skilled and well-educated labor force provides an extra competitive
edge to be successful. I was honored to join Dr. Kulczyk when the
CEED Institute was established and I was asked to serve as
a Programme Board Member.
I still believe that through the strengthening of multi-faceted
cooperation the CEE counties are able to utilize their precious
knowledge, experience and the widely proved innovative capabilities of their people to contribute to the progress of the Old
Continent. I welcome the efforts the CEED Institute has made in this
direction and recommend this publication to the distinguished
readers!
I still believe that through
the strengthening of
multi-faceted cooperation
the CEE counties are able
to utilize their precious
knowledge, experience and
the widely proved innovative
capabilities of their people
to contribute to the progress
of the Old Continent.
10
Introduction
11
Witold Gadomski
Too much or too little of the state
Economists have been struggling to define the role the state should play in the economy,
and thus to define the economic functions of the state and extent of its interference in the
economy. If the current tendency holds up, the state will continue to shrink as a result of global
processes. However, history has seen several waves of progressing and receding globalisation
as well as states opening up and closing to global influences.
Classical economists believe that the state should
ensure the safety of its people and the safety of economic
trading, have a monopoly in terms of coercive measures and
enforce the established laws.
An entirely different view was held by those
economists who found the market to be a dangerous element
that should be harnessed or at least controlled by man. As the
authors of the “Manifesto of the Communist Party” wrote 150
years ago, “the communist theory can be summarized in one
simple phrase: elimination of private ownership”.
Bolsheviks, who nationalized the economy,
believed that it could be run successfully much like the
German wartime economy. “That’s right, learn from the
Germans! (…) It just so happened that it is the Germans
that currently personify, in addition to bestial imperialism,
the principle of discipline, organization, orderly cooperation
on the example of the advanced mechanical engineering
industry, the strictest surveillance and tracking”, Vladimir
Lenin wrote in 1918. The communist experiment, which
involved running the entire economy like one would run
a single enterprise, i.e. through planning, tracking and top-tobottom orders, ended in the 1980s in a spectacular collapse.
A breakthrough in the approach to the role of the
state in the economy came with the Great Depression of the
1930s, which terrified ordinary citizens and political
decision-makers alike and shifted the focus in the economic
debate towards heavy interference of the state.
There were three main reasons for the increasing
role of the state in market-based economies, which continued almost throughout the 20th century.
The first reason were the great wars and the cold
war between the West and the Soviet empire, which lasted
half a century.
The second reason was the social pressure to
create a “prosperous state”. Following the growing wealth,
which was the result of many waves of the technological and
organizational revolution, the concept of providing all citizens
with a respectable standard of living regardless of their ability
or willingness to work appeared to be realistic and tempting
to both democratic and authoritarian politicians. As a result of
creating a system of social security benefits, the expenditures
of the national budget, which before World War One tended
to stay under 10 per cent of the GDP, now tend to exceed 40
per cent of the GDP in most OECD member states (i.e. most
developed countries).
The third driver of growth of the state was the
influence of interest groups. The late economist and
sociologist Mancur Olson (d. 1998) believed that long-term
functioning of democracy strengthens interest groups such
as trade unions and manufacturers’ associations. In his book
entitled “The Rise and Decline of Nations”, he explains how,
through proper organization, small interest groups gain
power, manage to secure tax advantages and limit external
competition.
In 1920, the United States adopted an act called
the Jones Act, which requires that all cabotage transport be
carried out exclusively on US ships, built in the United States
and that all crew members be US citizens. This protected
American shipyards from foreign competitors, and killed
those shipyards’ international competitiveness in the long
run. Attempts to repeal the law have been thwarted by trade
unions and, believe it or not, owners of railway lines.
13
Many economists feel that
one of the reasons for
the global financial crisis
was limiting the regulation
of financial markets, which
occurred in the 1980s
and 1990s in the United
States, United Kingdom
and many other countries.
Almost all countries in the world have regulations
in place that have been enforced by interest groups rather
than actual needs of their economies. Even a powerful
international structure such as the European Union cannot
force the governments of its Member States to observe the
rules of free competition. A classic example thereof is the
German government’s requirement for foreign carriers
whose vehicles are transiting Germany by road to provide
the German minimum wage to their employees, which
requirement specifically affects cargo carriers from Central
and Eastern Europe. This is an example of how the state tries
to circumvent EU rules concerning free movement of goods.
The new regulations were being adopted because
the economy was becoming increasingly complicated. Since
the late 19th century, states have been implementing antitrust laws, followed by phytosanitary requirements and
environmental protection, product quality and labour
protection laws in the 20th century. States saw the growth of
industries in which entities have to operate in observance of
uniform rules: energy, construction, rail transportation, air
transportation, telecommunications, banking and stock
exchange trading.
Many economists feel that one of the reasons for
the global financial crisis was limiting the regulation of
financial markets, which occurred in the 1980s and 1990s in
the United States, United Kingdom and many other countries.
However, opposing views have also been expressed.
It is also a fairly common belief that the economic
standstill experienced by Japan and many European Union
Member States was caused by excessive regulations that
impeded competition.
Quality of the state
In his essay entitled “Toward a Limited State”,
Leszek Balcerowicz lists three types of states existing in the
real world: 1) an extended quasi-liberal state, 2) an extended
illiberal state, 3) an extended anti-liberal (communist) state.
Following systemic transformation, most of the
Central and Eastern European states moved from category
three to category two. What emerged were extended illiberal
states, which, more importantly, unsuccessfully performed
the excessive responsibilities that they had taken upon
themselves.
Privatization, albeit incomplete, meant diminishing
the role of the state in the economy, but the poor quality of the
state in many of the post-communist republics has curbed
economic growth. An approximated measurement of the
quality of the state, despite its inevitable imperfections, is
offered by the World Bank’s Doing Business ranking. Three
small Baltic nations, which were part of the USSR before
1991, have placed very high in the ranking. They are led by
Estonia, whose government introduced a series of liberal
economic reforms, ensured transparent government
procedures and carried out a new media revolution in its
public administration bodies.
At the other extreme is Ukraine and the former
Soviet republics of Central Asia (except Georgia), wherein the
state has been placed at the service of its oligarchs. It is no
exaggeration to say that the state in Ukraine has been
privatized, together with its most fundamental functions such
as ensuring safety and enforcing laws. This is an extreme
case, which demonstrates that a complete deficit in the rule of
law is a major obstacle to economic growth.
Creating structures of the state from scratch is
a very difficult task. The Ukrainian politicians who took over
after the 2014 revolution have declared their intent to carry
out extensive reforms and establish an administration that
successfully enforces the law and protects the people and
businesses. However, no major improvement has been
reported thus far. In the past year, Ukraine has seen many
more burglaries and acts of violence against representatives
of small and medium-sized enterprises than in the year
before. The main reason for the Kiev revolt was corruption
and complete absence of the rule of law.
14
Maintaining governmental
control over “strategic”
companies stems from two
reasons. Firstly, they are
a convenient tool for politicians.
The second reason is the belief
the state can oversee assets
just as effectively as a private
investor.
Public opinion surveys carried out in December 2014
revealed that fifty per cent of Ukrainians believed that the
government’s treatment of the people had become worse,
47.3 per cent did not detect a decrease in the level of
corruption, and 1/3 felt that corruption had increased.
Also in other post-communist states the citizens,
especially entrepreneurs, have an unfavourable opinion of
their state. This stems from the low efficiency of public
institutions and treating higher offices in these institutions
and companies controlled by the State Treasury as the loot
owed to parties coming to power.
Growing importance of central banks
Percentage share of private sector in generating
GDP and employment
Country
Share of GDP
Share of employment
Czech Republic
80
75
Hungary
80
78
Poland
75
72
Slovakia
80
75
Bulgaria
75
72
Romania
70
80
Estonia
80
75
Latvia
70
68
Lithuania
75
68
Croatia
65
68
Slovenia
65
70
Ukraine
65
65
Russia
65
68
Belarus
25
50
Source: 2007 and 2011 Transition Reports,
European Bank for Reconstruction and Development
The global economic crisis, much like the crisis of
the 1930s, sparked serious discussion among economists
and politicians alike about whether and how the state can
protect the stability of the economy that is threatened
by dynamic market phenomena. Stimulus packages,
implemented by almost all of the world’s economies in the
years 2008-2009, brought about an explosion of public debt
in the USA, the Euro Zone, Japan and the United Kingdom.
In order to prevent interest rate increases, central banks
began using unconventional monetary policy tools: mass
purchasing of debt securities, primarily treasury bonds,
granting special low-interest loans to banks (e.g. Long-Term
Refinancing Operations used by the ECB in late 2011 and
early 2012) and maintaining near-zero interest rates for
extended periods of time.
Regardless of the limited effectiveness of that
policy – the US did not start to experience notable economic
recovery until six years after phase one of the quantitative
easing and Japan fell back into recession in 2014 – the
unconventional monetary policy did strengthen the role of
central banks in an unprecedented manner.
Thus far, discussions about the role of the state
in the economy focused on sectoral policy (industrial,
housing, energy etc.), fiscal policy and regulations. However,
over the past few years, central banks and their monetary
policies have become the most powerful tool used by the
state to influence the economy. Some economists and
political analysts are concerned about this state of affairs.
The increasing importance of central banks may make them
more political as they become desirable to politicians.
Decisions made by the banks are not transparent, not
understandable for the people, are not based on public
debate and thus violate the principles of democracy.
15
It is a much different world
than forty or fifty years ago,
when there were restrictions
on exchanging foreign
currency in most countries
and capital flows were
relatively low.
Furthermore, the consequences of these decisions for the
economy may be much greater than the government’s
decisions about budget expenditures or legislative changes.
The state begrudgingly retreats
One of the side effects of the global financial crisis
are the increasing statist sentiments. The common belief that
private banks were to blame for the crisis does not account for
the fact that in many countries, it was state-owned financial
institutions that granted the highest number of high-risk
loans or guarantees.
Slovenia, the wealthiest of the former communist
states, entered a banking crisis in 2012, which was only
aggravated in 2013. In March 2012, Slovenian banks held
EUR 6 billion worth of non-performing loans, which
represented 11.8 per cent of all granted loans. In October
2012, non-performing loans accounted for as much as 18.2
per cent of all loans (Source: “The Root Causes and Influences
of Slovenian Banking Crisis”, Liu Zuokui, Associate Professor
Institute of European Studies Chinese Academy of Social
Sciences, 2013). The banks in Slovenia are largely stateowned. In October 2012, 58 per cent of all loans were
granted by large state-owned banks, 8 per cent – by small,
local government-owned banks and only 34 per cent were
granted by foreign banks. Also in Spain, the financial crisis
started with banks controlled by government institutions.
Poland, where the majority of the loans are taken out at
foreign banks, emerged unscathed from the global financial
crisis.
Feelings of suspicion of foreign capital found their
breeding ground. Societies that for many decades had lived in
state-owned economies, were subjected to different degrees
of shock therapy in the 1990s. The privatization process was
carried out fairly quickly. As a result of the process, more than
60 per cent of the GDP is generated by the private sector,
which employs a similar percentage of the workforce.
The transformation process was generally painful,
generated high unemployment and forced large portions of
society to redefine their place in the new market economy.
In Hungary, the privatization process involved
foreign capital, more so than in other countries, which
sparked nationalist sentiments, subsequently used by the
right-wing Fidesz party, whose administration has openly
admitted to being against foreign corporations. The extraordinary taxes implemented target industries dominated by
foreign investors, i.e. supermarkets, telecommunications
and finance.
Poland has 161 companies that are fully owned by
the State Treasury, 45 companies that are majority-owned by
the State Treasury, 380 companies with a minority share by
the State Treasury and 19 state-owned enterprises that are
not companies. Land owned by the State Treasury accounts
for 11.96 million hectares, which represents 38 per cent of
the territory of Poland. The state controls enterprises and
entire sectors it considers strategic: energy, fuels, railway,
ports, gas and oil pipelines, copper mining and processing as
well as the defence industry.
The state retains a controlling interest even in
companies that have been privatized. This is the case for two
largest fuel companies, as well as KGHM, PKO BP and
PGNiG. Some of them have been listed on the stock exchange
for years, but the state has not agreed to the selling of larger
blocks of their shares to professional investors who could
then influence these strategic companies.
The policy of economic nationalism, similar to what
is embodied by Fidesz’s policy, was implemented by the PiS
administration in Poland in the years 2005-2007. This policy
continued to be implemented after 2007 as well. It does
not raise any objections among the people. On the contrary,
timid attempts to privatize larger companies (e.g. in the
energy and heavy chemical industries) were met with
hysterical responses from opposition politicians and the
media.
Maintaining governmental control over “strategic”
companies through the economy stems from two reasons.
Firstly, they are a convenient tool for politicians. They can be
used to influence the media (purchasing advertising), fund
mass events (e.g. sporting events) and provide jobs for
deserving associates of the ruling parties.
16
Governments make sovereign
decisions on whether to limit
their sovereignty by complying
with the standards set by global
markets or to separate
themselves from the rest
of the world through their own
currency, customs and legal
regulations.
The second reason is the belief held by people in
charge of economic policy that the state’s oversight helps
stabilize the economy, and thus prevents cyclic crises, and
the state can oversee assets just as effectively as a private
investor. A few years ago, Jan Krzysztof Bielecki, Chief
Economic Advisor to Prime Minister Donald Tusk, proposed
the establishment of a state fund to actively manage shares
held by the State Treasury. As he explained in an interview,
“these types of funds exist in Norway, Singapore, France and
other countries”.
However, there are not many examples of
successful ownership supervision by the state to be found in
Poland. The financial demise of Europe’s largest coal mining
company, Kompania Węglowa, where government institutions for two years silently watched its deterioration, is
a case that should give politicians food for thought about the
state’s level of involvement in the economy.
Former head of the McKinsey Global Institute,
William W. Lewis, in his paper entitled “The Power of
Productivity” provided only one example of a thriving stateowned company. In 1964, the steel company POSCO
(Pohang Iron & Steel Company) was established in Korea.
Until 2000, it was owned by the state and at one point
became the world’s most productive company in its industry.
For 30 years, POSCO was managed by General Taejoon Park,
who, at the very beginning, reserved three benefits for its
company: no influence of public administration bodies on the
purchasing of equipment, goods and services, no influence
of the government on the personnel policy and exemption of
the company from making contributions to the world of
politics. Park’s standing in the military and political oligarchy
was so strong (as was his character and integrity) that the
officials left his company alone for many years. Not too many
managers of state-owned companies can hope to have the
types of requirements stipulated by General Park fulfilled.
The role of the state in the future – the challenges ahead
Modern-day states are facing three fundamental
challenges. These are: the threat of disintegration, dominance of global markets and relations with supranational
organizations.
One of the consequences of ending the cold war
was the emergence of states referred to as “bankrupt”. During
the rivalry between the USA and the Soviet Bloc, the political
vacuum was being occupied by the forces of one of the sides,
which was working to strengthen the government that
favoured it in a country threatened by internal conflict and
disintegration. The list of areas that are too expensive for
stable states to control and stabilize continues to grow.
The examples of Ukraine, Bosnia or Kosovo demonstrate that
“bankrupt states” or near-bankrupt states can also exist in
Europe.
In the case of many post-colonial and postcommunist states, the biggest barrier to growth is a weak,
corrupt state. In “bankrupt states” or states on the verge
of bankruptcy, the only effective form of external assistance may involve extinguishing conflict and providing
humanitarian aid. In these countries, the biggest challenges
for the people include strengthening the state or even
building it from the ground up.
The states undergoing transformation in Central
Europe, in particular new member states of the European
Union, are stable and not in risk of collapse (as long as there
is no external aggression), but they are struggling with
improving the effectiveness of their fundamental institutions
and society’s supervision over those institutions.
In recent years, most small and medium-sized
economies, and even some large ones, were faced with the
immense power of global markets. At the turn of 2014 and
2015, this was the case in Russia, who is unable to stabilize
its currency and despite massive foreign reserve may soon
face insolvency. The dominance of global markets causes
states to lose some of the traditional attributes of sovereignty.
Missteps in economic policy may cause capital flight,
currency depreciation and higher borrowing costs. If a major
credit rating agency lowers its rating, this results in higher
cost of debt servicing and lowers the prices of debt securities.
The resources of certain multinational corporations are
greater than those of mid-size countries, which enables them
to successfully influence the decisions of the relevant
national governments.
17
It is a much different world than forty or fifty years
ago, when there were restrictions on exchanging foreign
currency in most countries and capital flows were relatively
low.
Countries are faced with the decision whether to
give in to the dynamics of global markets or fight it and try to
control it. Smaller states are especially subject to intensive
inflow and outflow of foreign capital, which can destabilize
the economy, as was the case in Iceland, Ireland and the
smaller Baltic states. It is becoming increasingly important for
governments to control markets through appropriate
financial regulations and implementing stable fiscal policies.
Attempts to implement policies against markets (for
instance, by discriminating against foreign capital in Hungary
or the new Greek government’s plans to denounce the strong
fiscal policy recommended by the European Commission and
the International Monetary Fund, but also expected by the
markets) are a very risky approach.
Modern-day states are also losing their sovereignty
in favour of supranationals. Interstate agreements have been
known for thousands of years, but it was not until the last fifty
years that international organizations took over certain
attributes of sovereignty from the states. The most obvious
example is the European Union, whose legislation prevails
over the states’ national legislation. However, there are other
organizations that impose restrictions on states. The Council
of Europe influences the operations of the justice systems of
the Member States. The World Trade Organization has
deprived the member states of the ability to make sovereign
customs decisions. Customs policy used to be one of the
most important elements of every state’s economic policy.
Today, its role is secondary.
Governments make sovereign decisions on
whether to limit their sovereignty by complying with the
standards set by international organizations and global
markets or to separate themselves from the rest of the world
through their own, non-convertible currency, customs fees
and their own legal regulations. The second route tends to be
taken by fewer and fewer states and their economic
performance and social achievements are not particularly
impressive.
Marxists once predicted that the state would
diminish until it was replaced by spontaneous selforganization of classless societies. When they came to power,
they created a regressive albeit not a very strong state.
This example illustrates the importance of extreme caution
in offering predictions regarding the evolution of the state.
If the current tendency holds up, the state will continue to
shrink as a result of global processes. However, globalization
does not need to be a one-directional process. History has
seen several waves of progressing and receding globalization
as well as states opening up and closing to global influences.
Witold Gadomski
Economic journalist of “Gazeta Wyborcza” Poland's
largest daily. Co-founder and former member
of the Liberal Democratic Congress (1991-1993).
During martial law, the founder of the “Independence”,
promoting liberal ideas. Kisiel Prize winner,
author of a biography of Leszek Balcerowicz.
The Basel Committee on Banking Supervision
defines standards for the operations of banks, which are also
adopted by states in which the president of the central bank is
not a member of the Committee. Thus, it affects the lending
policy of each state.
18
The survey
19
“Such will be the Commonwealths
as the upbringing of their youth”
Jan Zamojski, from the Foundation Act
of the Zamojski Academy, 1600
Are we smarter now?
According to the survey conducted by GfK Polonia for the CEED Institute among
the students of Poland's top economic universities, 75 percent of the future economists
and entrepreneurs favour solutions with a less significant role of the state, including
the most liberal Anglo-Saxon model chosen by as many as 26 percent of the respondents.
“We were foolish. In the 1980s, we caught the fever of neoliberal ideology,” Professor
Marcin Król, one of the leading figures of the Polish post-1989 transition, said in a famous
interview for Gazeta Wyborcza. He was a member of the opposition, an academic professor, and
in the front lines of the post-1989 decision-making that influenced post-communist Poland.
Król continues: we were not aware of the importance of social protection. Solidarity and
empathy were forgotten. Policies were based on liberal fiction, a blind faith in Hayek and Popper.
As a leading representative of the whole group that shaped Poland’s transition, he admits to
having made a mistake and issues an indictment in a generational way: “we gave up on ordinary
people and their daily problems”.
Sound harsh? Indeed. Here we have one of the intellectual founders of Poland’s post1989 path who sets the record straight: we were wrong. Blind faith in liberalism, market selfregulation and free market flexibility was a mistake and shows that we were naive.
Everything, however, seems to suggest that his potential successors – the next
generation which is about to take up the baton in modernising Poland – have not read that
interview or perhaps simply do not agree with him. According to “The survey on the opinions of
students of economics faculties about the role of the state in the economy” prepared by the
renowned polling agency GfK Polonia for the CEED Institute, they express unusually marketoriented views. In January 2015, the agency interviewed more than 500 students of Poland’s
top economics universities to find out their preferred economic model for the future.
Obviously, this whole discussion is nothing new. The deliberations on optimal relations
between the state and the economy, the role of the state in shaping economic reality and the
validity of the state’s participation in economic relations have all been continuing for over 300
years. There is no questioning of or raising any doubts about the principles of a capitalist
economy, such as the prevalence of private ownership and free markets. The other principles,
however, remain under constant discussion. Should the state intervene on the market, that is
regulate and control it, or play an active part? And to what extent?
At the end of the twentieth century, following the series of miraculous events of 1989,
came the conclusion that we had managed to reach “the end of history” and achieved a final
victory of one solution, namely liberalism. In his famous essay, American political scientist
Francis Fukuyama wrote that liberal democracy and a free market economy complement each
other and form a self-propelling mechanism.
21
It soon turned out that Fukyuama probably went too far in his optimism. In 2011,
he admitted that as a consequence of the 2008 and 2009 financial crisis the Americans and the
British discovered what had been already discovered by Asians ten years earlier, namely that
bringing together capital markets and an unregulated financial sector is the best recipe for
a disaster.
The results of the research show that Polish students are now also only somewhere in
the middle of that Fukuyama-style journey through liberalism. In Poland the belief in a social
state is exceptionally high - 95 percent (!) assume it is the duty of the state to provide a minimum
wage, pension benefits and free medical care, 88 percent believe higher education should be
free of charge, 84 percent think the state should provide a roof over their head, and 81 percent
want the state to provide them with a job in line with their qualifications. Against that
background, Polish students’ views are strongly pro-market. The liberal Anglo-Saxon model
attracted twice as many students (26 percent) as the Scandinavian social model (13 percent),
which in historical terms should in theory suit them better.
The data and charts below come from: “The survey on the opinions of students of
economic faculties about the role of the state in the economy“ made by the GfK Polonia for
the CEED Institute. A full report is available at www.ceedinstitute.org.
The preferred model of relations between the state and the economy
Please, indicate which model is the best in your opinion:
The Anglo-Saxon Model
a free-market model – the state
interference is limited to the absolute
minimum, it is assumed that only
the full freedom of competition
and flow of capital lead to the optimal
allocation of resources.
1%
5%
The German model
6%
26%
13%
a model of social market economy
– the state has to create institutional
conditions for the development
of competition and economic growth,
and if necessary to stabilize the
economic situation and support
achievement of social goals.
The Scandinavian model
the welfare state model – the capitalist
market economy, with an active role
of the state, which, by the high tax
burden and redistribution of national
income strives to provide an adequate
standard of living and social benefits
to all citizens.
The Japanese model
49%
a model of a strong state that while
maintaining the principles of the
free market competition affects
the activities of private companies
to implement national economic
and non-economic objectives.
An entanglement of state
administration with associations
of companies of a given industry
is characteristic for this model.
None of the above mentioned
N=502
It’s hard to say/ I have no opinion
22
The majority of students believe the model of the social market economy (Sociale
Marktwirtschaft), enshrined in the Polish constitution and based originally on a German model,
to be the most adequate. Their answers to most of the questions fall within the broad definition of
the market economy model, although their sometimes inconsistent belief in the limited role of
the state questions the possibility of meeting social demands. More than half of respondents
also agree with the statement that “the best state is one that minimizes its intervention in
economic affairs”, and “state interventions in the economy are necessary to ensure sustainable
development”. It is therefore, difficult to resist the impression that here and there their answers
depend more on the wording of a particular question than on their overall approach to the
economic system.
Opinions about the relations between the state and the economy
The interference of the state
in the economy is essential for assuring
a sustainable development.
13%
38%
22%
15%
11% 1%
The best state is the state that minimally
interferes with economic matters.
Without the state intervention the market
income distribution would lead to
the deepening of social inequalities.
The state is not able to effectively mitigate
the economic imbalances, and only adds
to their deepening.
19%
32%
18%
35%
9%
The state should determine the desired
strategy of development through
appropriate law regulations and leave
the rest to the free market.
26%
20%
23%
23%
21%
The state should produce or provide services
on its own only when there is no private
provider of services or products according
to the terms established by the state.
20%
7% 1%
15%
5% 4%
28%
41%
35%
21%
19%
17%
10% 4%
12%
16%
4% 4%
8% 4%
The free market leads to the socially
disadvantaged economic solutions.
8%
18%
25%
23%
21%
5%
The state should intervene
in the market only in critical situations.
14%
39%
I definitely agree
I rather agree
I neither agree nor disagree
I rather disagree
I definitely disagree
No opinion
19%
16%
8% 4%
N=502
23
Opinions about the relations between the state and the economy according to the preferred model
of relations
The interference of the state in the
economy is essential for assuring
a sustainable development. (%)
1%
7%
28%
17%
17%
The best state is the state that minimally
interferes with economic matters.
3%
3%
1%
4%
11%
2%
9%
11%
30%
14%
25%
27%
35%
21%
20%
31%
30%
12%
12%
23%
17%
41%
41%
29%
35%
23%
9%
11%
Anglo-Saxons
N=133
German
N=244
Scandinavian
N=66
The state is not able to effectively mitigate
the economic imbalances, and only adds
to their deepening.
3%
3%
7%
18%
13%
19%
2%
12%
Anglo-Saxons
N=133
German
N=244
The state should determine the desired
strategy of development through
appropriate law regulations and leave
the rest to the free market.
2%
3%
6%
3%
2%
14%
18%
32%
Scandinavian
N=66
6%
8%
12%
19%
39%
20%
42%
41%
23%
23%
20%
18%
5%
6%
16%
Anglo-Saxons
N=133
German
N=244
Scandinavian
N=66
43%
39%
29%
19%
Anglo-Saxons
N=133
German
N=244
15%
Scandinavian
N=66
The state should intervene in the market
only in critical situations.
4%
5%
6%
2%
9%
5%
9%
17%
21%
15%
19%
24%
51%
17%
35%
36%
14%
11%
I definitely agree
I rather agree
I rather disagree
No opinion
Anglo-Saxons German Scandinavian
N=133
N=244
N=66
24
This, however, says a lot about the attitude of today’s students towards the economy.
People who soon will be running Polish companies seem to be more pragmatic than ideological
and their views seem to be based on a careful observation of the successful Polish transition.
The observation of the operational troubles convinces them of benefits stemming from
privatization but at the same time they are aware of some strategic areas where it is better to
leave ownership with the state. Sometimes they even want to strengthen those areas by creating
the so-called “national champions”.
Opinions on privatization in Poland
Which of the following opinions on privatization in Poland best describes your own opinion?
41%
24%
12%
11%
12%
N=502
Privatization should proceed further and include more companies
Privatization should be stopped – no more companies should be privatized
Privatization should be stopped, and some of the privatized companies – renationalized
It’s hard to say / I have no opinion
In your opinion, are there in Poland any sectors of strategic importance, which should not be privatized?
44%
30%
32%
28%
9%
8%
5%
N=502
The possibility of indicating multiple characteristics.
The figures do not add up to 100%.
Energy sector
Fuel sector
Banking sector
Insurance sector
Telecommunications sector
Other sector
There are no such sectors
25
Opinions on privatization in Poland according to the preferred model of relations and the assessment
of economic situation
Which of the following opinions on privatization in Poland best describes your own opinion:
7%
9%
14%
11%
12%
10%
14%
10%
9%
11%
11%
20%
9%
16%
13%
11%
9%
18%
24%
24%
26%
13%
23%
22%
53%
Anglo-Saxons
N=133
47%
42%
37%
German
N=244
Scandinavian
N=66
good (1+2)
N=173
42%
33%
nor good
or bad (3)
N=180
bad (4+5)
N=132
Privatization should proceed further and include more companies
Privatization should be stopped – no more companies should be privatized
Privatization should be stopped, and some of the privatized companies - renationalized
It’s hard to say / I have no opinion
Attitudes towards the involvement of the state in the economy
Is it necessary at all to distinguish strategic industries covered by the special protection of the state
– that is, those in which the state has its shares, and in the development of which it invests?
20%
42%
18%
8%
12%
N=502
Definitely yes
Rather yes
Rather not
Definitely not
I have no opinion
Do you support the idea of creating national state champions* in Poland?
9%
N=502
36%
24%
9%
22%
I definitely support
I rather support
I rather don't support
I definitely don’t support
I have no opinion
* In some countries in the world, the state implements the development policy of, so called, “national champions”.
It involves creation of national capital groups in selected sectors of the economy. Large companies, created in this way,
operate according to the principle of economies of scale, and are preferentially treated by the state.
26
A generally negative approach towards the management of Polish state-owned
companies due to frequent, election-related rotation is the reason why respondents adopt
a negative attitude towards state intervention in human resources. Once again, however, this
understandable will to provide state-owned companies with independence reveals a certain
contradiction, if the key decisions on appointments should not be made by the state, who
should make them?
Opinions on the state-owned enterprises
The state-owned company will always
be less efficient than a private one.
24%
Employment policy in state-owned
companies is often carried out by the
political key and not based on the merits.
38%
20%
37%
39%
11% 6% 1%
15% 5% 2% 2%
The state should have a vote in filling
key positions in state-owned companies.
12%
The state companies enable to safeguard
national interests in key sectors
of the economy.
14%
The state should not subsidize
unprofitable state companies
with public money.
A greater involvement of the state
in the management of strategic companies
is necessary.
24%
24%
19%
35%
28%
14%
18%
29%
34%
26%
13% 4% 5%
21%
29%
3%
10% 4% 3%
15%
12% 4%
Large state-owned companies are unfair
competition for private entrepreneurs.
12%
35%
25%
18%
6% 4%
Political interest often influence decisions
related to state-owned enterprises.
31%
I definitely agree
I rather agree
I rather disagree
No opinion
44%
14% 6% 3% 2%
N=502
27
Opinions on the state-owned enterprises according to the preferred model of relations
The state-owned company will always be
less efficient than a private one.
1%
5%
6%
14%
7%
14%
1%
17%
The state should not subsidize unprofitable
state companies with public money.
4%
5%
5%
2%
4%
13%
18%
20%
21%
32%
34%
32%
36%
41%
27%
18%
23%
40%
36%
Anglo-Saxons
N=133
German
N=244
Scandinavian
N=66
A greater involvement of the state
in the management of strategic companies
is necessary.
4%
3%
7%
3%
9%
26%
15%
14%
24%
Anglo-Saxons
N=133
German
N=244
30%
1%
2%
5%
9%
4%
5%
6%
29%
31%
27%
14%
18%
29%
Anglo-Saxons
N=133
German
N=244
Scandinavian
N=66
29%
Scandinavian
N=66
1%
5%
6%
48%
20%
12%
36%
17%
47%
36%
20%
21%
Political interest often influence decisions
related to state-owned enterprises.
20%
18%
5%
9%
35%
Anglo-Saxons
N=133
German
N=244
24%
Scandinavian
N=66
I definitely agree
I rather agree
I rather disagree
No opinion
The research reveals that a specific form of reformed post-Washington liberalism
seems to dominate among students. It involves awareness of certain shortcomings regarding
social protection and key sectors of industry but on the other hand it is based on a strong and
unshakeable belief in the foundation of a free market and the assumption that further
liberalization can only bring benefits.
28
While more and more voices in Europe start to question the present economic system,
including those who supported it in the 1990s and led the liberal revolution in Central and
Eastern Europe, such as Jeffrey Sachs or Francis Fukuyama, Polish students seem to be
convinced that it is the best solution. There is no surprise here. Despite the divided opinions on
the current economic situation in Poland, the last twenty-three years of constant economic
growth – even during the global economic crisis – were probably the best time in Poland’s history
for centuries. Perhaps even since the 16th century, as Marcin Piątkowski, an economist at the
World Bank, noticed in his famous essay about Poland’s “golden age”. Twenty-five successful
years make questioning the ideas on which the success is based seem unreasonable, even after
the social costs are included.
The trouble is, however, that Poland will soon have to face challenges of a different
nature than those it managed to cope with after 1989. These new challenges include increasing
the share of innovations and new technologies, improving work efficiency, and responding to
demographic challenges. These problems did not materialize yesterday. On the contrary,
a solution to these problems is long overdue. A successful response in a particular policy area will
require a new, hybrid approach to economic theories, in certain cases applying far-reaching
social solutions and in others pursuing liberalism.
The success of this mission depends on flexibility and readiness to think outside the
box. We should be drawing conclusions as we go and listening to various European debates on
possible economic models without excluding any of them. Let us open our minds and look for the
best solution for Poland, even if it sometimes requires abandoning or entering into a conflict
with a particular set of economic views.
Otherwise, in twenty-five years’ time we will again hear: “we were foolish”, and we
cannot afford that.
Kazimierz Krupa
Jakub Krupa
is a Polish senior economic journalist who most
recently served as the editor-in-chief of Forbes
Poland (2007-2014). He also runs Drawbridge,
a law firm in Warsaw. Jakub's father.
is a Polish journalist covering the region
of Central and Eastern Europe and politics
of the European Union. Based in London,
he also works as communications advisor
to a range of companies and NGOs.
Kazimierz's son.
29
Essays
31
Leszek Balcerowicz
The role of state in the economy:
an analytical approach
There are two concepts of the state and – correspondingly – two approaches to its role in
the economy. According to the mythical approach, the state is the benevolent deity, omniscient
and omnipotent. Accordingly, whatever problem exists, it is the state which should and could
solve it. This faith-based approach is hostile to rational thinking and empirical evidence. It is
common to various varieties of statism: socialism, fascism (i.e. national socialism), extended
interventionism, etc. They differ much more in rhetoric than in substance: all rely on anti-liberal
laws and on extensive state apparatus. The analytical approach realistically assumes that the
state operates through political rulers and public officials, and that they do not differ from
ordinary mortals, i.e. they are rarely angels. Therefore, when analyzing the activity of the state
one must consider that its agents are usually self-interested and have cognitive limitations.
It was this realistic tradition which was so well expressed by the American Founding Fathers.
The mythical approach is more than useless, it is dangerous when applied. Therefore, the only
sensible approach is the analytical approach.
33
Using the analytical approach one can decompose the role
of the state in the economy into several, partly overlapping
dimensions:
• ownership,
• the content and enforcement of the law,
• regulations (the administrative constraints on
economic freedom),
• fiscal stance,
• and monetary regime.
The combinations of specific positions on various dimensions which
can co-exist permanently constitute different economic systems.
Economic systems differ in their performance resulting in
various types of outcomes. An especially important outcome is the
pace of the long-term economic growth, as it is the key to improvement in the standard of living of the masses, to employment, to
a country’s position in the word, and to its capacity to invest in
defense. Therefore, I will focus on long-term growth.
There has been massive empirical research into the growth
performance of the economic systems, which differ in the role of the
state in the economy. Here are some of the main lessons:
The state ownership of firms means that the ruling politicians have
the power to appoint and dismiss the managers of SOEs and thus to
control these firms. Hence the public sector in the economy is
a politicized sphere which – due to the misallocation of resources
and monopolization – slows down its economic growth. Also, the
politization of the banks distorts credit allocation and leads to more
frequent crises than in the private banks, thus hurting economic
growth in another way (see for example the cajas in Spain or
Landesbanken in Germany). Therefore, the higher the share of SOEs
in the economy, the worse for its long-term growth. In the most
extreme case of socialism the state sector had a monopoly and
socialism was an economic disaster. But even smaller doses of
SOEs slow down economic growth. This is why the Western
countries have largely eliminated the public sector by privatizing it,
starting in the 1970s.
Economic systems differ
in their performance
resulting in various types
of outcomes. An especially
important outcome
is the pace of the long-term
economic growth, as it is
the key to improvement
in the standard of living of
the masses, to employment,
to a country’s position in
the word, and to its capacity
to invest in defense.
Good laws protect individuals and give them a broad range of
freedoms, including economic liberty (i.e. private ownership and
the freedom of contract), which is essential for economic growth.
If laws are good in this sense, then the higher the level of their
enforcement, the better for economic growth. Therefore, the
differences in the justice systems, an important part of the state,
matter for the economy. If laws are bad (i.e. oppressive, including
a ban or severe limitations on economic freedom), then one cannot
say that the higher level of the enforcement, the better for the
economy and the people. The reverse is rather true.
34
There is a grave danger
that Poland’s economic
growth and this process
of catching up will slow down
substantially in the long term.
To avert this scenario
a new wave of reforms
is needed, so as to avoid
the decline in employment,
to increase the investment
ratio and to raise the recently
declining rate of overall
productivity.
There is a large amount of empirical literature on the impact of
various regulations on the economy. Here are some conclusions.
Regulations that limit competition tend to lower the economy’s
competiveness and thus hurt its growth. Labor market regulations
which rigidly control wages and employment tend to deepen
recessions during crises and thus hurt economic growth too.
Certain kinds of tax and financial regulation contributed to the credit
booms, and to the resulting busts.
The chronic condition of public finances – i.e. persistent deficits,
high public spending, and a high and/or growing ratio of public debt
to GDP, systematically lower economic growth (for example in
Hungary). Acute fiscal crises, a result of previous fiscal booms, tend
to produce deep recessions, and hurt growth in another way (for
example in Greece). Fiscal discipline is thus essential for economic
growth.
Economic growth can flourish under different monetary regimes,
provided growth fundamentals on other dimensions are present.
However, if some of these fundamentals are absent, no monetary
regime can substitute them. It is against this background that one
should look with apprehension at the unprecedented expansion
produced by the major central banks in the West, including the ECB.
This policy can delay the necessary reforms and slow down the
spontaneous restructuring of the economy.
Institutional economics not only provides a comparative
analysis of various economic systems, but also deals with the
transitions from one system to another. They can be divided into
destructive and productive. The former sharply limit economic
freedom, or undermine the health of public finances, and/or money,
or damage the enforcement of good laws. The destructive transitions sooner or later undermine economic growth, as was the case
with socialism, and with many anti-liberal changes in the Third
World and the West.
Productive transitions are intended to go in the opposite
direction: they increase economic freedom, restore the health of
public finances and money, or increase the enforcement of good
laws. It is only the productive transitions which are capable of
increasing countries’ economic growth, provided they are sustained
and not reversed.
Poland’s transformation is one of the most productive transitions in Europe. Poland’s GDP more than doubled between 1989
and 2013 and this was a better outcome than in Hungary and the
Czech Republic, not to mention Russia or Ukraine. Research
indicates that a strong link existed between the extent of market
reforms and of macro-economic stabilization and these results.
Since 1989, and for the first time in the last 300 years, Poland
started to catch up with the West.
35
However, there is a grave danger that Poland’s economic
growth and this process of catching up will slow down substantially
in the long term. To avert this scenario a new wave of reforms is
needed, so as to avoid the decline in employment, to increase the
investment ratio and to raise the recently declining rate of overall
productivity.
An extensive description of the necessary reforms can be
found in a report by FOR (Forum Obywatelskiego Rozwoju).
Professor Leszek Balcerowicz
is the leading Polish economist, the author of the Polish economic
transformation program in the 1990s. He is a Founder and Board Chairman
of the Civil Development Forum Foundation (FOR). Professor of Economics
at the Warsaw School of Economics, Former Deputy Prime Minister
of Poland and Minister of Finance (1989-1991, 1997-2000),
Former President of the National Bank of Poland (2001-2007).
36
Horst Köhler
The role of the state in the economy
The aim of this paper is not to tell you what to think. It is to tell you what to think about.
If you had to model the relationship between state and the economy for a brand new republic,
what would your main goals be, your key assumptions and guiding principles, your paradigms
and leitmotifs? What, to begin with, should the ultimate objective of that new republic be, what
should it help the nation achieve, first and foremost? Maximum freedom? Maximum security?
Maximum wealth, equality, and justice? Maximum happiness for its people? You may say that
the answer is “all of the above”, of course, but that is where the difficult part begins, for in real life
these goals, and the means to achieve them, tend to conflict.
Unfettered freedom may lead to gross inequality, providing
equality may tend to unfairness and cripple the spirit of enterprise,
and the quest for wealth and wealth alone may prove pointless and
end in unhappiness. The quality of life in any republic depends upon
a subtle mixture of the material and the spiritual, it mirrors the moral
tone of the society, its openness towards talent and initiative, the
reliability of its institutions and laws, and whether the weak and
disabled are cared for in decent ways. That is why eminent
economists have usually been social philosophers, too.
37
They all had to think about some rather basic questions:
Should the production and distribution of commercial goods be left
to individual initiative, enterprise and competition, or should it be
organized by state bureaucracy? Could that bureaucracy ever
muster the necessary information and foresight, or could it only
pretend to have, the knowledge required for the discovery of new
needs and new solutions and the balancing of supply and demand to
be best be left to free and fair markets? And if so, how do these
markets evolve over time? Do they develop tendencies to hamper
competition, or are they self-adjusting and stabilize themselves?
These are evergreen questions which Adam Smith did ask himself,
already, and Alan Greenspan probably did too (or at least he
does now).
In Germany, they have a certain reputation for pensiveness,
and in the field of economic thinking, it is rather well deserved.
Some economists came up with results that deeply influenced what
today we call the Soziale Marktwirtschaft or Social Market Economy
(SME). Walter Eucken, Alfred Müller-Armack, Ludwig Erhard and
the “School of Ordoliberalism” are household names in our lecture
halls and legal framework, in our discussions about economic
policies and in our daily newspapers.
The quality of life in any
republic depends upon
a subtle mixture of the
material and the spiritual,
it mirrors the moral tone
of the society, its openness
towards talent and initiative,
the reliability of its
institutions and laws,
and whether the weak
and disabled are cared for
in decent ways. That is why
eminent economists have
usually been social
philosophers, too.
Ordoliberalism addresses the question of how best to
balance state and society, public policy and private enterprise, the
power of the state and freedom of the individual, general welfare
and exclusive profit-seeking. As to that, ordoliberalism answers:
the state must regulate the forms of the economic process, it must
set the rules for competition and guarantee compliance, but the
state may not plan or steer that economic process. In other words,
if one compares the economy to a ballgame, then the state must
set its rules and act as referee, but it is only the citizens who shall
play – and make – the game. If they do not do this, if their enterprises
and calculations fail, they must be held accountable for their choices
– freedom and accountability should always be two sides of the
same coin.
This ordoliberal concept is based upon assumptions and
arguments so old and familiar they deserve to be called classical:
the natural, decent self-interest of the individual makes him
strive for improvement of his own situation. That brings about
industriousness, inventiveness and cooperation – on the precondition, of course, that the individual can freely engage his talents and
safely enjoy the fruits of his efforts, which presupposes professional
freedom and private property, and defence of the latter against
arbitrary expropriation as well as against undue inflation. Decent
self-interest also brings about division of labour, markets and
competition.
38
Now, decent people will readily agree which forms of
competition are licit and fair. Unfortunately, markets do not attract
decent people alone. On the contrary: If markets are left to
themselves, some individuals and groups will inevitably bend the
rules, and their avarice will destroy the necessary fairness and often
enough the market altogether. Therefore, the state has to furnish
freedom of enterprise and private property, has to rule out cartels
and monopolies, and uphold the price mechanism, and therefore
the state has to guarantee as much transparency of business activity
as possible, and free market entry.
Germany has, all in all,
resisted the temptation
to try bringing up
“national champions”,
and that was wise, since
that usually turns out to be
a costly and inefficient use
of taxpayers' money.
The state looks after certain
strategic resources,
e.g. the storage of gas and oil,
and there is an ongoing
discussion regarding
the question of how much
of the infrastructure should
stay in public hands,
e.g. the electricity and water
supply for private households,
which used to be run
by municipal enterprises.
In addition to that, men like Ludwig Erhard, the first German
Federal Minister for Economics, and Chancellor Konrad Adenauer
agreed (and could cite Friedrich Hayek for that) that the state has to
engage in a number of policies for economic progress, for fair
opportunity and for social welfare. Again, in itself, this was hardly
new. When Adam Smith listed what the state should see to and care
for, his third count, after defence and a justice system guaranteeing
the rule of law, was the following: “the third and last duty of the
sovereign or commonwealth is that of erecting and maintaining
those publick institutions and those publick works, which, though
they may be in the highest degree advantageous to a great society,
are, however, of such a nature, that the profit could never repay the
expence to any individual or small number of individuals, and which
it, therefore, cannot be expected that any individual or small number
of individuals should erect or maintain. (...) works and institutions
of this kind are chiefly those for facilitating the commerce of the
society, and those for promoting the instruction of the people.
The institutions for instruction are of two kinds; those for the
education of the youth, and those for the instruction of people of
all ages.”
Infrastructure, then, and education, which in our day entails
the promotion of research and development. Add to that
Smithsonian insight what had already been achieved under
Bismarck: a compulsory system of worker accident insurance,
a compulsory national health insurance system, and likewise
insurance for old age and disability. Add the ideas of distributing the
wealth harvested by productive gains more broadly and of giving
workers more of a say in the running of their factories, and add the
resolve to stimulate and cushion structural change by state
intervention and to insure those who lose their jobs against
destitution. Finally: add the resolve to be open-minded towards new
challenges, for example finding market-based ways of internalising
external costs like pollution of the environment and of finding the
path to a “green”, ecological SME – and you have more than just the
contours of the SME Germany has arrived at today.
39
Germany has, all in all, resisted the temptation to try
bringing up “national champions”, and that was wise, since that
usually turns out to be a costly and inefficient use of taxpayers'
money. The state looks after certain strategic resources, e.g. the
storage of gas and oil, and there is an ongoing discussion regarding
the question of how much of the infrastructure should stay in public
hands, e.g. the electricity and water supply for private households,
which used to be run by municipal enterprises. But, generally, the
political tendency is towards privatization and against state-owned
enterprises.
That leaves one final important issue to think about and take
heed of: how to ensure that the political process is not being taken
over by private enterprise, is not being undermined by the influence
of powerful economic or financial interest-groups, for the mirrorimage of a state-controlled economy tends to be as detrimental.
That is another key question for any democracy and market
economy. When you think about the constitution for your brandnew republic, think about that question, too.
Horst Köhler
served as the ninth President of the Federal Republic of Germany
between 2004 and 2010. During his term of office he was a staunch
campaigner for poverty eradication and the African continent.
Earlier in his career, Mr Köhler worked as State Secretary in the Federal
Ministry of Finance, as President of the German Savings Bank Association
and as President of the European Bank for Reconstruction and Development
(EBRD) in London. He then was Managing Director of the International
Monetary Fund (IMF) from 2000-2004.
President Köhler continues to serve in a number of national and international
organizations in honorary positions.
40
Ivan Mikloš
Euro, strategic industries, privatization,
nationalization and national champions
The role of the state in the economy represents a pivotal issue not only for economics
but also for practical politics. In this essay I want to explore this issue from the angle of
experience gained over twenty-five years of post-communist transformation.
Let me begin with two stories.
The first story dates back to 2009. The world and Europe are
in a state of crisis. In the town of Polyakovo near St. Petersburg,
workers are rioting because their employer, Russian oligarch Oleg
Deripaska, closed his cement factory. Vladimir Putin flies in to
Polyakovo where he harshly criticizes the oligarch for failing to
safeguard jobs; he throws a pen at him during a program that
is transmitted live, asking him to sign a pledge that he will
immediately reopen the factory and pay his employees. Deripaska
signs the pledge and the employees get paid with money transferred
on the same day by the government to the company's bank account
with a state bank.
41
The second story, featuring Ukrainian oligarch Dmitry
Firtash, was documented by investigative journalists at Reuters on
the basis of official data from Russian, Ukrainian and Cypriot
customs and financial statements and statistics. These data show
that Firtash made his fortune after 2004 by selling gas supplied to
him by Gazprom at prices well below the market value. In the 2010
presidential election, Firtash provided strong support to Viktor
Yanukovych, who narrowly defeated Yulia Tymoshenko. Reuters
journalists determined on the basis of Russian customs records that
the price Firtash paid in 2012 and 2013 for gas purchased from
Gazprom through his Cypriot companies was USD 230 and USD
267 per 1,000 cubic metres respectively. He subsequently sold the
gas at market prices not only to other customers but also to his own
fertilizer production plants. For example, his plants bought gas
at USD 430 per 1,000 cubic metres. In just two years (2012 and
2013), Firtash’s offshore companies earned him USD 3.7 billion.
Naturally, these earnings were obtained at the expense of the stateowned Gazprom, i.e. at the expense of Russian citizens – and not
just once but twice. The state suffered a loss first as a shareholder
because of a shortfall in revenue of several billion caused by these
transactions alone and, secondly, as a result of lower tax revenues
from Gazprom.
Several analysts argue that without Firtash’s massive
support Yanukovych would not have succeeded in narrowly
defeating Tymoshenko in the 2010 presidential election. It is quite
clear today that, rather than pursuing the Ukrainian national
interests, Yanukovych as president was a corrupt executor of those
of Putin’s Russia, and that is exactly why he ended up fleeing to
Russia to avoid the wrath of the Ukrainian people.
So these are the stories. It has been twenty-five years since
the collapse of communism. It did not collapse because of pressures
from the outside – communism literally crumbled from within,
mainly because the system was ineffective and unsustainable,
suffering from a lack of political and economic competition and
freedom. The general assumption was that the future belonged to
the free market and liberal democracy. That, in fact, had and has
been the case in many post-communist countries, but not of all by
far. It has become apparent that some political leaders have opted
for illiberal, controlled democracy and state capitalism as the
alternative to liberal democracy and free market economy.
The two examples given above clearly illustrate this point.
But this does not apply only to Russia or to certain former Soviet
republics in Central Asia. Already for his second consecutive term,
Viktor Orbán is building a model of this kind for society in Hungary,
and far from making a secret of it, he proudly acknowledges it.
He stated in the summer of 2014 that the model of liberal
democracy and free market economy was outdated, and he listed
Russia, Turkey and China as examples to be followed.
42
Orbán’s close associate, parliament speaker László Kovér, even said
that “perhaps it would be worth considering slowly backing out of
the EU”.
Thus, Russia and Hungary exemplify today illiberal
democracy and state capitalism. They exemplify the countries with
a strong state that restricts political and economic freedoms.
Illiberal democracy can be characterized as a system which, while
being based on free elections and a pluralistic political system, fails
to ensure fair and equal political competition and freedom of
individuals. Rather than being guardians of individual freedoms, the
state, state institutions, the judiciary and the media serve as
instruments of state power.
For its part, state capitalism can be characterized as a system in which the state has taken up the role of dominant economic
player, using this position primarily for political purposes. It is
therefore, evident that in such a system the state needs to exercise
control mainly over the companies and sectors it deems to be of
strategic significance. These are primarily extractive industries,
energy and banking. For the creators of state capitalism, the
privatization of these sectors amounts to high treason, and where
privatization was carried out in the past, they do everything in their
power to return ownership of the relevant companies to the state
(i.e. the holders of power).
I firmly believe
that the experience
with post-communist
transformation obtained
over the last twenty-five
years proves that state
capitalism and illiberal
democracy represent
a blind alley, and that
the future lies in the path
of reforms based on free
market economy and
liberal democracy.
The most important strategic company in Russia is
Gazprom, which holds close to a 90 percent share of Russia’s
extraction and processing of natural gas. It is true that Gazprom was
under state control even up until 2000, but the state’s ownership
share was then below 50 percent. By 2008, after the first two
presidential terms of Vladimir Putin, the state acquired majority
control over ownership of Gazprom. It also expanded its control over
Russian oil production from 10 percent to almost 50 percent
through the national oil champion, Rosneft. Putin’s government
coerced foreign-owned companies into handing the control of highvalue energy projects over to the state; at the same time it destroyed
Yukos, the largest private energy company. Moreover, the state
acquired controlling stakes in large corporations in the sectors of
armament export, aviation, shipbuilding, and nuclear energy. A law
adopted in 2008 defined 24 “strategic” sectors that were subject to
restrictions on FDI.
State capitalism in Russia has become the source and
instrument of massive corruption. This does not apply only to stateowned companies, which are being stripped of their assets and
plundered, but also to highly opaque system of provision of subsidies to private companies at the expense of the state and the state
budget. State capitalism has become synonymous with crony
capitalism. The economic crisis that hit Russia at the end of 2014 is
most often attributed to the fall in oil prices and Western sanctions.
43
What is not mentioned, however, is its third and very important
cause: the costs and consequences of corrupt state capitalism.
Corrupt state capitalism is the cause of low competitiveness of the
Russian economy and its continued dependence on exports of oil
and gas. In this respect, gas and oil can be literally seen as Russia’s
curse, because they enabled the system to survive up to the present.
This is well demonstrated by the difference between the consequences and implications of two crises – those of 1998 and
2009. As a result of the crisis that broke out in 1998 and the
government’s lack of money for bailing out failing banks and
businesses, many loss-making and inefficient companies went
bankrupt, thus liberating the capacities and markets for new, more
effective and debt-free businesses. This resulted in the cleansing of
markets and in the Schumpeterian creative destruction. Also, the
government had to cut its spending: in 1997-2000, the GDP share
of public spending in Russia fell by 14 percent.
However, the year 2009 showed a different picture.
By then, the government had at its disposal not only tremendous
economic power, but also money and reserves accumulated over
a decade of rapid growth driven by high oil and gas prices, as well as
the effects of successful restructuring following the 1998 crisis.
No restructuring or market cleansing followed the crisis of 2009;
the government spent around USD 200 billion on various forms of
subsidies and intervention to rescue loss-making state-owned, as
well as private, enterprises. The system was caught in the vicious
circle of corruption and mismanagement hindering innovation and
competitiveness.
A similar situation, albeit on a smaller scale, can be seen in
Hungary. Orbán’s government put an end to compulsory private
savings in the second pension pillar and nationalized accumulated
savings worth 10 percent of the GDP. Through the purchase of
shares, the government regained control of the oil company MOL,
and it levied higher discriminatory taxes on foreign investors in
the sectors it deemed to be strategic (banking, insurance, retail,
telecommunications, electricity and gas).
Even though the Hungarian economy has not yet been hit by
a crisis similar to that affecting Russia, its performance cannot
certainly be called a success. In terms of catching up with the
economies of Western Europe (EU 15) the most successful countries are those that carried out liberal economic reforms and
minimized state intervention in the economy. These are particularly
the Baltic countries, Poland and Slovakia. By contrast, the worst
performing countries were Hungary and Slovenia, i.e. the countries
characterized by the absence of liberal market reforms and, in the
case of Slovenia, also by a continuously high level of state ownership
in the economy.
44
While the average rate of convergence of the countries of the first
group (Baltics, Poland, Slovakia) with the economies of the EU 15
in the period 2003-2013 stood at 21.4 percent, Hungary and
Slovenia achieved convergence rates of only 7 percent and
3 percent, respectively.
The strong impact of liberal economic reforms can also be
exemplified by the case of Slovakia: the country drafted in 2003 and
launched in 2004 an ambitious program of far-reaching structural
reforms (public finance reform, labor market reform, tax, pension,
social and health reforms) aimed at boosting economic freedom and
reducing the role of the state in the economy. In the four years that
followed the introduction of the reforms (2004-2008), Slovakia
achieved the fastest progress in convergence among all postcommunist countries. Compared with the 2 percent convergence
rate of Hungary, 3 percent rate of the Czech Republic and 6 percent
rate of Poland, Slovakia’s rate of convergence with the average
Western Europe level over the relevant four-year period was as high
as 14 percent.
Moreover, these reforms made it possible for Slovakia to
enter the Euro area in 2009 as the only country of the Visegrad
Group (Poland, Czech Republic, Hungary, and Slovakia).
I firmly believe that the experience with post-communist
transformation obtained over the last twenty-five years proves
that state capitalism and illiberal democracy represent a blind
alley, and that the future lies in the path of reforms based on free
market economy and liberal democracy.
Ivan Mikloš
is former Deputy Prime Minister and Minister of Finance of the Slovak
Republic (2002-2006, 2010-2012), Deputy Prime Minister for Economy
(1998-2002), Minister of Privatization (1991-1992).
He co-founded and led a think-tank MESA10 (1992-1998).
In 2014 he was appointed as a President of MESA 10.
He was one of the leading figures of economic transformation in Slovakia.
Ivan Mikloš significantly contributed to the entry of the Slovak Republic
into the OECD and started an extensive and effective tax reform.
During 2006-2010 and from 2012 he is a Member of Parliament.
45
James Shikwati
The African context:
how much state in the economy?
African nation-state economies have traditionally been connected to the global market
system through exports of raw materials and less on value added products. The economic
activities on the continent, especially in Sub Saharan Africa, are characterized largely by
uncoordinated informality and short-term spasms of vibrant formal sectors in urban areas.
For African countries to be effective players both in the region and globally a mixed role of
state stewardship and private sector drive is required.
The continent is under pressure to develop mechanisms
that address legitimacy of African governments as a precondition to
addressing the role of state in the economy. The questions of the
extent of the presence of the state in the economy in Africa is largely
determined by the key actors who own capital, skills, and unskilled
labor.
47
The questions of the extent
of the presence of the state
in the economy in Africa
is largely determined
by the key actors
who own capital, skills,
and unskilled labor.
African nation-states continue to grapple with issues of
legitimacy, disjointed economic activities, and absence of a robust
constituency of capitalists, and are overwhelmed by donor country
prescriptions. The modern state configurations in Africa are a phenomena inherited from colonialism as opposed to in-country
evolution. Regardless of how and when they gained independence,
most countries in Africa were economically underdeveloped
and inherited similar economic structures from their colonial
experience. They inherited production and export of single commodities; underdevelopment of commercial, transportation and
communication infrastructure, high illiteracy levels and a lack
of economic opportunity and social justice. When independence
came, African countries associated capitalism with colonialism
and therefore opted to nationalize their economies. The process
of nationalizing the economy entailed deliberate employment
opportunities for Africans, exclusion of foreigners in rural trade, use
of work permits to limit expatriates, and establishment of StateOwned Enterprises (SOEs).
Under pressure to stimulate economic growth, African
governments pursued a variety of policies aimed at stimulating
economic growth. Key among them were use of economic
diversification through import substitution and diversification of
exports. The mixed economy approach promoted elements of
private ownership and state ownership and control. In order to raise
capital, African governments put in place measures such as use of
guaranteed property rights to attract private enterprises and direct
control of natural resources. Governments also focused on
borrowing from international lenders and applying for grants.
In the 1980s, donors under the leadership of the World Bank
and the International Monetary Fund championed Structural
Adjustment Programs as a precondition for financing. This led
to a wave of privatization of SOEs across Africa. Recent developments have witnessed a surge in backdoor re-entry of the state in
the private sector through Public Private Partnership initiatives.
Fifty years after independence, states in Africa remain
demonized social institutions. States have become synonymous
with corruption, cronyism, are weak, interfere with markets, are
repressive, are over dependent on foreign powers, and are largely
absent in most parts of their own territories. The African states, once
prime movers of development, have become more parasitical and
predatory and serve only the whims of the ruling elites.
African nation-states and African people have a huge
responsibility to evolve mechanisms that ensure inclusiveness and
legitimacy of governments in power. For it is through a predictable,
fair and open system of how governments are installed in power that
will nurture necessary institutions required to safeguard the quest
for economic growth and development.
48
With legitimate governments in place, the next challenge is to
transform African states from being mere agents of external actors
and geopolitical players to performing a proper role that marshals
a people to realize their full potential here on earth.
African states play a dual role of championing prescriptions
from donor countries and of espousing a legitimate desire to
position Africans’ productivity globally. In so far as the state plays
the role of simply becoming an agent doing the will of external
actors, its role in the economy should not only be limited but be
prevented. External actor initiatives have witnessed impressive
growth patterns (e.g. GDP growth of 7 percent on average for the
last 10 years) and insignificant transformation in Africans’
productivity compared to Asia and Latin America.
Sub Saharan Africa nation – states preside over vast
geological resources, youthful population (67 percent aged under
20) and a myriad of challenges that offer opportunities to solution
finders. An estimated 60 percent of the world’s untilled land is in
Africa; over 10 percent of the world’s oil reserves, 7.8 percent of the
world’s natural gas, and 30 percent of the world’s mineral reserves
are in Africa. Ironically, in the midst of this vast untapped wealth is
Africa’s iconic underdevelopment. To unleash the continent’s
potential, African states must assume a stewardship role in order to
unleash the talents of its youthful population to transform potential
into wealth and wellbeing. A complete change of mindset is required
to reposition African states from being agents of external actors to
forces that put wind in the sails of actors keen to transform and
increase productivity that measures up to global standards.
African states have a role to play in the economy through
legislating to protect entrepreneurs, consumers, property rights and
enforcement of private contracts. States have a big role to play in
Africa’s quest to develop a free trade area from Cairo to Cape Town
by removing legal barriers to trade, mobility of labor, immigration
laws and setting appropriate conditions for foreign investment
and foreign capital flow. The states have a key role to play in
infrastructure development within and across countries;
technological dynamism, uptake and evolution; and growth and
positioning of domestic capitalists to become global actors.
With legitimate governments
in place, the next challenge
is to transform African states
from being mere agents
of external actors and
geopolitical players
to performing a proper role
that marshals a people
to realize their full potential
here on earth.
Africans’ political independence has been characterized by
a policy orientation dominated by a “Welcome in Strategy.” Ranging
from governance, military, economic, religious, academic and civil
society activities, among other things, the expectation is that Africa
will be transformed from the outside. The quest for positive transformation for a people held captive in ethnic and in countryboundary capsules simply breeds prisons of poverty.
49
The “Welcome in Strategy” has been used by countries that
plan to facilitate in the long term domestic capital formation, market
reform and ensure technological advancement. The momentum
created by engaging with foreign entities then prompted such
countries to promote transnational businesses and activities. Longterm focus assists countries to go beyond the quest for Foreign
Direct Investment (FDI) merely as an employment generator. An FDI
becomes a catalyst to “wake up” existing potential in the country to
gain necessary experience to become global actors.
Countries that have clear national interests that go beyond
short-term political party interests have nurtured “Go out
Strategies” that have led to successful enterprises whose lifespan
is beyond 100 years. Successful transnational enterprises
contribute both to the economy and relations with other countries.
Can African countries nurture a “Go out” approach? Self-driven
initiatives such as those of Econet-Telecommunications
(Zimbabwe); Zambeef-Food and Retail (Zambia); Nakumatt - Retail
(Kenya); Oando – Oil and energy (Nigeria); Safaricom –
Telecommunications (Kenya); Equity Bank – Finance (Kenya);
Dangote Group – Industrial conglomerate (Nigeria); Ecobank –
Finance (Togo) and Mara Group – multiple activities (Uganda);
among others, can facilitate a template for Africa to “Go out!”
These self-driven initiatives are an indication that African
countries need not necessarily wait for a time to accumulate surplus
capital in order to “Go out.” The thirst for the African market on the
part of global players should position countries to opt for “Go out
Strategies.” African states have a critical role to champion forwardlooking platforms that will transform the continent’s informal sector
actors into formal sector actors that meet global requirements.
James Shikwati
is a Kenyan economist who believes that a free human mind is the ultimate
capital. He is a founder of the Inter-Region Economic Network (IREN),
a founder and CEO of an online business magazine the African Executive
and the President of Eastern Africa Sister Cities. He was named among
the most influential Kenyans by East African Standard newspaper (2007)
and a Young Global Leader by World Economic Forum (2008).
50
James L. Jones, Jr.
A time for responsible arrangement
of the global world
The United States' reputation as the world's beacon of political and economic freedom
is a source of considerable pride for its citizens and policymakers. The spirit of liberty and
entrepreneurship is deeply imbedded in the American character, and our nation has long
sought to foster the principles of freedom and progress around the world. From the earliest
days of the republic, American economists, politicians, and entrepreneurs have debated the
proper role of the state in the American economy. Surely that debate will be a dominant – if not
the dominant theme – in the 2016 American presidential elections.
I am neither a politician nor an economist. As a retired
United States Marine, I am a practicing independent voter and stay
out of partisan politics; but I recognize the linkage between
a nation’s prosperity, the quality of life its people enjoy, and
American global influence. That is why I care so deeply about our
nation’s economic competitiveness and America’s ability to remain
a model of prosperity, security, liberty, and good governance for
the rest of the world.
51
From our nation’s founding, free enterprise and individual
initiative have powered the American economic miracle. The state,
however, has always played a critical role in providing an
environment in which entrepreneurship can flourish. The axiom
“government matters” is as true today as ever. No matter the
country, the state’s actions and inactions profoundly affect the
capacity of people not only to enjoy their freedoms but to be
innovative and productive. The state’s core responsibilities in
providing a fertile economic environment are well-known. They are
imbedded in the criteria the World Economic Forum (WEF) uses to
rank national economic competitiveness.
The WEF’s 2014-15 competitiveness assessment ranks
the United States as the third most competitive nation in the world.
Despite this lofty position, it is clear that our country has a great deal
of work ahead to keep our business system fertile and thriving.
The following are a few of the more urgent imperatives.
First, American politicians must transcend partisan politics
to reduce our soaring national debt which exceeds 100 percent of
national GDP. No country in history has ever been able to maintain
the kind of global impact we have had since 1945 with such a large
and growing debt. Deficit spending and mounting debt driven by
unsustainable entitlement spending gobble up the annual budget
for debt service, create inflationary pressures, and portend higher
taxes – all of which sap business confidence in the United States and
harm our prospects for national growth.
Second, we must open new markets for American exports
and work to create a more liberal international economic order.
Ninety-five percent of the world’s customers live outside our
borders. President Obama has been correct to pursue ambitious
trade arrangements with our European allies and Pacific partners.
The U.S. – European trade relationship is the most lucrative in the
world but there is much we can do to improve it. Moreover, vast
middle classes arising in Africa and Asia are eager for American
goods, services, and solutions. U.S. access to these markets is
integral to our future prosperity. It is time for us to get these agreements across the finish line and for Congress to give the President
the trading authority he needs to keep the momentum going.
The axiom “government
matters” is as true today
as ever. No matter
the country, the state’s
actions and inactions
profoundly affect
the capacity of people
not only to enjoy their
freedoms but to be
innovative and productive.
Third, America must take a set of actions – too longpostponed – to improve the U.S. business system’s ability to foster
investment, risk-taking, job creation and growth. One is to ease the
country’s tax and regulatory burdens which are extremely high by
world standards. Two is to harness America’s extraordinary energy
abundance by removing policies and obstacles that impede its
development. Three is reform our education and job training
systems to stem the declining performance of America’s student
body in science and math skills and better prepare our workforce for
high-tech jobs. Four is to vastly upgrade the nation’s crumbling
infrastructure.
52
All of these challenges are well known to our country’s polity
and citizenry. Unfortunately, partisan wrangling and short-term
thinking have prevented meaningful reforms in recent years. In that
light, perhaps the single greatest risk to American competitiveness
today comes from the fact that our politicians seem unable to take
the actions we all know must be taken for our own good.
The good news is that the American private sector remains
the envy of the world and a global leader in innovation. It has proved
resilient and continues to rebound from the Great Recession in spite
of Washington’s dysfunction.
But we cannot take recovery for granted. U.S. policymakers
must show a renewed sense of purpose and patriotism to make the
state reforms necessary to provide for our future prosperity. Doing
so will not only bolster U.S. competitiveness and spur our economy,
but it will also strengthen America’s capacity to lead well into the
st
21 century.
General James L. Jones, Jr.
(USMC Ret.) is a former commander of US European Command
and Supreme Allied Commander Europe, where he led all military operations
for NATO. Upon retirement in February 2007, Jones became the president
and CEO of the US Chamber of Commerce’s Institute for 21st Century Energy
and, in 2008, served as the State Department’s Special Envoy for Middle
East Regional Security. From 2009 until 2010, he served as President
Obama’s national security advisor at the White House.
As national security advisor, he brought clear vision and steady leadership
to America’s mission in Iraq, the war in Afghanistan, and the country’s
interests around the world.
53
Yih-teen Lee
The concept of state
and its role in Chinese culture
How much state in the economy for the Chinese? To develop a deeper understanding
of this question, we need to go back to the source and ask: what does “state” mean for the
Chinese mind?
From the perspective of the communist legacy and the
image of a strong state guiding its rapid economic development over
the last decades, one may come to the conclusion that the state
plays a prominent role in the Chinese economy. We can trace the
role of the state exercising control back through history – as early as
in the Han Dynasty (206 BC–220 AD), the Chinese government
nationalized the commercialization of salt and steel so as to prevent
the benefits from being exploited by merchants.
In this essay I will discuss the concept of state and its role
in economic issues from cultural and philosophical perspectives.
55
Although the view presented in this essay cannot fully capture the
complexity and evolution of the Chinese political system over
China’s thousands of years of history, I hope to offer some insight
into the deeply-rooted cultural elements that influence Chinese
people’s thinking about the role of the state in the economy.
However, to develop a deeper understanding of this
question, we need to go back to the source and ask: what does
“state” mean for the Chinese mind? In this essay I will discuss the
concept of state and its role in economic issues from cultural and
philosophical perspectives. Although the view presented in this
essay cannot fully capture the complexity and evolution of the
Chinese political system over China’s thousands of years of history,
I hope to offer some insight into the deeply-rooted cultural elements
that influence Chinese people’s thinking about the role of the state in
the economy.
One defining feature
of Chinese culture is its
integrative and holistic
propensity in thinking
(in contrast to the analytical
tradition in the West).
This can be seen from
the fact that the Chinese
notion of state
(written as 國家) is literally
expressed as a combination
of two words: nation (國)
and family (家).
First, one defining feature of Chinese culture is its
integrative and holistic propensity in thinking (in contrast to the
analytical tradition in the West). This can be seen from the fact
that the Chinese notion of state (written as 國家) is literally expressed
as a combination of two words: nation (國 ) and family (家 ). In other
words, “state” is considered as an extension of one’s family, taking
care of and regulating people’s lives in a benevolent way. At the
same time, the state also requires people’s involvement and
contribution. “The Great Learning” (大學 ), one of the four Classic
Books in the Confucian tradition, teaches people to embrace the
following aims in developing oneself: “to cultivate oneself, to
regulate one’s family, to govern one’s state, and finally to make the
whole world tranquil and happy” (修身齊家治國平天下 ). In Chinese
history the state (and government) was often formed by ordinary
people coming from various levels of society, with the real administrative power and responsibilities in the hands of the prime minister
instead of the emperor. Active participation in and contribution to
governing the state in line with the Tao (道 ) was one of the key
concerns and responsibilities of Chinese intellectuals. As a result,
there is no clear distinction between the state and people, as the
state is simply a continuation and extension of individuals’ self and
family. The state may define policies and interfere in economic
activities in benevolent ways so as to ensure the functioning and
development of society in the right direction.
However, this does not mean that Chinese culture mindlessly favors a strong state role in the economy. Another important
feature of Chinese culture relevant to our discussion is “balancing”
or “the pursuit of the Middle Way” (中庸). This philosophy underlines
the importance of understanding two extremes of a phenomenon
while striving to maintain a balanced position somewhere in the
middle. To illustrate such spirit, we can refer to Confucius saying
that “To govern with virtue is to be like the North Star, which remains
in its position while the myriad stars revolve around it.” (Analects,
Book 2, Chapter 1).
56
This teaching emphasizes that a good governor (representing the
state) should (1) govern with virtue – in other words, think “how to
best serve the people” when making decisions, and (2) avoid unnecessary intervention and let subjects follow willingly. It offers
a kind of counterbalance to state intervention in many spheres of
people’s lives and in the economy. In combination, such philosophical thinking seems to grant the state an active role in the
economy while setting limits to its power and influence, with the
objective of better aligning economic policies with people’s wellbeing.
Overall, the Chinese tend to hold a most holistic and integral
concept of state (as an extension of oneself and family) and hence
are more open to its benevolent intervention. Furthermore, the
model of ideal government officials proposed by Confucius would
limit the risk of an overly powerful state in control of people’s lives.
Although the specific historical and contextual factors at any given
point in time may cause certain deviations from this general cultural
tendency, these principles seem to offer a consistent underlying
theme as they are deeply rooted in Chinese culture and have guided
Chinese people’s thinking and behavior in conscious and
unconscious ways. Interested readers are advised to have a closer
look at the Chinese political system and its functioning in history so
as to obtain deeper insight into how these general cultural principles
and specific historical factors interact in determining the role of
the state in China.
Professor Yih-teen Lee
is a Associate Professor of Managing People in Organizations at IESE
Business School. Yih-teen Lee earned his Ph.D. in management from HEC,
University of Lausanne, where he also participated in a research project
as postdoctoral research fellow. Prior to IESE, he has taught in HEC
University of Lausanne (Switzerland) and Angers Graduate School
of Business ESSCA (France), among others. He teaches subjects such as
leadership, cross-cultural management, leading global virtual teams,
and strategic human resource management in MBA, executive education
programs.
57
András Inotai
st
The role of the state in the 21 century
Modern economic history has dealt extensively with the role of the state in economic
development and policy-making. The seven decades following World War Two were
characterized by different periods of direct state intervention in the developed countries.
In addition, the role of the state reveals important changes in the economies that were catching
up as well, where, particularly in the initial period of take-off, state-managed policies used to
play a crucial role. Like the differences in economic policy priorities and socio-economic
development levels, there was a great deal of variety in the theories that emerged, from the
determining role of the state to the extreme form of neoliberalism that rejects any role of the
state in the shaping and implementing of economic policies.
Following the mostly neoliberal trend in the last two
decades of the previous century, over the last decade we witness
again growing emphasis on the necessity and even desirability of
state intervention in economic development. Obviously, the
principal reason for this lies in the global financial and economic
crisis and the widespread conviction that the crisis can only be
managed by repeated direct intervention by states. However,
increasing call for the state is strongly connected with the decadeslong globalization process that included the liberalization of commodities, services and mainly financial markets.
59
Increasing call for the state
is strongly connected
with the decades-long
globalization process that
included the liberalization
of commodities, services
and mainly financial markets.
While the national rules of
the game were not enough to
keep economic and financial
processes under control, no
efficient control mechanism
could be agreed on
(let alone implemented)
on the international level.
While the national rules of the game were not enough to keep
economic and financial processes under control, no efficient control
mechanism could be agreed (let alone implemented) on the international level. Although nation states are definitely not capable of
plugging this regulatory gap, there is a clear temptation to return to
the growing role of the state. This is supported by potential or real
losers in global competition, such as national small- and mediumsized companies vis-á-vis global conglomerates. Moreover, the
rapid privatization of the past decades has produced a backlash in
some countries, particularly in the public utility and financial
sectors. There has been a growing fear of losing “sovereignty” and
being dependent on foreign companies in selected areas that states
classed as “strategic” sectors. Finally, growing economic polarization, not so much the result of increasing wage differences but of
increasing differences in wealth accumulated over three generations free of war and major economic crisis, at least until 2008,
strengthened the call for the “paternalistic state” in order to keep or
restore social cohesion. Driven by the negative fallout of the crisis
and its (mis)management in several countries, populist voices for
state intervention may be understandable. However, going back to
state capitalism on the national level far from reflects the realities
of 21st century globalization.
The survival of the capitalist system definitely required
imminent and direct state intervention after the financial crisis
spread from the USA to Europe and other parts of the world. Even in
the European Union, most intervention happened on nation state
level, despite the advanced stage and the depth of several decades
of regional integration characterized by (although not always
implemented) four freedoms (commodities, services, labor and
capital) and the recently established monetary union with common
currency for half of the member countries. A return to normality
would mean that the state got rid of temporarily nationalized firms
and sold them to private investors after recapitalizing banks
(with taxpayers’ money) and after or before restructuring industrial
firms. Generally, for reasons of efficiency, it is better if restructuring
takes place in a private (reprivatized) company and the state
supports this process by indirect means (e.g. by easing the
conditions in which the unemployed seek jobs). If restructuring
happens in a state-owned company, economic reasons and
competitiveness requirements may get less attention than political
and social considerations. At the end of the day, the costly process
of restructuring may fail and old problems arise again within
a relatively short time.
Economic theory regarding state intervention argues that
markets are imperfect and such deficiencies have to be remedied by
the state. However, the other side of the coin is that, as proven by
numerous examples, state intervention used to produce other
imperfections, in most cases at a higher economic and social cost
than market imperfections.
60
According to international statistics, state-owned companies listed
among the 500 leading firms lost more than one third of their value
(expressed in USD) between 2008 and today. Previous “national
champions” of emerging countries, such as Petrobras, Gazprom
or other big companies representing the mining, energy, telecoms
or public utilities sectors, performed miserably after the crisis.
The share of state-owned firms in global market capitalization
declined from 22 percent in 2007 to 13 percent today. For example,
Gazprom, expected to be the first firm to reach the USD 1 trillion
level, was worth USD 73 billion just before the Russian crisis
1
entered a very critical stage. Additional problems arise in the
banking sector, since many state-owned banks need to be
recapitalized. Finally, it is difficult to lay off people. Despite their
crisis-ridden situation, state-owned firms have increased their
workforce since the eruption of the crisis. In all, the intervention by
the state proved to be the last resort during the crisis, but could
hardly offer any sustainable solution to the emerging problems.
Still, the state can and should have an important mission in
the rapidly changing political, economic and social environment of
st
the 21 century.
First, it has to create a sustainable business-friendly
environment by creating transparent rules, a favorable investment
climate and flexible labor markets. Particular attention should be
paid to the creation of a competitive small- and medium-sized
entrepreneurial sector. Incorporation of this sector into the globalvalue chains of transnational companies not only creates new jobs
but reduces income polarization trends and increases social
cohesion.
According to international
statistics, state-owned
companies listed among
the 500 leading firms lost
more than one third of their
value (expressed in USD)
between 2008 and today.
The share of state-owned
firms in global market
capitalization declined
from 22 percent in 2007
to 13 percent today.
1
For a comprehensive analysis see: State
capitalism in the dock. The Economist,
November 22nd, 2014, pp. 59-60.
2
Musacchio, Aldo – Lazzarini, Sergio
(2014), Reinventing State Capitalism
as quoted in The Economist,
June 21st, 2014. p. 64.
Second, a new type of state-owned company has to be
supported. In fact, they are closer to true private-sector firms than to
old-fashioned and outdated national(ized) sectors. Generally, they
are managed by technocrats and highly skilled business people
instead of ”party soldiers” and turn out to be highly competitive.
(Norway’s Statoil is a positive example of “good governance” in
a state-owned firm.)2
Third, the state has to foster new factors of competitiveness
(beyond the traditional factors, such as price, quality, delivery time,
exchange rate policy). Key importance has to be attached to the
establishment of competitive public administration. In the past,
several products and services offered by competitive companies
suffered serious market losses due to poorly prepared public
administration. Public servants have to be not only highly skilled
but without any party political preferences. Any reshuffling of public
administration as a consequence of party-politics-based appointment should be avoided and the transparency and impeccability
of public administration maintained (decisive and outright fight
against corruption).
61
Fourth, the state has to emerge or become the most important investor in the future of people and societies. In most developed
countries lacking natural resources, the main area of investment is
human capital. Since most investments in human capital turn to be
profitable only in the long run, the state has to develop a long-term
strategy (in contrast to the mostly short-term strategies of the
private sector). Investment activities include education, training and
retraining, research and development (including in cooperation with
the private sector) and healthcare. The latter is not only relevant due
to unfavorable demographic changes and the rapid ageing of
societies. Investment in education and R&D proves to be profitable
only if most people can enjoy a long and healthy life. In this context,
the traditional neoliberal theory, according to which states are more
efficient if they keep taxation (recentralization of the GDP) at the
lowest level, does not work. The main efficiency criterion of
budgetary recentralization is not the level but the structure of state
expenditure. If money serves to artificially keep alive uncompetitive
firms or sectors, even a low level of taxation is a loss-making activity.
In turn, long-term (strategic) investment in human capital may
require higher taxation and budgetary centralization but with longterm profitability.
Fifth, investment in human capital has to be complemented
by creation of innovative societies. Innovation is by far not a technological term. It is much more a social indicator. Only innovative
societies will be able to compete in the global(ized) environment and
benefit from investments in education, training and research.
Without an innovative society, most investments in human capital
will generate benefits in other societies, either as a result of massive
labor (e)migration or the inability of the given society to absorb
achievements of research and innovation.
Sixth, innovative societies are open and forward-looking.
Thus, the state has the unique task of preparing (and obligation to
prepare) society for future challenges and opportunities. Looking
back at one’s own often unprocessed and incorrectly interpreted
and managed history, and always blaming others for one’s own
mistakes or squandered chances and presenting society as the
victim of an international conspiracy is a guarantee of sustained
backwardness. Instead, society has to be confronted with the reality
and play an active role in shaping the future by correctly determining
the room the country has to maneuver in the international arena.
In this regard, the utmost attention has to be paid to grass-root
movements and bottom-up organizations that are in a position to
express the real hopes and concerns of society. This is the way to
combat populism, nationalism and extremism – all of them key
enemies of successful and competitive adjustment to global,
regional and local challenges. No organization other than the state
can provide such an efficient and widespread impact of
communication.
62
A successful response
to global and regional
challenges requires
a new quality of international
cooperation based on
the transfer of traditional
(and still deeply-rooted)
national competences
to regional or global
organizations. Particularly
small countries have to learn
to live in a world with shared
sovereignty and shared
competences, if they want
to remain or become success
stories in the next decades.
Seventh, sustainable competitiveness needs a critical mass
of cohesion and solidarity, which is much more than fighting
poverty, polarization and wide-ranging inequality.3 Realistic and
long-term vision and ability of society to adapt is expected to foster
social cohesion. Moreover, people have to consider that solidarity is
a two-way street that requires adequate steps, measures and
change in mentality in all parts of society. In this context, the
educational and enlightening role of the state (and leading media)
is indispensable.
Eighth, long-term vision is needed to manage the growing
time gap between political and economic decision-making.
In democratic countries, the political cycle is generally limited to
four years. Political rationality is based on those most recently in
power staying in power and on those most recently in opposition
coming to power. In contrast, decisive economic processes as well
as the solving or managing of more and more socio-economic
challenges are a much more long term approach. In cases such as
education, research, healthcare, demographic change, environment or the establishment of an innovative society, the necessary
economic “cycle” spans two to four political (electoral) cycles.
The state has to be able to create the necessary linkage between
short-term political and longer-term economic rationality.
Of course, here the active support of an “enlightened society” is
absolutely necessary.
Ninth, in many areas, a successful response to global and
regional challenges requires a new quality of international
cooperation based on the transfer of traditional (and still deeplyrooted) national competences to regional or global organizations.
Particularly small countries have to learn to live in a world with
shared sovereignty and shared competences, if they want to remain
or become success stories in the next decades. Evidently, due to
historical and psychological motives, this is a very hard nut to crack
for most countries. Obstacles to the otherwise inevitable and
qualitative deepening of the European Union demonstrate the degst
ree of difficulty. If, however, the Union wants to remain on the 21
century map (together with all member countries, even the relatively
strong ones), it cannot avoid shifting crucial decision-making
processes to the community level (starting with fiscal union based
on two-way solidarity of contributors and beneficiaries). Within this
framework, member countries have to redefine the role of the state,
in line with the reinterpretation of “national sovereignty” in the
increasingly interdependent global environment.
3
See to the topic: Utting, Peter – van Dijk,
Nadine – Mathei, Marie-Adélaide (2014),
Social and Solidarity Economy. Is there
a new economy in the making?
United Nations Research Institute for Social
Development (UNRISD),
Occasional Paper 10, August, 61 pp.
63
Professor Doctor András Inotai
had been working as General Director of the Institute for World Economics
of the Hungarian Academy of Sciences, Hungary between 1991 and 2011.
At present, he is research director and as of July 2013 holds a professor
emeritus status. He had a working contract with the Kiel Institute
of World Economy in 1971 and taught at San Marcos University in Lima,
Peru in 1972-73. Between 1989 and 1991 he worked at the World Bank’s
Trade Policy Division in Washington D.C. Between 1995 and 1998
he headed the Strategic Task Force at the Prime Minister’s Office in order
to prepare Hungary for official negotiations with the European Union.
64
Jože P. Damijan
Too much government in the wrong place
and too little government where it is needed
While the ongoing economic crisis raised serious doubts about the self-regulatory
nature of markets and showed that redefinition was needed of the role of the state in the
economy, this does not necessarily apply to Slovenia. At least not to the same extent. In the last
two decades in Slovenia one can hardly talk about the dominant role of the markets in
determining social outcomes. It is rather a combination of the unfinished privatization,
insufficient regulation and lack of supervision that caused much of the problem. While in most
countries it was reckless lending by the insufficiently regulated private banks to private firms
that set the stage for the crisis, in Slovenia it was mostly the politically motivated lending
policies of the poorly regulated state-owned banks to state-controlled and insufficiently
regulated firms. There was too much government in the wrong place and too little government
where it was needed.
When the communist era came to an end, Slovenia followed
the path of other transition countries in transforming the economy
from a centrally planned to market economy. The Slovenian transformation, however, has been less resilient and more gradual.
65
The transition was rather smooth and from the outside it was seen as
quite effective in generating stable growth with low volatility and
maintaining the twin balances. This picture of a balanced transition
path, however, came to an end in the wake of the financial crisis.
Arguably, one of the reasons the crisis struck the Slovenian
economy a little more was a larger direct involvement of government
in the economy. On the one hand it was the unfinished privatization
that contributed to major imbalances in the run-up to the crisis,
while on the other it was the state ownership of major banks that
amplified the imbalances. Both have increased the social cost of the
recent crisis.
The best way to study slow transformation from a state to
market economy in Slovenia and the eventual collapse is to look at
the privatization process. As opposed to other former communist
countries, the early privatization process shunned the word
“privatization”. The Slovenian privatization act, adopted in November 2002, was named the Ownership Transformation Act. The difference in choosing one or the other word by lawmakers, though, is
not only a semantic one, but rather symbolizes the future path of the
privatization process.
One of the reasons the crisis
struck the Slovenian
economy a little more
was a larger direct
involvement of government
in the economy. On the one
hand it was the unfinished
privatization that contributed
to major imbalances
in the run-up to the crisis,
while on the other it was
the state ownership of major
banks that amplified
the imbalances.
While this act introduced an immediate transformation of all
socially-owned companies into companies with known owners, the
true privatization was only gradual and does not seem to have
reached an end even now. Firms were free to opt for a specific
combination of four methods, such as (i) transfer of 40 percent of
shares to para-state funds (Restitution fund and State pension
fund), (ii) internal distribution of shares to employees in exchange
for vouchers, (iii) internal buy-out of shares at a discount, and (iv)
public offerings of a company’s shares. In two waves, the first taking
place in the second half of the 1990s and the second one in the mid2000s, the ownership shares were increasingly concentrated in
private hands. However, in most of the largest companies the state
remained an important owner with a blocking minority through its
two para-state funds. On the other hand, the Privatization Law of
1992 did not address privatization of firms in the so-called strategic
sectors (such as banking and insurance, telecommunications,
railways and ports, energy sector, etc.), which are yet to be
privatized.
At the moment, the government not only remains directly
involved in the economy as an important owner in a number of
companies, but its overall presence actually increased after the
recent crisis. While in some strategic sectors (such as energy and
distribution, transport network) the state remains the sole owner
and continues to have a majority share in the incumbent firms
in some regulated sectors (insurance, transport, telecommunications), it recently regained 100 percent ownership of most of
the banking sector by bailing out the troubled banks after the 2008
financial crisis.
66
State ownership per se
does not necessarily imply
lower efficiency, provided
that corporate governance
of the state-controlled
companies is efficient.
Most of the advanced
(OECD) countries assume
some state involvement
in companies for various
reasons.
According to some studies (see Ogorevc and Verbič, 2011), until
2008 the state, with a portfolio of 280 investments, directly or
indirectly controlled more than one third of all the assets in the
economy’s medium-sized and large companies. This share increased with the recent bank rehabilitation not only due to acquiring
direct 100 percent ownership of the bailed-out banks, but also
through the transfer of non-performing loans and associated
collateral of private firms from banks to the state-owned Bank
Assets Management Company (the so-called “bad bank”). Through
this, the direct and indirect government control of the economy may
have increased to more than 40 percent of total assets.
State ownership per se does not necessarily imply lower
efficiency, provided that corporate governance of the statecontrolled companies is efficient. Most of the advanced (OECD)
countries assume some state involvement in companies for various
reasons. As shown by the recent OECD study (see Christiansen,
2013), the rationale for public ownership of companies usually
includes (i) monopolies in sectors where competition and market
regulation is either not feasible or is inefficient, (ii) market incumbency, in sectors with established competition, but where a stateowned operator remains responsible for public service obligations,
(iii) imperfect contracts, where public service obligations of stateowned companies are too complex to be described in service
contracts, and (iv) industrial policy or development strategies,
where state-owned firms are intended to correct market
imperfections. In these cases, countries are advised to comply with
the recommendations of the OECD Guidelines on Corporate
Governance of State-Owned Enterprises.
Though since 2009 Slovenia has formally adopted these
OECD Guidelines by establishing a centralized agency for managing
state capital shares, the overarching state involvement in the
economy poses a serious challenge to the stability of the economy.
The widespread government control of firms and banks is shown to
have been a major factor in the current malaise by provoking the
financial crisis. More precisely, direct government involvement in
companies, combined with poor market regulation, insufficient
supervision and weak institutional setup, can explain a large part of
the credit boom and capital bubble in the run-up to the crisis.
There are three important aspects from that period that need to be
taken into consideration.
First, throughout the transition period market regulation
continued to be poor, whereby market entrants and foreign companies had a hard time fighting the incumbent firms owned by state
or by politically well-connected persons. The judicial system, almost
as a rule, remains extremely slow and inefficient in resolving
business disputes where established local firms are involved. Some
companies, such as the incumbent telecommunications provider,
Telekom Slovenija, maintained a rather evident privileged position
for two decades with all lawsuits concluded in its favor.
67
Many foreign companies or new entrants were scared off or driven
out of the local market.
Second, the Ownership Transformation Act of 1992
prevented firms from being privatized by sale to potential foreign
bidders. Instead, it simply redistributed shares to insiders and parastate funds. The majority of shares were redistributed mostly to the
previous managers, who were entitled to buy larger stakes in the
companies at a 50 percent discount. This is how the old elite either
transferred ownership to their members (existing managers) or kept
it under state control. Those assuming political power also
controlled directly or indirectly almost half of the economy. A sort of
a symbiosis between the recycled old political elite and the
managers in only partly privatized firms is a characteristic of the
transition period up to 2004.
Finally, after the political overthrow in 1990, new political
parties emerged. They formed a colorful coalition and won the first
free elections in 1990, only to lose power two years later due to the
lack of political skills and infighting. A coalition based on the reformed fractions of the old communist party came back to power
and assumed power for an additional 12 years. Its main focus was
protecting the economic interests of the old elite and to extract rent
from the companies controlled directly or indirectly by the state.
In the meantime, the long-existing frustrations among the members
of new political parties relegated away from power deepened over
time.
The political change came in late 2004 when the party of
Janez Janša, the symbolic figure of historical frustration, won the
elections and formed a right-wing coalition government. After taking
power, the main objective of Mr. Janša and a circle of his friends
appeared to be only to make up for what they felt they had been
historically deprived of. Their goal, however, was not to change
the institutional system, to improve regulation or to privatize
companies by sale to foreigners. Instead, they adopted a “Spanish
colonization strategy” (see Acemoglu and Robinson, 2013).
By assuming power, they took control over the economy by using
the extensive state ownership network as a vehicle. Within one
year, most of the big companies controlled by the state faced newly
appointed supervisory and management boards. Executives
were carefully selected from the circle of “friends” with close
personal ties to the government.
After joining the EU in 2004, Slovenia enjoyed a decreased
risk premium, which made foreign borrowing extremely cheap.
Encouraged by cheap liquidity, firms started to invest in risky
projects and takeovers, while managers – either politically sponsored or with the consent of the new right-wing government –
engaged in borrowing for management buy-outs.
68
Looking back, it is easy
to see how unfinished
privatization and large state
involvement in companies
and the banking sector
contributed to the credit
boom and capital bubbles
by encouraging managers
to take excessive risks
in borrowing for management
buy-outs and takeovers.
On the other hand, managers belonging to the old elite and holding
important capital shares in partly state-owned companies began
to fear they would be replaced or dispossessed by the new
government. To secure their property they engaged in a parallel
process of privatization by trying to buy out the state shares at high
market values. Between 2004 and 2008, stakes in almost 200
companies were sold by the two para-state funds. To be complete,
banks, most of them being either majority state-owned or controlled
by the state, assisted willingly in financing these deals by supplying
huge amounts of loans under extremely favorable terms. The loans
were secured by acquired shares or other assets at inflated market
prices. During the 2004 – 2007 period, Slovenian banks took on
EUR 20 billion (60 percent of GDP) of additional short-term loans
abroad and lent this to risky investors at home. Roughly one third
of this was spent on acquisitions and management buy-outs.
The plan, however, did not work out. With the collapse of
Lehman Brothers and suddenly frozen credit markets, the firms and
their new owners were left with large amounts of short-term debt
that they were unable to refinance. With the collapse of the stock
market, banks were left with collateral fast deteriorating in value.
Moreover, due to the high leverage, firms were extremely vulnerable
and unable to respond to the sudden dramatic decrease in demand.
The economy collapsed in 2009 and the GDP declined by 7.8
percent.
Six years into the crisis, the economy is still depressed and
some 9 percent below the 2008 level of output. In addition to weak
export demand, one of the major factors hampering economic
recovery is the troubled balance sheets of over-leveraged firms.
It will take years of painful deleveraging to get back to solid ground
for sustained growth.
Looking back, it is easy to see how unfinished privatization
and large state involvement in companies and the banking sector
contributed to the credit boom and capital bubbles by encouraging
managers to take excessive risks in borrowing for management buyouts and takeovers. This gives us several important lessons for the
future regarding the role of the state in the economy.
First, large direct state involvement in firms where this is
neither required nor justified by the strategic considerations of
society should be reduced to a reasonable level. Privatizing the
banking sector is the first priority, which will help to break the ties
between the state-controlled firms and the state-owned banks
as well as inhibit politically motivated lending policies of banks.
Privatization should continue also in other sectors where direct
state intervention is not required and in sectors where uncertainty
about the efficiency of regulation is low.
One should not mistake this call for privatization for the urge
by the European Commission for quick privatization.
69
In the current circumstances, this would be akin to selling capital
stakes in state-owned firms at fire-sale prices. This is neither
necessary nor optimal in the short term. On the contrary, it should
be done in a well planned and transparent process to maximize the
outcome and to prevent similar episodes in future.
Second, while the central agency for management of state
capital shares (Slovenian State Holding, SDH) has been
established, the government has to ensure that it has a sufficient
degree of autonomy as well as transparency and accountability in
managing the state capital investments. So far, political
interventions and direct political influence regarding the
appointment of supervisory boards in individual state-owned firms
has been the exception rather than the rule. A new strategy for
managing the state capital investments seems to be going in the
right direction by defining the autonomy of the SDH and ensuring
that its mandate involves following the OECD Guidelines and its
best practices.
Finally, the third lesson is that regulatory processes have to
be strengthened and organized in a way that provides for regulation
under the law and independence, transparency and credibility.
Sectoral strategies should be adopted to define the objectives of
government regulation and to ensure its predictability and
legitimacy. This means that the old practices of favoring incumbents
and discriminating against new private firms and foreign
competitors have to be dismantled in order to achieve the optimal
outcome for society.
To conclude, there is a need in Slovenia for a reshuffle in
government and its rellocation from the wrong place to where it is
really needed.
Doctor Jože P. Damijan
is a Full Professor at the University of Ljubljana / Faculty of Economics.
Senior Research Fellow at the Institute for Economic Research, Ljubljana
(since 1998), and affiliated to LICOS Centre for countries in transition
at the University of Leuven, Belgium (since 2004). Senior Research Fellow
at VIVES, Centre for Regional Economic Policy at the University of Leuven,
Belgium. Special economic advisor to the Slovenian Government
and Parliament.
70
Witold M.Orłowski
How much state is needed
in the Polish economy?
There is no clear and unequivocal answer as to the scale and the way in which the state
influences the economy which is the optimal one from the point of view of development.
A quarter of a century ago, when Poland shook off the yoke of communism and was laying the
foundations for democracy and a market economy, institutions and enterprises in the public
sector produced 70 percent of GDP and employed 60 percent of people in work. There was
an amusing paradox in this – at the time the state was in theory all-powerful, because it had
the power to make decisions about anything, while in reality it could not be weaker because it
was not capable of achieving any of its goals.
A quarter of a century ago, the ineffective bureaucracy tried
to control everything: prices, pay, exchange with foreign countries,
banking, and even distribution of basic foodstuffs and fuel. It only
tried to do this – because in reality it was no longer capable of acting
effectively in any way. The communist economy was grinding to
a halt, production was falling, inflation was spiraling out of control,
the shelves in the shops were empty while tender had ceased to
have any value, there was a boom on the black market, and Poland
was bankrupt.
71
A quarter of a century ago Poland’s road to a free market was
obvious: the less the state was present in the economy the better,
the sooner the decisions of inept bureaucrats were replaced with
the signals coming from the market place, the greater the likelihood
of development and creation of a normal economy. Changes in the
law which reduced the state’s influence over the economy, drastic
expansion of the sphere of market freedom, creation of the basic
market institutions, privatization – the question was not “if”, but
solely how quickly all of this could be implemented. Every step
towards reducing the role of the state was a tiny step closer to
a normal world. Each move making our institutional solutions
a little more like those in the developed countries brought the
dream economic model that assured the West stability and wealth
a little closer. The gap between us and that normal world was so
huge that for many years there was no point in asking the destination
of that painstaking journey. It was enough to be moving in the right
direction.
It cannot be ruled out that it was precisely this simple recipe,
which for many years was generally accepted by most of society and
the political elite, that enabled Poland to achieve success in
economic transformation, but the more normalized the country
became, the more it came to resemble the developed economies,
the more pressing the question became of the model according to
which the Polish economy would function and the role the state
should play in it. This was true especially from the moment the huge
financial crisis of recent years revealed in black and white that there
was no “ideal model” for capitalism. There is no clear and unequivocal answer as to the scale and the way in which the state influences
the economy which is the optimal one from the point of view of
development. Only we ourselves can answer the question of what
form the role of the state in our economy should take, taking into
account both the good and the bad experiences of other nations,
and the preferences of our own society.
The state continues to have a considerable presence in the
Polish economy even though the scale of state-owned property has
been reduced drastically, and most of the activities the state
bureaucracy used to perform have been replaced by market
mechanisms and institutions. Paradoxically, however, despite
a quarter of a century of transformation (i.e. of a strategy for
development intended to reduce the state’s role) in certain fields the
state’s presence is nowadays even greater than it was a quarter of
a century ago – not least because more effective government
administration can achieve more today than the theoretically
all-powerful but in practice helpless bureaucracy at the time of
the communist fin de siècle. This is also because, together with
economic success, a large part of Polish society expected more
with respect to the state’s role of care.
72
There is no simple answer to the frequently posed and
simple question of whether this presence is too great, or, to put it
a different way, simple answers can be found solely on an ideological basis. A hardline liberal will always say that this presence is too
great, in line with the conviction that the state is not the solution to
problems, it is the problem. A passionate socialist on the other hand,
for whom a free market is at best an unfair mechanism, the effects of
which we should try to compensate for – will always say that this
presence is not large enough. Meanwhile, the problem is more
complicated. In some areas the presence of the Polish state is too
large, which undermines the idea that the public should play an
active part in economic growth, while in other areas where the state
is expected to be effective, at times it is inadequate.
If we look at the presence of the state in the economy in
terms of the ratio of public spending to the GDP (this is an
economist’s favorite tool) Poland does not particularly stand out.
Poland’s 41 percent (according to IMF data) is considerably less
than in Germany (44 percent), Scandinavia (52-56 percent) or
France (57 percent). On the other hand it is more than in the US
(37 percent), the Baltics (35-39 percent), or in most of the developing countries (20-40 percent). These figures show, however how
misleading figures can be. Russia’s economy is entirely dominated
by the state, and yet the ratio of public spending to GDP is only
38 percent, while in the liberal UK this ratio is as high as 43 percent. This shows that there is no single, miraculous tool for
measuring the role of the state in the economy. It is better to look
at each area in which the state is present in the Polish economy one
by one – and ask oneself what level of presence is appropriate.
The modern state is present in the economy in four major
roles, which overlap in places.
Firstly, it is Big Regulator, setting the rules of the game for all
the parties involved in economic life and ensuring that those rules
are complied with. This is undoubtedly the oldest role of the state,
the origins of which can be found even in the Code of Hammurabi.
As centuries passed this function was expanded and redefined.
Today the state, as Big Regulator, needs not only to eliminate
dishonest players from commercial trade, but also to create the
appropriate legal and institutional framework for human activity and
ensure that market mechanisms function properly.
Secondly, the state is Big Producer, generating a whole
range of products and services, principally public services. This role
has varied in scope a great deal throughout history. There was a time
when “state production” was mainly effective law enforcement and
national defense, supposed to assure the nation’s people safety and
peace (Adam Smith saw this, with moderate taxation, as sufficient
conditions to ensure prosperity for the country).
73
Paradoxically, despite
a quarter of a century
of transformation,
(i.e. of a strategy
for development intended
to reduce the state’s role)
in certain fields the state’s
presence is nowadays even
greater than it was a quarter
of a century ago.
Later, the state began to be involved in a more and more broad range
of production, creating, in addition to the typical public services,
industries in network form, vital for growth (a postal service, railway,
network of roads). The state’s activeness as Big Producer reached
its height in the mid-twentieth century, when both in the communist
countries, and in many market economies as well, it became the
owner of steelworks, mines, power stations, factories, telecommunications companies and banks. The wave of enthusiastic
reprivatization in the West and economic transformation in the
East eventually led at the end of the century to major reduction of
this role of the state, but certainly did not eradicate it.
Thirdly, the state is Promoter of Growth, responsible for
ensuring the right conditions for balanced economic growth.
The state did not begin to appreciate this aspect of its role to all
intents and purposes until modern times (how innovative it must
have been when Henry IV King of France said he wanted each of his
subjects to be able to afford a put a chicken in their pot!). This was
followed by development-supporting instruments of varying degrees of successfulness, from protectionist customs duties and
subsidies, to tax incentives for investment, patronage of academic
studies, and government contracts to stimulate the economy. Over
time the state took a serious approach to strategic planning and
supporting the private sector in the investment process, especially
where there were no clear prospects for profits or plans related to
some remote time in the future and this did not encourage risktaking (for example when expanding critical infrastructure). At the
same time it realized that it had an obligation to provide financial
stability for the country, especially from the moment tender based
on precious metals was replaced by tender that derived its value
from government regulation, and expansion of the financial markets
made more complicated assessment of the risk connected with
saving and investing. Finally, the state also came to see that it played
a major role in creating human capital and supporting innovative
capital, today seen as the key factors of economic growth.
Fourthly, and lastly, the modern state also plays the role of
the Guarantor of Security, giving the public a high level of economic
comfort. This role has its origins in the name of Chancellor Bismarck,
who introduced in Germany a modest, compulsory health insurance
and pension system protecting workers against loss of income in
cases of incapacity for work. In the 20th century the performance
of the role of Guarantor of Security led to the creation of highly
developed institutions of a prosperous state in the Western
countries. Nowadays, the state is responsible for operating the
pension system, social welfare, universal education and a universally available (although to varying degrees) health service. It has
also assured the public that due to regulation of the financial
markets it has the capacity to guarantee that their savings are
secure, and through skillful policy-making stimulate sustained
economic growth and effectively combat unemployment, by minimizing fluctuations in the condition of the economy.
74
Finally, on the scale demanded by society in a particular country – it
took on the role of Robin Hood, limiting the extent of stratification of
income due to a universally applied system of progressive taxation
and generous social transfers.
All of this obviously comes at some cost. The more society
expects from the state, the more it is required to spend to run it.
There is no doubt that enlarging the role of the state leads to an
increase in spending, and consequently increased taxation,
because in the long run spending cannot be financed by steadily
increasing debt. The function of Guarantor of Security is especially
expensive, and the differences in the scale of taxation depend
mainly on the extent to which the prosperous state is developed.
In Scandinavia taxes are almost twice as high as in Switzerland,
because the Scandinavian public expect greater activeness and
care for the people from the state. High taxes definitely undermine
economic growth – but what is also certain is that Scandinavians
and the Swiss, by living in very wealthy countries, are able to decide
what suits them most. The situation is not as good, however in the
poorer countries – such as Poland – where, in a quite schizophrenic
manner, society wants on the one hand to enjoy highly developed
institutions of a prosperous state, while on the other they demand
low taxes to help growth and individual success.
The more society expects
from the state, the more it
is required to spend to run it.
There is no doubt that
enlarging the role of the state
leads to an increase in
spending, and consequently
increased taxation,
because in the long run
spending cannot be financed
by steadily increasing debt.
Assessment of the extent to which the state should be
present in the Polish economy usually starts precisely with the
argument presented above: If Poland needs rapid economic growth,
the Polish public should consent to lower taxes and less public
spending. This is a valid argument, but contrary to appearances it is
not the key argument if we are to be realistic. It is hard to imagine
contemporary Poles, who at each step of the way compare their
country, their income and their life to what they see in the more
developed countries in the EU, accepting drastic limitation of the
role of the state – especially the function of Guarantor of Security.
As it happens, without drastic cuts in this area, it will be difficult to
make significant changes in public spending, and, this being the
case, it probably has to be assumed that some kind of drastic
lowering of taxes in the next few years is a pipe dream, which does
not mean that it is impossible to lower slightly the ratio of taxes to
GDP, and that the taxation structure and manner in which taxes are
collected cannot be changed to make them more growth-friendly.
The key question of the presence of the Polish state in the
economy should be answered by analyzing, one by one, the state’s
main roles. The role of the state as Big Regulator seems to be the
least doubtful. I do not think that anyone is in any doubt that in this
respect the Polish state should be much more effective – both by
way of solutions introduced directly as well as indirect influence on
regulations drawn up at the EU level.
75
In both cases the measures require above all that law-making
channels be made more efficient in general, leading to higher quality
of regulation due to better analysis of the potential consequences,
a more transparent way of incorporating the opinions of various
interest groups (and this includes in particular the economy) and
more effective implementation. In the latter case a high level of
diplomatic efficiency in EU bodies is also important, but forming the
right role of Big Regulator is not easy at all and is not just a question
of an increase in efficiency of public institutions (which even by itself
is difficult and requires many years of construction, which is
something that has not been attended to in Poland, of an efficient
and honest civil service). However, the most important task is
something that is virtually non-existent in Poland: creating unobstructed channels of permanent dialogue and communication
between the economy and state institutions, in the spirit of a new
industrial policy. At the moment contacts of this kind are considered
as something reprehensible in Poland, and at best unclear. At the
same time, it should be evident to everyone that properly taking into
account economic interests when legislating is key to growth in
Poland, and this cannot be done without building a real partnership
between business and the state. This needs to be partnership not
serving to further individual interests, but enabling changes of a kind
which will be the most conducive to development and growth of
cross-border competitiveness of Polish firms. This is an honest
partnership in which both parties seek an area of mutual benefit and
do not try to dominate the other party or lead them up the garden
path. The state’s role as Big Regulator therefore, needs to be
redefined in Poland.
The Polish state’s
greatest weakness
is demonstrated in the role
of Promoter of Growth.
The lack of capacity
for extensive analysis,
strategic planning and
making long-term decisions
relating to development
(for example with respect
to the energy sector,
infrastructure or the way
the education and academic
sectors operate)
cannot be replaced by even
the greatest activeness
of the private sector.
The correct presence of the state as Big Producer seems to
be quite obvious as well. The state has to create public services
which the private sector is either unable or for various reasons
is unwilling to provide. Making a correct list of those services is
not however, at all simple and involves serious decisions. While
administration, law enforcement and domestic and external
security do not raise any particular doubts (although in the contemporary world the question will always arise of which parts of
those activities can be outsourced and it is economically viable to
outsource), a more fundamental question is that of the role of the
state as a provider of medical services or education. The problem
here is not so much the relatively obvious choice of economic
efficiency as much as the dilemma that then arises of equal access,
leading to the question of equal opportunities for members of the
public. However, the further we get from the basic functions of the
state, the more its role as Big Producer becomes obvious. In the field
of development of infrastructure it is worth reaching as broadly as
possible for the instrument of the PPP. In production there is no
legitimate reason for the state to own mines, factories, airlines, or
banks. The only rationale for preserving (in the long or short term)
the function of proprietor relates to security, which cannot be solved
in any way other than direct control.
76
This naturally leads straight to the conclusion that the role of the
Polish state as Big Producer should continue to be curtailed.
The Polish state’s greatest weakness is demonstrated in the
role of Promoter of Growth. The lack of capacity for extensive
analysis, strategic planning and making long-term decisions relating
to development (for example with respect to the energy sector,
infrastructure or the way the education and academic sectors
operate) cannot be replaced by even the greatest activeness of the
private sector. Although in general the Polish state has been fairly
successful in the past in ensuring the country’s financial stability, the
unpredictability of contemporary global finance might still present
severe challenges for the future (the example of the systemic crisis
on the credit market caused by the changes in the rate of the Swiss
franc – despite certain measures Polish state institutions have not
been able to adequately identify and slow down in time dangerous
scenarios in the banking sector – gives us something to think about).
Even more important is the fact that in financial policy strategic
instruments could not be found to increase the national savings and
accumulate capital necessary for growth of large firms with Polish
capital. The results achieved in the field of growth of human capital
are not grounds for complete satisfaction, and the negligible
success with regard to creation of a culture of innovativeness and
promoting scenarios of development on the basis of knowledge are
hampered considerably by lack of the relevant state policy, both
with respect to the academic sector (in which the introduction of
adequately far-reaching reforms forcing the sector to open to the
market was unsuccessful) and the economic sector (where there
was no success in creating real incentives for increasing innovativeness, despite using considerable EU funds for this purpose).
In a nutshell, the presence of the Polish state in the economy as
Promoter of Growth has to be strengthened a great deal.
In a sense the hardest role to assess is the role of Guarantor
of Security, because, as mentioned above, this is an unusually
expensive role, the scale of which is decided by society. Of course
one can use the simple argument that as Polish society demands
low taxes and greater prosperity of the country at the same time, the
first thing that needs to be done is educating the public to make it
understand that these two things cannot be achieved at the same
time. There is, however, something more important. The global
crisis demonstrated clearly that the obligations of the state towards
the people which have been prescribed for decades simply cannot
be met in full. In today’s world, in which it is easy for a French
millionaire to live in a Belgian village, and it is easy for a young Polish
engineer to emigrate and escape the jurisdiction of the Polish tax
authorities, attempting to finance a prosperous state by increasing
taxes is a dead end. The mass exodus of trained specialists,
combined with the exodus of capital to escape taxes, is a direct route
to loss of competitiveness and the economic collapse of the country.
The key mechanism for a prosperous state relies on solidarity of
those who work with those who for various reasons do not work.
77
The ability to maintain this system depends mainly on the ratio of
those in work to those out of work. This in turn depends to a large
extent on changes in the demographic structure of society, which in
Poland is heading in the wrong direction. The prosperous state at
the current level, i.e. guaranteeing the ratio that exists today of
income of those out of work to those in work simply cannot be
sustained. The state will be in the position to fulfill only the
necessary minimum of promises. This means that regardless of the
decisions made the role of the state as Guarantor of Security must
gradually be reduced in Poland.
There is no straightforward answer to the question I have
tried to answer in this essay, of how much the state is needed in the
Polish economy. There are areas in which the presence of the state
should be strengthened, naturally on the condition that the state
performs its functions effectively and in a manner which is conducive to economic growth, and there are areas in which the state’s
presence needs to be significantly reduced. Finally, there are also
areas in which reduction of this kind will have to be carried out due
to the changing demographic situation, but one thing is certain,
whatever the Polish state does, it has to do it in a more efficient way
than it does today. This means that the task of fundamental
reform of state institutions is something that still awaits us.
Professor Witold M. Orłowski
is former Chief Economic Advisor to the President of Poland.
He continues his academic and scientific activities - within the Independent
Center for Economic Studies (NOBE) and as a head of the Business School
at Warsaw University of Technology. As part of his current advisory
in the economy area, Prof. Orłowski is involved inter alia in development
of PwC services in Poland.
78

How much state in the economy?

Transcription

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