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Towards the liberal capitalist order

Published on February 8, 2010 by: in: Thought

Explanation

The author owns “Liberte” readers an explanation. As I took part, from the very first days of the transformation (or even much earlier), in various liberal program trials and errors, I created, sometimes alone, sometimes with others, numerous proposals concerning such a program. At first they were obviously proposals concerning systemic changes, but from the second part of the 90’s, after democracy and market economy in Poland settled down for good, they became just reform proposals, that is changes within the existing, yet imperfect, system. Changes which were not infrequently very radical. So I decided, in the moment liberal discourse was revived on the pages of a this new monthly, to recall some of the proposals. Those, who are universal in nature and should be kept in mind at all times, treating them like the meter from Sevres near Paris – checking the compatibility of current rules of the game and changes proposed by politicians with this liberal meter. But also those, which are far from being fulfilled on the scale necessary on our Polish arena.

ECONOMY SURROUNDINGS: STATE – LAW – POLITICS
Polish state, although highly interventionist, is in essence weak.

Such extensive interventionism is in fact one of of the main causes of its weakness. It is hard, however, to move away from such interventionism, as two trends overlap. One of them is a tendency, inherited from the totalitarian state, to engage in and regulate everything. Large part of the society is accustomed to the fact that the state thinks and makes decisions for them, and they believe this should carry on in the future. This in turn, is reinforced by another tendency characteristic to democratic welfare states. Such states are overloaded with the amount and variety of demands of numerous interest groups, which breeds tendency to expand the state apparatus (“an office is an answer to everything”, as a sign of interest of the government with the demands of a given group). This, however, intensifies the feeling of irresponsibility in the clients from these interest groups. “Overloaded democracy” functions less efficiently everywhere; in post-communist reality its functioning is even worse, because the tradition of seeking agreement with rival interest groups has been completely destroyed by the previous system, and new habits do not help achieving this agreement. Nothing showed better, how easy it is to slip from such a situation into an authoritarian state or, as a minimum, into ‘anti-liberal democracy”, hostile towards freedom (according to a definition of Fareed Zakaria), than two years of PiS rule.

A state, which tries to extend its regulation and immediate control over wider and wider spectrum of issues, must – due to overloading with too many problems – be fulfilling its role inefficiently. And while holding a lot, its grip becomes weak. As a result, it insufficiently fulfills its basic functions of ensuring law and order. The system of coercion and the judicial system are also overloaded with numerous duties and changing concepts of politicians on the efficiency of various means. Politicization of law turns the rule of law into rule with the help of law, that is the rule of politicians. The system uses the law like the drunkard from the joke uses the street lamp – for support, not for enlightenment.

We are also influenced by a line of thinking stemming from the evolution of Western civilization, which presumes a causative force of law-making as a cure for any social disease. Such wishful thinking, contrary to the tradition dating back to Roman times, drastically limits the reliability of law. The contemporary ideal state of law is limited to the certainty what law is in force today, in a given issue. It gives no guarantee that the same rules will be in force tomorrow, as the parliamentary majority can change a given regulation any given day. In a post-communist country such as Poland, a morbid amalgam is created, of complete disregard of legal norms, stemming from communism and a legislative diarrhea which, despite intentions, intensifies the legal insecurity.

On top of state and legal weaknesses, difficult to eradicate, as they stem both from our recent history and from the peculiar, deforming influence of the very civilization we are trying to return to, we suffer from a specific, post-communist tendency of political groups to appropriate the state. Political parties are not deeply rooted in the society; they rarely act in the clear interest of particular social groups. That is why they try to empower themselves even more, using the state as a spoil of the victorious party or coalition. Such appropriation is conducted most usually in two ways.

Firstly, through creating a new party nomenclature: appointments to various positions in public administration are only bestowed through the party, going down the administrative ladder (and appropriating lower positions). It lowers the efficiency of the administration, as the division of knowledge and skills rarely matches the division in the party. Administrative efficiency is also decreased through a chain of changes, brought up by the shifts in ruling coalitions.

Secondly, through a phenomenon called “political capitalism”. A still too large state sector and incomprehensible (often on purpose!) rules of the game, create the opportunities to apply the criteria of party membership (or a silent support for a given party) while selecting both specialists, as well as the executors of public procurements. Through this, the effectiveness of economic system suffers.

The above mentioned diagnosis of Polish democracy weaknesses leads to two conclusions of the most general nature, which can become the basis on which the direction of healing the Republic of Poland can be specified. The reaction to the perceived degenerations of civilization and peculiar Polish (and more broadly: post-communist) problems is the postulate of those who see themselves in the center of political scene, that is to limit the role of the state to minimum. If the state fails to deal with a growing list of problems, which various group of interests demand to be settled after their heart, it should limit itself only to those issues which cannot be resolved without the state. “Better less, but better” is becoming the main theme in the program of the supporters of minimum state.

The second element of the diagnosis, from which also particular conclusions can be made, is to recognize the fact that Polish capitalism suffers from a lot less degeneration than Polish democracy. Although the effectiveness of the economic system suffers as a result of various manifestations of “political capitalism”, fortunately it is still a minor part, compared to the value of transactions constituting global sales of goods and services in the private sector of Polish economy. As a consequence of this diagnosis, one must acknowledge the fact that in such circumstances allocation by the market should in most cases replace the allocation through political decisions. It should be noted that this conclusion was not based on any ideological preferences, but on pragmatic ones: relatively lower distortions of the market point to the necessity of relieving the state, which is more prone to distortions, of its allocative functions.

In the part devoted to economy, program proposals are presented, which bring the economic system closer to the minimum-state ideal and put more weight on the necessity of greater allocation through the market. They include tax proposals, proposals limiting redistribution, as well as privatization, regulation, anti-bribery and other proposals. All of these point to the need of limiting the activity of the state. Postulates leading to the minimum of state in the economy should be supplemented by proposals limiting the role of the state in relations with institutions of civic society and in relations with the citizens themselves. This issue will be expanded below.

Public expenditure is always less controlled with regard to its purposefulness and effectiveness than private expenses. For the same reason, it is particularly prone to bribery and corruption. That is why the diagnosis pertaining to the weaknesses of the party system, appropriating the state by the victorious parties and the prevalent phenomenon of “political capitalism” suggest yet another direction of action. Where the application of the postulate of limiting allocative role of the state is impossible – due to the nature of public expenses or even due to tradition difficult to change – the element of the strategy to improve the functioning of public authorities should be the movement of allocative decisions from the level of central power to the level of local government. Both central and local authorities, in their essence representing particular communities, are less effective than private owners. However, the level of control over local authorities by local communities is – due to greater visibility of achievements or negligence of local government – incomparably higher. For this reason the decentralizing strategy is at the same time a strategy of limiting the degeneration of Polish democracy.

Decentralizing strategy, however, should not be limited to extending the role of local government at the expense of less effective center. The rule of self-government, as a key element to civic society, should be understood far more broadly. Stepping out of the model imposed by the communism, of “nationalized society”, means regaining more and more areas of autonomy of individuals, families, professional groups and business circles, which should gain or regain their rights to decide about the areas of their activity, setting their aims and determining the means of their realization. We understand, however, rights in the historical context of balance of rights, including the right to make mistakes and the obligation to bear the responsibility for one’s actions.

LIBERAL ECONOMIC ORDER: DIRECTIONS OF CHANGES

1. No economic program can be started without expressing clear acceptance for the institutional determinants of economic order, almost universally seen as fundamental both for the economic efficiency (creating wealth), and for their relationship with basic values of Western democracy (relationships of economic freedoms with civic freedoms, morality as a foundation of economic order and civic duties, etc). Economic history, especially the experiences of the 20th century, clearly show which institutional determinants and the limits to intervention into creating and distributing wealth are favorable to economic efficiency.

2. Rules of economic freedom, competition and opening on the external world. After a few decades of fascination with economic planning, meticulous interventionism and the possibilities of actions administered or coordinated by the center, the 80’s and the 90’s of the previous century brought about an extensive change in thought and action. It was caused mainly by the failures of developing countries, which after World War 2 chose mainly the path of centralism, replacing private sector with the state, and far reaching isolation from the world market, by the collapse of the communist economic system, or, last but not least, by “over-regulation” and “over-socialization” of many Western economies (inducing the phenomenon of still not fully eradicated “Eurosclerosis”).
That is why today the principle of economic freedom is the irrefutable foundation even where it is more a directive regarding the future, than a current state. Economic freedom – for it to be an effective tool of creating wealth – should be accompanied by competition, together with all its useful, but sometimes painful characteristics (the principle of freedom to enter the market, but also the principle of the need to leave the market when the expenses, being higher than profit, do not allow for further presence on the market). Taking into consideration the fact, that in mass production, on a large scale, there are few manufacturers, the principle of competition means opening towards the global market. Without such opening, monopoly cartel is very likely to arise, harmful for the consumer and the economy as an effectively functioning whole.

3. Economic freedom and competition in the market economy are only warrants of effectiveness, when they are based on the dominant private ownership. The experiences from contemporary history prove, that never and nowhere in the world had the experiment of creating market economy without dominant private ownership (“capitalism without capitalists”) succeeded. Looking pragmatically, as a minimum aim we should consider Poland reaching the state present in Western countries with large public sector, i.e. maximum of 10-15% of the production in the company sector (in 2007 it was almost 30%!). There is therefore still a lot to do in this respect.
Avoiding economic woolgathering, we should clearly distance ourselves from the temptation of seeking a so called third way. We are aware that the notion, attractive for some, of “social market economy” formulated in Germany in the 40’s, was nothing else but a liberal market economy (presented by the ordo-liberal school) and even more liberal than anything introduced in Poland since 1989. Contemporary German problems (over 4,5 million unemployed, continuing flight of workplaces, among all, to Central and Eastern Europe (including Poland) and other weaknesses) are not the result of social market economy, but over-regulation of German economy and its overloading with welfare state services. These are not – for some- pleasant truths, but they certainly are necessary in understanding the real area of action in economic and social policy.

4. The most secure – and the only one in the long run – way of improving the economic situation of households is still fast economic growth. It relates also to the possibility of redistribution through budget: a “larger cake” to divide means more goods than in a larger piece of slowly growing or even shrinking “cake”. Apart from economic freedom and private ownership, the necessary condition for fast economic growth is another spoil of Polish transformation – a stable, exchangeable currency. It means both contemporary Zloty, as well as the Euro in the (hard to determine) future.
The experiences of countries which managed, over decades, to keep a steady, high rate of GDP growth, prove that it is the policy of monetary authority, preventing excessive emission of currency, and its consequence – low or even non-existent inflation – that encourages the society to save money, and low nominal interest rates and the expectation of the stability of currency, encourage businessmen to invest. It is stable currency, high savings and high investment rate that laid the foundation of Japanese success of the 50’s-70’s. (and not, as some think, “meddling” with the industry structure…).

5. High economic growth (around 7-10% a year), as the experiences of Ireland, closer to us than Japan, show, which solves or, as a minimum, reduces many of the social problems, is only possible in the long run in the conditions of limited budgetary redistribution. It should be clearly noted that motivation for saving, for working effectively, for entrepreneurship or for innovation is impossible to sustain where the state takes almost half of their income from the workers. Public budgets of Japan, South Korea and in Taiwan did not exceed 25% of gross domestic product (not to mention Hong Kong and Singapore where they were even lower!). Also in the Baltic states, and in Slovakia, which are the fastest developing countries in the 21st century, among the transformation countries – EU members, faster pace of GDP growth correlates with level of public expenditure lower than elsewhere.
Decades of nationalization of everything – including the mentality of many citizens – shaped the particular expectations towards the state. That is why a realistic directive for the economic policy should be a gradual but consequent, yearly lowering of the ratio of public budget (and the so called para-budgetary expenses) to the domestic product. Current government announced such a move on a very modest scale; we will be closely watching the consistency of actions in this respect.

6. The foundation of economic order consists also of effectively functioning labor and capital markets. Work relations should contribute to stabilization of expectations both on the part of employees and employers. There is a strong preference in Poland for the model of job market based on negotiations of mediating institutions (trade unions and employers associations). Strictly theoretically, such a model could – by stabilizing expectations – lead to increasing the effectiveness of the economy, as long as its remains flexible, taking into consideration, in group contracts, the necessary space for adjustments, stemming from current market state, industry situation or specific economic entity.
In Poland it is unfortunately a harmful model, as it reduces, instead of increasing, the flexibility of the job market and the economy as a whole. What is even worse, the power of trade unions – more outside the parliament, in the public sector and budgetary workplaces – strengthened by cheap populism of many politicians, drove the job market into the state of over-regulation, highly destructive to any business activity.
One must also add to this picture specific Polish pathologies of the trade union movement. A clearly higher tendency, than anywhere else, to go on strike is also a consequence of pathological institutional solutions, blowing the rights of trade unions out of proportion. Without the rights of unions to finance their actions by the employers, without the aberration of paying the wages for the days on strike, our social life would be calmer, and the activity of businesses (especially public ones), less costly. It is necessary to change the regulation in this respect, and introduce a principle applied everywhere else in the Western world – financing of trade unions by membership fees (including paying strike benefits out of these fees). It would greatly limit the tendency to go on strike, because it would be on their own cost. It would also decrease sponging on the companies, as the number of trade unions and their full-time activists will drastically decrease.
Effectively functioning financial institutions are the bloodstream of the economy. The best guarantee of such effectiveness is – as everywhere – healthy competition. It cannot be present where credit decisions are made largely based on personal connections and political calculations. These in turn are easily spotted in state banks. Not only Polish, but also Western (e.g. French) experiences prove this).
That is why privatization of the most part of banking sector, so criticized by the”meddlers”, was one of the few institutional successes of the last years. And the fact that those banks have mostly foreign owners, increases the certainty of rational actions. This means decisions made in the interest of the saver and the entrepreneur, expecting a low-interest credits, and not in the interest of politicians, looking for money for politically popular, but economically nonsensical undertakings.

CHANGING THE ROLE OF THE STATE IN THE ECONOMY

1. The inheritance of socialist economy in Poland is a still too large state participation as an owner, a central regulator and a distributor of public procurement in the economy. There is, however, definitely too low state participation as a institution creating conditions for economic development, entrepreneurship, innovation – and human initiative in general. The assessment of the state is even worse when it comes to fulfilling its basic duties in the economy, i.e. ensuring the security of trade through internally consistent system of law, where the interpretation of law and the decisions made by the public administration are based on it, through competent and fair courts and effective execution of court orders in economic cases.
Program directive should be changing the state role in the economy – and in two directions. In the field of strengthening the law and order in the economy, the authorities should be aiming at increasing the quality, transparency and inherent consistency of economic law, and strengthening the judicial and executive system. The state, which does not satisfactorily fulfill its role of the “night guard” in the economy, exposes itself to disregard of the very laws it makes, concerning this economy – to the detriment of the efficiency of business, as it increases the transactional costs of economic entities (not to mention the moral losses stemming from such disregard for the law). Furthermore, the low level of security in trading is – next to high taxes and arbitrariness of tax bureaucracy – an important factor in continuing existence of the gray zone in the economy. Companies staying within the gray zone do not see the benefits of a possible transfer to the registered economy, if they are still in large extent devoid of legal protection in conducting economic activity.

In the sense of creating conditions for higher efficiency of operation of economic entities, the state should be guided by a strategy based on what is often called the rules of theory of economics of supply. It spans over the set of undertakings releasing the economic activity, innovation, productivity and other desired economic characteristics, increasing the dynamics of creating wealth. All activities, from removing unnecessary or even harmful regulations to increasing the safety of trading, are increasing the dynamics of the economy.
On the other hand, the change of state role in the economy should be based obviously on resigning from the role of the owner of a multiplant company called national economy. The route leading to this destination should be the fastest possible privatization of what is in the hands of the state and constitutes the so called “black hole”, sucking in public money. Years of negligence caused a situation where a large part of state-owned companies has negative worth and will have to be liquidated, most desirably in the normal course of market economy.


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About Jan Winiecki

Economist, professor of Aalborg University and European University Viadrina in Frankfurt, co-founder and president of the foundation of Adam Smith Center, former member of the EBRD board, co-founder and former president of the Polish Economic Society, laureate of Kisiel Prize.

Original Liberte.pl
Fredrich Naumann Foundation For The Freedom
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