Free marketeers must fend off the statists
By Leszek Balcerowicz
Published in: THE FINANCIAL TIMES
Date: April 29, 2008
Leading Nowadays, the necessity of further market reforms is rarely questioned. But why does this need even arise? It does so because there is a constant battle between the expansion of the state - seen in increased regulation, national-isations and growing fiscal burdens - and a retaliation against it.
A look at history shows remarkable fluctuations in institutional systems. In Bolshevik Russia in 1917, and in Mao's China after 1949, the surge of statism was brutal and drastic. These models spread to many less developed countries. Deng Xiaoping'sreforms in China in the late 1970s and the collapse of the USSR initiated a shift towards a freer economy. Western countries liberalised their economic systems in the 19th century, followed by a period of statism resulting from the Great Depression in the 1930s, only to start market reforms again in the late 1970s.
I do not believe a unified theory is capable of precisely explaining these transformations, yet one can outline the main interacting forces behind them. For example, modern antimarket dictatorships resulted from the interplay be-tween the quasi-religious doctrine of Marxism, the traumatic experience of wars and the activity of ruthless individuals such as Lenin and Mao. Once established, these regimes lasted, despite declining economic performance, be-cause society was intimidated and the ruling group was largely shielded from the drawbacks of the system. The demise of such regimes is typically unexpected, requiring special events or an individual, such as Deng, Mikhail Gorbachev or Boris Yeltsin, that interact with the forces of long-term decline.
In western democracies one could ex-pect that the free market would be self-supporting because of its superior econ-omic performance. However, history is full of episodes of statism: market re-forms typically meet resistance and re-main in danger of being left in-complete or even reversed. How to explain that? I would suggest that the direction of institutional change in democracies results from a constant, peaceful struggle between two opposing forces: collectivist and anti-collectivist. Any shift is triggered by a traumatic event that interacts with established beliefs.
For example, statist policies in the west were caused by the crash of 1929 and the popular view that it un-derlined the bankruptcy of free market capitalism. Those beliefs fuelled the popularity of John Maynard Keynes' General Theory, which, in turn, dominated western economics. It took another shock, the stagflation of the 1970s, to undermine the collectivist appeal of crude Keynes-ianism, with its belief in fiscal activism and distrust of private investment.
Many collectivist myths are alive and well in the west: there are voters who supportincreased spending while expecting lower taxes. Democracy is widely accepted while its indispensable basis, capitalism, is viewed with suspicion. Increased state intervention is seen by many as a solution to all kinds of problems, mirroring attitudes of the typical Soviet official. That is evident with respect to the welfare state. Individual pension accounts, which reformed the pension systenin Poland and some other transition economies, were recently rejected in the US. Flat taxes have been introduced in most post-socialist economies, but are blocked by ideological hostility in all western countries. One wonders sometimes whether there is more Homo Sovieticus in the former or the latter.
Statist interest groups also exploit collectivist myths for their own benefits, from politicians who expand power while claiming to defend the public good; to trade unions that demand protection against imports in the name of the "national interest"; to beneficiaries of social transfers who defend them by citing "solidarity".
However, as statism expands, econ-omic problems accumulate. It is then only a matter of time before market reforms emerge, via the ballot box.
But there are caveats. First, the crisis may be a result of the fact that the reform package has left intact some crucial vulnerabilities, which are activated by economic shocks. However, the public may blame the market reforms for the economic disaster. This seems to be the case in Argentina, where genuine privatisation and deregulation in the 1990s were not accompanied, for example, by efforts to address labour market rigidities. The Argentinian public drew the wrong conclusion, bringing to power the Kirchners with their collectivist policies.
Second, one wonders whether successful reforms extend their roots into society's psyche thanks to the improved economic performance they produce, or whether, by reducing situational pressures, they allow scope for a renewed increase in statism. One can ask this question with respect to the current situation in Germany.
History is open-ended, leaving no room for fatalism or passive optimism. The economic crisis is a great educator, but it is better to reform under more normal conditions. To achieve that, believers in limited government and free markets must defeat their collectivist foes in the battle of ideas. They need to appeal to reason and a sense of fairness. Collectivists should not be allowed to occupy the moral high ground. High structural unemployment, the misuse of poorly structured social transfers - all products of statist policies - are simply unjust. Free market advocates should highlight benchmarks, comparing bureaucratic burdens on business or the investment climate between countries. Statism does not need to prevail.
The writer is a professor in the Warsaw School of Economics, and a distinguished fellow at the Center for European Policy Analysis in Washington.
The views expressed in this article are those of the author and do not necessarily reflect the opinions of the Center for European Policy Analysis.