The Success Of Eastern Europe
From the desk of Richard Rahn on Thu, 2012-09-06 15:08
Year by year, the current nine countries of Eastern and Central Europe that were controlled by the Soviets -- Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia -- become relatively more prosperous in comparison to the richer nations of Western Europe. As a result of the European debt crisis, this trend is likely to accelerate.
It has been more than two decades since these countries acquired their freedom. All have become multiparty, largely free-market democracies. What seems normal now was far from a foregone conclusion at the time of the dissolution of the old Soviet Union. In fact, most bets would have wagered that not all these nations would have made it.
I was one of the economists who advised the reformers in Hungary and Estonia -- then later Russia and Ukraine -- and served as co-chairman of the transition team in Bulgaria. To say that at the time we were not all confident that the democratic and economic reforms would be successful would be an understatement.
Per capita incomes still lag somewhat behind those of the richer Western European countries, as can be seen in the accompanying table. But economic growth rates on average in the nine new countries, with plenty of ups and downs, have been much higher than the average of the European Union (EU).
The improvement has been much greater than the official numbers indicate because the real level of well-being in the nine countries at the end of the Soviet period was greatly overstated.
The Soviets exaggerated their success for obvious reasons, but many in Western intelligence agencies also accepted those phony higher numbers because it made the communist threat seem greater than it was, which led to higher defense and intelligence budgets. Many who leaned to the left in the media and academic establishments wanted to inflate socialism's success beyond actuality.
Why are the nine doing better than the rest of the EU? As can be seen in the table, all but Hungary have far lower levels of government debt as a percentage of gross domestic product than the EU average of 83.4 percent. They also have smaller government sectors than the EU average, and they have much lower marginal and flatter income tax rates than the rest of the EU.
France is included in the table to serve as a comparison. France is a large, rich country on its way to becoming poorer because it increasingly is less competitive in comparison with the reformed nine thanks to its high tax rates (the 75 percent tax on income over 1 million euros is pending), heavy labor and financial regulations, and an elevated level of government spending.
Why have the nine succeeded?
First, their citizens saw socialism/communism up close, and they knew it did not work in practice or even in theory. They understand that government is more often the problem than the solution.
Second, in most of the countries, there were those who had read and understood what F.A. Hayek and Milton Friedman had been saying, despite the difficulties in obtaining those economists' works.
Many of these young economists became leaders in their respective nations -- notably, Leszek Balcerowicz, former deputy prime minister and minister of finance and former chairman of the National Bank of Poland, who initiated Poland's economic reforms in 1989; Mart Laar in Estonia, who was trained as a historian but had read Friedman and implemented many of his ideas when he served as the first real reformist prime minister in his country; and finally, Vaclav Klaus, president and former prime minister of the Czech Republic.
As a young economist, Mr. Klaus had the opportunity to spend limited time studying abroad. He quickly picked up the ideas of Hayek and Friedman, which got him in trouble in his home country. He was forced largely to keep out of politics until things began to change in the late 1980s in what is now the Czech Republic. It was during that time when I first met Mr. Klaus, and he was filled with enthusiasm and perhaps a bit of naiveté about the task at hand.
He went on to become finance minister and then prime minister, and finally for the past nine years he has been Czech president. In addition to his political success, he has continued to write serious economic policy books, including a highly regarded and widely distributed (in English) critique of global-warming hysterics: Blue Planet in Green Shackles.
Mr. Klaus, despite his official duties, has been an active participant in the Mont Pelerin Society (the global organization of classical liberty and free-market scholars and proponents formed by Hayek in 1947) which is holding its biannual general meeting in Prague this week. As one of the most free-market heads of state in the world, he is both hosting events at Prague Castle for the society and engaging in the debate over solutions for the global economic crisis.
France and many countries in Europe are headed in one direction. The Czech Republic and the other reform countries are headed in another direction. The question is, how long will it be before the Czechs overtake the French in per capita income?
When that day comes, the Czech people should remember that a major reason for their success is that they were wise enough to elect Mr. Klaus as their leader rather than a typical European socialist.
Submitted by koenraad.elst on Thu, 2012-10-25 00:27.
I am posting this reaction on behalf of Mr. Ivan Darakchiev:
Sir, I take issue with your writing: You are proclaiming a success what actually is nothing short of a total disaster!
I will present herewith some arguments concerning Bulgaria, of which I am most knowledgeable; however, the situation in Romania is just about the same, if not worse, and my information about the others – the Czech republic, Slovakia and Hungary in particular – point to only marginally better situation, as compared to those two.
Now, how can you talk of any improvement when from 9.0 million in 1989 the Bulgarians today number 7.5 million? An estimated 2.0 to 2.5 million people having left for good, of which about half represent the quintessential “brain drain” that anybody in the West could have only dreamed about, decennia ago, among other things as a sizable saving in education. This exodus represents in my view a self-inflicted national genocide that the ruling Nomenklatura is collectively guilty of, and should one day be held accountable for. And you are proud of advising the perpetrators?
Sir, how can you talk of improvement in the economic situation of a country which 20 years after 1989 has a GDP about the same size as it was then? I am sorry, but using just the standard PPP numbers is pointless. What do you make of the facts that today:
In brief, the “transition” from “Communism” to “Democracy” has brought the Bulgarian state to its knees and the Bulgarian people have been impoverished as never before in the country’s millennia old history. Contrary to popular belief, membership into EU has further contributed to the disaster. I have explained this in detail in my recent book “Bulgaria, terra europeansis incognita” (www.dukaty-books.com) where also arguments in detail are presented about why using the standard PPP comparison makes no sense. More important, I have outlined what I consider the first and only (to my knowledge) objective and realistic comparison between the two systems, in terms of their impact on the economic and cultural aspects of population’s everyday life. Guess what? “Communism” wins hands down! No wonder all independent polls today report that in 60-80% of the responses, within the relevant age groups, people consider having been better off prior to the arrival of “Democracy!” The masses being nostalgic to “Communism” is the true achievement of 20+ years under “Democracy” – that is the only real result which you could, in all fairness, take pride in contributing to, if you wish, no objections here.
Now, before you stick to me a label of Commie or another affiliation of that sort, let me inform you that on 01.03.1982 I have defected to Belgium, where I am a citizen with accomplished career of executive in the microelectronic industry, recently retired, and my Bulgarian citizenship was restored only in 1994. Moreover, in 1954 my father, a regional enterprise director in Burgas, Bulgaria, has been sentenced to death by the Communist “People’s Tribunal” for “economic sabotage of the young socialist republic,” in a mock up of a trial designed to scare the populace into submission. In 1955, at the age of 35, he has been executed, leaving behind a son of 7 and a daughter of 2; my mother has not been given the body, nor have we been shown his grave. I do challenge you – and anyone else, for that matter – that nobody than myself could be better qualified as advocate AGAINST Communism. Yet during all my life I am striving for uncovering the whole truth, and can not – nor will knowingly permit to – be blinded by ideological reasons.
The question may be raised “Why comparing to Communism given comparing to EU is readily available?” Well, that is true, and by the way even though it uses formally derived parameters (like in your case) there it is plainly seen as well that Bulgaria is by far the poorest and totally, completely, helplessly lost (that is, with no chance to get any closer to the better-off “sister-countries” on the block). Hence my search for a different approach, digging much deeper, in order to analyze the chances – and the pathway – for getting out of the current morass.
The reason for my choice here is to raise your awareness that we all have been looking in the wrong direction. In my book I have presented the case that the modern representative democracy has degenerated into its last – terminal, I believe – phase that I call Nomenklaturocracy. The source of evil being the profession of “politician” and the aspiration of those – typically undereducated, with limited personal abilities and unsuccessful in any other profession individuals, otherwise rather ambitious and pretty greedy – who form the Nomenklatura to cling to power (and the presumed riches that comes with it, even to the least capable, sufficing to be “politically correct”), three conclusions are becoming obvious: (i) Communism (a single party Nomenklaturocracy) and Representative Democracy (a multi-party one) are basically the same animal, the ideology being used essentially as a tool to justify staying on power, with all the “nuances” being simply a function of the conjuncture; (ii) Such system inevitably fails economically, due to inherent malaise: uncontrolled overspending (wasting) of national resources – more politely I would put it as “irresistible tendency to assign ever-increasing added value to the activities of a huge non-productive while ever-growing bureaucratic machine.”(iii) The world is pregnant with system change and the only reasonable alternative to Nomenklaturocracy is an optimized form of Direct Democracy. More in the book.
Hence in continuation of the search for improvement in Bulgaria, far beyond PPP, the use of which makes no sense here, as well as most other macroeconomic parameters, I do suggest that one needs also to take into account other criteria as qualifiers of the nation’s “state of mind” and “quality of life.” I’d throw herein just a tiny sample of those, in order to raise your awareness about the facts that:
In conclusion, never before has the moral of my countrymen fallen that low! Never before had patriotism completely disappeared from their minds and souls. Or all the Christian values, for that matter, the very same that first consolidated the nation’s formation from three originally different peoples, and later on enabled the endurance of almost five centuries of Ottoman yoke. The “success” of the Nomenklaturocracy of the last 20 years can be measured only by the wiping out of all moral categories and replacing it by the one also called “American Dream.” Leading to the total moral degradation accompanied by economic misery never experienced before, given this nation’s resources.
Obviously, in view of the briefing above I can not but find your proclaiming the success of Bulgaria’s evolution of late either the result of a superficial analysis by perhaps biased or ignorant researcher-theoretician, or otherwise a plain mockery! Case closed.
Submitted by peterakiss on Thu, 2012-10-04 11:36.
Mr Kahn would probably benefit from another, closer look at Hungary. Or perhaps Hungary would benefit from another dose of his advice - if he could find anyone who would listen. What he desrcibes above may have been true of Hungary up to two years ago, but in 2010 a sea-change took place.
The political elite in power at present has been abusing its parliamentary majority. The country is well on the way to becoming a corporatist dictatorship along the lines of Mussolini's Italy in the late 1920's.
The checks and balances that are essential for democracy to function (independent judiciary, consitutional court, freedom of expression) have been dismantled, weakened or sidetracked. As a result of "unorthodox" economic policies investment is at a standstill, capital (not only foreign, but domestic as well) is fleeing, 40 % (that is no error, four zero percent) of the people live at or below the powerty line, and as winter approaches there is a real possibility of hunger revolts in the more neglected eastern regions.
Submitted by KO on Fri, 2012-09-14 20:47.
Thanks for this encouraging report. I would speculate, as well, that these countries are at an earlier stage of the life-cycle of a liberal democracy. It takes time for a liberal democracy to be corrupted by the people's willingness to sell their votes for goodies, and for the politicians to legislate enough goodies and ways of paying for them to occupy the entire economy. Hopefully, the new democrats will be admonished by the travails of the profligate West, but human nature being what it is, it seems likely that the constituency for goodies will grow and the number of politicians willing to provide them will too. Eventually the new democracies will also totter under the burden of universal parasitism, unless their people inculcate sobriety and self-reliance, and skepticism towards government largesse, in future generations.