The Thorn in Poland’s Side

25.05.2016 • The Economy

From Capital & Conflict (GREAT BRITAIN) –

For less than 12 hours The Free Market Road Show team was hosted in Warsaw by the FOR think tank. But the event was spectacular. The quantity in attendance and the quality of speakers combined meant you really can have both. Good old capitalism…

Then again the former finance minister Leszek Balcerowicz illustrated just how badly The Free Market Road Show is needed in Poland. He claimed that economic outcomes and innovation are determined by government policies…

But what are government policies determined by? And this is where his speech got interesting. Balcerowicz explained how individuals and their culture are the factors influencing policy. The rule of law, much touted by liberals, is in reality a fluctuating variable, not a constant or binary variable.

And this variable has two sides. The first is procedural. Do people actually have access to the law? Does the legal system even enforce the law if they do have access? These are open questions in much of the world, including eastern Europe.

In North Korea, for example, they have a wonderful set of laws providing human rights. But they’re completely irrelevant for procedural reasons. Similarly, the Soviet Union was very popular in the West because of its impressive laws guaranteeing human rights and even economic outcomes. The fact that neither were delivered is the big illusion that makes communism seem attractive.

Then there’s the substantive side. The rule of what law? Governments can make good and bad laws. Their voting populace can ask for good and bad laws. Here Balcerowicz compared the Dominican Republic with Haiti. The Dominican Republic provided imperfect property rights under its laws while Haiti did not even manage that. The result is a wildly divergent economic outcome.

Balcerowicz finished by appealing to aspiring politicians. He explained that reformists only pull off their achievements when they are a little pig headed about it. Just implement good policies and don’t worry about other people’s views or criticisms.

Aleksander Laszek, the chief economist of our hosts FOR, went back to basic economics. Productivity is the only true source of economic growth now that demographics mean populations are stable or declining in Europe. Usually the amount of capital has some relationship to productivity. Capital makes labour more productive. But in Poland, capital can be used unproductively thanks to the politician-run companies and bizarre regulations. In fact, within the EU, Poland has the largest gap in productivity between its most and least productive companies. To get economic growth, Poland needs to fix its productivity problems.

Ignacy Morawski, the director of public policy research at the WISE Europe, discussed the convergence effect. This is the idea that poor countries should catch up to the rich ones simply because of their cheap labour and the ease of copying good economic policies. The thing is, the convergence effect is actually very weak… outside of Europe. Inside Europe it’s rapid. Eastern Europe is closing in on its Western neighbours much faster than, say, Africa or South America.

Morawski argues that’s because of the EU. It has encouraged trade, stable political institutions and the spread of ideas. He didn’t mention EU funds flowing east. Nor the fact that, according to Dan Hannan in his speech at a Brexit debate, the only two continents that didn’t experience economic growth since 2006 are Europe and Antarctica. Then again, even the EU is preferable to the Soviets on trade, stability and liberal ideas…

Deirdre McCloskey asked what makes people wealthy. McCloskey’s home, Chicago, is the second biggest Polish city in the world, and its Poles are much wealthier than their Warsaw comrades. Why? The same people in two locations, so what makes the difference? It’s taken her three books to discard the conventional explanations and come up with her own.

It’s not about capital, institutions or political change, says McCloskey. Those changed many times all over the world with varying results. The true spark is ideas – liberal ideas. But what ideas exactly? You’ll have to buy her books to find out.

Richard Zundritsch risked his personal safety by announcing he is in favour of tax harmonisation. The usual libertarian line argues that tax competition between countries is precisely what keeps them low. Ireland is the only thing keeping the EU from raising corporate taxes to the moon, for example. Every company would just move to Ireland. The tax harmonisation that Zundritsch believes in isn’t what the EU has in mind though. He wants a tax harmonisation at 20%; 10% to the government, 10% to welfare. And that’s it, done, finito. Nothing else. It’s similar to the system in the Middle Ages.

But Zundritsch’s most interesting point was to share some history. Maria Theresa, the Archduchess of Austria in part of the 18th century, introduced a corporate transaction tax to save paper. She didn’t like how much paper company contracts were using up. The tax continues to this day. And that explains how we end up with the tax systems we have around the world. They’re a build-up of bad ideas over time.

It seems that each country has a particular industry which the government forgot to destroy with taxes and regulation. Usually it’s IT, because governments don’t understand IT. In Greece it was shipping. Marcin Nowacki, a Polish entrepreneur, explained his experience with teleradiology in Poland. There simply aren’t any regulations on it, despite the fact that it’s in the holy healthcare industry which the government must of course control. Thanks to the government’s absence, sending your scans around the world to be analysed works brilliantly.

The speed of growth in Nowacki’s company was only interrupted when he tried to apply for some EU funding. At this point his voice changed pitch, and he struggled to maintain eye contact with the audience. It was like he told us about a near-death experience as he relayed the awful story of dealing with the EU administrative burden. In the end he had enough and abandoned the effort. His business boomed.

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