The Estonian Model
Given these institutional weaknesses in the post-communist
countries, some economists, including the Nobel laureate Joseph
Stiglitz, have argued that liberalization should have been slowed
down. But the cost of postponing reforms, whether in terms of
subsidies to inefficient producers or of forgone economic growth,
would have been immense.
Moreover, Oleh Havrylyshyn, the former deputy director in the Office of Internal Audit at the International Monetary Fund, shows in her new book, Divergent Paths in Post-Communist Transformation, that by virtually all the relevant criteria, from growth rates to corruption, Central European nations have performed significantly better than formerly communist countries that took a more gradualist or haphazard approach to reform, such as Russia and Ukraine. Central Europe, in turn, is outperformed by Estonia, the most fervent liberalizer in the post-communist world.
Estonia began to liberalize at the end of 1992. The government eliminated import tariffs and instituted a flat income tax. Corporate taxes on reinvested profits fell to zero. To arrest inflation, the government established a currency board, which tied the exchange rate of the Estonian kroon to the deutschmark and, later, the euro. State enterprises were sold off in a transparent fashion; unlike in Central Europe, Estonian privatization favored the highest bidders regardless of their political connections. Foreign investors were welcomed, though Russian firms were treated with suspicion due to national security concerns.
Like all the formerly communist countries, Estonia initially entered a recession as inefficient firms folded. By 1995, though, its economy was growing again. According to the World Bank, its per capita GDP grew at a compounded average annual rate of 6.9 percent between 1995 and 2004. Poland, the best-performing Central European country, grew by only 4.5 percent during that period. Adjusted for inflation and purchasing power parity (which accounts for variations in consumer prices across countries), Estonian per capita GDP rose by 96 percent—twice the rate in Hungary, the best-performing Central European country by this measure.
The real problem with Central Europe’s economic transition was not that it went too fast but that it did not go fast enough. The amount of money available to Central European governments some 16 years after the fall of communism continues to astonish. On average, the region spent 44 percent of its GDP on a variety of welfare schemes, subsidies, and government purchases in 2005. By comparison, Estonian government spending was 36 percent of GDP. Slovakia spent as little as Estonia, but the overall level of economic freedom in Estonia was considerably higher, thanks to Slovakia’s heavy regulatory burden. In 2005 Slovakia had the 37th most welcoming business environment in the world, as measured by the World Bank’s Doing Business report, while Estonia came in 16th.
According to Transparency International, Estonia also has the lowest level of corruption in the post-communist world. That supports the argument that corruption in the former Soviet empire is related to the size and scope of government.
It is true that some countries have both high government spending and low levels of corruption. In 2005, for example, the Swedish government spent almost 54 percent of the country’s GDP, but Sweden was rated the world’s ninth least corrupt country. That lack of corruption is partly attributable to relatively light regulation of the economy; according to the World Bank, Sweden had the world’s 14th best regulatory environment in 2006. The Swedes, like most other developed nations, also enjoy a well-entrenched rule of law. The government’s activities are subjected to thorough judicial and parliamentary oversight, and if the usual checks and balances fail the government can be held to account by a vibrant civil society. The situation in Central Europe is quite different; decades of totalitarian rule left the region without a strong civil society or a robust rule of law.
The Return of Liberalism
The liberalization of Central Europe remains unfinished. Social
attitudes tend to be very conservative, partly because the
political scene is dominated by voters who grew up behind the Iron
Curtain. The pensioners, who are very conscientious voters, are
particularly conservative. The young, however, are increasingly
cosmopolitan, better informed, and more socially liberal.
There are several reasons for that. E.U. membership makes it relatively easy for young Central Europeans to work and travel in Western Europe, where tolerance is stronger. As incomes in the region increase, a growing number of Central Europeans can afford to buy computers and go online. Cable and satellite television are also readily available. Moreover, a growing number of young people have access to higher education. Like elsewhere in the world, university-educated people in Central Europe tend to be significantly more socially liberal than people with less education.
Economic liberalization also has a way to go. Government spending is high and the regulatory burden remains excessive, thus prompting many businessmen to resort to bribes. They find willing collaborators among thousands of powerful bureaucrats, many of whom see careers in public administration as a way to get rich. The public, which bears the heaviest burden of a corrupt, inefficient, and overbearing state, has imposed the only available punishment on their rulers by kicking them out of office. Unfortunately, many of those disgraced politicians paid lip service to the virtues of liberalism and the free market.
But the recent electoral setbacks for liberal parties do not mean that liberalism is dead. In time, the public in Central Europe will find that their new rulers are at least as corrupt as those who preceded them. Since they are unlikely to reduce the size and scope of government, they will be unable to address the underlying causes of corruption. That will undermine their popularity and electoral support, as will policies that are apt to result in low growth and high unemployment.
When the liberals return to power, however, they will need to finish the job their predecessors started after the fall of the Berlin Wall. The discretion and regulatory power of national, regional, and local governments will have to be substantially reduced, as will the level of spending and the number of bureaucrats. Public administration will have to be simplified and made more transparent.
Above all, the politicians will have to be humbler and more honest. Before I left Slovakia, a friend told me a story about the wife of a liberal government minister who was very angry with her husband because, as she put it, “the man was as poor at the end of his term in office as he was at the beginning.” We will know that liberals have succeeded in Central Europe when that kind of performance by a politician is standard rather than extraordinary.
Marian L. Tupy (mtupy@cato.org), a policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity, is the author of the Cato study “The Rise of Populist Parties in Central Europe: Big Government, Corruption, and the Threat to Liberalism.”
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It's about time when the disgusting liberals are wiped out of Europe. Multiculturism is the most dangerous idea in the history of the world. And how dare the author call these heroes racist! When someone's culture and home is threatened, they have every right to act to protect and preserve it. The author of this article sounds like another one of the brainwashed, minority-crowd pleasing idiots who, for the time being, run Europe. We all know that when someone says that they are "anit-racist" what they really mean is that they are "anti-white". Any European should be ashamed to stand against their own heritage and nation in this way. It makes no sense: The world agrees that Africa is for Africans, Asia is for Asians, etc. But why is Europe for the world? It's absolutely disrespectful to call the leaders of some European nations racist for wanting to keep their home in the hands of their own people.