Freedom is still the best policy
It is said that the only thing that people learn from history is that people learn nothing from history. Looking at how the world is handling the current economic crisis, this aphorism appears sadly true.
World leaders have forgotten how the collapse of Wall Street in 1929 developed into a world-wide depression. It happened not thanks to market failures but as a result of mistakes made by governments which tried to protect their national economies and markets. The market was not allowed to make its corrections. Government interventions only prolonged the crisis.
We may hope that, even as we see several bad signs of neo-interventionist attitude, all the mistakes of the 1930s will not be repeated. But it is clear that the tide has turned again. Capitalism has been declared dead, Marx is honored, and the invisible hand of the market is blamed for all failures.
This is not fair. Actually it is not markets that have failed but governments, which did not fulfill their role of the “visible hand” — creating and guaranteeing market rules. Weak regulation of the banking sector and extensive lending, encouraged by governments, are examples of this failure.
At the same time, it is clear that the invisible hand still points the way out of crises. It is easy to see when we look at how the postcommunist transition countries are tackling the economic crisis. After the collapse of communism, Central and Eastern Europe and the Baltic countries launched several radical reforms and achieved remarkable economic growth. Some of these countries have trusted the invisible hand more, others less. As a result, not only have the results of reforms been different, but the impact of economic crises as well.
During the 1990s, the most radical and successful reforms came from the three Baltic States: Estonia, Latvia and Lithuania. Open markets, economic liberalization, fast privatization, stable currencies, flat tax rates — all of these became the trademark of the “Baltic Tigers.” Early in the new millennium, the Baltic countries started to enjoy the fruits of their reforms. Economic growth reached 11% to 12% per year. Living standards rose to 60% to 70% of the European average from 15% to 20% in 1992.
Yet times of rapid growth are unfortunately not always times of good decisions. Governments thought they could afford a Western-style welfare state because the economy was doing so well. Conservative financial policy was weakened, lending was encouraged, chances to join the euro zone were missed, and social expenditures rose beyond the economy’s ability to bear them.
Combine these mistakes with corruption, weak government and loose control of the banking sector, and the results can be very difficult — as in Latvia, which had to take out a loan from the IMF. Countries with a more effective visible hand, such as Lithuania and Estonia, are doing much better. Estonia is cutting nearly 10% of its government budget, relying more on the market than on state intervention, and hoping to keep its finances under control so that it can join the euro zone by 2011.
The situation is even better in some parts of Central and Eastern Europe. While the European Commission last month projected the euro-zone economy to contract by 1.9% this year, most new member states’ economies are forecast to grow. The most positive developments are in countries that have learned from the Baltic experience and introduced radical economic reforms. They have even learned from the mistakes of the Baltic States — and not tried to become too rich too fast. The “best” reformer in Central and Eastern Europe, Slovakia, introduced a flat 19% universal tax rate and launched other reforms, allowing Slovakia to join the euro zone last month. The Commission predicts that Slovakia will have the highest economic growth rate in Europe this year, at 2.7%. At the same time Hungary, which has been very cautious on reforms, has been hit harder by the crisis than the more radical reformers, and like Latvia is now dependent on the IMF.
The same experience is seen in former Soviet republics. Russia has been slow in its economic reforms and built up an authoritarian state; it was hit especially badly by the economic crisis. Russia’s aggression against Georgia last August and its gas war with Ukraine this January have made the crisis only worse for the Russian people. The trust of foreign investors is gone, and capital is quickly escaping Russia.
Georgia, on the other hand, has followed a very different policy. It has fought against corruption, is building up stronger democratic institutions, and has supported a good business climate, which the World Bank ranks 18th in the world. Making the visible hand more effective has allowed Georgia to trust the invisible hand of the market. This in turn has helped Georgia — against all odds — overcome the results of Russian aggression with surprising ease so far. Like the rest of the world, Georgia was hit by the recession. But the response of its government was not to increase taxes, but to cut them and continue with reforms. Georgia’s response to the crisis has, according to the IMF’s latest report, been more successful than anybody hoped.
So as we see, freedom still works. Moving the world away from free choice and restoring the power of Big Brother is not the right answer to our current problems.
I agree totally (well, from a “learning from the past” perspective). I’m surprised to see the modernity and the advanced instituitions of the Baltic countries after Soviet occupation, which has surpassed many Balkan and other Eastern-European countries. I’m not sure how much the US is to blame, but I know some foreign markets have been destroyed because of our policies.
The government should have only limited activity in the financial markets, but I don’t think the de-regulation policy the US had was something Adam Smith would have promoted.
As an American citizen, I do think we are to blame to a certain extent. First of all, we no longer lead by example. If America would become a pro-capitalist country again, I would like to think other nations would follow.
We don’t have to learn from the past either. All we have to do is look at the present world, like Mugabe’s Zimbabwe.
Dear Mr Mart Laar,
With reference to your article “The Estonian Economic Miracle” published August 7, 2007 in the Backgrounder published by The Heritage Foundation. I wish to draw your attention to the specific sections titled “The Rule of Law” and “Property Reform”.
For over 17 years thousands of Estonian citizens have suffered and are still suffering serious economic hardship and emotional distress as a direct result of the Estonian government’s refusal to resolve the issues involving Property Reform.
Tens of millions of kroons, of taxpayers money, have been spent by the Estonian government on not resolving this problem.
Estonia has a people’s constitution, national laws, has ratified to the Human Right Convention and the refugee Convention. All these provided a lawful and finite resolution to the property reform as early as 1992 and absolutely as of 1997.
In 1992 the Estonian government failed to regulate the documents which could be relied upon to correctly determine the status of applicants; this being either a refugee or a contractual resettler.
As of 1997 this issue was resolved. Estonia had ratified to the Refugee Convention and with the Estonian Constitution’s article 123 lg 2 and the conventions article 12 in mind this decision was no longer for Estonia to make.
If either an applicant or sunduurnike was unhappy with a decision made by the OVVTK, based on the German Government documents of 1939 – 1949 then they would have to take the German government to court to have the applicant’s status changed.
The Estonian courts or commissions had no legal right to determine a person’s status in any other way as this is a violation of Germany’s sovereignty, Estonia’s Constitution and foreign treaties; yet over 125 (information provided by the Estonian rahandusminiteerium) decisions were made here in Estonia by the Estonian courts and commissions.
Why was the rule of law not followed? It is obvious that not to resolve this issue has been, and still is, a powerful political election tool for many parties; but is it right that political parties place their political ambitions above those of the very people they are elected to serve?
Every citizen of Estonia suffers as a result of the passive corruption demonstrated by the Government of Estonia in not using the rule of law to resolve this issue.
This would have saved the Estonian economy millions of kroons and produced millions of kroons of revenue which would be helpful in today’s economic climate.
Currently the Estonian government faces millions of kroons worth of damage payouts to the people whose lives have been put on hold or destroyed over the last 17 years, and still counting.
This right for compensation is guaranteed under the Estonian Constitution, whether the properties are returned or not, privatised or not as the cause is directly due to the Estonian Government not intervening in the actions of the OVVTK commissions; despite the fact that they are state government appointed organs.
During the 8 years that I have dealt with this issue I have provided crucial German Government documents, of WWII period (Himmler, Internal Security Police and Immigration Department Orders and Directives), to the Estonian government.
Estonia also had an active Embassy in Berlin as of the early 1990s and these documents were available as of pre 1990.
Despite corresponding with numerous Government Ministries up to and including the President of Estonia not one Ministry requested further information, made enquiries or demonstrated any concern. All replied within the mandatory 30 days stating why they cannot assist with the primary reason being article 154 of the Estonian Constitution.
When will Estonia commence to become a democratic state where the interests of the citizens are a concern for the politicians above and beyond their own political ambitions?
When will Estonia become a democratic state where the rule of law is applied equally and not just to the less influential and lower class citizens?
Article 13 of the Estonian Constitution accords The Right to Protection by the state to all its citizens. This however does not apply when the citizen’s Constitutional, legal and human rights are being violated by the totalitarian and arbitrary actions of the Tallinn City Council.
More that 25% of my late father’s life, 30% of my life and 50% of my children’s lives have been seriously affected by this corruption and after 17 years is not time the Estonian Government practices what it preaches? Or is all this ‘self praise’ and ‘chest beating’ only a show for the world?
The Bank of Estonia?
The pro-capitalist thing to do is great rid of the Bank of Estonia and all government central banks.