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Twenty years of Transformation in CEE: Results, lessons and prospects
01:28:38
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- [00:00]
A
Good evening, My name is Raj Riveru. I'm the president of the Economic Society and it's my pleasure to welcome Professor Balsarevich to LSE tonight. This lecture forms part of our Economist in Residence lecture series has brought leading academics from across the country and the world to speak at the lse. Some of the brightest and most interesting students in the country. I'm going to keep it short and hand straight over to Damon Chalmers, who'll give a short formal introduction to the lecture which as you can see is on the transformation in CE and the results, lessons and the prospects. Thank you.
- [00:40]
B
Good evening. Thank you very much all for coming. I'm Damien Chalmers, head of the European Institute. It was a little bit intimidating first speaking in here because you were the projector glaring in your face. Secondly, I think it's the first time as a lawyer that I've spoken to so many economists. But of course I think I was invited today because the topics about Europe, in particular Central and Eastern Europe, 20 years of transformation. What have we learned? Results, lessons and prospects in this regard. There's probably no one better placed anywhere to speak about it than Professor Lezek Bodrovicz. He was at the center of significant reforms, one could say, if you like, the path leading reforms that were realized by Poland in the late 1980s. He's been a central bank governor, finance minister, newspaper journalist, so all possible sources of power. He now works as head of Bruegel, in my view possibly the most interesting think tank in Brussels. Leading forward as Dave and we'll get out of the current difficulties we now face in Europe. He will speak for about half an hour and then we will take questions. I hope you will join me in warmly welcoming him to the floor.
- [02:06]
C
Thank you very. Thank you very much. First of all, let me say that the topic is not a parochial one. I think why it is so important not only because it refers to rather important part of the world, but first of all I think this, this transformation is one of the very few freedom enhancing radical changes in the contemporary history. So everybody interested in institutional change in a radical way and in the freedom enhancing direction should be interested in this. Not only because of central and Eastern Europe. And this is a living laboratory. You have very, very rarely such an opportunity to study and to test various theories. What I am going to do is try to do something impossible to discuss this few huge subjects in 30 minutes. But I think I was rather known as shock therapist. So I try to do my best. First, just to remember, if you discuss a change, you have to discuss Initial conditions. Very briefly, what was socialism as a system, institutional system. This was the most statist system in the world history, except perhaps for pharaohs in Egypt. It meant that all kinds of individual freedoms were banned and attempts to use them were branded as crimes. There were crimes against socialism if you try to set up enter private enterprise or travel without permission or set up a newspaper. This was all crimes against socialism. And this was the defining characteristic. The second one, not as crucial was that this no state system in contemporary history was combined with what I called an overgrown socialist welfare state. This was the more present side, partly because of inefficiencies. There was no open unemployment because the system was so hugely inefficient. So people thought it is always better to be unemployed on the job than open unemployed. Okay, I'll leave it now. There were huge costs in terms of opportunity costs, but sometimes not only human cost. Remember Stalin, Mao? Millions of people were killed. But there are also economic costs in a sense that every country which had socialists for a number of years have lost a lot compared to a country which had capitalistic economy, even not the most efficient. Look at Poland and switch Spain 1950, the same period parking income 1990 polished only 42%. The same goes for Hungary and Austria. Of course, the most extreme differences between north and South Korea look the same. Per capita income 1950 then 7%. North Korea has 7% of South Korean per capita income plus million of people who died. China, very briefly, you have two phases in China. This is Maoism. And China was diverging, was not catching up with Western Europe. Then you have this Chinese economic growth. What happened? Has China invented better socialism, as many people think? De facto, China makes an undeclared transition towards capitalism as defined by private ownership. So you have very clear increase in the share of private or quasi private enterprises. China has tremendously opened to outside world, etc. Etc. Okay, so socialism was very costly. Why? Because socialism was the most stated system in contemporary history. It was depriving people all kinds of freedoms, including economy, which are crucial for growth. What has happened very briefly after collapse of socialism? What is striking that the diverging institutional trajectories. So sometimes Eastern European countries have now have been functioning democracies. While what is called Commonwealth of States, you have either autocracies or semi autocracies. This is very clearly more clearly visible. These are measures taken from Polity 4. So you see differences. Basically we have countries which are democracies. They include central Eastern Europe, but also Mongolia and also to some extent Moldova. I would Ukraine, even the Democracy of Ukraine, even though it's pretty, I would say chaotic, it is a democracy. Now the opposite camp, so to say. There are autocracies like Central Asia and Belarus and then semi autocracies like Russia or Kazakhstan. Now what's interesting is that all the democracies have more or less capitalistic system while among non democracies most of them has more capital, status, economy. And only some of them like Russia and Kazakhstan try to move into Chinese direction. Meaning democracy? No, Capitalism. Yes, even though it is rather status capitalism. This confirms old truth. You cannot have democracy without capitalism. While capitalists can be combined either with democratic regime or non democratic regime. This is nothing new, but it's being confirmed by this living laboratory. There are also differences. This I will skip. This is a stylized description of the enormity of institutional change in Central and Eastern Europe. Vasnik may return to that. Now this also confirms that countries which moved towards capitalism also have maintained democracy. I will skip that. And this describes differences in the court system. There are very interesting differences in the court system regarding impartiality and effectiveness. Now to sum up, countries of Central and Eastern Europe. Europe are about the same level of impartiality independence as Greece, Italy, Portugal and Spain. Not yet at the Danish or Finnish level. But efficiency of the codes as measured by the speed is usually better. And it's not a great compliment to say that your codes are more efficient than those in Italy or Greece. This is the Fed. Okay, now let me move to the third point. The second point is different trajectories. And it's a very interesting question. I haven't discussed why. Now I move to more solid facts. Economic and non economic outcomes during last 20 years. And the striking fact is enormous differences have appeared both along economic dimension and non economic dimension. You see here GDP growth aggregate. So the differences between. This compares the level of GDP 2008-1989. So the range is between plus 77% in Poland and minus 29 in Ukraine. And these are differences in terms of per capita income. You see, Poland on the one hand, Georgia, Ukraine on the other hand. This is something which should be very mobilizing for the Polish audience and for Poles in general. How much have been catching up on Germany? Yes, you see, you see, you see. This is the Polish catching up on Germany. It's not yet finished. It requires a little more mobilization to catch up on Germany. Not in 50 years time, but in 20. If you need a mobilizing goal for Poland, this is that. And can you imagine the satisfaction? Well, it would be at least as great as the one which was felt by the Irish when they have overtaken Britain. And it was the fact that. So this is the trajectory now on inflation. Everybody has reduced inflation compared to the initial levels which were very high. But you can see through unequal levels. And countries which have lower inflation now on the whole enjoyed more rapid growth, while countries which have high inflation like Ukraine, Kazakhstan, have enjoyed slowly on average. There are exceptions, which means that low inflation is good for your growth. Remember that low inflation, rapid inflation may be good, if at all, for very short run growth. Now what's interesting, and this is less often noted, that huge differences appear not only in economic outcomes, but in non economic. To look at life expectancy at birth, you can see that in most countries it has increased In Poland from 71 to 75, say Croatia 70 to 76. And these are mostly the weaker sex, which are men, which usually die on average earlier the strongest. But there are some exceptions. Look at Ukraine, it has declined. Look at Russia. And this decline is again centered on male part of the population and probably has something to do with improper consumption of alcohol. It's not the quantity by the structure, what they are told by the doctors that two glasses of red wine is supposedly good for your health, but a bottle of vodka is not so good. Now another very important indicator is infant mortality. You can see that there has been a tremendous improvement, say in Poland from 17 per 1000 live births to 7. The same for Serbia, but improvement is unequal. So Ukraine 25 to 24, so much smaller. So improvement, yes, but very, very different. And I can also there's an improvement in environmental pollution change. So CO2 is a very watched indicator. So you can see that in most countries emission of CO2 per capita have declined. You can see this. But again the decline is different. Say where in Russian Federation from 16 to 12. Where is Poland? It's somewhere here. Nine to eight is different. Now there are some other differences in the inflows and stock of fdi, but I will stop here. I can say that adding indicators would not change the fundamental conclusions. During 20 years after collapse of socialism, enormous differences appeared both in economic and non economic dimensions of the quality of life. And of course we are very much interested why this is the living laboratory now. We don't need to speculate, we don't need to engage in magical thinking like saying social is good, shock therapy is bad. It's magical thinking because there's a massive empirical research which tries to respond to this question, focusing for a while on differences in the Long run growth. What would be the conclusions of this massive research? I try to summarize them. This is my reading of extensive empirical literature. There are two main factors, the variation of which explain these huge differences. The one is the extent of market reforms. What are the market reforms? Reforms. If you start from socialism, privatization is absolutely fundamental liberalization, meaning that you move command economy, you remove restraints and you have mount ups. There's the second very important. If possible, you reduce the fiscal size of a state. Fiscal spending for GDP is too high. This was typical. This was the typical situation. But market reforms also mean that you try to transform what is the core of the state. What is the core of the state? The state does not need to be very social. And if it is, it's pretty dangerous to the people. But the state, a good state has to have good police, professional prosecutors, good judges. This is the call of the state. So a transformation involves reduction in the state presence, which is harmful, and improving of those parts of the state which is beneficial for longer term economic growth. These are the main direction, not only in Central and Eastern Europe. Whenever a country has a problem, it usually has to do with at least one of these two. The states are usually overgrown fiscally regulatory or directly, through having the political power over enterprises, through state ownership and. Or they are weak and they should be strong. Okay, now, so the first factor which explains the differences, a factor in the extent of market reforms. But there is a second factor, and this has been confirmed, confirmed by many, many independent investigations. This is just a sample, but there's the second factor. And the second factor deals with macroeconomic policies. These are those policies who are responsible for the growth of demand relative to the growth of the potential power. And if the demand, meaning spending, grows too fast, it is very pleasant because we call it boom. But booms have an unpleasant inclination to go bust. We are nowadays witnessing that. And this is why it is prudent. Since bust are very unpleasant, costly in terms of growth. It's better to avoid excessive booms. And this depends on how expansion is fiscal policy, how expansion is monetary policy, and how prudent or imprudent is banking situation. There are three policies. Of course, these policies matter only if the people who are responsible for these policies are independent from the political power. So you can't have these policies under dictatorship. They are just epiphenomena of the they matter if the power, political power is limited and the quality in this three dimension matters. And what we know from experience that expansionary macroeconomic policies are extremely costly, extremely, because they lead to deep financial crisis, debt crisis. We are witnessing this now. And they explained the differences in this policy as second reason for the differences in outcomes. You see this if you compare Hungary and Poland, for example, Hungary has reformed at least as much as Poland. But Hungarian macroeconomic policies, especially fiscal were even worse than Polish was. So even more catastrophic hours between Polish between 2005, 2007 were on their very bad. While in Hungary they were catastrophic. Why they spend it as crazy. And they had a crisis even before the global crisis erupted and they had to cut spending very deeply. And they suffered partly because of that 7% decline in GDP last year. So I think there are clear lessons. I will skip more speed lessons. And I would move very briefly to another subject. I skipped that. Ah, one more. Why that's interesting question which is not as widely investigated as the one regarding economic outcomes. Why? It is so that there is pretty strong correlation between economic and non economic outcomes. Meaning that countries which achieved better results on economic growth tend to achieve better result in health. For example, environment, which means that capitalist is good for your health. It's not often we are. Yes, that's not overstatement. It is. But why? That's an interesting. I leave it with this puzzle. You may ask some questions. Why moving towards capital is good for your health as long as it is a free more or less free market capital capitalism? And why moving towards free market capitalism lots of competition, hard budget constraints is also good for environment? That's enough. That's empirical fact. But why? I leave you with this question and I move further now I move to another fundamental factor which is this global financial crisis. Now, of course it would require a longer meeting to explain what were the causes. I'd only say, and this probably may provoke some questions that the popular interpretation which blame the greedy bankers the extensive financial innovations are very superficial, not to say wrong because they completely omit huge public policy errors in such countries like United States and Britain. So these countries Britain would have a crisis even if US did not engage in these policies. I would only mention that monetary policy was extensively in fact policies. Greenspan doctrine, meaning that you do nothing against growing bubble, but then you try to ease longer term consequence. Fannie Mae and Freddie Mac were not exactly typical private enterprises. U.S. congress exerted powerful pressure upon financial institutions, et cetera, et cetera. It's a huge error and very dangerous one to blame markets for this crisis. Why? Because if most of the public opinion draws this conclusion, you'd have a pressure against reforms and would not only deal with a crisis, but with Wrong policies as a consequence of wrong interpretation. Factual wrong interpretation. This is why I am saying that I've seen lots of books, including the nearby library with this wrong interpretation. Because nonsense as distinct from some intellectual products in soft sciences like economics sell better than good products because they evoke powerful emotions like envy, greed, hatred, etc. Okay, now coming back to this problem of the impact. I would leave that now the impact. The impact of the global crisis upon the central and Eastern European countries depended very much on two factors. First of all, let me say it was very, very different. The range is from -18 in Latvia, more 10 or more in Hungary, to say between 1 and 2 in Poland plus so huge range, right? To cut a long story short, I think that two main factors. First, how dependent on external, external markets was a country? And this in turn, larger countries on the whole are less dependent on external markets. So Poland was hit less than Lithuania. I don't think we should be proud that there are more numerous Poles than Lithuanians. This is not something which depend on the present generation, but it help us help Poland. Second, how vulnerable a country was because of the past mistakes, policy mistakes. And here fiscal. I mentioned Hungary. Fiscal expansion in Hungary, also fiscal expansion in Britain, which predated the crisis, made them badly prepared for the crisis. Second, countries of Central and Eastern Europe hugely differed in the rate of growth of domestic credit to household. You see that? And some countries engaged in wrong type of shocker. They allowed huge expansion, huge credit booms which had to end very sadly. And that crisis, global crisis accelerated and deepened the result of the previous credit followers, and they suffered. Okay, so the conclusion is again, be prudent in macroeconomic policies, be radical in reforms if possible. And this leads me to the last. Okay, to the lessons. And the lessons are the following. Based on what my reading of extensive empirical literature, there will be two lessons. If you start from a status system, the more you reform the system in the direction of reasonably free markets which are well protected by the state. So clear property rights, good enforcement of property rights, so good justice system. The better for your longer term growth, the more also you reduce excessive fiscal presence of the state. So inherited wealth state. By the way, you don't need extensive welfare state to have welfare. If you have extensive welfare state in a poor country, you can't have welfare. I'm saying this because there's a popular myth that without welfare, state welfare is impossible. It is called European social model. Okay, so if you inherit. And this was a typical situation for former socialist that inherited huge fiscal states and reduction of them which requires better spending systems. It's important, very important. And I would say not only based on literature, but my own observation and say policy. This is probably the most difficult reform politically the most resisted. And this way lots remains to be done in most countries of Central and Eastern Europe. Then I mentioned macroeconomic policies. The social importance. I am using this word to manipulate you. Social importance of prudent fiscal and monetary policy. It cannot be overestimated. If you look at history, what you see lots of catastrophe produced by expansionary policies. Basically, until today I can't find just single country which has suffered because of excessive fiscal discipline. Can you find one which suffered in terms of longer term economic growth? I can't find one. Which probably shows that it's a huge asymmetry. There are powerful forces within each society which push the state towards fiscal expansion. And the countervailing forces are weak. So if you want to avoid catastrophes, strengthen the countervailing forces. Which brings me to the ultimate lesson. It's not extremely difficult to say what works and what fails. If you want to get economic growth so as to make a push poor country a rich one. This is Adam Smith's question. To be sure you have to repeat certain truths. So I repeat. You have to reduce the harmful present of the state and strengthen those parts of the state which are beneficial. But the ultimate challenge is to do it. And in democracies, since in every free society you you have for various reasons powerful status, so force. It requires a mobilization, a systematic, organized and professional mobilization of those people who believe that limited state rule of law, freedom are indispensable factors for economic growth and for respecting the dignity of man practice. So I end with a call to mobilization. Thank you very much.
- [29:26]
B
Right, we have some time for questions. I think it might be helpful if you just identify yourself a little bit before asking the question. So please raise their hands. Do we have any microphones?
- [29:39]
C
No.
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B
So please shout when you ask the question. The gentleman. Yes, you sir, Please stand as well.
- [29:57]
D
And yet I know you are personally opposed to pre banking and the gold standard for the commodity standard. Generally speaking, even though I know that the Polish central bank cost also the publication of the book by Business Cycles.
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C
I wrote the recommendation precisely that which.
- [30:19]
D
Means the introduction of 100 commodity back demand deposits and the elimination of fractional reserve banking. So if I'm not mistaken that you are personally opposed to such measures take non issue completely out of the hands of the state. Can you say why as briefly as you can?
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C
Well, I can.
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B
You don't have to the question was not brief.
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C
No, no, no. It's a very. It's very good question. When I ask a. As a central banker I could not accept the job while being against the central banking because it would be dishonest. First. Second, I have engaged in things which were considered to be impossible by many people and sometimes impossible things can be done. I don't think it is feasible to introduce to go back to gold standard and and to introduce 100% reserve banking sector in the foreseeable future. So you have to work within the established paradigm. This does not mean that I think they are wrong, but I suspend my judgment. I wouldn't like to spend most of my energy of things which are not considered by me by non feasible. While I think it's in intellectual circles it is useful to discuss I think the contribution of Austrian economists like Paul Mises, Hayek and their successors are very important. But they are regarded as marginal, completely marginal. And this is why as you noticed. Well, this was not me who financed the book, this was my successor. But I read it and came to the conclusion it was being recommended. So perhaps this would grow. Perhaps, but not in the foreseeable future. So you have to look on how you can improve the working of the monetary financial system within the existing paradigm. Which means that you are going to have the fired manner which is called in Polish papieroga. It's not any paper money anymore because you don't need paper to trade money nowadays and you work with fractional banking system and you trade in pool. An attempt was made by say oh De la Rosier report. I was a member of it. You have identified reforms which would make this system within the Prada a bit okay? Yes.
- [33:04]
E
I'm studying MSc in accounting finance here at LSE.
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C
Kind of like to your previous question given the current problems in Europe to travel Portugal, Spain and so on. Are you still following joining the Eurozone? And if yes when and if you see soon what conditions should follow before that happens? Well, the fact that Greece is in trouble does not necessarily mean that Europe is in trouble. Look in the United States California is in trouble. Rhode island is in trouble, New York is in trouble. Financial I would do people people say United States and dollars are in trouble? No, I know the differences between United States and European Union. You don't need to point out a certain thing. But still there are drastic adjustment fiscal adjustment in California, drastic fiscal adjustment in some other states probably as drastic. And the ones which are required in Greece, so. So I would not equate the two but what matters is that I think that in order to one should not shift problems instead of solving them. Shifting would mean bailout, which would be a substitute for adjustment. In this sense, the European Union is a crossroads. If it creates a huge moral hazard, then the problem may still spread. This is the checking point on Euro. I try to base my judgments, which are empirical, on empirical research. And there are three reports which I know, which are pretty professional, which try to establish what are the net. What are the net benefits of earning of countries for countries of Central and Eastern Europe from Euro adoption. They try to list all the costs and all the benefits and the risks. And all of them come with the conclusion that net benefits should be large, that benefits should be larger than costs. Not every year. This is long term calculation. And as long as I don't see reports which would professionally prove the opposite, I would be for adoption of euro all the more that to adopt Euro Poland needs to reform. And these reforms are needed intertangled from Europe. So if you want to have Euro engage in fiscal reforms, streamline fiscal spending, this is the case. My case for for Europe. But perhaps one thing. The recent crisis has shown how dangerous it is for countries to have excessively low interest rates. It is United States, but also within the Eurozone who suffered the most, Ireland and Spain. And in these two countries, the European Central Bank's interest rates clearly too low. What's the conclusion? The policy conclusion would be to come out with a certain supplement. And this supplement is called macroprudential regulation. So instruments which are different than interest rates because you can't operate your own interest rates when you are member of the Eurozone and there is a work in progress. How could you slow down the growth of credit if you think it is successful? Okay.
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B
More questions.
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D
First of all, thank you very much indeed, professor, for the lovely appointment. Thank you very much again.
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C
And my question is, how did you.
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D
Feel when you were called by IMF as a 2 liberal economist?
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C
I don't remember, but if it happened, it is not one of my main problems.
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D
So do you really feel that market regulates everything and stage not?
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C
This is not synonymous. Well, if you ask me, first of all, for example, I can disclose that I invited when I was for the second time in the government between 19, I wanted to see speed up restructuring of mine Polish mining, coal mining. So I invited the World bank and I was hoping that they would push for privatization. But they didn't. They were too statistical. So they were very happy with lending and they did some restructuring. Without restructuring, without privatization is not very Lasting you have to be completed. Now the second question. Well, I already mentioned that there are certain functions of the state which probably cannot be replaced by informal institutions. And they have to deal with the classical definition of this state as a protector, but not as a social protector. It's a protector against physical violence. And this includes police, law and order and national defense. As you know, these goods are the closest we have to what is called public goods and not ideal public goods. But most of the goods which are nowadays financed publicly are private goods. Education is a private good. If you don't pay, somebody else pays. You know, okay, healthy said private good. Because you cannot. It can be paid individually. In many countries it is. So there are certain, certain forces different than the nature of goods which push the state beyond its. Its certain minimum. I had mentioned this forces. And they win whenever there's enough efficient countervailing power organized and acting all the time.
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E
My name is Alex Ratzinger, I'm former.
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B
Head of information systems at the bank.
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C
For International Settlements and Violence. My question is to follow up on the last one. Do you see any role for the state in a major rest state policy in major research? First of all, most recessions were caused by the state, remember in the sense of deep declines in gdp, usually the financial crisis or fiscal crisis. To think as a state as the only force which only protects us against vagaries of the market is a wrong view. It's absolutely anti empirical. Most economic catastrophes were caused by the states, usually non democratic. But democracy also has their own record of falls. And I think having expanded state it means tolerating a very big danger to society. What would be the result of fiscal expansion nowadays we don't know. But many people are worried and I think they are justly worried whether it's going to be expansion of monetary easing. Perhaps these were the necessary steps to try to neutralize the consequences of the boom. But the boom was largely created by public policy errors. And BIS was very. I remember the analysis of bis. So the state what is doing? The state is intervening in order to tries to neutralize the effects of these spirit arrows while creating perhaps the seeds of new arrows. And this is right. So the question of keeping the state limited is not ideological, it's hugely empirical. You want to protect the people against economic and social catastrophes. This is the moral, an institutional case for the limited state. Now this does not mean that I want to limit the state to zero. And I already mentioned what are the necessary roles. Remember that expansion of some expansions of the state are results of previous expansion. So I call it the intervention expiral. For example, in the 30s, what happened in the financial sector? In the certus there was a widespread introduction of deposit insurance, which was spread all over the world. And deposit insurance became more and more generous. What does it mean in practice? You eliminate market discipline in the sense that people who have deposits savings they are looking what bank is more solid as a result. And this is empirics. Their capital to asset ratios has declined all over the world with the introduction of deposit insurance. So banks became much more fragile. They were much higher these ratios in 19th century. So you have an unintended or undesirable consequence of one form of intervention, which is introduction of deposit insurance. And you need a new another form of intervention, which is banking supervision. So you have to substitute for market discipline, which was replaced by the first intervention to try to ameliorate the consequences of this intervention. So banking supervision. Banking supervision are not angels and they are not omnipotent. And sometimes, usually they are not as good well paid as the bunkers. So it is so sometimes to roll back the state. It's not enough to roll back one intervention, because some interventions, as I said, are results of previous intervention. This makes for the indivisibility of reforms. If you deal with a very stated system. And socialism was a very stated system with lots of limits things and it could not be reformed by small doses. You do not abandon socialism by small steps. It has a fatal power of attraction. Explain what does it mean?
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D
Are these transition still in progress or.
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C
Do you regard it as sufficiently complete? Well, if we set ourselves the goal to catch up with Germany in hundred years time, it is complete. But it's not an ambitious goal. If you want to improve our standard rule league faster. It's not complete. And what we need to complete, let me repeat, reducing the harmful presence of the state, competing privatization. This includes some deregulation. But if you want to deregulate lastingly, not to have ways of regulation and deregulation, you have to have better deputies who creates the law deputies. So you have to choose better. So we are going back to the civil society fiscal. In Poland, spending to GDP ratio is now 45, 47%. It used to be 42. It's still way too much. It's much higher ratio than in Sweden, when Sweden had income of Poland in the 60s. So. And this is the most difficult political reform which needs mobilizations. So I would say this is still a very interesting agenda to mobilize Iran and of course the justice system Needs to be more efficient. That's also important and a bit more just.
- [45:34]
B
Could I take you up on the last question? How would you make the justice system more efficient? Curious, because all over the world we have inefficient justice systems. And as a lawyer, I'm just not sure how one makes them efficient.
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C
Okay, let me show you. Now, how do you measure the efficiency? I am speaking about the courts now, but the same refers to police and to prosecutors. You measure by the time it takes to settle, say, disputes and the costs. And you see huge differences according to doing business across countries. For example, in, say in Denmark it takes on average 380 days, while in Greece, in Italy it takes 1390 days to set at the same time of a dispute. So here, huge difference. Yes. Now, and this has nothing to do with the number of lawyers or judges. There are a lot of judges in Italy, so it has to do with organization. Now, if you look at central Eastern European countries, then you see that the ranges from, say I would exclude Belarus, because perhaps justice system is a bit too small. So let's say Slovenia. 250, yes, Slovenia, Slovenia, Russia and Poland, unfortunately, which takes 830 days for the same kind of a dispute. So there are differences and there are ways. This is a question of organization. Absolutely. Very simple. I do have to make your law a bit less complex.
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B
This is my question, what otherwise, Because I give you.
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C
Okay, absolutely. Elementary reforms. Allocated efficiency requires that on the margin you allocate the same resources to similar tasks. So in Poland, for example, we have codes who are overburdened. And there are some other courts which are pro, do not nothing, do nothing or very little. So misallocation of resources. Simple organization too. You have to. You can organize work much, much better. So this is nothing earth shattering. It's rather simple, as some countries manage to. For example, Slovakia under Jorinda has managed to reform the codes much better than so far we did it in Poland. Another reform or direction is to make the judgment more accurate. And this is about the justice. So to reduce or to minimize the ratio of innocent people who are prosecuted, and to reduce a number of crimes without perpetrator. And for that you need to analyze the incentive system of police, prosecutors and judges. Something which is not very well investigated. But I think it's crucial for the prosecutor should risk his career or her career if he prosecutes somebody with very weak case. And it happens. And also if your justice system is very slow, as in Poland, on average a person may be arresting, get kept in prison, temporary arrest for five years. And this already a punishment regardless of whether you are considered guilty or non guilty. So if a justice is too slow, it cannot be very just.
- [49:27]
F
Thank you.
- [49:28]
B
More questions.
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C
Which does not.
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B
So who are you?
- [49:39]
C
Sounds very interesting. The questions are very interesting.
- [49:53]
F
How come? Well, the foreign market is not as efficient. And how would you go about how? Perhaps taking some of the people who managed to run so efficiently.
- [50:11]
C
The question is, first of all, countries differ in the extent of informal economy. Both among western economists. You probably know that Italy is probably number one. But Sweden is not very far away for different purposes. In Sweden because of taxes, Italy because of regulation. There are huge differences across central and Eastern Europe. Probably much larger second economy in Ukraine than in Poland. Now, what are the main reasons for the differences? Why people try to not to be in the formal economy? Mixture of reasons. First, if you have like in Russia, it was interesting status. In Russia you will receive predatory regulation inspections. If you are a victim of public officials, you try to hide. So you go informal, but operating informally. You cannot use the services of the official justice system because you are informal, but you may have disputes. Whom do you turn to? To mafia. Yes, it has been shown, because the mafia. In fact the basic functions of the mafia is not very different from the basic functions of the state. Don't be surprised. Don't laugh. Yes, study the studies of mafia conflict resolution. Study. For example Italian mafia. The same legal. They have special legal system. They have their own police, only they are not. You may be a policeman, being an ordinary man, etc. It's an executor. Okay, but this was half jokingly now. So one reason is if you have over regulated state and corrupt officials who squeezed inspectors, then people go informal if they can, and then turn to mafia. Second, if the official taxes are very high, then you try not to pay them or to pay them only partially. So you have tax evasion. So both these two reasons have to do with an overgrown state. So I would say that non harmful ways. You of course may try to reduce this through increased punishments. But then the result may be that people stop operating in the economy at all. So they prefer to be public officials, employees. So neither formal nor informal. Everybody will be an official. So like mandarins in China. So it's not a better side. So measures which reduce informal economy without hurting very much growth have to reduce the reasons which are excessive regulation, excessive inspections and excessive taxes. There may be combinations of these reasons. Lady.
- [53:40]
F
I would like to ask what was the significance of its important.
- [53:50]
C
Micro credit? I was interested in microcredit Even before when I was in government I remember I read an interesting story about Grameen bank and its creator Dr. Yunus and I thought it's a very beautiful idea which is to some extent 19th century Europe. There was were cooperatives of poor people and I thought this is a beautiful idea because it's not based on gifts, on transfers but on trying to help people to be entrepreneurs. Very poor people in Bangladesh, mostly women because they try to be more responsible borrowers than men. And there was a lady who worked in large investment bank and she got interested in that and asked me advice. I got risk this create micro credit in Poland and it was a success. So you now have microcredit initiatives even in richer countries because in rich countries you have some poor people. In poor countries most of the people are poor. In rich countries minorities are poor. So try to do something about these minorities in such a way that this does not perpetuate their inactivity. It's extremely important from moral and economic point of view.
- [55:23]
B
Any further questions?
- [55:35]
E
Legal system I'm wondering whether compensation incentives.
- [55:40]
C
In primarily the financial system do you.
- [55:45]
E
See them as actually less regulated than.
- [55:47]
C
They should be or do you see.
- [55:49]
E
Them as primarily a symptom of essentially loose monetary policy?
- [55:56]
C
That's a very good question and your question including the correct response, empirically correct response because again important empirical investigation including one by the prominent Indian economist Raghurajan, he's in Chicago and he has shown empirically that the loose monetary policy has contributed to very short termism and to compensation policy be more and more aggressive. This does not mean that there were no errors. Of course there were huge errors at the top of some financial conglomerates. But remember that the number of errors depends on environment under which people work. For example drivers. Drivers may commit more errors if there is lots of fog and snow. So in this, in the case of financial system the fog and snow was created by mostly by public authorities. You have more errors.
- [57:08]
B
Any more questions?
- [57:12]
C
So. Oh.
- [57:15]
B
Checking the notes.
- [57:17]
E
I'm a student here at the other well last year Nicolas Sarkinson panel of international economists led by Joseph Stiglitz so you're not a very clear fan of this for me working on new different measures of common galaxies. Now one consequence of the Commission's proposed enhancements to the GDP data was taken into account factors such as health, service, income distribution, welfare system and even long holidays. So would you agree when would you agree that when using the so called gross national happiness measures the transformation in CE states would not look as impressive as it does in terms of The GDP figures. And if you do, do you think this is a necessary process or do you think something could have been done? For those who found it hard to.
- [58:13]
C
Get used to.
- [58:16]
E
Doing new.
- [58:20]
C
What is the association, mental association with this new term gross national happiness? What's your association? My association is Orwell. You've heard about Orwell? Yes, of course you can't prohibit various inventions, but to make such very complex indicator a target of national policies, meaning using state power, which is ultimately police power to increase happiness, aggregate terms is Orwell really it should absolutely crazy for everybody who believes in human dignity. Can you imagine you have now this hundred indicators and fifty indicators. It shows that if you do that and you maximize this. I think everybody knows that GDP is very imperfect. But you can't measure economic performance with just one indicator. So attempt to measure with just one leads to all of them. So you have to have at least several indicators. You had. There's an indicator for inflation, there's an indicator of inequality, of chance opportunity, there's indicator for growth. And first of all, you should not measure happiness. You should not measure changes in the conditions of life of people only through aggregate indicators. You have to respect values. And I think that freedom is an important value. Without there is no dignity within the sufficient freedom. If you have become a prisoner, if you have a prison, if you are a client of a non state, non estate. Yes, there's a new development. Who cares who try to limit your actions in such a way that you cannot hurt yourself in any way. What about dignity and freedom? There's nothing. So they are fundamental. So I think this is just over complete. I think people who care about the fundamental values of Western civilization, which is freedom and dignity, should laugh at it. But effectiveness so that this is not being pursued.
- [60:52]
F
I'm an ecologist and for me the index of. And to make this question sort of shinkier, I asked, not leaning into any psychological measure, what would you say about the sort of common feel of social wealth or social well being in Poland regarding this transition and when you think it will be included in this? Because I think that at the moment people really don't participate in Iraq and they feel that the deep rise of the countries of the condition as it resulted.
- [61:34]
C
Well, I think it's too simplistic to measure social satisfaction with election participation. Yes. So what did you say.
- [61:49]
F
Of the national wealth? And they feel that they are not really well and they are not feeling that their social well being isn't good.
- [61:56]
C
Okay, I think people were deprived of socialism, but I don't think depriving of socialism meant depriving them of social wealth. And what is social wealth, by the way? How do you define social wealth? Because you said people were deprived of social wealth. Is it correct or I miss? Yes. Look, look, look. I in no way. I am in no way proposing to prohibit psychologists from measuring various aspects. So there's no worry for you. I am only saying that for national authorities to make a target of a state power, a maximization of a sort of a complex factor which includes various measures of supposedly psychological well being is all well, it's just all well. Yeah, this is my point, sure. But unfortunately I am not the only one.
- [63:11]
B
Any more questions?
- [63:12]
C
Let me more concrete. I know this more or less these status and these status shows. Professor Layard has published a small booklet on happiness. They studied show, for example, that some people feel worse in the presence of better off people. What would be the policy conclusion? You should do something about better off people. So in this way you in a way support envy if you come first. And this does not require very deep psychological study that some people are feeling a certain discomfort when they view better of people. The old fashioned name for this is envy. And the progress has to measure envy. Okay, this is nothing revolutionary, but what would be the policy conclusion? You reduce all the inequalities to zero or to what measure inequalities not of chance, but of situation. What is the policy conclusion or variant? You will have to go back to socialism, to happiness, socialist happiness. This is the ultimate measure. This is the ultimate conclusion. If you think logically, these various measures, you end on this. But psychologists are free to investigate, Of course. But some people are even more angry when there is a very bad stagnation. Ask those people in Cuba.
- [64:58]
F
Here.
- [65:04]
C
I can't comment because I don't understand, but never mind.
- [65:08]
B
Okay, what else the lady about inequality.
- [65:16]
F
From the economic and moral perspective using higher education should be free.
- [65:23]
C
I don't think. What does it mean free? Free education. Because I know that your professors are being paid or do they work for free?
- [65:31]
B
No, paid enough. But anyway, go on.
- [65:34]
C
So what we are calling free is somebody else is paying for you. I don't think it's very just. Especially in the view that those students in most countries, including Poland who got this free education, meaning that other people pay for them. I use her on average for richer families. So this is the consequence. So poorer people are subsidizing services which are granted to richer people on average. This is very unjust. I am always surprised that socialists are not condemning that in the name of social justice. There's a choice. Either other people pay for you, or you and your parents will pay for you. Of course, usually we prefer that other people we like the free lunch. Yes, but since there's such a thing as a free lunch. Free lunch means that other people pay for you. Take your pick.
- [66:38]
B
There's a question.
- [66:43]
C
In terms of the quality of jobs.
- [66:48]
D
A state is only what you would.
- [66:50]
C
Like it to be.
- [66:51]
D
And there be the quality of chance.
- [66:56]
C
Education or health. Again, realize that most of inequality of chances were created by overextended states. So the initial assumption that without a state there would be huge inequality of opportunities. Wrong. Factually wrong. Until recently, you have states in which people were legally discriminated because they were divided into three states. Remember peasants? Then there were citizens of towns and aristocracy. This was not something free market has created. This was the political power which created. So one of the great achievements of 18th, 19th century was inequality in front of the law. So this was abolished in many countries. To become entrepreneur, you have to be. Well, politically connected. And this is un. But this is not a feature of limited state. It is a feature of expanded state. Yes. If you have so called free health system, meaning you pay as a taxman, as taxpayer. Sooner or later, since it is. Since you know, until we are in communism and everything would be all goods will be free in a sense that there would be no scarcity. You have to ration access to goods. Either you rush through price system or you Russian are different ways through queues. And whenever you have long queues, sooner or later some people want to jump a queue. That's human nature. Is it equality? So it is very. I think one of the fallacies is to mistake to misunderstood freedom market civil society as a source of huge inequality. While it is the widespread political power which creates most of inequality. This is not to say that if you say dealing with a legacy of extended state like socialism, that sometimes you have to engage in things which go beyond proper limited state. If you inherit education inequalities. Yes. And you continue for various reasons. Tax, finance, education. And you see that. So you have to think about how to reduce inequalities. Usually good education. The quality of education depends on the quality of the teachers. So if it so happens, it happens that say institution small localities in your villages, you have poorer teachers. You would have to think about the system, how to make extra payments for teachers to move to small localities. But this is not something trade unions are demanding. They demand high wages, salaries without regard to the quality of education. So for Example, in Poland we have privileges of the teachers as obtained by the trade unions. Teachers, Trade unions. This is called teachers chart. There's nothing in it which would show that they care about education inequalities. Nothing. Just privileges for the profession as a whole. So, summing up, it's a fallacy to think that inequalities come naturally whenever you have limited state because it is an overextended state, which creates most of the harm of inequalities. But if you inherit in certain situations, I think you need some interventions to deal with the inherited inequalities. Basically, we are speaking about education in the early age. And that matters because how people develop depends on, according to psychologists, what happens to them in the early age. Early education matters. This is why I am believer in trying to reduce inequalities in early education.
- [71:16]
B
Professor Balkarich, I'd just like to take you up on a question was actually raised by the two questioners over here. I understand your objections and concerns about some overall aiming aspiring to some overall collective notion of happiness. Now my understanding I might be wrong because I'm not sure of the research is the highest levels of psychiatric illness are found in rich liberal societies. People who know better than me can argue that, but certainly all the dsm, which is the bible of psychiatrists, psychologists, relies on research from the U.S. now, if that were the case, and I stress if that were the case, but I'm not sure would that affect your attitude to rich liberalism? If the effect of rich liberalism is it makes us all wealthier, but 15% of us mad, does not that normatively mean that there is some room for government intervention there? Because this is a little bit. I mean US studies. I think I'm right in saying it's about 20 to 25% of us will undergo psychiatric illness at some point. This is the U.S. should we not worry about that one in five?
- [72:27]
C
Well, on your assumption, the more you get richer. But your assumptions suggest I would first of all look at the data.
- [72:35]
B
Okay, first, but if you don't found that.
- [72:38]
C
No, then I. Well, without looking at the data, I would not say more. But even. Well, it's extremely doubtful that you can find a strong, strong and lasting links between the growth of the economy and the share of illnesses of this kind. Remember that for example, Swedish, you know, the Swedish people, they are very healthy, they are very fun for sports. But the percentage of SW Swedish people who enjoy and benefit from sickness benefits has been growing constantly over time. Why? Because the generosity of sickness benefit has been increased. So you create the supply of unhealthy people, even in very high society, I would look at that. And now then you invent new kind of illnesses. So look, first of that, before you jump to more radical conclusions.
- [73:36]
B
It was just exploring the relationship. It wasn't actually saying there was a. Sorry, Let's just take any more questions.
- [74:00]
C
Yes, we'd better go in less dangerous directions.
- [74:06]
B
But anyway.
- [74:24]
F
Kilowatt hour in Poland and.
- [74:26]
C
To put that in comparison, I just.
- [74:38]
F
Wanted to ask, how do you think?
- [74:53]
C
Well, first of all, why should they be tackled? You should ask fundamental NPVs at what speed and by what methods? Yeah, I don't want to enter in a huge discussion, but I may if you wish. I may say that even before the recent disclosed instances of what to. How to call it polite, not the most honest research standards as being practiced by the most prominent scientists of performance of global warming, a man of average intelligence would have a serious doubt about the case. And there are four or five questions I ask. First, how strong is the proof that you have an inexplorable and disability to global warming, given the history of our planet? Remember Middle Ages, Remember? And when it was until recently that wine was grown in Britain and then we have the Glacier Age. Second, even if you prove that, which we cannot prove, that is something which is. Which is going to go on, you cannot prove convincingly that it's mostly because of human intervention. And you can read lots of, I think, scientific stuff linking it to much more powerful causes, including the activity of the sun. Third, even if you say yes and yes to first and second question, it does not follow that the best strategist try to slow down global warming because you may spend, you may be much more effective in spending part of it on trying to shield the most effective country against the consequences, like Bangladesh, instead of perhaps wasting this in an attempt to force. If you go. Nevertheless, for that strategy of trying to slow down, you have to ask about the costs, which are social costs. I am using this favorite word, social cost, which means unless you believe in a free lunch, but there is no free lunch. You know, most of these, all of these non conventional technologies nowadays are very costly. They are hugely subsidized. So if you try to speed up the transition to more costly technologies as though you increase tax, and if you increase taxes, the final result is unemployment. So you would have increased unemployment in the right end. But the popular presentation was a freelance. There are two popular presentations which are very effective, especially as far as young idealistic people are concerned. First, that is cost nothing but second, otherwise There will be a catastrophe. The globe would stop existing. So if you hear that alternative is catastrophe, you don't think about the cost, because everything is better than catastrophe. And the same sort of pseudo justification was presented when countries were hugely increasing budget deficits. Remember, we have to do it. The more the better, because otherwise there would be a catastrophe. Calling berries names, meltdown, collapse, catastrophe, etc. And there was not a calculation, not even an attempt was done to calculate what is the optimal dose of stimulus, what would be the longer term costs. Now people start to think about exit. They call it exit. So we have. Now if you have. So the rightness or wrongness of the question number three or four depends on the rightness or wrongness of the. So you have the. You have to multiply the probabilities. So multiply 0.5 times 0.5 times 0.5-times 0.5. What do you get? What number do you get for the rightness of the strategy which was adopted at the level of European Union because there were politicians who wanted to present themselves as the savers of the world. And this Norwegian not connected. And we know from experience that biofuels, for example in Europe are very costly in the United States too. So they require extra subsidies. And it turned out that they contribute to the rises in the prices of wood stoves. Well, this was not reversed. So there is no error correction at the policy level in the United States, in European Union. So we have to work for that. Errors should be minimized and if they are committed, they should be reversed. Otherwise there would be sad consequences from time to time. Okay, what else? So global warming have already discussed. Are there any global issues left untouched? One more.
- [79:55]
B
I think this final question, gentlemen.
- [79:57]
C
My. Of course. Why I give you one example. One of my students have recently written an interesting thesis comparing Dominicana and Haiti. Remember Haiti? Now these two countries are on the same island. 50 years ago they were very poor at the same equally poor. Now Haiti is four times as poor as Dominicana. So Dominicana has, even though most of dictatorship not very perfect economy has been growing four times as fast on the height. Four times. What was the main difference? What was the reason? The main difference, the proximate reason was that the rate of investment in Dominicana was much higher than in Haiti. And you know that investment is very important by why the rate of investment in Haiti was so much lower than that in Dominicana. Because in Haiti you have a negative proximity protection, not less than zero. Negative protection is when you have a unit called state which is not protecting potential Investors against private crime. But on top of that, government officials engage in crime against ordinary citizens. This is called failed state. And the cost of a failed state, meaning negative justice system is such so act terrible power in Haiti are much better than not extremely good situation. Dominicano, this is one. So you need to protect property rights have to be not only good, informed, private, but they have to be protected. And it matters for investment. Second, at least from the times of Adam Smith, what we know that race depends on on the size of the market. So if you expand the market, you expand the number of transactions. But the number of transactions or size of the market depends on how efficiently disputes are resolved. So I mentioned the cost. This is obviously not only arrangement to solve, because you have arbitrage and other private arrangement, but still having good codes matters for the economy. Third, the content of law matters for the economy. For example, if you ban private ownership, you have socialism and it fails. If you protect debtors very much, let's say you are soft hearted, you care about ordinary people. So do you want protect the debtors? What is the social price? If you protect the debtors, but not lenders, what is the price? So credit. If you protect debtors very much creditor, you don't protect creditors. Yes, there will be less credit. Who would risk granting credit? If you, if you can't get your credit back, loan back. So it means that would be less credit or the price of credit would increase, meaning risk premium won't increase. Would they incur? Or if you are very soft hearted, you care about people, it usually does care about people tremendously, day and night. And you say, well, well, people should be protected. So if you rent an apartment, the law should make it very difficult to evict you. So protection of those who rent the apartment. This nowadays in Poland, what is the result? What is the result if you protect those who rent the apartments very, very much? You are economists? No, no one wants to okay, rent. The risk to private investment is tremendous. Who would risk buying, building an apartment, financing an apartment? If you would tolerate a person who destroys an apartment, but you cannot evict him, so you don't invest. As a result, you have a shortage of apartments legal for legal rent. So people go informal. So this is the social price of wrong cloth. And there are many, many examples. And usually wrong cloth is caused by magical thinking, which is the opposite of thinking. Remember, magical and magical thinking has induced by words, nice words and bad words. Nice words are social, national, everything you have, you know, national means status, social means the or bad word shock Capitalist is a very bad word because it was coined by socialists. Yes, there's a German socialist who coined it in 19th century as invective. And many people dislike socialism because they feel it is an invective. Okay, anything else? Look.
- [85:26]
B
Okay, one last question, gentlemen.
- [85:30]
C
Previously said something like. I don't know what was happening in mind, I can't say. But I can say that you need both. So you, you mean rule of law? Rule of law, state of law is something. Rule of law? Well, it depends if you use neither or. First of all, it's bad to operate with dichotomies usually. So either you have or you don't. Nowadays we try to measure it and there are indices like freedom House, heritage, you've got indexes from 0 or minus to 10. And here we've got the rule of law courts. Independence, it's very important feature of the rule of law. You see that on this measure. Who is at the top? Independence like Denmark, Finland, New Zealand, Switzerland. But most of central Eastern European colonies are at the level of Greece, Italy, Portugal and Spain. So we have a moderate level of rule of law in this respect. If you want to have. Let me see. Oh, this is another measure. This is the measure of, of the more or less rule of law with respect to the political regime. Whether you have. If you equate rule of law with a limited power through elections, then you see that there's not much difference between Central and Eastern Europe and Western economies. Now if you look at the rule of law, this is a summing up of 10 parcel indexes which measure the protection of property rights, the risk of expropriation, etc. Etc. So you see that these countries are at the top. You have variation here, but the best countries in central Eastern Europe are at the level of Spain and Portugal. Greece is going down. And this is the. These are the data which are summarized from 96 to 2006, the last 10 years. So if you want to respond empirically, you can say that there was tremendous change in the direction of the rule of law. Not yet completed, but we are at the moderate level.
- [88:29]
B
Thank you very, very much. I have to say the slide.