It’s very important to defend the monetary politicy from political pressures

Interview with Leszek Balcerowicz:

When real wage growth exceeds productivity gains, tensions can dissipate two ways: through inflation or unemployment. Poland chose not to hide unemployment, while Romania chose inflation. Which are the weaknesses associated with the second approach?

I wouldn’t want to comment specifically on Romania, because obviously I don’t know enough situation of your country. I would like to address the problems which are common, to some extent, to Romania and Poland and other countries. As every economist knows, economy and people suffer when in the longer run real wages growth exceed productivity, so the answer is obvious: this should be avoided. The best way to speed up productivity is through reforms, both at the enterprise level and the country level? And where do you usually have excessive wage growth? The answer is: in the public sector. Because in the public sector the incentives to introduce measures to enhance productivity are weaker then in the private sector. The answer is privatization, that’s the indispensable part of the solution.

Romania, a market of 21.6 million consumers, has 500,000 companies. According to this ratio, Poland, a country of 38.2 million people, should have at most one million registered companies. Yet, in Poland there are over three million firms. How would one explain the difference?

Usually, when there are differences between the dynamics of setting up new firms in various countries, you must look at the entry conditions for new companies. You must check what the formal and informal conditions are for new comers and how easy or hard is for new firms to enter the markets. If the number of new comers is low, it means that fiscal and administrative costs for setting up a new firm is too high and the policies must focus on that problem.

Poland, Hungary and the Czech Republic privatized and sold a large number of companies through the stock exchange, while Romania preferred mostly strategic investors. Which is the route you find most efficient?

I would not say that there is one general optimal method of privatization regardless of specific conditions. For example, in Poland we’ve been quite successful in privatizing previously state-owned companies with strategic investors. This was, for example, the case of the bank sector privatization and this privatization technique has some advantages. If you are competent on privatization, then you are able to go beyond the price factor and obtain favorable agreements with the strategic investors regarding their commitment to the level of investments they would make in the privatized companies and the necessary restructuring process. So, in some cases, this privatization technique may be preferred, but I would not say this is the only way, for every case. This doesn’t mean stock exchange privatization must be excluded. I say, no matter the privatization method, you must ensure the proper restructuring of the company.

How would you comment the statement of the former ECB president, Mr. Duisenberg, who said that “The temptation for politicians to take monetary measures which bring temporary solutions at the expense of the long term economic opportunities is always present?”

As a former central banker, I can only agree with Mr. Duisenberg’s statement - it’s very important to defend the monetary politic from political pressures. Why is it so important? Because the current monetary system is not self-protected, given the fact that money is not related to anything substantial. There are also big temptations in the political system to use the monetary system for its own goals, such as spending big amounts of money in election periods. So, the independence of central banks is a very practical issue: people want stable money, there’s nothing ideological in it.

In continental Europe, in general, and in Central and Eastern Europe, in particular, energy strategies are often used as arguments against the privatization of the sector. Do you consider that the state can play a role in the allocation of resources?

I don’t think the specific characteristics of the energy sector – one of the most important being that every economic sector depends on it – require state ownership. These specificities may be addressed by different means: a proper choice of investors, regulation and not just the continuation of the heavy-handed and politicized state ownership. I would even say that because this sector is so important it should be privatized. For example, in Poland, there are more and more signals that the energy sector, which is still predominantly state-owned, may be incapable to provide the necessary quantities of energy for the Polish economy, because the companies have not invested enough.

In your book, “Freedom and Development”, you advocate for state intervention against natural monopolies. Don’t you believe that, in the long run, the market will solve more efficiently this problem? Does not state intervention create an artificial oligopoly consisting of pressure groups interested in eliminating the natural monopoly?

In my opinion, there are less and less natural monopolies and that’s because the technological progress, which makes it possible for the previously owners of natural monopolies to be subjects to competition. I refer especially to sector like energy, telecommunications, and - more generally - network industries. There were also changes in the understanding of the economy. So, I would say whenever it’s technically possible one should introduce competition and privatize the companies and my opinion is that this is technically possible in most sectors.

In Romania there is a perception that the only way of financing infrastructure is by running budget deficits. Are there any other ways of financing it?

The infrastructure financial needs do not justify irresponsible fiscal policies. There are countries who manage to finance the infrastructure projects without excessive budget deficits. Chronic deficits are harmful for long term economic growth and if they harm economic growth, they would indirectly harm the possibility to invest in infrastructure projects, too. The policy of high budget deficit justified by the needs to finance infrastructure is very short – sighted.

Sometimes, authorities come up with pretexts -- “Pollution changes the climate”, or “Smoking kills” – to introduce or raise taxes and avoid citizens protests. How would you comment, in this context, the statement of the Czech President, Mr. Klaus, according to which: “The poorer the society, the more brutally it would behave against nature. On the opposite, the richer, the friendlier would treat it.”

First of all I would say we need much more reasonable debate on the prospects and risks of the global environment and climate. I agree with Mr. Klaus. This is to say that we should avoid taking measures without sufficient rational analysis, based only on emotions. When we adopt arbitrary projects, which are not cost-effective, just for prestige or ideology, people will suffer, because when costs are high, their standard of living would be affected. We should not allow emotions and ideology to replace rational analysis. And I give just one example: biofuels. It was decided, both in the US and the EU, that we should increase the use of biofuels. It turned out that increasing biofuel production drives up food prices and in this way harms, especially poorer people. Besides, it turned out that some biofuel production technologies are harmful for the environment. So, the decision to increase the use of biofuels was arbitrary, not at all based on rational analysis. The question is: is this decision going to be reversed by the EU authorities? Political authorities must base their decisions on rational analysis and if they err, because it is possible for humans to err, they should correct their errors and we, citizens, must demand that from them

How would you comment the statement of Mr. Jurgen Stark, member of the ECB Board, who warned: “European governments risk sharing the fate of the dinosaurs if they do not cut public spending?” Mr. Stark thinks that countries could perform best, economically and socially, if total government spending, including repaying debt, would be in the interval 30-35% of GDP.

I agree, because I know a lot of research which shows that high levels of spending in GDP, especially in poorer economies, harm longer term economic growth. High spending requires high taxes, high spending comes often with high deficits and high spending usually means social spending, which often discourages people from seeking work and working. One of the most misleading messages is that high social spending is good . On the contrary: experience has proven that high spending harms the people in the longer run.

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