Abstract
The economic crisis currently ravaging the world sadly recalls the Great Depression, which in the 1930s led to the crisis of democracy, the rise of totalitarianism in Russia and Germany and, at the end of the decade, to the Second World War. As with the current crisis, that of the 1930s started with the collapse of Wall Street in 1929 and then developed into a worldwide depression. It happened not because of market failure but as a result of mistakes made by governments trying to protect their national economies and markets. The market was not allowed to make its own corrections. Government intervention only prolonged the crisis and made it far worse.
We may hope that even though we see several bad signs of neo-interventionist attitudes, not all the mistakes of the 1930s will be repeated. But it is clear that the tide has turned again. Capitalism has been declared dead, Karl Marx is honoured 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, by not fulfilling their role as the ‘visible hand’ in creating market rules and guaranteeing them. 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 this when we look at how the post-communist 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 trusted the invisible hand more, others less. The countries which trusted it more have been more successful, demonstrating the fastest growth rates.
Yet times of rapid growth are unfortunately not always times of good decisions. The mirage of the welfare state became stronger. Governments thought that they could afford a Western welfare state because the economy was doing so well. Conservative financial policy was weakened, lending was encouraged, chances to join the Eurozone were missed and social expenditures rose beyond the economy's ability to bear them. In countries where such miscalculations were combined with corruption, weak government and loose control of the banking sector, the collapse has been very serious.
At the same time, countries which joined the Eurozone in a timely manner are doing well. And even with some badly performing countries, Central and Eastern Europe is doing better under radical reforms than the ‘old’ Europe is. While Eurostat projects economic growth in the ‘old’ Europe to be –-0.1% in 2009, new Member States are forecast to grow by nearly 2.5% over the same period. Slovakia, the most aggressive reformer in Central and Eastern Europe, has introduced a flat 19% universal tax rate and has launched other reforms, allowing it to join the Eurozone on the 1st of January, 2009. Eurostat predicts that in 2009 Slovakia will have the highest economic growth rate in Europe, 4.9%. At the same time Hungary, which has been very cautious about reforms, has been hit harder by the crisis than the more radical reformers.
The same experience is seen in former republics of the Soviet Union. Russia has been slow in its economic reforms and has built up an authoritarian state; it has been hit especially badly by economic crises. Russia's aggression against Georgia last August and the gas war with Ukraine this January have only made the situation worse for the Russian people. The trust of foreign investors is gone, and capital is escaping Russia at a high speed. 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 ranked 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–-to overcome the results of Russian aggression surprisingly easily 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 had hoped.
It is positive that several European governments have expressed their concerns about the situation in Central and Eastern Europe. But the best help ‘old’ Europe can give to new Member States is to follow sound economic principles at home. Generous aid schemes for ‘national champions’ are a new kind of protectionism that must be cancelled. ‘Solidarity’ means that the countries in the Eurozone must follow the same rules as countries interested in joining. There is no need for special privileges for some; the rules are rules for everybody. This means that the budget deficits must be kept under control not only in applicant countries but also in member countries of the Eurozone. Only a policy which combines the invisible hand with an effective visible hand and which rejects both extremes in politics–-no control or absolute control–-can bring Europe out of the present crisis.
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