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, Mart Laar, the chairperson of Pro Patria and Res Publica Union writes in weekend's Wall Street Journal.
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.
Mart Laar: Freedom is still the best policy (1)