Promoting economic freedom: what have we learned?
Presented at the conference "A Liberal Agenda for the New Century: A Global Perspective"
Moscow, Russia, April 8-9, 2004
by Elena Leontjeva
Founder and Chair of the Board, Lithuanian Free Market Institute
What is the use of looking back for those who do not wish to revise or polish or charge history? Can a seeking mind identify the key factors why this or that happened this or that way, and to help his fellows citizens to come to peace with what happened? As peace of this nature remains a “luxury item” for many, not to mention the unique Russian soul, it may be helpful to look at where such suffering soul seeks salvation.
Freedom had no alternative at the time when the Great Socialist Empire came to its end, just like free market, free trade and private property had no bona fide alternative. Peoples’ souls were striving at freedom in all of its manifestations. In order to give people bread, not to mention meat and bananas, former socialist states had no solution but market. If one wanted to measure “the amount” of freedom, it was probably the biggest at the time when reforms were commenced. Old socialist rules and regulations had no moral support nor among the rulers, neither among the ruled. People could trade without restrictions, do business without regulations, cross borders without customs, and create wealth without paying too heavy tax. This was a time when most starting capitals were created, and more importantly, when people learned principles that were never taught in socialist school. The making of new institutional grounds came a bit later, and was beneficial, since it laid the new rules of the game, although it frequently led to overregulation. In some cases interventionary regulations even preceded indispensable rules. Was it possible to confine ourselves only to gains and to avoid the losses of institution-building? The experience of creating the fundamentals of the Lithuanian Capital Market and the Stock Exchange provides some insights into this question.
When the market was set free, was there an alternative to private property? It may seam inconsistent, but in most people heads private property was not a must. Fortunately, every kind of mimicry of economic independence of enterprises (I mean all types of “chozraschiot”, financial and economic self-dependence of socialist enterprises) was already tried during the socialist times, widely and unsuccessfully. Thus at least the decision-makers knew that the quicker they start privatizing factories, shops and services, the better it will turn out. Alas, privatization had so many faults, some inevitable and some – definitely avoidable, that the number of confused was rising as privatization took speed. It is a well-known fact that privatization is never spotless and that every model has its own flaws; however, people are not satisfied with this explanation and the “injustice” of privatization continues to outweigh many of the recognized merits of new market order.
The key unresolved question is still, whether voucher privatization was a proper way to follow. One can argue that voucher privatization is the only way to go if the aim is to truly privatize, and not to turn material property into financial one, and all over again. Once the state gets proceeds from privatization, there are plenty of needs which the money could serve, and it is very hard to give money away to people. Lithuania has unique experience in dealing with this problem and after a broad public debate has used part of privatization proceeds to compensate savings lost due to rouble inflation. There is an even more important aspect to voucher privatization, an aspect which deals with an often raised complaint that “this property has been built on our sweat, dedication and our whole life, and it cannot be given to anybody but us.” Voucher privatization responds to this rightful claim (but only to some extent, since in no country everything has been “voucherized”). Voucher privatization gave a chance to all people to claim “their” rightful property and even if they lost it later, or did not take it seriously at all, one can not underestimate the importance of the chance given per ce.
Privatization of social security systems, as a rule, has lagged behind privatization in all countries. There are understandable explanations why it happens this way, but the fact is that at the time when the state needed to pay people back for the sweat and dedication they brought to the altar of socialism, it had already no assets to do it. Poland comes to mind as an uncommon example of a country that at least made a connection between state assets and personal pension accounts. If voucher privatization had been dovetailed with pension reform, two essential advantages would have been likely (I can’t say certain!). People would have more sober attitude towards vouchers and would act more responsibly. Market participants and mediators would be more accountable, and more attention would be given to preventing financial fraud. I mean both the institutional background, which, as we know, has been especially weak in many counties,
and the rise of private enterprises with conflicting interests (joint-stock companies, pension funds, depository trusts, trusts, and insurance, rating companies) would bring more discipline to the market.
The existence of these kind of private entities on the market would probably diminish another popular concern “why we suffered such huge losses in privatized companies, why people lost jobs and whether it was not possible to prevent it.” Many losses and closures of entire factories were unavoidable, since that production had space and demand only in the wasteful system of central planning. However, many companies suffered from unprofessional transition or even open fraud. Question, whether authorities had any choice to prevent it, is still in the air. That choice can be very generally described as: (1) privatizing privatization (relaying on private intermediaries, whose conflicting interests would bring discipline to the market, and shifting all the responsibility to the market) or (2) strictly managing privatization from the state tower. Sadly enough, every expert of human nature would suggest that the (2) had unbeatably more chances. Number (1) was left almost untried. Politicians, statesmen, clerks and even fellows-economists shared the belief that selling companies into “good, wisely chosen, hands” through “wisely formulated contracts” would solve the problem of fraud and improper transition. But there are several buts.
First, there are good reputable companies abroad, and not at home, where everybody is young and bold; second, it opens doors to political favouritism, it requires too much effort and distracts government from other fields of reform (most of all, deregulation and creating proper conditions for private sector); and third, it does not prevent failures, and even add in some, so it does not serve its purpose. We in Lithuania have striking examples to illustrate all of This. Fortunately, voucher privatization helped to create a layer of domestic capitalists, and criticism of foreign owners who entered our country through muddy privatization deals is limited to several companies. Just a few more deals like that and the image of capitalism would be destroyed altogether and there would be a strong national opposition against foreign lords. In the countries where the state went further and undertook the role of banking institution in privatization (by providing property on rent-to-own), it created even more depressing outcomes. All in all, politically managed privatization was one of the most important vehicles to institutionalise corruption. It is also responsible for a spread of regrettable feeling that a very good authority can choose a very good owner, and that future developments on the market can be foreseen and taken care of.
After several years of believing in a spontaneous order, many people started to believe that changes in the market can be foreseen and that instead of waiting until the market brings desired results, authorities can intervene and “take care.” Dealing with this matter only from the utilitarian point of view provides answers mainly to those who provide the answers, but not to the general public, whose daily concern remains how to deal with uncertainty. The reviving Church could help people to accept a spontaneous way of life. But a call to relay on Providence and to obey higher inherent rules (in the economic field those are rules of community life, division of labour, contracts and exchange, etc.) is mixed with the calls of solidarity, certainty and provision for everybody. Naturally, many choose the easier way.
If people are not eager to accept spontaneous way of life (and economic life as well), then prospects of freedom are dim. Without a deep acceptance of the spontaneous, people will always seek to introduce institutions of certainty which will most probably come about as institutions of central planning and redistribution.
The need to implement a free market is commonly based on the understanding of the human nature and the genuine principles of exchange. However, there is something in the human nature which, as a rule, is not given timely and proper assessment. I mean human willpower to rule and to impose on others by force what he/she considers proper and beneficial. There is no difference between government clerks in a socialist and capitalist system as they are both exposed to the same kind of human and institutional weaknesses. However, the popular understanding of the need to restrict state authorities and to give all possible functions to people, their economic undertakings and communities, does not come at the same time as recognition of the need to let market go. As a result, authorities multiply, get themselves well established and almost uncontrolled, while market participants come to be dependent on their favours. Worse of all, there is virtually no force in society that would clean and deregulate the system, on the other hand statesmen become heavily motivated to keep and strengthen the machine. Lithuanian initiative aiming to size down the government and make it customer-friendly shows how much this crucial work depends on those who perform these functions, and how difficult it is for them to make order in their own kitchen. This is fully understandable and it proves how important it is to build a wide coalition to bring the notion of freedom to the corridors of power. Think tanks can play a vital role in uniting community, preparing action plans and even acting as police force of sizing down the state.
International institutions could be a helpful vehicle in this area, but, as a rule, this is not their priority. What is important in this context is that a promise to international institution is almost a must for national administration, while a promise to people, to the electorate turns to be ignored and therefore requires some kind of a policy watch-dog. As a future member of the EU, we have had quite bitter experience – the old socialist type of institutions were still acting when new institutions, copying EU schemes, were put on top of them. A thorough revision of state functions before joining EU was promised to people, but never fulfilled. In such conditions, the space for market is little by little shrinking. People’s faith in justice and order is dwindling. However, experience of a well thought-out national initiative to improve business conditions, get rid of all unnecessary regulations and state functions, and make the remaining functions serving the needs of the people provides optimism that this kind of toil is not unworkable.
Many people ask the question about the role of international institutions in transition, and the conspiracy theory is still shared by many. Conspiracy is easy to imagine and sometimes even to plan, but almost impossible to implement - in the modern world of a vast number of players and spontaneity that is not ruled out yet. The role of international institutions, as of most phenomena, is twofold. Frequently, they prevent the countries in transition from going too much left, although one can doubt whether freedom brought through coercion can be sustainable. In Lithuania international institutions were instrumental in preventing a halt and revision of privatization, in opening doors to foreign banks, in supporting the introduction of a Currency Board (after a revolutionary change on the 19th street in Washington, DC), and in some other cases. In many others, however, international institutions prevented us from going more right and adopting solutions that would fit our needs. Among the most striking examples let me mention a western opposition to abolishing the corporate profit tax, to introducing a voluntary deposit insurance system, to giving people privatization proceeds, to voucher privatization and non-political privatization through the Stock Exchange. We didn’t avoid some comic examples, whose results were not funny at all, when some trivial regulations were introduced with a help of international community, while fundamental institutions were still lacking (sophisticated norms of prudential supervision were introduced in banking, while the mortgage system was altogether missing and credits were easily lost). Agriculture is another field where the western world obstructed deregulation by every word and deed. It is fully understandable that one cannot refuse to see how the western society lives and to learn its essential lesson, but in many cases indigenous decisions that would fit domestic culture, be consistent with free market principles, and would therefore work better have been prevented by foreign power or rules prevailing abroad. It is not only our society that, faced with this intervention, is at a loss. One day the western world may also need a healthy alternative to systems that start falling apart, and then they will too find themselves at a loss, because all of the world will be similar.
Among such home-grown solutions that could play a vital role, let me first list the initiative to put limits on law-makers and administration, providing that every natural and legal person is treated equally by law, and that no privileges or limitations are applied by any tie of government. We came to formulating this simple but revolutionary provision through painful experience of corporate welfare and rent-seeking, through opposing the laws that were designed for specific entities and selected foreign investors, through explaining the need to improve business conditions for all, not for a few. It required significant efforts to bring home to the business community that they should not seek improvements only for their own sector or type of business, which could naturally look more realistic and entrepreneurial. Although the proposal to put constitutional limits on statesmen didn’t go through, it was a major educational accomplishment in explaining what kind of reforms would put an end to interventionism and corruption and lay the grounds for genuine free market.
Despite the efforts to restrict and direct economic freedom, it still brings its rewarding results. The future of freedom depends on people’s attitude towards the nearby past and ideology that will be prevailing tomorrow. The choice that many people are facing today is whether freedom is good only at feeding them, or whether it has another critical role. If we start wondering, we find many occasions to realize that freedom is vital to living our lives all the way through a conscious choice and to perceiving the universal laws of humanity, the laws that are also behind the journey of the last dozen years.
