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Notes for India Speech: Dubious Attitudes of Western Countries Vis-à-Vis the Developing World

English Pages, 8. 11. 2005

Thank you for giving me this very special opportunity to address this distinguished audience. This is not my first speech in India. In the spring of 1999, I spoke about „Emerging Markets and Their Current Problems“ at the Delhi School of Economics (1) and about „The Czech Economy and Its Ten Years of Transition“ at the Federation of Indian Chambers of Commerce.

The first speech reflected the fact that „the end of the 1990’s brought about the undeniable loss of a more or less general consensus both about the structure of the transformation strategy and the interpretation of transformation achievements (in all emerging markets as compared to the beginning of the 1990's)”. I tried to defend my views about transformation based on my „Ten Commandments of Systemic Reform“ (from 1993) (2) and warned that „we should not become victims of vested interests of a very skillfully organized group of international advisers, investment bankers, powerful auditors and bureaucrats of international financial organizations. They established a very successful rent-seeking and pressure group“. (p. 58)

In the second speech I tried to explain the reasons for the then so visible enormous vulnerability of emerging markets. I could not accept the arguments that it was possible to create „a brave new world of perfect markets and of perfect government“ ex-ante and that „politicians should be able to guarantee – in their democratic, pluralistic and open societies – the optimal sequencing of reform measures“.

I do not think I have to correct my views after six years. This time, however, I would like to pay more attention to the external side of the economic development problem and to the western (or perhaps northern) attitudes to this problem.

I have to admit that we, who live in Europe, are – these days – preoccupied mainly with ourselves, with our Komfortgesellschaft (comforting or comfortable society) and as a result we pay only a lip service to the problems of the rest of the world, including the problems of economically less developed, sometimes underdeveloped countries. The nice, neat, calling for care speeches of moralism-pretending politicians, of course, do exist, especially on the occasions of opulent summits, but that is all. There is no follow-up, no real contribution.

It is not accidental. Europeans were persuaded by their politicians and their academic fellow-travellers that they deserve an ever-growing well-being and welfare regardless of their own present economic performance. If competition from other countries and continents starts to threaten their currently not very fast growing and not very efficient economies, they are ready to block the competition coming from abroad and are willing to start creating a sheltered, protected economy again – this time not at a national, but at a supranational, pan-European level. With all the easy talk about globalization, the protection of domestic vested interests remains to be the dominant goal.

The European preoccupation with Europe is connected with the fact that Europeans were made to believe that the era of nation states is over and that, because of omnipresent externalities and because of the artificially built belief in the importance and inevitability of continental-wide public goods, Europe must be unified and, therefore, organized, constructed, controlled and regulated from above. It inevitably leads to supranationalism and Europeanism and, in effect, to new, self-invoked problems, especially to a frustrating European democratic deficit. Attempts to get rid of this deficit are accompanied by permanent but ill-conceived reforms of existing institutional arrangements, take all their time and, in addition, make the problems ever deeper.

This is our own problem and I do not intend to bother you with my views on how to eventually overcome it. It has, however, its very unfavourable impact on the wide range of policies of European (or Western) countries, including their policies towards developing countries.

Not to be misunderstood backwardness, I would like to stress my strong belief that to overcome economic is a domestic task. It cannot be imported, it cannot be arranged at international conferences, it cannot be delivered as a foreign investment. Some countries do understand this. India – I believe and see around – belongs to them. But the external side of economic development is important as well.

What is the main message? Developing countries need open markets in the rest of the world, not sheltered, protected markets; they need only minimal social, labour, environmental, safety, hygienic and other standards reflecting their own economic level, not standards – rationally or irrationally – imposed upon them from outside; they need trade, not aid. It seems to me, however, that the developed countries of Europe and America offer just the opposite of what the developing countries need.

We – as classical liberals – have at our disposal plenty of theoretical arguments concerning these issues and I do not think it is necessary to repeat them here now. My arguments would not be original and I am sure you know them as well. We have, however, something else than just a theory. We have the unique and unforgettable experience with the transition of our country in the 16 years after the fall of communism, with our transformation from oppresion and central planning towards freedom, parliamentary democracy and market economy. I would try, therefore, to recount our main lessons as regards the external side of our transformation process (3):

1. The role of foreign aid is of marginal importance, and for several reasons it is practically irrelevant.

First, the size of this aid is usually very small. In our case – in the case of a Central European ex-communist country with one highest GDP per capita– the foreign aid was almost nonexistent. This was not surprising for me. There is traditionally – as I am sure you know – a huge gap between the foreign aid rhetoric and foreign aid reality. I do not believe it can ever change. It is in the interests of the foreign aid community (which is a specific rent-seeking group) to make the gap as big as possible.

Second, the form and the structure of foreign aid is usually unsuitable. They are both based on supply-side considerations, which means on the interests of the donors, not on the demand-side, not on the needs of those who are supposed to receive and use it. The interests of the donors, concealed in their missionary moral progressivist rhetoric, are very earthly and very selfish. As a result, much of foreign aid is wasted. It is the case both of the material and financial aid as well as of the so called consulting. I cannot resist to repeat now my 15 years old, often quoted reply to the attempts of the World Bank officials to force me – as finance minister – to accept a technical assistance loan for my country. I answered then that „I am not ready to pay hard money for soft advice“. It is still relevant now.

Third, the aid is never free. It is, usually, very costly in the long run and even the soft loans turn out not to be so soft. The lending institutions have a bureaucratic incentive to lend. They are not ready to watch reforms passively, risking that their irrelevance will be revealed. We have practically not used the World Bank or EBRD loans due to their true costs. The combination of non-zero interest rates with supplementary requests of granting state guarantees did not make them interesting for us. The same problem is with cofinancing, which is currently so popular in the EU.

2. Free trade is absolutely crucial, because all other arrangements, including fair trade, are wrong. Fair trade means protectionism in disguise. Who should define what is fair? The myth of fair trade is that politicians and bureaucrats are fairer than markets. As a politician and bureaucrat I have to say that I don’t want to play games with the rules of trade.

Free trade would be sufficient, but it is almost nonexistent. Even if the world is probably more „free“ now than it used to be in the past, new sophisticated forms of protectionism are not less dangerous than the old ones. We also understood that in reality tariffs represent a smaller problem than various explicit or implicit quotas. And we also know that the implicit quotas are more dangerous, more difficult to avoid or to change by international agreements.

The export subsidies of developed countries are even more important, because the less developed countries do not have financial resources to do the same.

Trade barriers bring about many other problems, including mass migration. It is well-known that trade and migration are substitutes. Migration is a result of protectionism and of all kinds of other trade-restraining barriers.

3. Another significant constraint on various economic activities is accomplished by the imposition of the so called international standards. Their basic role is to restrict entry into the market and competition. I do not want to say that all „standards“ are wrong but for good standards two preconditions should be fullfilled:

- the standards should be introduced at a contractual basis between those who supply and demand the goods in question;

- the standards should be, eventually, introduced by domestic politicians and legislators, not by international organizations either of general political kind or of special interests (and of interests of various chambers, associations, societies, or all other types of international NGO’s). Below the surface of their claims of progress, caring, risk-aversion and universality we usually find a very specific political and economic agenda of influential groups of various „progressive“ activists, advisers, consultants, etc.

There is no doubt that standards should be either contractual or should be reflecting the level of economic development. These standards are a good example of „luxury goods“. The demand for them grows more than proportionally to income. For the developing countries the standards are often very costly, if not prohibitive.

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As I said, the external side of economic development is important. I am afraid that the „temporarily“ developed world does not see this.

(1) The lecture was published in my „On the Road to Democracy: The Czech Republic from Communism to Free Society“, National Center for Policy Analysis, Dallas, 2005.
(2) The text was published many times, see my „The Rebirth of Liberty in the Heart of Europe“, CATO Institute, Washington, D.C., 1997.
(3) Our lessons concerning the domestic side can be found in my book „On the Road to Democracy: The Czech Republic from Communism to Free Society“, National Center for Policy Analysis, Dallas, 2005.

Vaclav Klaus, Liberty Institute, New Delhi, India, November 8, 2005