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Reflections on Potential Global Power Shifts: Notes for Lago Maggiore

English Pages, 1. 7. 2010

Thank you for giving me a chance to address this distinguished audience. However, I have to start by stressing that I do not claim to possess any comparative advantage for discussing this afternoon’s topic – the global power shifts and their potential economic and financial implications. I suspect the éminence gris behind the program of this conference, Charles Dallara, knows this as well. He either wanted to motivate me or, more probably, to publicly disclose my lack of competence in this field.

I want, first, to express a small terminological disagreement with the title of the session. I find it more meaningful to speak about size, strength, importance, influence, etc., than about power. Second, being from a relatively small country and looking at the world from its perspective, in my case from the perspective of the Czech Republic, I do not feel authorized to speak on behalf of larger entities, such as Europe, the West or the world.

Third, I am an economist who thinks (or at least hopes he thinks) as an economist. My “box of tools” does not help me very much in the discussion of power shifts. Economic theory is about the behavior of economic agents, not about countries or continents. Consumers, investors, firms do behave in a rational, hence predictable, and therefore scientifically analyzable way. Continents do not behave. They do not compete, consume, invest or make innovations. There is a competitiveness of individual firms located in Europe, not a competitiveness of Europe. This is often forgotten.

How, then, to structure the thinking about global shifts of economic importance? In a recent article in The World Economics Quarterly Journal (Vol. 11, No. 1, 2010), F. Erixon and R. Sally look at the world economy by dividing it into a “labor-abundant Asia”, “resource-abundant Latin-America, Africa and the Middle East” and “the capital- and technology-abundant West” and speculate about its future developments. I am not sure such an approach is of real help. In the course of history, these “abundancies” have been subject to fundamental and sometimes surprising shifts and to use the current, only temporary state of affairs as a key to the explanation of the future doesn’t make sense.  It is not a thousand years that separate one state of affairs from another.

Most of us – I suppose – believe that economic growth and development is much more connected with rationally functioning economic (and political) institutions and with a broader cultural or civilizational setting than with resource abundance. In other words, we believe more in the power of ideas of Adam Smith, Ludwig von Mises and F. A. von Hayek (if not of Max Weber) than in the relevance of exercises with the Cobb-Douglas or any other production function.

My decades-long experience with the communist political, economic and social system tells me that standard factors of production – labor, capital, natural resources, technology – play a rather limited role, especially in the long-run. What is important is the quality of the economic system.

In my following, very simplified speculative exercise, I will distinguish three distinct economic groupings – Europe, America and the so called BRIC countries. All the other – small or big, rich or poor – countries are subsumed under one of these three groupings. Unintentionally, it looks like an Orwellian scheme of the world as described in his famous antiutopia “1984”.

The closest to us is Europe with all its beautiful but decadent places like Lago Maggiore and Stresa. My guess is that the importance of Europe will continue declining. Whereas in the year 1950 (which is only 60 years ago), 22 % of the world population lived in Europe, it was only 12 % in the year 2000, and – based on quite reliable demographic forecasts – it will be only 7 % in the year 2050. In the past, Europe was able to react to similar changes with the help of its economic system based on free markets, rule of law, property rights and of its political system based on individualism, freedom, democracy, openness and – because of its nonuniformity – on a very productive system competition.

This ceases to be true. Nowadays, Europeans prefer leisure to performance, security to risk-taking, paternalism to free markets, collectivism (group entitlements) to individualism. They have always been more risk-averse than Americans but the difference continues to grow. Also freedom seems to have a very low priority there. German philosopher Peter Sloterdijk aptly speaks about “die europäische Komfortgesellschaft”, accompanied by “allgemeine Lethargie bei hohem Wohlstandard”. This is a good, but alarming description.

All of that is indicated by (or hidden in) the concept of „die soziale Marktwirtschaft“, which is one of the main pillars of Europeism, of this heterogeneous cluster of interrelated but mutually inconsistent ideas dominating today’s Europe.[1]

It seems that Europeans are not interested in capitalism and free markets and that they do not understand that their today’s behavior undermines the very institutions that made their past success possible. They are eager to very intensively defend their non-economic freedoms, or better to say the easiness, looseness, laxity and permissiveness of modern, or perhaps post-modern European society, but when it comes to their economic freedoms, they are quite indifferent. They fail to acknowledge that the remaining freedoms will be further blocked or at least radically weakened by the straight-jacket of a more and more unified and harmonized Europe. The current tensions inside the eurozone are just one example.

In many respects, Europe sleeps. Its role will decline and as a result, its future development may not even be considered a global power shift. To study it may be interesting just for us who live there.

The future of America looks slightly brighter. Liberty is still treasured there; the “Komfortgesellschaft” is less highly regarded and less praised; the European “Lethargie” is not yet so deeply rooted there. Some features of dynamism remain.

Nevertheless, we witness important changes in the American culture, in the American values, in the American sense of its future. The seeds of disbelief in the markets, in self-responsibility, in vertical mobility, in individual achievements are there as well. This is not for no reason at all. It has been influenced by the unparalleled abundance and affluence, by the growing short-sightedness, by the acceptance of the dictate of political correctness, by the increase of social-engineering mentality, by the doctrine of environmentalism (and especially its extreme variant – global warming alarmism). These trends should be subject to serious discussions. I am afraid they are not.

These tendencies are difficult to measure but some of their symptoms are visible. The Obama administration differs from previous administrations, including the Clinton one. The way the current crisis was dealt with is alarming. The health-care reform and the misuse of the issue of potential climate changes to undercut the markets are similarly dangerous.

The long-term balance of payments deficits, spending and borrowing, as opposed to saving, the belief in new, information or knowledge economy – rather than in free markets – suggest that the U.S. will have big troubles to retain its contemporary dominance. Nevertheless, America remains healthier than Europe, there is more of Schumpeter there than in Europe where he was born (on the territory of my country). It is tempting to say that Europe is a forerunner to America. I still do believe, however, there will be more of resistance and less of lethargy there.

The future of the BRIC countries seems to be more optimistic. There are, of course, quite plausible scenarios going both ways. The BRIC countries will either continue liberalizing themselves or will evolve towards rigid state capitalism and some variant of mercantilism. What is important, however, is that the people in these countries know that success and their personal advancement cannot be achieved without hard work. People in Europe and America hope it can be done by means of technology, education, computers, science, but without working hard. That is a big difference.

We have reasons to criticize the BRIC countries. We particularly dislike the fact that they give lower priority to something which has a very high priority for us – to political democracy. We should, however, accept that – whether we like it or not – they consider economic freedom more important than political freedom now. There is some rationality behind this because democracy is  a luxury good and the demand for it depends on income. It will grow in time even in these countries.

We should get rid of old clichés and prejudices. To my great regret, the theory of comparative economic systems has been more or less abandoned together with the fall of communism and as a result we lost a theoretical framework for the discussion of economic systems. What remains is a superficial story-telling, the theory is missing. Is the current Chinese economy a variant of a market economy or of a command economy? There are plenty of books about the Chinese economy, but I am looking for different ones with the title Comparative Economic Systems: The Case of China (or Russia). There is none of them, as far as I know.

We have good reasons to believe in the continuous growth of BRIC-type economies in the long run. In the short- or medium run their growth may be blocked by burdens imposed upon them by two losing giants, by Europe and America – by their protectionism, by their promotion of the irrational arguments of fair trade, by their accusing BRIC countries of antidumping, by their insisting upon the implementation of labor, health, safety, hygienic and all other standards everywhere – irrespective of the level of economic development, and especially by enforcing upon the less developed countries the most powerful recent anti-market invention – the nonsense of global warming.

That’s all I can say about potential global shifts. 

Václav Klaus, The Ditchley IIF Conference, Stresa, Italy, July 1, 2010

[1] “The crucial tenets of this European metaideology are post-democracy, with supranational institutions replacing the good old democratic institutions of a well-defined and sovereign nation state, promotion of all possible “isms”, such as multiculturalism, feminism, ecologism, homosexualism, NGOism, apolitical politics and disbelief in spontaneous order of things. The Europeists believe in a vertically structured and hierarchized human society. They want to mastermind, plan, regulate and administer the others, because only they know what is right. They think that rationalistic human design is always better than an unplanned result of interactions among free citizens. According to this ideology, the market is primarily anarchy and the government is here to correct it.” For more on Europeism see my essay “What is Europeism or What Should not be the Future for Europe”, Center for Economics and Politics, Prague, 2006. https://www.klaus.cz/clanky/1326.