Grzegorz Kolodko: Look to the horizon and beyond

Grzegorz W. Kolodko, Professor of Kozminsky University, Director of Transformation, Integration and Globalization Economic Research Center, and Minister of Finance of Poland (1994-1997 and 2002-2003) took part in the Gaidar Forum in Moscow, recently housed by the Russian Presidential Academy of National Economy and Public Administration. On the sidelines of the Forum he gave an interview to Invest Foresight, the event’s strategic media partner, in which he shared his views of the complex issues of the global economy and specifically the challenges which Russia has been facing.

When we observe the world economy we see that there is a different economic growth and development in different parts of the world and in different countries. The political correctness suggests that we are supposed to say that the more democracy we have in a country there is a more robust economic growth there. Yet that is not the case. There are examples where democracy or liberal democracy – since there are different types of democracies – are supporting economic growth, but we have also seen cases where democratic procedures are making economic expansion more difficult. One may see this problem through a prism of efficiency of a decision-making process. Let’s take an example of, for instance, China, which is not a democracy but an authoritarian system, yet the decisions are made in a fast and accountable way, they are reasonable – and I would say most of the time it is a rational economic policy, though not a democratic one.

If now we take, for instance, the United States, especially under Trump presidency, it’s hardly rational and is even simply stupid what Trump does or what Trump economics implies. So one may say that an authoritarian regime is better for an economic expansion than a democratic one, but that is not true, because an authoritarian regime does work in China but does not work, for instance, in Egypt, in Saudi Arabia, in Congo and some other countries, so it depends on very many factors, and the political regime, the political system, the political culture, the political institutions are very important for political performance, for economic growth, for social and economic development, but that is not a leading or a decisive factor. Also important are institutions, that is, the rules of the game and the culture.

So the case of China which I call Chinism and which is neither capitalism nor socialism, is a different system, a unique one. Chinism is a totalitarian political regime, yet a meritocracy. It’s an authoritarian regime but people in charge are professionals, they are technocrats. I can not say that, for instance, about the current US administration. The lead negotiator at the trade negotiations between China and the US, Mr Robert Lighthizer, is a lawyer, but he is ignorant in economic matters. And what Americans are insisting on, is hardly rational from an economic prospective, because if they want to get rid of a too big fiscal deficit or trade deficit, they have to raise domestic savings and not attack China, because a current trade balance is a multilateral and not bilateral problem.

So it depends. Political correctness says democracy is good for everything, yet democracy is a value per se, and for that reason I am very much in favor of a democracy regime, of a democratic system, of liberal democracy – but if it is supported by a proper leadership. To be successful – and it is my experience in Poland where I was four times Deputy Prime Minister and Minister of Finance – one has to have a vision, not an illusion. A vision is something complex, dynamic and long-lasting. Secondly, one has to base a development strategy on a proper economic theory. It is supposed to be not a merely knowledge-based economy, it’s supposed to be also knowledge-based policy and politics. Third, we have to have a good leadership.

So the question is, what kind of a leadership do we have? We have better leadership, with all of its problems, in France than in Italy. We have a better leadership with all the reservations in Germany than in Spain. We have a better leadership in Mexico than in Brazil. And definitely we have a better leadership in China than in the US. So, very much depends on vision, professionalism and leadership which may be good or bad within a given ideological or political system.

For the global economy, the biggest challenge in the long run is no doubt the climate change. This is a long-term problem which must be addressed gradually in the long term. If we are talking about 1-2-3 years or even 3-5-10 years, we can survive the climate change but we can not survive it for 1-2-3 generations. To be responsible, and accountable, and successful we have to act now – year after year, country after country.

Going back to the basic economics, it’s the question of rebalancing the world economy. My trait of thoughts says that globalization is an irreversible process, even if Mr Trump does not understand it and even if he dislikes it, even if current US administration – not only, but mostly US, as the US is very important – dislikes it. If you have new nationalism in some smaller countries, you do not care, but the US is a leading economy in the world, and its unilateralism, protectionism, nationalism and likeliness of trade wars are contributing to more problems intentionally. Trump’s attempt to solve the problem of trade disbalance will cause more problems since it is a multilateral problem due to globalization.

What is globalization – in economic sense (as there are other aspects of globalization such as culture, security, environment and so on)? It is a historical and spontaneous process of liberalization and integration which brings separately performing national economies into one interconnected, intertwined worldwide economy, global economy. What happens here, be it Indonesia or Russia, depends on what happens elsewhere, whether in Canada or Israel, and that is making some influence still elsewhere, be it Nigeria or Argentina. We are all connected because of the supply chain.

Now China is moving up what makes the US nervous, but we are interconnected. So the question in medium and short run is about rebalancing the world economy, because some countries have too much of savings while others do not have enough savings. There is a surplus of savings in China, Japan or Germany, while there is a lack of savings in the US, France or Poland. So some countries are importing capital whereas others are exporting capital. But the problem of economic imbalance, trade, current account is a very big challenge for the ongoing globalization.

There is one way, Mr Trump’s way, which is irrational and which in a longer run will be harmful for the US economy. In mid-January they signed the so called Phase One Agreement between the US and China. China accepted it because it gives more time to cool the separation down. My reading of China’s approach is, they decided to take time, its leadership decided – which is constant, as they do not change it in a democratic way like they do in the US, and they do not change it like they do in Russia where in the morning Mr Medvedev was a Prime Minister and in the afternoon somebody else was a Prime Minister. So we have a spectrum of political systems and a spectrum of economic regimes.

Hence in the short run, the challenge is the flow of capital, including speculative capital, and efforts to regulate financial flows all over the world, on the global scale. That may be done either by the IMF – or we need some coordination within G20, of which partners are not only the biggest and richest western economies, but also India, China, Brazil, Mexico, Russia, Indonesia. It’s very difficult, but it is possible. I am not an optimist but just a pragmatic rationalist and I know that each and every of these problems has a solution. We are not doomed to have another great crisis if there is a proper effort to govern, because in our lifetime, as a result of a historical process of globalization, the global economy has emerged and we do have an interconnected global economy. But we do not have interconnected global politics and policy. We do not have a governance mechanism in the interconnected world economy – unlike on the national scales. So it is a very long shot.

I can not see a good solution for the short-term problems like trade imbalances, currencies volatility, flight of capital – without a long-term approach and long-term view. If you want to solve a problem which you are confronting today or tomorrow, you have to from time to time look to the horizon and even beyond. So the best solution to the current problems is a long-term approach, including climate change and migration which is linked somehow to these processes – and we need to bring a little bit down the traditional rate of growth in the richer countries of the world to leave more ecological space and room to catch up for the developing countries – and also to encourage people to stay there. Otherwise they’ll be leaving the poorer countries trying to get not only to the rich West but, for instance, from some Central Asian republics to Russia which is a Big Brother and a richer country for them.

As for the less developed countries, cancelling out or catching up with the more developed ones, there will never be a situation when everybody is as rich as Switzerland, Norway, New Zealand or Canada. Yet we would like to have a level of consumption of the US which now has a GDP per capita of roughly $60K – all over the world. In the US, there are 330 mio people, whereas globally there are 7.6 bln people. So if one would like to have the standard of living or level of consumption which is approximate to the standard of living at the US level, one has to have the US GDP per capita and the US labor productivity. It is a long shot. Presumably, from a theoretical viewpoint, it would happen. Then, we would have to have as much resources per capita as there is in the US – to have that standard of living of $60K. But for 7.6 bln people, with the current technology it would require resources three times larger, than we have on the entire Earth. So simply due to the natural barrier it is impossible. The technological progress will contribute a little bit because consumption and output become less material- and energy-demanding and we need less energy and resources for producing products.

With catching up, there is a certain process and for it globalization is a good thing as it fuels the growth of countries lagging behind – if they have a proper strategy to use globalization to their advantage. China has such a strategy, while Saudi Arabia – not necessarily. Russia is actually somewhere in between. Actually, Russia is not a good player in globalization and in promoting expansion of Russia’s economy. Poland, for instance, has recently done much better.

So when we observe what is going on in developing countries which I would rather call emancipating or catching—up economies, they are liberalizing and opening up, but they also have a kind of their own domestically oriented development policy. Mexico is growing faster than the US, so it is catching up. Poland is growing faster than Germany, so it is catching up. Estonia is growing faster than Finland, so it is catching up. Indonesia is growing faster than Japan, so it is catching up. So the distance now is much shorter than it was 10, or 20, or 30 years ago.

Some would say there is more inequality in the world due to globalization. It is true, because at the same time, inequality within the countries is growing. In Russia, there is too much of inequality. In some countries – very few – inequality has been going down, for example, in Poland and to some extent in Brazil or Morocco. There has been increasing inequality within countries, while between the countries the gap in average income – say, between Hungary and Austria or Albania and Greece – is now smaller than 20 years ago. That is again a positive result of the globalization, liberalization, of the transition in our part of the world to the market economy.

Some countries have been much more successful, for instance, Poland, because we did have a vision, a proper economic policy based on a proper economic theory and, most of the time, a good leadership.

As for Russia’s hardships in economy, they are due, to some extent, to political arrangements because Russian democracy is still somehow limited and it is not a full-fledged liberal democracy as there is a low exchange and competition of different options of economic policy. The main cause for Russia’s somehow lagging behind in taking advantage of the indispensable global economic game, is the resource curse, because it relies too much on its resources. True, over the last two, three of four years, the non-energy sector has been growing faster than the energy sector based on oil and gas. But definitely, a recipe for the success of Russia in the future is diversification of the real sector and diminishing dependence on energy. Somehow, that is a major challenge, because it is easier to take the cream, especially if there is a good price for oil and gas. Sometimes bad news are good news. We see problems not only in Venezuela and Nigeria, but also in Libya and Iran. All that is good for Russia as most likely the prices of oil and gas will go up. We will pay more since we buy them, while Russia sells them.

So this is a factor which is not a good motivation to work hard to restructure and diversify the economy. That is one of the factors why Russia is not so much successful in engaging in the globalization game. The second is the influence of oligarchs in Russia’s economic and political matters.

There were many factors that contributed to the success of economic reforms in Poland of which I am considered to be an architect, and one of them was the fact we could avoid an oligarchization of the economy. We knew since the beginning that we wanted to join the EU which is not an option for Russia. But diversifying its economy and engaging its industries in the global supply chain are certainly options for it. Yet Russia has to be more supportive for FDI and open some industries which are still relatively closed for foreign investors. That is what China has managed in a perfect way, and now because of that China is being accused – by the US first of all – of stealing intellectual property. I was saying 25, 15, 5 years ago that China did even better than we in inviting direct investments to the sectors and industries they wanted to develop. Investments brought technologies. It essentially means, if you want to invest in China, you are welcome, but you should share your technology and show your managerial marketing skills; you get access to our market, but we will get access to the world market through increasing our competitiveness due to technology you bring. Now Mr Trump says China was forcing foreign investors, but that was not a blackmail, it was business, indeed, a different one – with Chinese characteristics. And it contributed a lot to the diversification of Chinese economic structure and enabled China to become a powerhouse in the global economy because now they export capital but not in the way it is done in Russia – by buying expensive properties abroad. China invests in industries including hitech, and now it exports more capital than comes from abroad.

So the question is, how countries are involved in globalization in a successful way. Definitely, Germany does it much better than Italy, Poland much better than Ukraine, the US does it pretty well too, but without taking care of complexity. The answer to all challenging questions is complexity.

When I first became Deputy Prime Minister 25 years ago, I was very much critical of the shock therapy which I called shock without therapy with too much shock and not enough therapy. So I came up with a program called Strategy for Poland. A journalist asked me, what was the difference between Strategy for Poland and shock therapy, summarized in 15 seconds. Strategy for Poland is a medium-term developing program addressing not only the issue of a dynamic economic balance, but also social issues and an ecological balance and based on an orthodox economic theory – and it is a very complex approach. So the biggest difference between it and what they did before was, I was not confusing the ends and the means and saw means as way to get to the ends – and that is about complexity.

I had a privilege of having known Yegor Gaidar. We were together in Erasmus University in Rotterdam in 1991 when he got a call from Russia’s President Boris Yeltsin who asked him to join the government as Finance Minister. Gaidar was trying, not understanding to the very end, to liberalize and stabilize the economy – behaving wrongly, thinking liberalization and stabilization constitute a critical step towards a market economy.

In 1990, 500 Days program of transition to market economy was presented in Russia by Grigory Yavlinsky. To me, it was a program 500 Days to Hyperinflation, and I was right. Market economy is basically about institutions and rules of the game – of course, based on the dominance of private property. So a very tricky part of a transition is a sensible privatization. But what Russia did wrong in the 1990s under Yeltsin administration was denationalization and privatization which was not linked with demonopolization and unfortunately fueled emergence of oligarchic structures which are very much engaged in politics. What is the difference between Russia and Ukraine? Both systems are corrupt and oligarchic, but in Ukraine oligarchs say to policymakers: Do what we want – and they do. And in Russia policymakers say to oligarchs: Get out of politics and do your business. We may need big business, but not an oligarchic one. So oligarchization of Russian economy which occurred in the mid-1990s, was a critical moment when Russia actually started to lag behind.

In Poland, a transitional recession was just three years or 12 quarters: second half of 1989 through first half of 1992 and the country lost less than 20% of its GDP. The policy at that time was also wrong though, it was about shock without therapy. It was proclaimed, privatize as much as you can, the faster the better, be tough in fiscal and monetary way, and the market will do the job. No, the market will only come up with recession and hyperinflation. You need relations, institutions, supervision of the markets. What is necessary, is synergy between the power of the invisible hand of the market (of which I am in favor of to some extent) and the power of the visible hand of the government.

There is all the time too much of the power of the government in Russia and not enough of the power of the invisible hand of the market. One would not like to see the government to have as much power as in China or Saudi Arabia, but this is a tricky game because it is contextual. The new pragmatism theory requires a triple balance, an economic one but also ecological and social ones, also stressing the problem that it is contextual. We do not need 200 economies for 200 countries, but it is impossible to have a one-size-fits-all economy. We need a contextual approach. The basics of economy is always the same one but particulars and details – they depend on legacy, geopolitics, geoeconomics, culture, what we have got from the previous system, etc.

As Poland and Hungary were reformed since 1989 towards market and democracy much more than anybody else, it was relatively easy to jump towards the transition to a full-fledged market economy. Besides, since the very beginning there was a consensus in Poland that the country was to join the EU. That required implementing certain reforms, so influence was at some moment coming from the outside, from the EU, but it was in line with our free independent wish to join the EU.

In Russia, there was much more hesitation about where to go. People knew they were leaving the Soviet Union behind and going to a better future. But what does a better future imply? There are so many views which are sometimes contradictory. So the subject is to be discussed more – because there still are solutions to these problems.

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