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Dr. Milton Friedman, Nobel Laureate:

Post-Communist Eastern Europe, The Rule of Law, Protection of Property Rights and Privatization

Why We Aren't Free Yet

 


Natasha Srdoc

07 February 2008

 

 

A new study shows that economic freedom is still repressed in southeast Europe, and corruption is the biggest reason why.

By Natasha Srdoc in Rijeka

 

 

Few citizens in southeast Europe would be surprised to hear that economic freedom in their countries is “repressed”. Whether or not this state of affairs is addressed head-on in diplomatically-tweaked reports from Brussels, it is common knowledge, muttered about in cafes across the region – even where statistics show that economic growth is brisk.

Yet it is not easy for people in southeast Europe to understand the dichotomy of the difficulties they face in day-to-day economic life and the tide of positive news about progress and reform.

To understand better, they might want to take two steps back from the analytical narrative offered by the European Union and instead read the new 2008 Index of Economic Freedom.

Published by a think tank and a newspaper, The Heritage Foundation and The Wall Street Journal, two driving forces of economic common sense in the world’s most powerful economy, the United States, the index analyses the state of economic freedom not just in southeast Europe but around the globe.

In contrast with the narrative on reform preferred by the EU, which focuses mostly on governmental compatibility with EU norms – which in some cases actually hinder economic freedom rather than enabling it – this index seeks to answer the questions of essential interest to the average person.

Does the government let me keep my money, or does it confiscate a lot of it as taxes? Is private property protected in general? Can I get a job easily? If I run a business, can I hire and fire easily when I need to? Can I buy and sell easily within the country, and across its borders? Does the government compete against private businesses, or does it want them to thrive? How important is corruption in this picture?

The index grades countries on questions like these. It is along such lines that its authors have once again, as in years past, graded as “repressed” all the countries of southeast Europe. Overall scores were better, with Albania, Bulgaria, Romania and Macedonia deemed “moderately free” and Croatia and Bosnia-Herzegovina “mostly unfree”. (The index’s one drawback is that it does not grade Serbia and Montenegro, owing to what the authors say was a lack of reliable data. However, both countries are none the less examined, along with all others.)

If we really care about the wealth and well-being of people in this region, then we should take these disappointing scores seriously.

Examining the index, one aspect that jumps out is that all the graded countries of southeast Europe –Romania, Bulgaria, Croatia, Bosnia-Herzegovina, Macedonia and Albania – are categorized as “repressed” in the areas of property rights and freedom from corruption.

Bosnia-Herzegovina, the worst performer overall, scores abysmally in the area of property rights, with a grade of 10 out of 100 compared to 30 for all others.

Albania is rated highest in the region overall, at 27th place out of 41 countries in Europe, and 56th in the world. It achieved this despite receiving the region’s worst marks for corruption, with a grade of 26 out of 100.

Indeed it is remarkable to note that Albania performed marginally better overall than new EU member states Romania, Bulgaria, Slovenia and Poland. Along the same lines, Croatia, widely held to be the most EU-ready of the region’s non-member states, receives the region’s lowest scores in the areas of labour freedom, fiscal freedom and size of government as measured by a ratio of public expenditure to gross domestic product (GDP).

The implication is that economic freedom does not necessarily yield diplomatic rewards. This looks like a mismatch. Milton Friedman, the Nobel Prize winning economist, taught that “economic freedom is a pre-condition of political freedom”. Policy wizards should see to it that the EU – and also NATO as the other key Euro-Atlantic institution – uses its diplomatic leverage for sake of maximising economic freedom and the deep associated political rewards.

Perhaps this has not happened because of a basic misunderstanding. Genuine reformers in post-communist Europe are sometimes surprised to find that they think very differently about freedom than their Western partners, because their contexts remain so different.

For example, I can recall Andrei Illarionov, an advisory board member at the Adriatic Institute of which I am president who was Vladimir Putin’s economic advisor until he parted bitterly with the Kremlin over issues of political freedom, posing a question: “If you have to choose between the rule of law and a favourable business environment, and you cannot have both, which one would you choose?”

To listeners from Western democracies in his audience, including a number of senior politicians and policy experts, the question sounded like contradictory nonsense, since no favourable business environment can exist without the rule of law. But in post-communist Europe, we inhabit this contradiction, and the factor that makes this situation possible is corruption. The law exists, and in a certain sense it rules, but in the manner of its rule it is institutionally subverted.

If we want economic freedom in southeast Europe – and as we learn what it truly means we discover we definitely do – then we need to reprioritise. Yes, we need to see continued efforts to make business environments more conducive to foreign and domestic investment. But we also need to address more overtly the twin legacies of communist rule: disregard for private property rights and the inheritance of institutional power by networks of corrupt government officials and their private partners in crime.

Strictly speaking, many of the countries of southeast Europe have shown that they can be effective reformers. For instance, Albania, Bulgaria, Romania and Macedonia have all recently lowered tax rates and their ratios of tax revenue to GDP. In most instances across southeast Europe, though there are exceptions, freedom of action in financial markets is strong, and there are notable successes in privatisation in that sector.

But in order to beat back the scourge of corruption we need both to help ourselves, most importantly to be helped by outside forces. Citizens can exert a certain degree of pressure, by resolving not to accept endemic corruption. However, they would benefit greatly from more immediate and more robust support from international partners.

This is why, contrary to conventional wisdom, many citizens of the countries of southeast Europe would be grateful to the EU and NATO if these organisations would more explicitly pressure governments in the region to curb corruption.

The freedom that membership in such organisations is meant to strengthen and protect is otherwise exposed to attack and erosion on its crucial economic flank. The risk may not be felt in Brussels or in this region’s halls of power, but we citizens feel it in our bones.

Natasha Srdoc is president of the Adriatic Institute for Public Policy, a free-market think tank in Rijeka, Croatia. First published in Balkan Insight. Srdoc had served on the Advisory Board of BIRN - Balkan Insight.