14 th European Association for Comparative Economic Studies Conference Leszek Balcerowicz The Institutional Systems and the Quality of Life* Keynote speech *I am grateful to Tomasz Dróżdż and Paulina Woźniak for their assistance in preparing this presentation 1
Content of the Presentation: I. Four Tasks of Institutional Economics II. The Institutional Variables the Dimensions of Institutional Systems III. Types of Institutional Systems IV. The Dimensions of the Quality of Life V. Institutional Systems and the Quality of Life: the Analytical Scheme VI. Institutional Systems and Economic Growth VII. Institutional Systems and Employment, Non-employment, Unemployment VIII. Institutional Systems and Health IX. Institutional Systems and Inequality X. Institutional Systems and Self-realization XI. Institutional Systems and Fear XII. Concluding Comments 2
I. Four Tasks of Institutional Economics 1. Standarization of the definitions of the Main Variables. Measurement of these variables 2. Which institutional subsystems in various fields of social life can lastingly coexist with each other and which can t (Laws of Systemic Cohesion) 3. The Institutional Systems and the Quality of Life (Performance) 4. The Dynamics of Institutional Systems a) Economics of Institutional Change b) Political Economy of Institutional Change (Reforms) 3
II. The Institutional Variables = the Dimensions of the Institutional Systems 4 1. The Main Variables: Democracy (D) vs non-democracy (non-d) The Rule of Law The Civil Liberties The Economic Freedom The Fiscal Stance 2. The Institutional System: a potentially lasting combination of the forms (values) of the Institutional variables at various levels: supernational (EU), national, regional 3. Institutional Systems vs the Policies: various institutional systems are associated with various sets of possible policies e.g. the most destructive economic policies, sometimes associated with mass murder are possible under the despotic systems (e.g. Hitler, Stalin, Mao). The worse crises occur under the non-market economies because of the excessive concentration of political power which allows terrible policies.
II. The Institutional Variables Political Rights 2016 (Freedom House). A country or territory is assigned a rating (7 to 1) based on its total scores for the political rights questions regarding electoral process, political pluralism etc. 8 7 6 5 4 3 2 1 0 Source: Freedom House 5
II. The Institutional Variables Civil Liberties 2016 (Freedom House). Each country is assigned a numerical rating from 1 to 7 for civil liberties, with 1 representing the most free and 7 the least free. 8 7 6 5 4 3 2 1 0 Source: Freedom House 2015 report, https://freedomhouse.org/report-types/freedom-world 6
II. The Institutional Variables Rule of Law 2014 (World Bank) Captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. 100 90 80 70 60 50 40 30 20 10 0 Source: World Bank 7
II. The Institutional Variables Economic Freedom of the World 2013 (Fraser Institute). Measures the degree to which the policies and institutions of countries are supportive of economic freedom. 10,00 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 Source: Economic Freedom of the World, Fraser Institute 2015, http://www.freetheworld.com/release.html 8
Social spending in percent of GDP II. The Institutional Variables Fiscal Stance (the State of the Public Finance) GDP per capita and social spending (years 2013-2014*) 45 40 35 30 25 20 15 10 5 Finland Denmark France Sweden Austria Ukraine Slovenia Belgium Holland Portugal Italy Germany Serbia Latvia Greece UK Iceland Slovakia SpainJapan Hungary N. Zealand Brazil Croatia Poland Malta Ireland Moldova Mongolia Belarus Estonia Cyprus Bulgaria Lithuania Israel Czech Rep. USA Macedonia Russia Canada Turkey Australia Uzbekistan Switzerland Romania Lesotho Egypt Iran S. Africa Albania Tunisia Chile Georgia Colombia Mauritius C. Verde China Mexico Azerbaijan Seychelles El Salvador Maldives Kazakhstan Korea Hong Kong Bhutan Peru Taiwan Jamaica Yemen Timor-Leste Indonesia Norway UAE Singapore Luxembourg 0 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 GDP per capita based on PPP in current international dollars * or the closest available. Sources: IMF Government Finance Statistics, OECD.SOCX, World Bank, Eurostat, IMF World Economic Outlook 9
III. Types of Institutional Systems 1. Socialism (communism) Democracy Civil Rights Rule of Law Economic freedom Fiscal stance Examples of countries Non-D. Banned V. low None; Command Economy North Korea, Cuba 2. Quasi-socialism Non-D. Banned V. low Dominance of SOE s. A little private sector Belarus, Central Asia, Venezuela 3. Free Market Capitalism Usually D. Extensive High Wide Hongkong, Switzerland, Ireland 4. Crony capitalism Usually non-d. Limited Low Limited due to uneven protection of property rights Russia, Ukraine 5. Overregulated and/or fiscaly unstable capitalism D. or non-d. Rather high Limited - due to arbitrary regulations Limited due to overregulation and/or fiscal instability Italy, France Examples of available measures Political Rights (Freedom House) Civill Liberties Rule of law (World Bank) Economic Freedom Index (Fraser Institute), Spending/ GDP ratio Range 1-7 1-7 0-100 0-100 0-100 10
IV. The Dimensions of the Quality of Life 1. Main Dimensions Economic growth, especially in poorer countries, best measured by the rate of growth of consumption Employment, non-employment, unemployment Health Inequalities Self-realization (possibilities, to realize individuals, realistic professional plans Fear 2. Some of these variables are correlated, e.g.: economic growth health employment inequalities of opportunities 11
V. Institutional Systems and the Quality of Life: the Analytical Scheme Scheme Institutional variables D or non-d Civil rights Rule of law Economic freedom property rights regulations protection of rights taxes Quality of life Consumption growth Employment Health Inequalities Self-realization Fear Initial conditions Climate Natural resources Demography Geog. location 12
VI. The Institutional Systems and Economic Growth 13 1. The main institutional determinants: Economic Freedom The Intensity of Market Competition Rule of Law
North Korea Nepal Iraq Philippines Vietnam Algeria Jamaica Cuba Morocco Egypt Indonesia Sri Lanka Jordan Tunisia Iran Brazil Colombia Mexico 8 L. America Syria China Thailand Venezuela Malaysia Argentina Poland (1870) Uruguay Czecho-slovakia Chile Portugal Italy 14 small WEC Germany W. Europe France S. Korea Japan Ireland Finland Taiwan Denmark England/GB/UK Austria Netherlands Canada Sweden Australia Norway W. Offshoots USA Hong Kong Until recently everyone in the world was poor except for the elites. By 2015 GDP per capita of some countries was even multiple times higher. GDP per capita (in 1990 international dollars) in 1820* and 2015. 35 000 30 000 25 000 20 000 15 000 10 000 5 000 0 1820* 2010 * or the closest available. Sources: Maddison Project Database 14
The most important determinant of growth: economic freedom ( -> competition) + rule of law GDP per capita and economic freedom index (Fraser Institute, PPP constant 2011 US dollars) 50000 40000 30000 20000 10000 0 Least Free Second Economic Freedom Quartile Third Economic Freedom Quartile Most Free Source: Fraser Institute, Fraser Institute, Economic Freedom of the World: 2014; World Bank, World Development Indicators. 15
Improvement in social indicators in Poland after 1989 have reached even higher level than that of economic growth.. Human Development Indicator Education Moderate Inequalities Improving overall satisfaction 39th place in terms of the UNDP Human Development Index 47th place in terms of income per capita Index takes into account the results of education and life expectancy Polish students achieved very good results in international OECD PISA competency tests: 13th place in mathematics 9 in life sciences 10 in reading comprehension Since 1996 the Gini coefficient remained stable at around 33% And remains below the average for OECD countries and the EU In terms of the OECD Better Life Index Poland ranks 24th among 34 OECD countries In terms of income per capita occupies 29th place among OECD countries 16
VII. Institutional Systems and Employment, Non-employment, Unemployment 17 1. The basic determinants: a) Economic growth (see VI) b) The level and structure of education (educational mismatches) c) Some tax welfare payments combinations > social traps d) The labor and product market regulation (see e.g. OECD)
VIII. Institutional Systems and health 18 1. -> (Economic growth -> life expectancy, child mortality) 2. But: a growing independent role of medicine -> the improvement in health may be faster than that in economic growth
VIII. Institutional Systems and Health The mortality rate, under-5 (per 1,000) is multiple times higher in the poorest countries. Under-five mortality rate is the probability per 1,000 that a newborn baby will die before reaching age five, if subject to age-specific mortality rates of the specified year. 120 100 80 60 40 20 0 Source: World Bank and Knoema. 19
VIII. Institutional Systems and Health Life expectancy at birth is higher in the richest countries than in the poorest countries. Life expectancy top 5 richest economies and top poorest economies (years, GDP per capita in 1990 international dollars) 90 85 80 75 70 65 60 55 50 Source: World Bank and Total Economy Database 20
IX. Institutional Systems and Inequality 21 1. Elementary Distinctions: a) inequality of situation (income, wealth, power) versus b) the inequality of opportunity (usually proxied by the upward social mobility). The modern ideal for the inequality of opportunity is zero. What is the modern ideal for the inequality of income? 2. Do not confuse the inequality of income with poverty 3. Inequality in political power is often neglected. What about socialist dictatorships, e.g. Cuba, North Korea?
X. Institutional Systems and Self-realization 22 1. Self-realization is strongly correlated with the upward mobility and that with education. 2. However, there is another variable: the availability of certain positions within the respective systems: The socialist and quazi-socialist dictatorships eliminated the very positions of private entrepreneurs, independent journalists, civil leaders, etc. and thus they strongly limited the scope for self-realization for many individuals.
XI. The Institutional Systems and Fear 23 1. The bad cases: a) the failed states, i.e. no organized government; the armed functionaries act as private robbers b) The despotic states: A long list of actions declared as crimes against the regime, e.g. socialism The state apparatus can be used as a tool of repression against the opponents, including the police, tax administration, prosecutors, judges, etc. The prominent role of secret police In the socialist system, the state-the main employer can deprive individuals of their jobs 2. In non-despotic states there remains the problem of how to shape the incentive system of the police, prosecutors, judges so that they act in an unbiased, professional and efficient way
XII. Concluding comments 24 Institutional economics is the most important stream of economics (and more broadly of social sciences) both from the academic and policy point of view. After decades of neglect it is rapidly developing during the last 50 Yeats under various guide: law and economics, public choice, economics of politics, property rights theory, the design theory etc. No serious analysis of socio-economic problems (growth, poverty, employment, inflation, crime, health, etc.) can omit some institutional variables. The institutional analysis has been entering the mainstream economics. The progres in the institutional economics has been largely due to the ongoing standarization of the basic definitions and to the spread of the relevant datasets. However, much remains to be done in thee respects.
XII. Concluding comments 25 In the research on the institutional-based performance the most difficult and very important problems are not those narrowly economic but the institutional determinants of the behaviour of the policemen, prosecutors, judges, physicians, politicians. For it is here that the information asymmetry (principal agent problem) is especially acute. Ample possibilities for interesting research exist with respect to the instructional change, including bad transitions which start after free elections (e.g.. in Putin s Russia, Erdogan s Turkey, Venezuela under Chavez, Hungary under Orban, Poland under Kaczyński).