01/12/2022
Texts in English
Can the World Economy Be Made Stable and Growing (Given Dominant Ideologies and Interests)?
Speech at the Summit on Geopolitics, Security and Defense in Budapest
Václav Klaus

Many thanks for inviting me to attend this conference, for offering me the privilege to speak here, for giving me a chance to meet old friends and, last but not least, to be in Budapest again. In a city and country that plays a courageous and much needed role in the brave new world of contemporary Europe. I am frustrated that my country – with its current political representation – is not able to do the same.

I accepted the topic of the speech without the slightest hesitation, which didn’t prove to be very wise. When I started preparing notes for my today’s presentation, I found out that the topic is more challenging than it seemed to be.

Speaking about a stable world economy does not mean discussing a well-defined and well-structured topic. It has many dimensions belonging to different disciplines, to several social sciences. There is no simple textbook wisdom covering this topic, because there can’t be any. No hard data can help, no sophisticated econometric models. I can’t, therefore, promise more than offering a few elementary remarks.   

Perhaps both my personal experience and my country’s perspective can be of some help. At least I hope. My experience can be briefly summarized as forty years of communism, a fascinating decade of radical transformation era in top political positions and much less satisfying two decades of living in a special entity called the European Union.[1] 

This mixture may be useful. It is almost unique. My perspective is also relevant: a small Central European country without any geopolitical ambitions, a heavily industrialized country, a country without access to the sea and without sufficient domestic reserves of natural resources.

This session is supposed to discuss ways, which can contribute to the “Rebuilding a Stable World Economy”. This is for me a rather illusory, if not entirely misplaced goal. It is constructivistic, and we – with our artificially constructed communist past – are very cautious about such an ambition. Is rebuilding a world economy a meaningful task? Whose task should it be? Who should get the mandate to rebuild the world economy? A new central planner, a digitalized one these days?

People like me tend to argue that promises of building a stable world economy belong to the UN or, perhaps, IMF plenary sessions, not to the Danube Institute gatherings. My assumption is that we, who are here today, don’t believe in global masterminding of the economy and are not interested in playing the role of advisors. Speaking for myself, I am certainly not motivated to give prescriptive recommendations.

In spite of that, I am not forgetting that I promised to say a few words on this topic. Let me concentrate on two of the many, very diverse dimensions of this issue.

I.  The Role of the Shifts of the World Economy Centers of Gravity

One of the keys to this debate could be to speculate about potential and probable shifts of the world economy centers of gravity (as it is sometimes called) in the foreseeable future. The ongoing trends and tendencies are well-known and are so undisputable that it is not necessary to bring statistical data. The gravity center of the world economy is shifting eastwards. The original centers – Europe and North America – have been evidently losing their previous positions in the last decades. Especially Europe. In the 1990s, the US and Western Europe controlled almost 70 per cent of world GDP, it is only 43 per cent now. The shift is enormous. And will continue.

When I look at the European economy, being strangled by overregulation, overtaxation, ridiculous green imperatives and the intrusive behavior of EU bureaucracy, it is evident that Europe cannot grow. It is condemned to stagnation. This is – not surprisingly – what we are experiencing. It is even worse now – we are stagflating. The policy based on the ideology of Great Moderation, so fashionable two decades ago, produced rates of inflation unknown for decades. In my country for the whole century. The so much heralded theories and models were all wrong. Not just the almost unbelievable ridiculous concept of the New Monetary Theory.

By contrast, China, India and other BRICS (or BRICS-like) non-Western countries are and will continue moving ahead. To say this is neither new, nor revolutionary. It has already become part of the mainstream orthodoxy. The differing growth rates of the West and the East will not have neutral consequences. Shifts of that kind destabilize the existing structures and undermine the old “stability”.

In a growing economy, it can lead to a positive sum game. In a stagnating or even declining economy, it will bring the opposite. Historical experience tells us that such developments often brought about conflicts and wars. Similar conflicts and wars can be expected to happen in the foreseeable future. Ukraine is just one example. This will certainly not improve the current fragile stability of the world economy.

Growth of the world economy does not, of course, depend on geographical shifts to faster growing regions only. This is valid in spite of the fact that the unprecedented growth of the Chinese economy in the last four decades has undoubtedly contributed to the rapidly growing world GDP. This factor seems to be – mainly or partly – exhausted now. I agree with Richard Jerram that “the entry of China into the global trading system was essentially a one-off shift and seems to have run its course.”[2]

Given the recent political, social and cultural changes in China and the relatively high degree of its economic maturity (not to mention its more than serious graying problem), there is no reason to expect China to continue growing rapidly in the next decades. Will other non-Western countries take over China’s previous role? Will the West itself be able to do it? This is not what I would bet on. 

II. The Role of the Quality of the Economic System

The worldwide economic growth and its stability are in the long run based on something else. Definitely not on science or technology, as it is irresponsibly proclaimed by very loudly speaking technocrats and non-economists of all kinds, but on the efficiency of the economic system. This brings me to my main argument, which is the emphasis on the quality of the economic system.In this respect, there is, however, no reason for optimism either.

As a citizen and as an economist, I spent decades of my life in a system, where the economy was not autonomous, but dictated by aprioristic political imperatives. This was the lesson which was deeply rooted in our minds. Fifty four years ago, in August 1968, in the week when Warsaw Pact armies invaded Czechoslovakia, I published an article that dared openly discuss special relationship between politics and the economy in the communist society. This topic was forgotten for the next two decades.

We returned to it after the fall of communism. This era is usually understood as the constructed rebirth of the market economy in our part of the world. Yes and no. The decisive change was the breaking the ruinous link between politics and the economy, the getting rid of the dominance of politics. The rebirth of the market economy was a consequence. The market cannot be constructed.

In the communist centrally administered economic system, the economy had to follow politics. This brings me to my main question. Was it specific for communism? Can’t it be repeated even without an old-fashioned communism? Aren’t we already moving in the same direction now? Aren’t the new ideologies (or isms) leading to the emergence of a similar system again?
 
Looking at it with my experience and from my perspective, I consider this an imminent danger. The autonomy of the economy in my country, in the EU and in the West has been visibly suppressed. Evidently and resolutely since the 2008-2009 crisis. What were the main causes of this development? I will concentrate on four of them, which I consider the crucial ones:
 
1.  After the fall of communism, we assumed that the social imperative, coming from the old-fashioned Marxist perspective, had already lost its strength. This belief of ours was strengthened when looking at the evidently declining power of trade unions. As we see it now, it was both a wrong analysis and a wishful thinking on our side. We are witnessing that the imperative of equality has regained a new strength, and not just in the economic sphere. The idea of equality is used as a justification for new forms of political interference into the economy. Again. Their consequences are no less dangerous than in the past. They are irresponsibly underestimated by almost everyone now because they look like not having any direct connection with communism.
 
2.  In the last fifty years, since the publication of the Club of Rome’s bible “The Limits to Growth”, a new political which means non-economic imperative has emerged. It is based on the tenets of green ideology, of environmentalism. It fatally suppresses economic rationality and, as a consequence, the efficiency of the economy. It fundamentally alters the quality of the economic system and undermines economic growth and development. No one of today’s politically correct green slogans can be defended on rationality grounds. They have no basis in science. They are political and aprioristic. And purposefully destructive.
 
Accidentally, I started preparing my notes for today’s presentation on the day of the opening session of the Sharm El Sheikh climate change summit. The scandalous statement of UN Secretary General Antonio Guterrés that the world is on a “highway to climate hell” is not worth commenting upon here. Such political stances, transformed into policy, do change the economic system. The new banking criteria for evaluating investment projects and for granting loans, the so called ESG (Environmental, Social and Corporate Governance) system, are contrary to the economic way of thinking. Regretfully, the economists don’t protest sufficiently loudly. They prefer easy ways of getting PhDs and generous grants.
 
3.  The third fundamental blow to the economic efficiency and to the economic performance is the acceleration of the transition from share-holding to stake-holding. This explains the irrational and arrogant views of leading businesspeople on many current, not just economic issues. Their behavior undermines the substance of market economy and of the functioning of the system of property rights. This process started to be discussed more than half a century ago, but has reached a new strength in recent years. The principle of profit maximization, this symbol of economic efficiency, has been more or less dismissed as politically incorrect. This fatally undermines the possibility of healthy and stable economic growth.
 
4.  The whole idea of our transition from communism to free markets was based on free trade, on the rejection of protectionism, on the abolition of state monopoly on foreign trade, on the criticism of building geographically restricted trade blocks, etc. One of the most important (and risky) decisions of my early political career was the liberalization of foreign trade in my country on January 1, 1991. That rapidly changed the functioning of the economy. What we see now is the emergence of politically motivated neoprotectionism and of new forms and arguments of political promotion of trade blocks. This I see as a fatal attack on free trade.

Not accidentally, I don’t often use the fashionable term “globalization” because it is not an economic term. It belongs to journalism and TV talk-shows. I prefer speaking about increasing or decreasing internationalization of economic activities. This sounds politically incorrect now – it implies a nation, or a nation-state, to be the original entity, the starting reference point. This way of thinking is not fashionable these days.
 
As regards the so called globalization it becomes evident that – due to technological and supply chains complexities – it is reaching its natural limits. We should, therefore, pay more attention to the rationality of domestic policies. Let’s return to the defense of openness, freedom of movement, free trade and liberalized capital flows. Let’s not discuss it ideologically only.

Put together, all above mentioned leads to my pessimism as regards the possibility of healthy world-wide economic growth and development in the foreseeable future. And as I indicated at the beginning, without economic growth, there can be no stability of the world economy.                                                    
 
 
Václav Klaus, Notes for a speech at the Second Danube Summit on Geopolitics, Security and Defensethe, The Danube Institute, Budapest, December 1, 2022. Session on “Rebuilding a Stable World Economy”, 1. 12. 2022

Published in Hungarian Conservative, Vol. 3, No. 1, 2023. 

[1] Some of you may have heard about my regretfully unsuccessful efforts to block the – European democracy, nation states and European economy devastating – Lisbon Treaty.

[2] The International Economy, Summer 2022, p. 25.