Many thanks for giving me the opportunity to make introductory remarks to the session which is devoted to the economic side of the rather gloomy world of today. It is definitely not an innovative idea to start with saying that the world economy, and especially the European economy, are not in a good shape these days. This is well-known.
In the last couple of years we have been permanently talking about stagnation, inflation, growing public indebtedness, energy crisis, shortages of fuels, falling living standards, increasing poverty in many places of the world, etc. We are also witnessing a growing disbelief in the invisible hand of the market and a new attraction to the visible hand of government bureaucracy. What bothers me most is that we don’t sufficiently protest against more and more aggressive green imperatives as well as against other non-economic justifications of massive government interventionism.
I feel it very strongly because my country is a typical part and product of it. Because of its structural economic and foreign trade characteristics, because of its malfunctioning political system and because of its absolute passivity as regards the EU antimarket policies, the Czech Republic’s data have been worse than the average in the Covid and post-Covid era. We are the only EU country which has not yet reached the 2019 GDP level and are not sure we will reach it this year. Our inflation, the highest in the 105-year-old history of our modern state, is one of the highest in Europe. The resulting fall in the living standards is felt across the whole society. I don’t intend to bother you with the Czech problems, I am mentioning this to demonstrate that I don’t look at it theoretically or ideologically only.
We shouldn’t forget that talking about the world or European economy doesn’t mean discussing a well-defined and well-structured topic. No one can be an expert on it even though many pretend to be. I can’t, therefore, promise more than to offer a few remarks.
One of the keys to this debate is to look at the recent significant geographical shifts in the world economy. The gravity center of the world economy is shifting eastwards. The original centers – Europe and North America – have been rapidly losing their previous positions. Especially Europe. Whereas in the 1990s, the US and Western Europe controlled almost 70 per cent of the world GDP, it is only about 40 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 doomed to stagnation and stagflation. Policy based on the ideology of Great Moderation, so fashionable two decades ago, produced rates of inflation unseen for decades. The much heralded theories and models were all wrong. Not just the evidently irrational concept of the New Monetary Theory.
By contrast, China, India, and other non-Western BRICS (or BRICS-like) countries are and will continue moving ahead. This destabilizes the existing structures and undermines the old division of labour.
In a growing economy, this can lead to a positive sum game. In a stagnating or even declining economy, it brings the opposite. Historical experience tells us that such developments have often brought about conflicts and wars. We should expect them in the future. One of them already broke out not too far from here.
The unprecedented growth of the Chinese economy in the last four decades has undoubtedly contributed to the rapidly growing world GDP. This factor, however, seems to be – mainly or partly – exhausted now. It means that the entry of China into the global trading system was only a one for all shift and seems to have run its course.
Given the recent political, social and cultural changes in China and its relatively high degree of economic maturity (not to mention its more than serious greying 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 so? This is not something I would bet on.
We should concentrate on something else. The economic theory tells us that the economic growth and its stability are based on the efficiency of the economic system. Let me say a few words about it.
I spent decades in a system, where the economy was not autonomous, but dictated by aprioristic political imperatives. Due to this experience, I feel very strongly about the interconnections between economics and politics. The changes introduced in our part of the world more the 30 years ago were based on the breaking of the ruinous link between politics and the economy, on the getting rid of the dominance of politics. The rebirth of the market economy was a consequence of it. Not the other way round.[1]
In the last era we have understood that the dominance of politics doesn’t need an old-fashioned communism. We are moving in the same direction again. The level of autonomy of the economy in my country, in the EU and in the whole West has been visibly suppressed. Evidently and resolutely since the 2008-2009 crisis and even more so since the covid crisis.
In the past the economists paid most attention to the role of social aspects of economic systems. Austria and Germany were proud of their social market economy, of their “soziale Marktwirtschaft”, without realizing its high costs. After the fall of communism, we assumed that the social imperatives, coming from the old-fashioned Marxist perspective, had already lost its strength. As we see it now, this was wrong. The imperative of equality has regained a new strength. Its consequences are no less dangerous than in the past.
In the last fifty years, since the publication of the Club of Rome’s bible “The Limits to Growth”, a new political imperative based on the tenets of green ideology has emerged. It succeeded in fatally suppressing economic rationality and, as a consequence, the efficiency of the economy. Today’s politically correct green slogans cannot be defended on rationality grounds. They have no basis in science. They are political and aprioristic. And purposefully destructive.
The third fundamental blow to the economic efficiency and to the contemporary economic performance is the acceleration of the transition from share-holding to stake-holding. 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.
And finally, 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 of foreign trade. What we see now is the reemergence of politically motivated neo-protectionism and of new forms of blocking the international division of labour.
These are my brief introductory comments. Let me conclude by stressing that we have to return to the defence of free markets, of openness, of free trade and of liberalized capital flows. Or to put it differently, we have to push politics and ideology out of economy.
Thank you for your attention.
Václav Klaus, 21st Vienna Congress 2024, Vienna City Hall, January 29, 2024
