Escape Forward to Global Social Market Economy 12 Apr 2012

In an exclusive interview with the Emirates Center for Strategic Studies and Research (ECSSR), Grzegorz W. Kolodko, Professor of International Political Economy at Warsaw-based Kozminski University and Former Deputy Prime Minister and Minister of Finance, Republic of Poland, talks about Polish economic reforms, European debt crisis and the future of capitalism. The interview was conducted following Prof. Kolodko’s lecture – Politics and Economics in a Volatile World – at the ECSSR on April 2, 2012.

You played an important role in Poland’s integration into the European Union. Is the country going ahead with its plans to join the Eurozone by 2015?

I’m afraid Poland won’t join the Eurozone before 2017 or 2018. Afraid because currency convergence would be good for Polish competitiveness and growth. It’s so since a common currency decreases transaction costs and eliminates the exchange rate risk between the Eurozone partners. For Poland it implies about 75 percent of foreign trade. The best time for Poland to join the Eurozone was 2008. Again it was possible since this year, but the government policy has made it impossible.

You have been an architect of Polish economic reforms. What, according to you, has been the key to these reforms and where do things stand today?

The key to Poland’s relative success has been complexity in structural change and institution building as well as gradualism and lasting commitment to go toward social market economy. Despite the early shock-without-therapy on the onset of 1990s and mistaken overcooling in the late 1990s, we were able to streamline private entrepreneurship and support it by smart government intervention. This combination, together with caring for social cohesion, is what I call New Pragmatism, as an alternative to both the neoliberalism and right or left populism. Recently, the economy is, unfortunately, losing momentum again and this year GDP growth will be only around 2.5 percent, yet there is a potential for 5-6 percent. Under my stewardship, at the time of ‘Strategy for Poland,’ it was even as much as 7.5 percent and Poland was called ‘Tiger of Europe.’ The current slowing down is resulting not from the world economic crisis, but is rather due to wrong government policy – a mixture of neoliberalism and populism. It doesn’t fit, so it doesn’t deliver.

How would you describe the European financial/debt crisis? What has triggered it and can the recently announced firewall arrest the slide?

The European crisis has been different from the American one. If in the latter case it was caused by neoliberal policies, the former basically has been caused by fiscal irresponsibility and living beyond the means. Additionally, wrong regulation of the financial sector, especially banking and a lack of proper supervision have led to reckless lending. Things happen the way they do because many things happen at the same time. Hence the combination of these driving forces, with a series of too-late and too-little bail-outs has brought the overall crisis. This is the structural crisis, not just an accident in policy-making. Therefore, the firewall, as developed thus far, may turn to be insufficient to stabilize the situation. One must go deeper, into the systemic roots of the imbalances, and not just act superficially, to cure the symptoms of the disease.

Could you briefly explain the truths, errors and lies you are broadly referring to in your bestselling book Truth, Errors and Lies: Politics and Economics in a Volatile World? What is the basic premise of the book and what prompted you to write it?

The book is tour de force across time and space answering the question of the substance of long term development. It is a quest for the question about the successes and failures. In my unorthodox, interdisciplinary approach, I am going through issues and disciplines, regions and countries, ages and generations, cultures and values, from the past into the future, to find a way forward to a better world. The book can be also read as a kind of political economy of globalization and new development economics. It’s published already in 10 languages and now is also available in the Arabic language under the title Hkaak w Akhtaa w Akazeeb. Al Siasah W Al Ektsad F Aalam Motahawel. Columbia University Press has nominated it for the Michael Harrington Book Award for an outstanding book that demonstrates how scholarship can be used in the struggle for a better world. I’m looking forward to learn the critical comments of the Arab readers.

A lot of people have started questioning capitalism these days, but few propose the desired reforms or the framework for an alternative system. What are your views on this matter?

Capitalism – that is the market economy based on dominance of private property and profit maximization as the driving force for economic activity – will survive. Yet the neoliberal capitalism – that is the systemic bias which manipulates the market and public opinion, and works on behalf of a few at the cost of many, using for this end such liberal ideas as freedom, democracy, private ownership, market competition – is failing. The current crisis is caused by neoliberalism, hence going back to ‘business as usual’ would be just a recipe for an Even Grander Crisis, as I call it in my book. So, there isn’t a future either for neoliberal capitalism or for state capitalism. What remains, is an escape forward, along the lines of New Pragmatism. It’s a heterodox concept, leading toward a global social market economy, properly regulated on the worldwide scale. It’s a long way to go, but the only sensible way forward.

In your view, why did we have the global financial crisis? Do you agree that only a fundamental overhaul of institutions and mechanisms can bring things back to normal?

Yes, indeed. You are right that we need ‘a fundamental overhaul of institutions and mechanisms.’ However I would challenge the claim that it should bring things back to normal. What’s been recently and what we have now is not normal. It’s an aberration of sound market economy which serves the needs of a minority at the cost of majority. To overhaul the syndrome we must go forward, and not back. The future should be designed and shaped within the triangle of values, institutions (in the behavioral meaning) and policies. All three must change substantially to stand the mounting challenges of the civilization and interdependent planetary economy.

Do you think the power of global corporations and big banks are undermining the sovereignty of nation-states? How can we tackle this issue?

What we face in the contemporary global economic and political game is the lack of compatibility of the nation states and worldwide economy. It’s a kind of flaw, showing that even if the national economies are rational (and most of the time they are not) the sum of them doesn’t create global rationality. How can it be tackled? It can, but only if there is a proper mechanism of transnational, or worldwide, policy coordination set in motion. Again, a long way to go, but to a certain extent a shift from G-7 to G-20 is a step in the right direction. To be sure, it calls for much more. Thus, the 21st century must be the century of a quest for global policy coordination, for a supra-national mechanism to negotiate different, quite often colliding purposes. One more time; it calls for the change of values, institutions and policies.

You seem to question the lionizing of so-called BRICS states. Can one call it an artificial framework created by a global corporate construct? How different is it from organizations such as OECD when it comes to representing the interests of a group of countries? What role are they likely to play in the aftermath of the global financial crisis?

BRICS is not an organization. It is not institutionalized structure. It does not have common, agreed values. It does not propose any coherent policies. It is just a group of different countries which have been put under the same denominator, because they are big, populous, and emerging. Yet if they decide to discuss the crucial global issues among themselves, and will come to the world forum with an agreed agenda and progressive propositions how to change the values, regulations, and policies, it will make important input in our quest for performing global governance.

As head of a think-tank – Transformation, Integration and Globalization Economic Research (TIGER) – how do you look at research institutions around the world? What role do they play in forming public opinion and policymaking?

The research organizations and various think-tanks are so much needed. Much more the former, than the latter since some so-called think-tanks too often happen to be just the instruments of lobbying on behalf of groups of special interests and not on behalf of sustained growth and equitable development. But I can’t see any way forward, toward a better future if the policy (and not just the economy) is not knowledge-based. Wherefrom such a knowledge is supposed to come if not from the universities and research centers? Definitely not from the biased media, particular lobbies and narrow-minded political parties. The latter must rely on the former and the former be subordinated to the latter.

The content herein does not necessarily reflect the opinion of the ECSSR