December 16, 2014
Last Monday, I took part in the Rzeczpospolita daily newspaper’s economic debate entitled ‘The end of the free market? Origins of the crisis’. Three questions were sent to the participants by the host:
- Have capitalism and the free market discredited themselves?
- What is the alternative to the free market? Which economic system should we choose?
- Should Poland increase the involvement of the state or of the market?
I am quoting the questions here to outline the context of the debate, which revolved around the most fundamental aspects of the political system and the relationship between the state and the market. Has the global financial crisis, whose effects are still felt today, altered the laws of economics, for instance by taking interest rates, the key tool for controlling inflation, away from central banks? Those interested will find the account of the debate in the newspaper, while I would like to take this opportunity to elaborate on the dog metaphor which I invoked in the conclusion of my answer to the third question.
Seeing that two of the previous speakers, asked about what Poland should do to ensure economic growth at a reasonable rate, argued that the country needed to look for its competitive advantage in entrepreneurship and innovation (because the growth model based on cheap labour is running dry), I decided to focus on how this should be accomplished.
The issue is not with the extent of involvement of the state and the market, but with the state’s responsibilities and the way the market operates. The state should become involved primarily where the market is not enough, which justifies the state’s role in overseeing today’s markets and creating new ones. This is done not only through appropriate institutions, such as banks and stock exchanges, whose scope and quality depends on the quality of the state, but also through suitable regulations and rules of operation. Nowadays reality is changing before our very eyes. New, revolutionary technologies emerge, giving rise to associated products and services which change the rules of the economic game, making regulatory adjustments necessary. If these adjustments are not made fast enough, the economy pays the price, suffering depressed growth, which is something that can be avoided. Examples abound.
In the oil and gas industry, where I work, this leads to regulatory uncertainty regarding shale gas exploration and production in Poland. Currently, after four years, this uncertainty has been significantly limited. Alas, in the meantime, however, American companies (which have the necessary know-how) lost interest in making investments in Poland, having been drawn by the prospect of the U.S. ban on gas exports being lifted, which has turned Poland from a potential shale gas producer into a potential importer of LNG derived from American shale. Europe’s CO2 emissions trading market, which is in need of a thorough overhaul, is yet another example.
What should Poland do? Improve the quality of the state by fine-tuning its presence to the needs of the economy. The state should withdraw its involvement from production and modernisation projects, as businesses can handle these areas with ease. Since running state institutions is costly, funnelling funds into the two areas is a waste of the taxpayer’s money. However, there are certain areas where, despite its involvement being very needed, the state is either absent or its presence is insufficient. What I am talking about here is creating visions for Poland’s growth. It appears to me that because state institutions fail to investigate the topic, they are unable to make proper use of the results of the studies that certain universities carry out. In any case, such academic research does not aim to create alternative visions for Poland’s growth or its place on the economic map of Europe and the world, but rather to develop tools which can be used to create such visions.
Poland has so far managed without a vision for growth, because we have taken economic transformation and modernisation as a priority. Busy building a market economy, we have failed to notice that we have achieved tremendous success in securing continuous economic growth and a steady rise of incomes. Having joined the club of high-income countries, we are facing yet another challenge – to ensure further growth of per-capita incomes. Mimicking others in enforcing cost (salary) controls will not help us meet the challenge. So far we have been creating a second Japan and a second Norway, and now we are working on a second Denmark, or so the politicians say. Now it’s high time to choose our own way.
Poland needs a course of its own to serve as the fulcrum for the research paving the way to innovation. Primary research gives rise to new products and technologies, which are not immediately usable. They are like Lego bricks in that they can be used to build anything we need. Those who played with Legos as a child will remember that new bricks matched previous sets and offered entirely new possibilities. What I am saying is essentially that we should focus on financing those primary and applied research projects which are geared towards practical applications, rather than the research whose sole objective is to be published. Doing so by funding research with public money, we are shifting onto the state the part of the risk associated with the first stage of the process whereby an idea is transformed into a product. Many ideas will fail, while others will have to wait for the right time, but some will be transformed into new technologies and prototypes which will attract the attention of venture capitalists. Furthermore, to avoid spreading out the financial potential too much, we need a vision for growth. Today, Poland does not have such a vision as there exist no state institutions whose business it would be to create such visions. It is essential that the life of such institutions, the visions their create and the research their pursue be perpetuated by subsequent administrations. Such institutions must be created.
This where the dog comes in, a black-and-white terrier digging vigorously in Sopot’s sandy beach. I first noticed it during my morning walk and thought the creature was trying to reach water. When I was coming back an hour later, I saw an impressive ditch, which grew further as the excavations continued. It was apparent that reaching water was not the plan after all. No discernible purpose could be seen, as the dog did not seem interested in connecting the ditch to the sea. Tired, the terrier continued digging. The moral of the story is that if you do not know where you are going, every road will get you nowhere.