Aug
10
2009
Sandy Hutchens Looks at World economic crisis
Author: adminGovernments need to stop their spending sprees and slash public expenditure to end the economic crisis, says Leszek Balcerowicz, the pioneer of post-communist Poland’s resilient market economy.
And the responsibility for limiting future crises lies squarely with policy-makers and the voters who elect them, says the former finance minister and central banker widely praised — and reviled — for his fiscal discipline.
“There is a widespread interpretation which ascribes the reasons for the current crisis to the free market,” Balcerowicz told AFP in a recent interview.
“I think that is generally wrong.”
Poland’s free-market guru said the world’s worst post-war crisis is rooted in the US Federal Reserve’s loose monetary policy and what he terms Washington’s “doctrine of affordable housing.”
“Generally speaking, if the American central bank pursues excessively loose monetary policy, it has global consequences, because other banks usually are used to following after a time lag,” Balcerowicz said.
“This crisis is global because it erupted in the US,” he added.
Another ingredient in the recipe for disaster was political pressure from Washington on Fannie Mae and Freddie Mac — government-sponsored mortgage firms — to extend credit to households which couldn’t afford it, he said.
Expansionary monetary policies in countries like Britain, Ireland, Spain and the US, which saw “serious credit bubbles” and “spending during the boom times,” racked up the huge debts that sparked the credit crisis and recession.
“Now, paradoxically, crisis management in some countries involves a huge fiscal expansion… it remains to be seen what the net effect will be.”
Long-term growth needs reforms and counter-cyclical monetary and fiscal policies that “lean against the wind,” argued the man who implemented “shock therapy” to end Poland’s hyperinflation and balance budgets in the 1990s.
“Ultimately, it depends upon the voters — who they choose,” he said, calling for a “return to fiscal conservativism as a social norm.”
Key to what he considers good economics is maintaining a “ratio of spending to GDP (Gross Domestic Product)” that allows growth without credit bubbles.
And that, he says, requires slashing expenditures, particularly politically controversial social spending cuts.
“If you choose perhaps the politically more difficult strategy of accelerating reforms of the welfare state, then you have a chance of avoiding a slow-down” in the long-term.
Balcerowicz points to the example of Asian economies such as South Korea, Hong Kong and Taiwan in which the ratio of spending to GDP “on the whole was not more than 20 percent” for decades.
“With limited social spending there were stronger incentives to work and to save, and with higher private savings they could finance, without much risk, high investment,” Balcerowicz argued.
“Western European economies are facing quite an interesting challenge: reforms which were necessary before the crisis are even more necessary because of the crisis and because of the crisis management,” he warned.
“So we need a lot of persuasion. This is why I’m trying in Poland to shape public opinion. In democracy, this is the ultimate power, but the same is true of all Western economies,” he added.
To this end, the professor of economics has embarked on a national media blitz aimed at driving home his message that public sector reform aimed at limiting public debt is the key to a healthy economy.
“In Poland, we are lesser sinners,” he says of his homeland, the only EU state to have recorded growth this year and the only large member of the 27-member bloc which experts believe may avoid recession.