WSJ: The Wealth of Nations - Thee's no halfway house to economic growth.

Wall Street Journal ^ | October 6, 2005 | LESZEK BALCEROWICZ

[OESY]

The failure of various forms of statism in the Third World, the bankruptcy of communism in the former Soviet bloc and China, and the high long-term unemployment and relative stagnation in Western European countries with overregulated economies has forced a revision of the development paradigm in favor of the market and private property -- in short, a more limited state. But the battle over ideas and policies is far from over. As a matter of fact, it will never end, as the forces of statism regroup rather than capitulate. This is why it is so important to analyze which policies work and which ones fail, to generate lasting convergence -- and to bring poor countries out of poverty.

Communism, an extreme form of statism, went farthest to suppress markets and criminalize entrepreneurship. The opportunity costs of this organized folly were enormous: relative per-capita income in Poland, for example, declined from about 100% of that in Spain in 1950 to only 40% in 1990. And with the collapse of the communist system, a great natural experiment began. Looking at its results, one is struck by the huge differences among countries of the former Soviet bloc:

• In 2004, GDP had increased, relative to 1989, by 42% in Poland, 26% in Slovenia, and 20% in Slovakia and Hungary. In contrast, it declined by 57% in Moldova and 45% in Ukraine. If the shadow economy were included in the calculations, the differences in output would be smaller....

• All transition economies have made considerable progress in lowering inflation, yet better long-run growth performance went hand in hand with lower inflation. This confirms that in countries that inherit high inflation, successful disinflation is conducive to long-term economic growth.

• Foreign direct investment usually follows past economic success and strengthens future economic success....

[OESY]

Mr. Balcerowicz is president of the National Bank of Poland, the country's central bank.

[A. Pole]

The failure of various forms of statism in the Third World, the bankruptcy of communism in the former Soviet bloc and China, and the high long-term unemployment and relative stagnation in Western European countries with overregulated economies has forced a revision of the development paradigm in favor of the market and private property -- in short, a more limited state.

"bankruptcy of communism in China"?!

For Mr. Balcerowicz EVERYTHING is a proof for the false dogma of free market.

[Wonder Warthog]

".."bankruptcy of communism in China"?!For Mr. Balcerowicz EVERYTHING is a proof for the false dogma of free market.

Actually, he's right on target. China has embraced "compartmentalized capitalism". To the extent that it has succeeded, it has been due to that fraction which is capitalism.

[teledude]

Unbeleivable statement. Look at any prosperous country and you will find economic freedom and capitalism. Chinese communism did fail... they are far more capitalist now.

What's the matter, did your union job get outsourced? Some people cannot see past the end of their nose.

[A. Pole]

What's the matter, did your union job get outsourced? Some people cannot see past the end of their nose.

Do not judge others by yourself.

[A. Pole]

Shock "therapy" of Balcerowicz created 20% unemployment in Poland, destroyed whole branches of economy, gave away the key assets to the German, French corporations/governments and subsidized rise of Polish "oligarchs" like Bagsik.

[Grzegorz 246]

Let me guess: Balcerowicz musi odejsc ?

[Grzegorz 246]

"Shock "therapy" of Balcerowicz created 20% unemployment in Poland"

Bullshit. The reason of high unemployment are huge non payroll labor costs and that's not Balcerwicz's fault.

" destroyed whole branches of economy "

Soviet style heavy industry...

[Grzegorz 246]

Besides half of those "jobless" people work illegally, in Poland or in Germany.

[freeforall]

At least under communism everyone is miserable!

[freeforall]

Under Communism those in the Gulag were never counted as unemployed as they had a job everyday.>

[Moonman62]

All transition economies have made considerable progress in lowering inflation, yet better long-run growth performance went hand in hand with lower inflation. This confirms that in countries that inherit high inflation, successful disinflation is conducive to long-term economic growth.

It's the other way around. Economic growth cures inflation.

[Lukasz]

Typical socialist slogans from A.Pole.

[freeforall]

Remember the guy with the funny mustache from Germany in the 30's and 40's...he was also a Socialist just not an International one.

[Grzegorz 246]

A few years ago Japan had less than 1% growth and deflation.

[Moonman62]

A few years ago Japan had less than 1% growth and deflation.

Japan has a serious banking problem. In spite of massive government spending they still have deflation because they can't get enough money into their economy. Their banks are unable to make new loans, because they are still covering for bad loans they made during their stock market boom in the late 1980's and have never written off.

[Grzegorz 246]

Thanks for your explanation of Japan's situation, but I still don't agree with your #12 ("Economic growth cures inflation."). I think that high growth = at least 2-3% inflation.

[Moonman62]

Economic growth is how Reagan cured inflation.

Look at a fictional economy that produces apples. Last year it produced 100 apples and there were 100 dollars in the economy so each apple costs one dollar. This year it produces 200 apples but there are still 100 dollars in the economy. The most that can be charged for each apple is now 50 cents. Of course it helps if the the apple growth was due to factors such as technological innovation, less government interference, or investment in more apple trees.

Ideally the central bank led by Alan Greenapple would create 100 more dollars so the apple producers could still charge a dollar for each apple. It wouldn't make any sense for him to choke off the money supply to slow the production of apples to prevent inflation because the production of more apples is actually deflationary.

[Grzegorz 246]

"The most that can be charged for each apple is now 50 cents."

But that's not possible in practice. In my opinion higher economic growth = bigger employment, so consumers have more cash and this = bigger consumption and bigger consumption = inflation.

You may also create higher growth in short therm printing more cash, but that would start high inflation. There is positive correlation between growth and inflation until inflation is relatively low.

BTW I don't know what exactly would happen If more money wasn't created in case of 100% growth, but rather nothing good :)

[Moonman62]

There is positive correlation between growth and inflation until inflation is relatively low.

Starting in the early 1980's we had robust growth, yet inflation decreased. In the 1970's growth was weak, yet inflation increased. Where's the correlation?

Look through the history of the CPI. The only correlation with inflation that shows up again and again is large scale war and currency devaluation. The highest rate of inflation in modern times was in 1946 with a rate of 26%. Do you know why? Here's a hint: it wasn't because of economic growth.