The borders of economic freedom

 In the earTito Boerily 1990s, from the privileged vantage point of the OECD, I witnessed the countries of the former soviet bloc transition to a market economy. On one of my missions to Eastern Europe I was sent to Bratislava, via Vienna. Given that the plane was delayed and I risked being responsible for the cancellation of an important meeting, a Viennese colleague offered to give me a lift to Slovakia, driving through the corridor reserved for Austrian citizens. According to his calculations, this would save me at least one hour. In the circumstances, I happily accepted his offer. The only problem was that although I had a diplomatic passport, I am not, nor was I then, an Austrian citizen. The Austrian and Slovakian checkpoints in that corridor stand a few kilometres apart. There was no problem on the Austrian side where our passports were not even requested. The Viennese licence plate sufficed. But on arriving at the Slovak border the zealous officials who asked for our documents, on discovering my true nationality, did not allow us to enter. We were forced to turn tail. This time round the Austrian officials, surprised at seeing us back so soon, asked for our passports, and on establishing that I was neither Slovakian, nor Austrian, also refused to let us through. Long telephone calls to the Austrian embassy and a fax clarifying the objective of our visit were required before we were finally allowed back into Austria and from there, into Slovakia, through a border point that was also accessible to non-Austrians. Obviously the meeting was rescheduled. But during that hour spent in “middle earth” I imagined what it would have been like to live in those five kilometres that separated the two borders, between a mostly planned economy and a market economy with a strong public sector presence.  

The Great Recession has left us many middle earths, many  poorly defined borders between private and public initiatives. The financial crisis was followed by that of sovereign debt and governments have been forced to take emergency measures. Fiscal consolidation plans often make provision for cuts to spending programmes rather than any rise in taxes. The new Stability and Growth Pact does not only look at countries’ balances but also calls explicitly for cuts in public spending. In this way fiscal consolidation tends to redraw the boundaries of state intervention, arresting the almost unstoppable advance of the public Leviathan since the second world war, when public expenditure as a share of GDP doubled in many countries. The questions being asked by politicians and economists concern not only what to cut, but also how. There are those who, like Chancellor Merkel, have called on the euro-area governments to introduce into their constitutions, therefore into laws that are difficult to change later on, the obligation of achieving a balanced public budget. This would mean depriving them of the possibility of conducting anti-cyclical policies, to mitigate the effects of the recession. The English government has proposed reducing the role of the State in social protection, by involving the third sector directly and moving from the “Welfare State” to what they now call “Welfare Society” or “Big Society”. The choice is a difficult one because globalization has brought with it an increase in the demand for social protection. In Italy, the State continues to rely on the family as a social shock absorber. Almost everywhere in the advanced countries, an aging population is pushing up pension outlays and demand for health services. Unless we want the State to get even bigger, it is inevitable that there will be an even bigger involvement of the private sector in the provision of these services. How can we distinguish between the duties of the public and private in social welfare, health and even education? 

Despite the efforts in many countries to reduce debt by cutting public expenditure, it would be a mistake to conclude that the role of the State in economics is in retreat on all fronts. The crisis has led to an increase of regulated areas in which limits are imposed on free private initiative, to the point provoking outcries against the violation of individual freedoms. The decision, for example, of the Obama administration to impose by law the subscription of obligatory health insurance unleashed a barrage of appeals to the Federal Court. Forms of protectionism are also reappearing, strategic funds are being built up in order to oppose the acquisition by foreign investors of national businesses and there are proposals to reintroduce previously abolished restrictions on trade. There are those among economists, traditionally hostile to imposing restrictions on free trade, who have now found new reasons to protect national industry. It is no longer taboo to speak of a “new industrial policy” among those who in the past had openly declared their hostility to State aid for specific sectors. There are debates not only on imposing pay limits for superstars, but also on limiting the size of some businesses, especially in the financial sector, to prevent them from becoming “too big to fail”. Defences are being put in place against the arrival of foreign capital, by defining as strategic sectors which have little in common with considerations linked to national defence, security or the environment. New barriers are being erected to the free circulation of people, including against those who are fleeing from bloody civil wars or where there is violent repression of domestic opposition, if not actual genocides. In short, the regulation and restriction of free private initiative has been anything but undermined and on the contrary, appears to be on the increase, to the great indignation of liberal thinkers.

In this sixth edition of the Festival, we will try to enable everyone to form an opinion on the complex questions that define the new borders of free private initiative that are being put in place in various parts of the planet. We will attempt to understand the reasons and highlight the consequences, using, as always, the categories and analytical tools of economists, but also by asking for help from other disciplines, such as law and philosophy. We will introduce, as always, new formats for the debates, beginning with the arguments “for” and “against”, in which all the participants will be called on to give their opinions on important and complex issues, before and after the debate between the various speakers. This will also allow us to assess the value added of the Festival in changing the perceptions, if not the opinions, of that ever attentive and well-informed public, which for six years now has flocked between May and June to the extraordinary city of Trento.

 

 

Tito Boeri

Scientific Director of the Festival of Economic