INTERVIEW WITH JOHNNY MUNKHAMMAR

In your newest book called "Guide to Reform" you emphasized the significant importance of economic and structural reforms to pursue flexibility, prosperity and change. What is, in your opinion, the main task of economic reforms?

I attempted to define reform as a political decision which aims at removing obstacles to change, progress and wealth creation. It is a fairly wide definition, which means that it should be evident that it is in everyone’s interest to support such reforms. This means that the purpose of economic reforms should be to make it possible for society to develop and improve instead of suffering from stagnation and problems.

In the abovementioned you have enlisted a great amount of empirical evidence that supports the need to implement economic reforms. How do you see the role of strong leadership, commitment to change and strategy in the process of reform implementation?

I have participated in numerous economic discussions that end in relative unity among economists about what should be done – and then, everyone agree that it will not happen because of political obstacles, such as lack of leadership. That is where my book starts. I think that there is a need to analyze how reforms can actually take place, which conditions that should be in place for politicians to actually go from knowledge to action. Indeed, I think that is of great importance. But I do conclude that you don’t have to be Superman to reform; it is all about following the right strategy.

Competitive strategy, vision, well-defined mission and cutting-edge management are crucial determinants of successful promotion and implementation of structural reform. Madsen Pirie, the president of the Adam Smith Institute, described the reform agenda as the main policy asset in the future. How do you think the awareness and vital importance of structural change can receive attention in policy issues?

I think that good policy is unfortunately not always good politics. It is not enough to have the best analyses and proposals, though that is crucial too. You also have to have an agenda and a strategy about how to do it – from asking the voters for a mandate to reform all the way to implementation and winning the story about reforms afterwards. Indeed, Dr Pirie has a relevant point about that being an asset, both in terms of getting elected and in pursuing real reforms.

Numerous European politicians have not shown any initiative to reform the structural backlash of the politico-economic system in European countries. Significant amount of literature and empirical evidence has confirmed that the European corporativist model of government intervention and stakeholder protection is the main obstacle to more innovative economy and higher economic growth. What is your own opinion about the corporativist model in continental Europe?

There is indeed substantial evidence that the powers and influence on politics from special interests is harming society in economic and social terms as well as creating obstacles to important reforms. The more powerful the special interests are, the worse it gets. They all want privileges from the state, paid for by everyone else. They have to be confronted and reform governments have to launch reforms anyway. This might be easy to say, but it has happened. In Britain, Margaret Thatcher implemented reforms despite very tough resistance, and nobody today wants to go back. And sometimes, it is enough for one special interest to change position to change the entire structure and open up for change.

One of your main areas of research is the field of labor market. The deregulation of the labor code is strongly unpopular in countries such as France, Germany, Slovenia and Italy. What are, in your opinion, the consequences of regulated and rigid labor market?

If there are many and substantial interventions by the state in the labour market – such as taxes on labour, hiring and firing regulations, public monopolies, mandatory social insurance systems, etc – there will be more problems. Low employment levels, high and long-lasting unemployment, social exclusion of certain groups like the young and immigrants – those are all effects of state interventions. This is quite ironical, since the interventions are often motivated by social concerns.

In Slovenia, the concentration of the monopoly power of trade union is huge, resulting in a two-sector employment model and widespread rent-seeking at the expense of productivity growth. How to demolish the monopoly power of trade unions through a reform process and why do trade union leaders oppose labor market reform by all availible means?

I am not an expert in the particulars of the Slovenian labour market and its trade unions, but I could comment in general terms. Trade unions often – but not always – oppose reforms because they have been granted privileges from the state. They may have the right to demand that everyone should sign collective wage agreements, or provide state-funded unemployment benefits, etc. And those are all in the way of important reforms to increase flexibility. They want to keep their privileges as organizations as long as possible.

Your books are very well embraced by the readers from all over the world. In your book called "European Dawn" you analyzed Western-European countries and concluded that radical reforms are only the question of time. Western Europe is faced by a bulk of structural problems. Economic growth is quite low, welfare dependency is growing and welfare state is not suitable for demographic and ageing problems that Western Europe will face in the years to come. In your opinion, where are the reasons for Western European stagnation in terms of low growth, high unemployment and high taxes?

In brief terms, many of the problems can be said to stem from the very idea that the state should intervene in many parts of society. Very high taxes do lead to lower economic growth rates, labour market interventions do lead to unemployment, having welfare services in public monopolies do create waiting lists, etc. This very harmful idea is a remnant from the decades after World War II when many people believed in the centrally planned economy. But today we know better.

Nearly a year ago, at the CATO Institute conference entitled "Should the United States be more like Scandinavia" you succinctly explained the so-called Scandinavian model. As we know, Sweden walked out from the agricultural bastion of Western Europe, and became the wealthiest European country in terms of GDP per capita in 1950. What happened in Sweden from 1890 to 1950? What were the driving forces of Sweden's path to prosperity?

Those decades were a fantastic success story. The foundation for Swedish success was laid already in the 1850s and 1860s by a series of reforms. Foreign trade was liberalized, freedom to start businesses and compete was introduced, the infrastructure was improved by railways, the education system expanded and financial markets were opened up. Sweden had, during all those years, lower taxes than the European average and lower than the United States. Still, in 1950, the total tax pressure as a share of GDP was 21 per cent.

After 1970, none of top 10 Swedish companies listed on stock market was established. Also, Sweden is known for 60 years of an uninterrupted social democratic rule. Olof Palme's economic policy attempted to restore Swedish competitiveness by the devaluation of the Swedish krona what later resulted in an inflationary spiral. What brought Sweden to fading competitiveness and extraordinary economic problems in early 1990s such as high unemployment, public indebtedness and inflation?

Sweden experienced severe and returning economic and social problems during the 1970s, 1980s and early 1990s. This was due to the economic policies during the decades preceding the crises – policies of raising taxes, socializing companies, Keynesian economic policies, regulations in the labour market, etc. During the past 15 years, the situation has improved, due to a series of reforms, mainly in the late 1980s and early 1990s.

Aftermath, Swedish policymakers launched several pro-growth reforms that restored growth potential and productivity performance. What have been the main reform steps?

Sweden has been one of the most liberalizing countries in the Western World, rising from number 40 to number 20 in the Economic Freedom of the World index, from 1985 to 2007. We de-regulated many product markets, made the Central Bank independent, got inflation down, decreased marginal tax rates, introduced choice in welfare services, joined the EU and did a pensions reform.

A growing list of nations adopted non-discriminatory flat tax rates on productive behavior, namely on labor supply. Also, tax rates on corporate income have been lower dramatically, showing the Laffer curve effect. Flat tax revolution and pro-growth tax and economic policy installed "Eastern European Tigers" such as Latvia and Estonia. In 1991, Estonia pioneered the introduction of flat-rated tax on personal income. What is your view on taxation?

Taxes should be made flatter, simpler and lower. The flat and quite low tax rates of several countries in Eastern and Central Europe have achieved several such aims. We know that tax bases are getting more mobile, and that low and simple taxes are a competitive advantage. It is essential that countries can continue to compete with taxes.

Which countries, in particular, have been highly successful in the implementation of economic reforms? Can you list a few examples?

Almost all industrialized countries – the 30 OECD countries – have reformed in trade, some product markets and macroeconomic frameworks. But several countries have done much more than that, in somewhat different areas. I would say that Australia, New Zealand, Estonia, Slovakia, Sweden, Ireland and Iceland are very good examples.

What are the main obstacles to economic reforms and how can leaders and individuals fight the status quo properly to avoid stagnation and low growth epidemics?

One obstacle is risk aversion among voters, another is special interests, a third is the political system and a fourth is the media. A reform government will have to realize that these will oppose reforms all the way, and be prepared for that, but also remember that in every reform country, people have approved of the reforms later on. Politicians cannot just follow current opinion polls, they have to focus on the longer term, endure opposition and then get re-elected. Almost all reform governments have actually been re-elected – and they have a better record in the history books. We can also, as individuals and private organizations, act to support reforms and promote new ideas.

In your opinion, which country reformed the most and achieved incredible outcomes?

I think it is hard to say that one single country is the winner, because countries have reformed somewhat different areas and they may all be important. But I think that the countries that have done the most remarkable transformation would be in Eastern and Central Europe. Perhaps I would say Estonia because of its great success from tough starting-points and also because it was one of the first real reformers in the area.

On May 15, you intend to come to Slovenia where you will present your newest book "Guide to Reform" and have a lecture about change, progress and the need to reform. As a post-communist country, how do you think Slovenia can, restore its competitive advantage and hopefully becomes a perspective success story such as Switzerland, Iceland, Ireland or New Zealand after these countries implemented pro-growth reforms?

Of course Slovenia has come far too during the past 15 years, and what is important is to keep reforming. There are still problems and the world is changing faster than ever. Focusing on areas such as taxes, labour market and public sector would probably be important. Of course Slovenia could become one of the wealthiest countries in the world in a few decades. But it takes a political leadership that wants to make it happen.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK