Poland Must Now Wind Back the Power of the State

This article appeared in Financial Times on October 23, 2007.
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The victory of the liberal Civic Platform in Poland’s early elections over the weekend could mark the beginning of the end for populism in central Europe. The governing parties in Poland and Slovakia came to power promising to end corruption, and the Hungarian opposition, which lost last year’s election by the narrowest of margins, promises to do the same. The collapse of Jaroslaw Kaczynski’s Law and Justice party shows that in addition to better policing and steeper sentences, the fight against corruption must include the reduction of the size and scope of the state.

Two years ago, when populist parties such as Law and Justice made electoral advances throughout central Europe, most commentators saw it as a rebuke to the liberal parties and the market reforms they had implemented. Such explanations ignored the resentment that people in the region harboured against their corrupt incumbent political elites.

Corruption in central Europe is rampant. According to Transparency International’s Corruption Perception Index, which measures corruption on a scale from 0 (highest) to 10 (lowest), Poland slumped from 4.6 in 1998 to 3.4 in 2005. The Czech Republic fell from 4.8 to 4.3, Hungary’s remained at 5 and Slovakia rose from 3.9 to 4.3. Though all four countries made small improvements in their CPI scores in 2006, they fell far short of the Organisation for Economic Co‐​operation and Development’s average of 7.2.

Corruption in central Europe persists for two main reasons.

First, despite much economic liberalisation over the past 17 years, governments continue to spend, on average, more than 40 per cent of the region’s gross domestic product. However, unlike in western Europe, where government spending is also high, parliamentary scrutiny, judicial independence and the strength of civil society in central Europe remain relatively underdeveloped. Government procurement programmes lack transparency and are often used as vehicles for self‐​enrichment by corrupt officials.

Second, the central European business environment remains overregulated. The World Bank’s Doing Business report, for example, found that businesses in Slovakia, the Czech Republic, Hungary and Poland were more heavily regulated than businesses in most developed econ‐​omies, including most European Union members. The armies of bureaucrats in central Europe have ample oppor‐​tunities to extract bribes from private firms.

The populists in the region, including the Law and Justice party in Poland and Smer in Slovakia, tapped into the popular feeling of disgust at the conspicuous spending of the governing elites and their ill‐​gotten wealth, and won. But corruption in central Europe is systemic — it cannot be eradicated through better procurement controls, as is currently being attempted. Instead, corruption has to be tackled by reducing the size and the scope of the state and with it the opportunities for self‐​enrichment among the political elites.

As Oleh Havrylyshyn, the former deputy finance minister of Ukraine, shows in his book, Divergent Paths in Post‐​Communist Transformation — Capitalism for All or Capitalism for the Few? , countries that implemented more radical economic reforms after the collapse of communism experienced less corruption than countries that opted for more gradual reforms. The transition from communism to capitalism was marked by corruption, not because of too much liberalisation but because of too little. Perhaps that explains why Estonia, which is the most economically free of all excommunist countries, also has the highest CPI score.

By contrast, the governing parties in Poland and Slovakia postponed further economic reforms, thus in effect ensuring that corruption in the region continues.

A liberal victory in Poland could mark the beginning of the end for central European populism and, it is to be hoped, a return to a reform agenda in the region. Once in power, the Civic Platform should address the source of corruption in Poland — the overextended state. The same goes for aspiring reformers in the rest of the region.