Still in the Market for Reforms

This article appeared in the Wall Street Journal Europe on October 20, 2006.

A year ago, Central Europe seemed like an example for others to follow. Today, it is a region marked by growing extremism and political instability. Some blame liberal reforms, claiming that capitalism concentrated too much money and power in the hands of the few. In fact, reforms did not go far enough. The business sector is overregulated and governments spend too much money. This fuels corruption and public dissatisfaction with the democratic process.

In general, Central Europe is a success story. The Czech and Slovak republics, Hungary and Poland are free‐​market democracies. Formerly part of the Warsaw Pact, they are now members of the North Atlantic Treaty Organization and the European Union. Central Europeans have higher incomes, life expectancies and school enrollments than ever before. Yet liberalism, the philosophy of political, civil and economic freedom that was instrumental in bringing about those advances, is on the defensive.

In Slovakia, a nationalist‐​socialist coalition defeated Mikulas Dzurinda’s reformist government. In Poland, a coalition deal between conservatives and nationalists kept the liberal Civic Platform out of power. In the Czech Republic, the liberal Civic Democratic Party won the elections but is too weak to form a government. In Hungary, the populists were kept from gaining power — but only by a whisker, and only because the ruling socialists lied about the real state of the economy.

Many commentators saw the poor performance of liberal parties in the elections as a sign of weakening public support for the free market. In fact, the most comprehensive survey in the EU accession countries, conducted by the Gallup Organization in 2003, found most Central Europeans supported free competition and less government intervention in their lives. Similarly, many of Mr. Dzurinda’s radical reforms, including the flat tax, had the support of the majority of the Slovak public shortly before the 2006 elections.

The rise of the populist parties in Central Europe is partly attributable to their promise to wage a war on corruption. For example, Poland’s rating in Transparency International’s Corruption Perception Index slumped to 3.4 in 2005 from 4.6 in 1998. The Czech rating fell to 4.3 from 4.8, Hungary’s remained at 5, and Slovakia’s rose to 4.3 from 3.9. In contrast, Iceland, which was the world’s least corrupt country, received 9.7 points out of 10. Why does corruption remain such a big problem in Central Europe?

Despite a dramatic rise in the region’s economic freedom since the end of communism, Central European economies remain overregulated. The World Bank found that Slovakia, the Czech Republic, Hungary and Poland were more heavily regulated than most developed economies, including most EU member states. This means the armies of bureaucrats in these four countries have plenty of opportunities to extract bribes from private companies.

Moreover, government transparency, parliamentary oversight, judicial independence and the strength of civil society remain relatively underdeveloped in Central Europe. Public spending is seldom transparent and bidding rules for government contracts are often subject to the whims of capricious public officials. Thus, overregulation and opaque public procurement have facilitated the creation of a whole class of people with political connections, who have made their fortunes in a dishonest way. The outraged public has exacted punishment on the corrupt ruling class by withdrawing its support from the established political parties.

The rise of the populist parties will likely postpone further economic reforms. That is regrettable, because the size and the scope of the state in Central Europe will have to be reduced in order to lessen the problem of corruption. Ironically, the postponement of further liberalization and the concomitant failure to address the underlying cause of corruption could undermine Central Europe’s new rulers and pave the way for a liberal renewal.