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Strengthen economic freedom – main task of poor countries to be successful

6 November 2015
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Main points and video of Ivan Miklos speech at the public discussion “What is the optimum level of public spending in Ukraine?” (November 2, 2015) 

“If poor countries want to be successful, the most important strategic decision is to strengthen economic freedom as much as possible. Only chance to be successful is to reduce role of state and to focus it on the most important functions which state has to have in society. It means creating rule of game for maximizing investment, doing business, activity”. It was stressed by Ivan Miklos at the public discussion on the optimum level of public spending in Ukraine that was organized by CES and KES with the support of the Ministry of Finance of Ukraine on November 2, 2015.

Below there are the main points of Ivan Miklos speech. Video is available at the bottom of this post.

  • If you want to have real success, reforms have to be comprehensive. Sustainable fiscal consolidation should be connected with other macroeconomic stabilization measures, structural and institutional reforms. However, from short point of view MACROECONOMIC STABILIZATION IS MORE URGENT. Only when you have stable macroeconomic environment, it has sense to start structural reform, only then it will bring real sustainable results.
  • If poor countries want to be successful and converge to the level of rich countries, the most important strategic decision is TO STRENGTHEN ECONOMIC FREEDOM AS MUCH AS POSSIBLE. Significant part of economic freedom is the role of government in society. Only chance to be successful is to reduce role of state and to focus it on the most important functions which state has to have in society. It means creating rule of game for maximizing investment, doing business, activity. There are only few countries in the world, which were poor and became rich. These more successful countries are Singapore, Thailand, Hong Kong, South Korea. It was taken dozens of the years, but today all these countries have higher GDP per capita than USA. Also if you look at the transition countries, there are five most successful countries by convergence– three Baltic countries, Poland and Slovakia. All these countries are most successful because they introduced the policy based on maximizing economic freedom and minimizing (redistribution) of the role of state.
  • In Ukraine before Maidan public expenditures as share of GDP were more than 50%. VERY IMPORTANT QUESTION IS IF IT IS POSSIBLE TO PROVIDE MACROECONOMIC STABILIZATION AND AT THE SAME TIME ACHIEVE ECONOMIC GROWTH. Figures from Slovakia shows that it is possible; of course, not in one year, but in few years it is possible. You can see that we reduced public expenditures to GDP from 52.1% in 2000 to 34.9% in 2008. We made very strong decrease. Important that it was done not only by reducing public expenditures; even more it was achieved by increasing GDP by economic growth. In 2003, we prepared public finance reform, fiscal decentralization, pension reform, reforms of social system, labour market, healthcare that came into power starting January 2004. From 2004 to 2008, we achieved real jump in economic growth. At that time, we had far highest growth in Europe and we did real convergence jump.
  • At the same time, IT IS NECESSARY TO HAVE TOGETHER NOT ONLY FISCAL CONSOLIDATION, NOT ONLY CUTTING EXPENDITURES, BUT ALSO STRUCTURAL REFORMS. If you reducing public expenditures only by cutting current expenditures without doing structural changes, this reduction will be unsustainable. Very good example in Ukraine, you have a lot of small schools which are very expensive and very ineffective as they have just few pupils; costs for one child is much higher than in bigger schools. Good idea is to close these schools, but organize buses and move these children to bigger schools. Result is not only reduced costs, because costs for transport much lower than difference between costs per child, but also higher quality of education for these children.
  • If you are doing real reforms, you are reducing public expenditures as share of GDP, but as GDP is growing very high, despite of this decrease as relative share, IN ABSOLUTE TERMS YOU WILL HAVE GROWTH OF THE PUBLIC MONEY for offering public services. And if you are doing at the same time structural reforms, than you have more money and can use this money much more effectively. For people it is visible that reforms bring real results – results in much better public services. This is the miracle of the real reforms.

We invite you to watch video of Ivan Miklos speech:

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