July 15, 2015
As it happened, I was unable to attend the lecture by Prof. Finn E. Kydland and Prof. Edward C. Prescott, entitled ‘The Poor Economic Performances in the EU and the US: Problems are Political, not Economic’, which took place on June 24th in Warsaw. I was in Sopot at that time, presenting the energy and climate policy recommendations developed at the European Financial Congress.
Essentially, both the EFC recommendations and the conclusions of our report on the European Energy Union refer to the same problem, which was first noticed in 1977 by F.E. Kydland and E.C. Prescott, who in 2004 received the Nobel prize in economics for their study of the field. It pertains to long-term predictability and credibility of economic policies, which, as Kydland and Prescott demonstrated, are currently the most important drivers of long-term growth. Meanwhile, economic policies are not consistent over time: what seems the best (optimal) action today will cease to be that in the long term, even if no new facts emerge and the state of our knowledge remains unchanged. Our decisions, however, produce tangible consequences. Consider this: to attract capital, companies are promised life-long tax credits, but when the businesses begin to prosper, there is a temptation to make them pay taxes. Imposing a tax which had not been considered before not only changes the rules of the game, but also does permanent damage to the credibility of economic policies. How can this be prevented? Kydland and Prescott propose that rules take the place of discretion.
To simplify things and give a general idea of what they mean, we can say that there is so much uncertainty in the world that any more of it where economic policies are concerned is undesirable and harmful. What capital values is the predictability of economic conditions over the long term and so it gravitates towards countries whose economic policy is more reliable, creating a solid basis for long-term growth. Technological progress is expensive, and we have to wait long for its effects (innovations) to appear. It is vital that economic conditions (profitability conditions) do not change materially over that period. Charting long-term policies is therefore much more important than short-term planning. Robert E. Lucas (who received the Nobel prize in 1995 for his theory of rational expectations) would say that if one sets up a business they should not look at the current or next year’s economic policy, but rather focus on how it is going to develop over the long term (their company’s lifetime).
Poland’s economy has been growing steadily since the early days of transformation, and both Nobel laureates believe this has been thanks to the predictable character of the country’s economic policy. Let me just add that the consistent vision of Poland in Europe, which all political parties have shared since the very start of the transformation, has been immensely helpful. To make this vision a reality, we have had to implement EU regulations and follow the path of sustainable development. Having joined the EU, we have received substantial funds to reduce any development discrepancies, which Poland’s successive governments have put to good use.
While the financial crisis unsettled the EU economy, Poland was able to weather the storm unscathed, because, as the Nobel laureates point out, we did not change our economic policy or take any stimulating measures, unlike other countries. How do I know this if I did not attend the lecture? That is what the Internet is for.
Still, the crisis has left a mark – due to the deplorable state of the Eurozone’s economy we have lost sight of the vision / purpose of our development. Where are we heading now? What kind of economy do we want to have? What is our place in Europe and the world? We should find answers to these questions, and find them quickly, lest we lose our momentum.
Also the European economy policy badly needs predictability and a term longer perspective. In the recommendations presented at the EFC, we argued that a vision of Europe’s future would be helpful − a vision specific enough to encompass the hopes and ambitions of all member states, but also spanning enough time to enable all countries to adjust, taking into account their different starting points. Poland should actively contribute to developing this vision, because time is running out.
Author : adamczyzewski