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Statism – a false solution to a real problem

Published at: 31-05-2024

Posted on: May 31st, 2024 by RaduC No Comments

The rise of populism is a cause for concern all over the world. But the rise of this current of thought in Europe and the US is being watched particularly with concern, because of the major economic and geopolitical impact that developments in these regions could have on the whole world.

Populism is primarily the prerogative of parties at the extremes of the political spectrum, which is why for a long time the mainstream political parties have been tempted to neglect it, or to regard it with arrogance or superficiality. This kind of attitude still applies, with political leaders blaming the rise of parties promoting populist policies on lack of education, social media, sophisticated manipulation or funding from hostile countries.

By indulging in such superficial and convenient explanations, the main political leaders ignore one essential fact. The reasons they give as explanations are in fact ways of widening the cracks in society. But the cracks have been generated in the first place by the mainstream parties themselves, who today point the finger elsewhere. The original problem was that the political system stopped delivering two major benefits to voters: prosperity and representativeness.

It has ceased to deliver prosperity as economic developments have not spread equally across different social and professional categories. In this way, in Europe, from West to East, prosperity has spread to the elite, while the middle class has stagnated or even regressed. This is also the case in Romania and part of Central Europe where, even if the economic recovery process has continued, the associated benefits have had an impact below the expectations of a large segment of the population. And the reality is that, indeed, the consequences could have been much better had they not been distorted by political and economic decisions taken on sub-optimal and sometimes cronyism criteria.

In this context, in the case of Western countries, we can talk about the negative consequences of globalisation accelerated by prioritising the interests of capital owners over those who provided the factor of production “labour”. Somewhat counter-intuitively, while more and more businesses were relocating to distant countries with cheap labour and large markets, in Western countries deserted by capital, where more and more people began to suffer from stagnating wages or lack of alternatives, mainstream leaders were advocating an open door policy for immigrants, side by side with business representatives.

At the same time, the fact that some of the immigrants came from Central Europe, and primarily from Romania, raises other questions. Why is one of the Central European countries with the fastest economic recovery measured by GDP the main source of emigration? The answer is that this was the population’s form of “protesting” against the polarizing economic benefits offered by Romania’s mainstream political system. Some of the most relevant examples of this are the major discrepancies in development between the urban and the rural or between the east and the west of the country.

The second benefit that the mainstream system ceased to deliver to expectations was representativeness. And when I say that, I mean the disconnection of the main parties from the real concerns of the population, a lack of leadership towards much needed change promoted in the absence of proper social and economic impact assessments, a lack of effective communication and ultimately a lack of management of the inherent resistance to change.

We can include in the categories of topics addressed clumsily the challenges brought by demographic trends and the need to increase the retirement age, but also the presentation of immigrants as the only solution, as ghettoisation and their lack of integration become increasingly visible in Western societies. This also includes environmental policies, which are absolutely correct in principle, but which have been aggressively promoted by the mainstream parties without a thorough study of their economic and social impact. The lack of a step-by-step approach that wins popular support has created major tensions on issues such as energy prices and agricultural policies.

The election agendas on which the mainstream parties were voted in provided little detail about their real plans. The political system no longer seemed to feel obliged to deliver on its promise when it was voted in. The reversal of priorities or the introduction of new political themes led to the perception of a growing divergence between the voters’ agenda and what the system actually delivered.

In the case of Romania, perhaps the most striking example is that of the diaspora, a traditional center-right voter until recently, even at the price of queuing for a whole day at the polls, but which has shifted in recent years to an anti-system party. A similar case study is provided by the preoccupation of the local political class exclusively with the standard of living of pensioners, while sociological studies show that poverty is much more alarming among young people. The consequence that should not be surprising is their above-average propensity to vote for anti-establishment parties, as mirrored by opinion polls.

The good news is that some parties promoting political and economic populism and challenging EU membership, once in power, have undergone a dramatic change of agenda, accepting that what they were promoting was a utopia leading down a dead end.

In the context of the major crisis Greece faced in 2008, on the wave of a virulent discourse against the EU, Germany, the IMF and promises to default on foreign debt, the Syriza party took power. The leap was remarkable, given that before the crisis it had 5% popular support. Holding a referendum on, ironically, austerity policy, showed Syriza playing the populism card even after taking power. But only briefly. Greece had missed an external payment, Greek banks were no longer receiving funding, and the population’s withdrawals were limited. The country was on the brink of economic collapse. Reason enough for the Greek parliament to decide to ignore the referendum and continue the austerity programme in order to get a financial assistance programme. All the populist rhetoric from the opposition and the first months of government was worthless. Syriza was turning, tail between its legs, to economic rigour.

More recently, while in opposition, the Brothers of Italy party was labeled by its political opponents as a neo-Nazi party with strong anti-EU tendencies. The major fears were that, once in power, by coordinating with similar parties in Hungary and France, it could lead to a destabilisation of the EU and the eurozone. Reflecting these fears, in the context of the Italian elections, the risk premium for Italian government bonds increased substantially. And yet, once in power, the Brothers of Italy party did not confirm the fears provoked by its rise: it did not ally itself with other anti-European parties, it did not destabilise either the EU or the euro, it supported Ukraine despite Italy’s historic rapprochement with Russia. The rhetoric of today’s far-right party has changed remarkably.

But it would be an illusion to imagine that all nationalist-populist parties change, once in power. Examples can be found in Central Europe, where they either end up disappointing and being voted out of power, as was the case in Poland, or continue to lead and produce mediocre economic results and anti-European geopolitical alliances, as in Hungary.

Given the unpredictability of nationalist-populist parties, mainstream parties still in power are trying to prevent the rise of the former by taking up their themes and dressing them up in a less radical form. Thus, we see political parties beginning to have a more nuanced policy on immigration, or beginning to reverse certain excessive and economically costly measures related to environmental protection. At the same time, they are taking action to protect local companies and boost domestic investment by relying on domestic capital.

Such tendencies have been promoted in Romania under the name of nationalism or economic patriotism. This is an interesting idea, but it can hide pitfalls if it is confused with the promotion of statism, meaning an increased presence of the state in the economy. Such an error would start from the idea that the Romanian state is the only champion of the “national interest” and should therefore assume a role accordingly, including in the economic field.

This has led to a number of initiatives, such as stopping any sale of shares held by the Romanian state in the companies it owns. Let’s not forget that last year’s listing, Hidroelectrica, was achieved through the sale of shares held by Fondul Proprietatea, a private institutional investor, and not by the Romanian state. And the future of other privatizations is in doubt, as some companies have been labeled, officially or not, as having strategic importance. Which brings me to another counterproductive approach, whereby dozens of state-owned companies have been labeled as strategically important, thus subjecting themselves to special governance and shareholding limitations.

This is a misguided approach, as the Romanian state already has a reputation of being a weak manager of the companies it controls, and a poor shareholder, unable to support their development. Labeling some companies as strategic should in fact be an extremely strong argument in promoting high quality management and a sound financial situation.

In reality, the key to economic patriotism lies at least as much in developing the private sector, stimulating entrepreneurial activity and the accumulation of domestic capital. It is worth noting that, paradoxically, some of the great advocates of economic patriotism are also opponents of the private pension system. Basically, they promote national economic interests, ignoring the benefits that the largest accumulation of domestic capital, worth almost 30 billion euros, can provide for development.

The promotion of economic patriotism should not be based on the promotion of statism, but should aim at stimulating the development of a dynamic economy as a whole, through an optimal allocation of existing resources. And the private sector is best qualified for this, which is why it must be supported. In this context, excessive taxation of the private sector to cover budget deficits due to poor collection and overspending is certainly not a decision in the right direction. A large and inefficient public sector, which is a cannonball at the foot of the private sector, makes economic patriotism a meaningless notion. Let’s not forget that it was also “economic patriotism” that delayed the exploitation of Black Sea gas for years, prolonging dependence on Russian gas and increasing Romania’s vulnerability with the outbreak of war in Ukraine.

In conclusion, the rise to power of the national-populist parties cannot be stopped without solving the two major problems mentioned: prosperity and representativeness. Achieving these goals means reconnecting the mainstream parties to the European electorate’s agenda, understanding that they have a big credibility problem. Solving this credibility gap that is sweeping Europe from West to East means giving up hypocrisy and arrogance, giving up turning political correctness into dogma, understanding and taking the priorities of the electorate on board. As a manager, politician or party, you stand no chance of becoming a leader without the trust of those who should follow you. So the first step is to be, with humility, a follower, and then, once the trust is regained, to become a champion of change through leadership.

Regaining trust also requires a much more balanced approach from the political class, aimed at creating equal opportunities for all citizens, regardless of whether they represent a majority or minority group, regardless of their economic power and financial strength. Favouring the private sector is not just about favouring the rich or well-connected, but about stimulating all entrepreneurs and the entrepreneurial mentality in general.

As far as direct state involvement is concerned, it should be promoted only in those areas that are too risky, or require too large amounts of money for the private sector to get involved. And Europe, including Romania, needs state involvement in the development of an efficient infrastructure on all its dimensions: road, education, digital, energy and so on. Not least, stimulating large scientific research projects, including through public funding, will be a key element of competitiveness and security in the 21st century, and compared to the US and China, Europe seems to be in danger of missing this crucially important train. In this picture, Romania cannot afford to be an exception.

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