On October 14-15, 2005 the 2nd European Resource Bank Meeting (ERBM) entitled “The European Third Way: the Way Forward?” was held in Vilnius, the capital of Lithuania. It was hosted by the Lithuanian Free Market Institute (LFMI), one of the oldest and most active free-market think tanks in Europe celebrating its 15th anniversary in the autumn of 2005. The event drew prominent free-market economists from Europe, Chile, and the USA to debate the future of the crumbling European social model. Around one hundred participants from 24 countries took part in the 2nd ERBM. The idea to organize annual gatherings in Europe has been borrowed from the USA’s greatest NGOs - the Heritage Foundation and the ALTAS Economic Research Foundation who have been staging similar forums for decades. These events bring together around four hundred promoters of liberty every year to discuss and work out a better case for the free market course.
Vision: Only Voluntary Private Pension Insurance
LFMI was honoured to host ERBM’s key speaker the world’s distinguished economist, the architect of Chile’s pension reform Dr. José Piñera, who visited Lithuania for the first time. Twenty-five years ago, Dr. Piñera developed and implemented successfully a fundamental and then radical pension reform by introducing a fully funded pension system which replaced the state-run pay-as-you-go (paygo) system. He was also invited by a number of country leaders to explain to them “the Chilean miracle,” among them being Presidents of the United States Bill Clinton and George W. Bush, Russia’s President Vladimir Putin and Italia’s Prime Minister Romano Prodi.
Delivering his speech “Towards the World of Worker-Capitalists,” Dr. Jose Piñera did not provide statistics and other specific issues, but spoke about his aspiration to see the Chilean people not slaves to the state-run social security system, but as economically free citizens (capitalists); he told the ERBM audience about his personal choice between a comfortable professor’s chair in the USA and coming back to his native country Chile plagued by a crisis, about the power of ideas and other similar notions that are equally important as the pension reform in Lithuania and other European countries. (Dr. Piñera’s revised speech is presented in this issue of “The Free Market”).
According to Piñera’s pension system model, the entire contribution paid to the mandatory state-run pension insurance fund had to be transferred to the worker’s individual retirement savings account held in a chosen private pension fund and became his or her property. This pension reform stands out as highly consistent: the state-run paygo system has been dismantled fully and at one time, which hasn’t been repeated in any other country of the world. Later countries chose a model propagated by the World Bank – a three-pillar pension system in which the paygo system is maintained intentionally. Lithuania is also among the countries who have launched a pension reform in a “cautious” way, by allowing to transfer to private pension funds only 2.5 percentage points of the social security contribution until it reaches 5.5 percentage points in 2007. the ERBM participants agreed that the paygo systems are very sensitive to demographic changes and political speculations and undermine workers’ incentives. However, in practice the battle is being won by political arguments such as the state’s duty to take care of the pensioners, that is why the current paygo systems, labelled as the “Titanic” and “crashing planes,” fail to undergo such sweeping changes as the one in Chile.
Participants of the 2nd ERBM also debated what could supplant the decaying pyramid of social security and what alternatives exist for the European pensioners. Dr. Ján Oravec, the Slovakian reform architect and Adviser to Prime Minister, highlighted, while shaping the future tendencies in pensions, that Piñera’s model was but the first step towards an effective pension system, befitting a free society, as it preserves an element of coercion: both Chileans and citizens of other countries that have introduced the second pillar in the pension system based on private saving must save for the old age nonetheless. There is no doubt that this was a gigantic step forward, as compared to the paygo system where contributions must be paid to one state-run fund, being redistributed rather that invested, and where the payer is not an owner of these contributions. However, the element of coercion should vanish in the future, and the state should no longer force its citizens to save for their pensions in one or the other pinpointed way. As a result, the pension system is to boil down to what we call the third pillar today – the voluntary private pension insurance or saving only. According to Mr. Oravec, such goals are awaiting us in the coming decades. On the other hand, ERBM participants raised a major question if decades would not be too late. In other words, decades might be too lengthy a period of time because the unreformed state pension systems might eventually collapse and hit the countries’ economies so severely that politicians will see more crucial tasks to handle at that moment than the wellbeing of pensioners.
Waldemar Inghal, Director of the Eudoxa, Sweden, touched upon one more noteworthy issue, and that is the altering concept of living in the old age. If a pension-age individual is not entirely dependent on the state-provided pension, state funding of health care and state-rendered education, he will prove to be an economically active individual. There is much likelihood that under such circumstances individuals would be able to use life-learning opportunities, to improve their qualification and take better care of their health, as compared to the current pensioners. Also, it is probable that such people, at their retirement age, would be capable of, and tend to, set up their own businesses. Consequently, they will possess a certain amount of income from labour (or real estate) apart from their state-paid pension. Mr. Inghal concluded that if people perceive ageing as dynamic they will see the benefits of private insurances, and career reinvention. People dare to seize opportunities if they see openings, and total safety will not be necessary.
The ERBM discussions also revolved around the specific issues of practical policy which ensue when conducting the so-called parametric, or incomplete, reforms of pension systems. David Lipka from Liberalny Institute in the Czech Republic stated that the essential economic problem to be solved while reducing the scope of the paygo system is a deficit emerging when a share of the social security contribution is redirected to private pension funds. In his opinion, it is fair both from the economic and social point of view to cover this shortage by proceeds from privatization. LFMI proposed and advocated an identical recommendation when the pension reform was being contemplated in Lithuania several years ago.
How to Shift from State Funding of the Health Care?
At the European gathering, promoters of the free-market thought also addressed the issues of the health care reforms in Europe and asked a question who will pay for every European’s “right” to covered health care. On the one hand, every free marketer and every economist find it obvious that the thing called “the right to health” doesn’t exist (just as the right to have a job, rest, and the internet and all other positive rights) because there is no agency who would have a duty and realistic abilities to ensure these rights. Equally the same it is evident that health care services, just as any other type of services, have to be covered by an individual himself. In her presentation Dr. Guoda Steponaviciene, LFMI’s Vice President, named the core reasons why the health system financed from public sources cannot be sound and effective neither from the economic nor social nor medical point of view.
This conference focused on ways and methods of how to forego public funding of health care systems in Europe. ERBM participants discussed how to shift from a system in which the health care of a number of consumers is covered by others. As a result some people believe they have the right to get health care services for free, while others feel they are paying into a holey sack. After it was stated that, in the long run, people should have to pay for routine health care services from their own pockets and should insure privately to cover the expenses of serious (insured) illnesses, the questions were raised as to how, under market conditions, should be supported those people who are not insured by private companies due to a high risk of morbidity. Dr. Alphonse L. Crespo, an orthopaedic surgeon and Director of Research of the Institut Constant de Rebeque, Switzerland, conveyed an idea that there are numbers of forms of genuine – voluntary - solidarity existing in society, therefore if taxes and mandatory health insurance contributions were reduced, a more favourable environment would emerge for philanthropic activities of individuals, corporations, patient organisations and communities. Once the state usurps the role of providing care to the poor and the sick, people direct their voluntary support to other, often secondary, areas. The discussion rounded up in a conclusion that the choice of funding in health care will eventually depend for the most part on whether society understands the damage being done by “free treatment” and its willingness to take responsibility for one’s health.
Educations systems crave for competition
Apart from the European pension and health care systems, the 2nd ERBM addressed the funding of education systems, the issue that has been causing serious concern in Europe in the recent years. Prof. Nils Karlson, President and CEO of the Ratio Institute, Sweden, explained the highly appraised voucher reform in the secondary education system in Sweden which was conducted more than a decade ago and implemented the principle “money follow students.” Lithuania has carried out a similar reform in its secondary education system, however, the Swedish reform is seen as a more consistent one because under the Lithuanian model the voucher money in the end is redistributed from successful schools to underperforming ones anyway. Prof. Karlson pointed that the secondary education reform in Sweden has lead education establishments to focus on their clients –even being financed by the state, students gained more opportunities to control the quality of services provided. New types of private schools emerged, the remainder was forced to improve, and no negative effects have been observed after the Swedish reform. Even when the opponents of the reform - the Swedish social democratic party - won the election, this successful step was not overthrown. The major reason was that the party’s leaders started to send their offspring to the new private schools.
Alberto Mingardi, General Director of the Insituto Bruno Leoni, also stressed the importance of education in society, underlying that education should be organized according to people’s choice rather the government’s plan. This is the only way to achieve that the government propaganda was not being foisted on society members from their early days. He highlighted that the liberal people, who are deeply concerned with the state-run education today, are in part to be blamed themselves for such a state of affairs. Being enthusiasts of education, they strongly backed the idea of introducing universal education which has lead directly to the mindset that the provision of education services should be a state function. The ERBM debate was prevailed by views that the amount of education is not a primary concern and that people should be able to receive as much of education as they need, whereas the existing funding and organization of the education system stimulate its artificial expansion. This results in poor quality, expensive education services, and subtly censored contents of education in European countries.
Free-market think tanks are not in consensus on some educational reforms. Some believe that the implementation of voucher reforms in the secondary and higher education systems would create preconditions for competition and bring improvement thereof. Others think that such reforms are in principle the salvation of the defective system and spoiling of private initiatives as market participants would tend to correspond to the state-regulated needs rather than the free choices of their customers. But the idea predominated that the current education system is too costly and does not conform to people’s needs.
The Illusion of “The Third Way”
Although the impressions and conclusions of ERBM participants differed quite considerably, they agreed unanimously that there isn’t and can’t be any third way in the economy. The formation called “the third way” is just a mixture of the two systems – the market economy and the central planning, and its composition rests on time, local topicalities, fashions and tastes. With an exception of perhaps only Dr. Jose Piñera, most of the speakers focused their presentations less on the criticism of the welfare state but more on discussing various schemes of market reforms (such as advantages and shortcoming of the voucher reforms, further stages of the pension reform, etc.), reform tactics and opportunities of think tanks in this endeavour.
The panel on economic security demystified the fallacious myths regarding the state’s role. If somebody nursed hopes that the state is its citizens’ best saviour from domestic violence and foreign aggression, this idea had to be berried after listening to Prof. Hans Hermann Hoppe’s speech on the real dangers to economic security (the transcript of his speech of presented in this issue of “The Free Market”). In his speech on financial institutions, their regulation and the impact on security and terrorism, Dr. Richard W. Rahn, Director General of the Center for Global Economic Growth, explained the effects that are contrary to those sought by extensive and meticulous regulation of the financial sector. He concluded that if financial institutions and their customers are weakened or bled to death by regulatory malpractice, the war against real criminals and terrorists will be made more difficult (the paper is presented in this publication). Dr. Remigijus Šimašius, LFMI’s Vice president, delivered a presentation on the real and imagines dangers of economic security on the Baltic Region. He highlighted that if economic security is understood as the absence of uncertainty whatsoever this will never be attained as it is simply impossible. Measures aimed at ensuring security are a big burden on national budgets, i.e. the taxpayers. Moreover, governments’ efforts to increase security invariably impose extra costs and may be the cause for insecurity instead. Dr. Šimašius suggested that it is openness and markets rather than boundaries and planning is the proper way to increase economic security.
Debates in the workshops on the 2nd day was a real testimony that free-market think tanks in the USA are far more active and influential that their European counterparts. Moreover, the American society has a more favourable attitude, as compared to the Europeans, towards the mission and activities of NGOs (they at least don’t need to keep making out that NGOs and lobbyists are two different things). The activities of the European think tanks are also being impaired by the fact that the societies in their countries are concerned mostly about the domestic issues only, while an increasing number of decisions is being made at the EU level. It is extremely difficult, if not impossible, for individual think tanks to reach the airs of EU institutions so the issue of how to act in Europe as a united movement remains among the most pressing tasks.
ERBM participants repeated various arguments that even though the model of the welfare state seems attractive it is doomed to ineffectiveness and, under the conditions of globalization, even to the downfall. This forces the pro-market economists to search for alternative solutions. The free market is a lighthouse showing the course in this search, however, tremendous work is in store for free-market think tanks showing to society the inevitable collapse of the current pension, health care and education systems, ways leading to the free market and specific measures that would help to get move from the current deadlock. It is natural to believe that think tanks don’t lack ideas. What they lack most is managing to speak in the way that the listeners would be willing to hear what they say.
