Ensuing paradoxes :

1. UNDP EPIN Meeting in Bishkek, 3 December 2005Case Study 2: In search of Success Stories of the Public Policy Advisingby Vladimír BenáčekIES and CESES, Faculty of Social Sciences, Charles University, Prague

2. Public policy advising is like navigating between Charybdis and Scylla. According to both Hayek (Law, Legislation and Liberty. Vol. 1, Rules and Order, Univ. of Chicago Press, 1973) and Marx (Das Kapital),(or even Popper, Keynes, Robbins, etc. ...)social order is a contradicting duality of the real and the wanted.

3. The bias in policy-making when politics dominate over economics in the privatization stage of transition I.

4. The bias in policy-making when politics dominate over economics in the privatization stage of transition II.

5. The dilemma of a policy advisor:A/ To analyse the economy as objectively as possible and to recommend policies subject to Pareto (or Kaldor) optimum.B/ To analyse the politics as subjectively as possible and to recommend those means maximally satisfying what is demanded. Ensuing paradoxes: A/ Getting entangled in economic theory (models) no one in politics understands => misunderstanding, confusion, ... ... ignorance and rejection.B/ Getting entangled in Machiavellian politics that everyone understands but many hate => the conflicts are deepening in the long run.

6. Krugman criticised B. Clinton, J. Delors, J. Major, T. Blair, L. Tyson, S. Brittan, L. Thurow, I. Magaziner and R. Reich. By means of logical reasoning based on both economic theory and empirical evidence, he has shown that policy attempts at boosting national competitiveness are: a/ Unfounded and misunderstood b/ Leading to inefficient or irrelevant policy measures c/ The problem can be dealt with by a different logic and by different means. . Case 1: Krugman on policies supporting “competitiveness”Krugman P. (1994): Competitiveness – a Dangerous Obsession. Foreign Affairs, 73, no. 2

7. Problem identification: The economic globalisation deepened the problem of national enterprise adjustment, which is painful and costly. Some external threats are supported by foreign government’s subsidies. Trade and capital transfers are a zero-sum game even at the national level. Incorrect policy implications: The national governments should protect the national economy against such influences by means of trade protection, subsidies and even policies undermining foreign competitors and foreign countries. . Case 1: Krugman

8. The reality of the problem: • Countries are not like enterprises. • They have specific means: exchange rate policy, monetary policy and wage policy of enterprises. They all reflect the national comparative advantages, relative productivities, relative factor endowments. • Free trade is not a zero-sum game: e.g. a loss in one sector (an import penetration) opens new opportunities in exports. Trade deficit (surplus) is sustainable only within the balance of payments equilibrium... • Government intervention can rarely improve the affairs. Case 1: Krugman

9. Policy alternatives: 1/ Building the trade on comparative advantages 2/ Governemnt should support the externalities supporting the free trade (education, R&D, law, international cooperation via WTO) 3/ The cases of policy intervention are rare and require a transparent environment (infant industries protection, strategic trade). Impact of the argument on world’s policies: The real geo-politics became more cautios, the economic controversies became more clear, and even the intensity of outright protectionism became less practiced. Case 1: Krugman

10. Case II: Growth, exports and exchange rateBenáček V., Víšek J.Á.: Impacts of the EU Opening-up on a Small Open Economy. In Karadeloglou P. (editor): Enlarging the EU - Trade Balance Effects. Palgrave/Macmillan, New York, 2003, s. 3-29Vladimír Benáček, Jiří Podpiera and Ladislav Prokop: Command Economy after the Shocks of Opening up. WP of CNB, December, 2005   Problem identification: According to the official statistics, the average annual growth in the Czech economy for 1997-2003 was 1.8%. Such performance is grossly incompatible with the developments in real wages (growth 3.6% ), GDP measured in constant EUR (6.4%), or the real effective appreciation of Koruna (2.9%).

11. Case II: Growth, exports and exchange rate Incorrect policy implications: Low GDP growth is a sign of economic stuttering, impefect adjustment and unfinished restructuring. Therefore it could be inferred that it was due to exchange rate overvaluation, too high wage hikes and too many frictions in the institutional support. The correction could be seen in higher government spending, easier monetary policy, subsidization, concessions to foreign capital and wage controls in the state sectors. BUT ARE THESE CORRECT ? NO !

12. Case II: Growth, exports and exchange rate The reality of the problem: The studies of Benacek et al. (2003, 2005) revealed that the Czech exports were growing due to improvements in terms of trade (2%), growth in total exports in EUR (11%), unit export prices to EU (13.2%), improvements in the quality of products and an intensive reallocation of production and exports to such industries. At the same time there were new studies by J. Hošek of ČNB, 2004, U. Kohli, JIE, 2004, R. Filer and J. Hanousek, 2004, which also came with a hypothesis that the Czech growth for 1997-2003 could have been higher than presumed. Thus the imposition of previous policies would be incorrect.

13. Case 3: Privatization and entrepreneurship Winiecki J., Benacek V., Laki M.: The Private Sector after Communism. New Entrepreneurial Firms in Transition Economies. Routledge Publ., New York, 2004, p. 1-202 It was presumed in the early years of transition that the mass (voucher) privatization could open wide windows of opportunity to entrepreneurship and efficiency due to sudden ownership changes. Unfortunately the result was a massive wave of bad debts, bank defaults and frauds. As was found by Winiecki et al., 2004, the privatized enterprises were not more productive than the non-privatized ones, and the de novo SMEs sector and the efficiency gap behind the incoming foreign firms was sharply widening.

14. Case 3: Privatization and entrepreneurship Incorrect policy implications: The sluggish performance of the re-privatized acquisitions was supposed to be cured by easier access to money and loans, government excessive spending, benevolence to contract breaching and caution in FDI entries. There could be even a conclusion that privatization as such was an incorrect policy measure and nationalisation or very gradual development of the private sector would be more appropriate.

15. Case 3: Privatization and entrepreneurship The analysis of privatization in Central Europe revealed that there were more successful techniques than the mass privatization : restitutions, retail auctions, competitive tenders to foreign capital and the creation of authentic ownership on green fields. Also Pejovich S.: On the Privatization of „Stolen Goods“ in Central and Eastern Europe. Paper from CRCE Symposium „Inhibited Transition“, Bled, September, 2004, and Selowsky M., P. Mitra et al.: Transition: The First Ten Years. Lessons and an Agenda for Policy. The World Bank, Washington, 2002, ... have come to a conclusion that privatization by itself cannot lead to successful restructuring and entrepreneurship if they are not accompanied by liberal economic environment: the creation of free markets for institutions and the incentives supporting property rights.

16. Case 3: Privatization and entrepreneurship • Alternative policies to be considered: • Attracting FDI; • Schemes for developing clusters of large foreign and small indigenous enterprises; • The sales of domestic banks to foreign owners; • The crucial upgrading of the legal and judiciary system enforcing property rights, competition and new entrepreneurship.

17. CONCLUSIONS:Policy-oriented papers cannot be divorced from an independent objective analysis of the economic reality supported by the theory and/or the empirical data. Often the analysis could be based on the theory alone (e.g. on the laws of economic behaviour and incentives) or on the empirics alone (e.g. in comparing the productivity of green-field domestic, foreign or privatized indigenous firms).However, the impact of the analysis on policy-making can be negligible if the society does not have independent research infrastructure, independent press and media, and contestable political system.