Augusto Lopez-Claros, Director of the Global Competitiveness Program of the World Economic Forum.
Eliminating Redundant Regulations Is More Important Than Worrying About Inflation
Interviewed by: Hrvoje Mateljic Photo by: Drazen Lapic
Lider Poslovni Tjednik, March 10, 2006
Some thirty CEOs from the Croatia 's largest companies, representatives of state institutions, and international organizations gathered in Zagreb last Wednesday to debate over two models of enhancing competitiveness of the Croatian economy: regulatory reform and quality management. The organizers invited Augusto Lopez Claros , Director of Global Competitiveness Program of the World Economic Forum and a former IMF representative in Russia , to be their keynote speaker.
Do you agree with those who criticize the IMF because it favors macroeconomic stability over other elements important for economic growth?
Macroeconomic stability is very good and crucial if you want to create conditions that aim at economic growth. However, if you focus only on this and ignore innovations, technological innovations, and state of institutions, prescription for success will be incomplete. I am not critical about the IMF, as it operates within a very limited legislation framework. (.)
Is the situation getting any better?
Twenty years ago, the IMF spoke reluctantly of corruption and transparency. Today, it is generally accepted that high degree of inefficiency and misuse of public resources in a country can influence its development. This cannot be ignored and therefore, the IMF is getting more and more involved in discussions on corruption and quality management. However, this is not considered a precondition for cooperation with the IMF, as this is not the IMF's policy.
The IMF is particularly unpopular in Latin America . Is this justifiable?
Most of the problems faced by Latin American countries were created by the countries themselves. There is a tendency among some politicians to shift the blame and responsibility to other institutions, and the IMF has always been a rewarding target. (.) We must not forget that countries in general approach the IMF, because they poorly managed their countries' economies and need loans. Chile has not had an arrangement with the IMF since the 1980s, because it has properly managed its economy. Argentina , on the other hand, had to request the IMF's assistance every year during the 1990s and 2000, because it poorly managed the state finances. The truth of the matter is that the IMF has made mistakes as well. Its role in Argentina in the end of the 1990s and 2000 was a subject under serious criticism, and to a certain extent for legitimate reasons. Still, I think that in a large number of cases the IMF provides assistance and has a constructive role in international economy.
Can economic rehabilitation and development in Latin American countries be compared with transition processes in Central and Eastern Europe ?
Since the fall of the Berlin Wall, East European countries have implemented a number of reforms and upgraded their economies in a fascinating way. One can say that a potential EU membership has been a strong momentum for these countries. (.) Economic performances of Central and Eastern European countries in the last 15 years have been much better than Latin America 's.
Is the role of macroeconomic stability in Croatia overrated?
As countries improve their macroeconomic policy - paradoxically, it becomes relatively less important. This is how it ought to be, because once a state enters the macroeconomic stability era and once state officials and the business community accept the concept that responsible budgetary management is inevitable, then itbecomes an everyday fact. (.) Elimination of redundant regulations in Croatia is of greater importance than taking care of inflation. Why? For the reason that inflation is no longer a problem in Croatia . However, Croatia has to achieve progress in the area of budgetary deficit and indebtedness.
How do you comment on views that Croatia should sacrifice a share of its macroeconomic stability, say by relaxing the exchange rate, in order to strengthen exports?
My experience tells me that exporters always complain about the exchange rate level, which for them is never low enough. (.) The key is productivity increase which is far more important than the exchange rate level. (.) Estonia, for example, has succeeded in this because its government enhanced competitiveness of its export sector by decreasing the regulatory burden, eliminating excessive expenditures, larger investments in education and infrastructure, instead of applying exchange rate depreciation. This is a far more efficient way of assisting the business community and exporters, rather than by depreciation. Besides, Croatia does not have much choice in this, as it has decided to join the EU, and exchange rate stability is one its requirements.
Growth of public debt has been a major topic of public discussions lately. What do you think about that?
Croatia 's public indebtedness is bigger than it should be. (.) It is much bigger than in similar countries like Estonia , Latvia , and Slovenia . The amount of public debt indicates the way in which the budget was managed in the past. (.) In order to manage it, more and more resources have to be used. I am not trying to say that Croatia is already facing this scenario, but it can easily happen. (.) Croatia is progressing in the direction of decreasing the deficit. However, this is slippery ground. Once your country joins the EU, most probably the same thing will happen as it has happened in a number of other new member countries - economic growth will accelerate due to the influx of new investments, etc. This will gradually solve the indebtedness problem, because the debt share of GDP will be shrinking.
What are Croatia 's competitive advantages and, in what areas are we lagging behind the EU?
There are several areas in which Croatia 's position is very good: the entire area of education, literacy, and work-force skills. This is a characteristic quality of the majority of the Central European countries which has significantly helped them in achieving economic success. There are only a few countries in the world that have an educated work-force and relatively low wages and economic and political stability. It is hard to find all the three factors in one country. Central and Eastern Europe has all of these three and therefore they attracted a huge amount of direct foreign investments. Croatia has many of these elements and as you approach the EU standards, bigger influx of foreign investments will take place and contribute to the creation of more new jobs and development of the economy.
What are our weak spots?
Surveys conducted in Croatia by the World Economic Forum, as a part of the Global Competitiveness Project, indicate that the business community is seriously concerned over bureaucracy. This is why I support initiatives of the National Competitiveness Council, which advocate decreasing the regulatory burden. (.) Closely related to this is efficiency of public administration, functioning of the legislation, proprietary rights, etc. Progress can be achieved in the category of quality of public institutions. Reforming institutions can be much harder than decreasing inflation or exchange rate stability.
Your estimates and recommendations are based on data collected by the World Economic Forum through surveying the business community in a certain country. To what extent can this data be impartial?
In our surveys we relate to two types of data. Survey data present only one component, and the other is firm data on budgetary deficit, inflation rate, etc. The survey data is used for factors that have no firm data. When I want to find out how the judicial system operates, the only way to do so is to survey the beneficiaries of the system. The answer to your question is yes, our work does have elements of partiality, because we seek out opinions of approach if we do not want to disregard the quality of judiciary, protection of proprietary rights, an so forth, in which case we could be criticized for not taking into account factors that both theory and practice have proven to be of vital importance.
In my opinion, much of the work related to enhancing competitiveness is expected from the Government. How much can the business community and national competitiveness councils, such as the Croatian one, do in this respect?
National competitiveness councils can be a very efficient mechanism for identifying necessary reforms and lobbying government for these reforms to be carried out. When I refer to lobbying I refer to a positive process, where a business community, through the national competitiveness council, establishes a dialogue with the government in areas where improvement needs to be identified, reform strategies defined and implemented. Government authorities must make final decisions, but they also have to be familiar with the position of the business community. Whenever a government believes that it can manage without the opinion of the business community, it renounces a very important source of information and is subject to making mistakes. I have seen this in a number of countries. Without dialogue with the business community, governments usually make a mess.
We have seen very often in Croatia that certain industries, such as tourism, are expected to be vehicles of overall economic growth. In your recommendations to the Croatian Government and entrepreneurs, you do not mention any specific sectors or industries whose development should be fostered. Does that mean that creating an enabling environment is a sufficient precondition for achieving economic growth?
Economic experts have been debating this a long time. The Chilean approach was a neutral one. Good quality management on the macroeconomic level and improvement of the business environment without giving preference to one particular sector over another or display of favoritism towards particular industries. (.) For example, the [Chilean] government did not give preference to domestic industry over foreign companies, but at the same time it did not provide tax breaks to international investors. That was a very good decision. On the other hand, governments in Finland and Israel do intervene in order to support technological innovations. That functioned very well in Finland , as the level of candor in public administration is extremely high, and control mechanisms are exceptionally strict and transparent.
Should the state influence be completely excluded from public companies, such as power-supply, road building, public utilities, etc.?
There is no simple solution for this. There are examples of huge industrial countries in which state owns these natural monopolies. On the other hand, there are smaller countries where the government has entirely excluded itself from these industries. A larger part of the Chilean public infrastructure, such as highways, was financed by the private sector. They applied the so called public-private partnership model in which most of the money came from private sector sources. This is how the best quality infrastructure in the Latin America was built. Of course, it worked out only because the government established firm rules of conduct, so as to prevent concessionaires from plundering their consumers. The government made sure that these strict rules were implemented.
To what extent can the lack of well-trained personnel influence the performance of a government or public administration?
This is a huge problem, especially in economically disadvantaged countries. We talk about the country's capacity to implement high-quality policy, knowing that this capacity is often quite limited. I was told that very often small, disadvantaged countries cannot obtain favorable terms in negotiations because they lack skilled negotiators. Trade negotiations are very complex and you have to have highly qualified experts, which many of these countries do not have. This is an example of how the absence of highly-educated experts in public administration can harm interests of the state.
The flat tax: Can Croatia be compared with Russia or the U.K. ?
What is your opinion about a possible introduction of a flat tax, which has been one of the hottest macroeconomic topics in Croatia ?
This has been a very controversial issue. Estonia has the flat tax, the Russians have also introduced it and with some success too. However, the flat tax has worked in Russia because up to that moment, no one was paying taxes. Their tax system was so inefficient and had so many unnecessary exceptions that introducing the simplified taxation system was a huge administrative step forward which has produced a considerable increase in tax revenues. The U.K is not going to introduce the flat tax. They have a progressive tax system which functions well, because there is a taxpaying culture - companies pay their taxes and fines for nonpayment is very high (people might even end up in jail for that).
The question is whether Croatia is more similar to the U.K. or Russia . The whole debate boils down to this.
