Transcript | 6. lecture: Who falls down, who rises and why? - University for modern Slovakia

In the previous lecture we talked about the strong force of inertia in terms of wealth of nations, and we agreed that we will talk more about exceptions to this inertia. Let us have a look at the cases of Ireland and the Asian tigers, which have overcome inertia and got from the bottom to the top, and the cases of Argentina and Czechoslovakia, where inertia was of no help in their fall from top to bottom.

First, some numbers. Wealth will be compared on the basis of gross domestic product per capita in purchasing power parity.

Argentina was tenth richest country in the world a century ago (1913), today it is on the 62 place in the world (CIA World Fact Book). Czechoslovakia during the first Republic (1918 - 1938) belonged to the twenty richest countries in the world. There were differences, of course, the Czech part was on about the 13th – 15th place while the Slovakian part on approximately 25th place. Even in the late forties, shortly after the onset of communism, Czechoslovakia was richer than Austria was at the same time (we reached 76% of Western European average, while Austria 69% only).

How did the situation changed during four decades of Communism? We fell somewhere into the seventieth place among the countries of the world and comparing to Austria (in 1990), we did not reach even half the level. Today, twenty years after the fall of communism, and challenging transformation and integration, Czech Republic reaches 66% and Slovakia 58% of the Austrian level.

And what about the Asian Tigers and Ireland? In 1970 Ireland reached only half the level compared to the average of Western Europe. Even after joining the EU in 1973, it did not change quickly; in 1981 it was still only about 55%. In 2008, however, it was 130% of the EU average.

For the Asian tigers let us look at South Korea. According to the UN in 1970 the GDP per capita in the country was at 295 USD and in communist North Korea 388 USD per capita. And do you know how much it was according to the same source in 2008? In South Korea (democratic country with market economy) it was 21 876 USD while in North Korea (communist dictatorship with a centrally planned economy) it is 555 USD per capita. While in North Korea the GDP per capita has increased 1.43 times for 38 years, in South Korea it increased 74 times for the same time.

Enough with numbers, let's summarize and draw conclusions.

If we look for the common denominator behind the fall of Argentina and Czechoslovakia and the rise of Asian tigers and Ireland, so we would finally find out that it is freedom, motivation and competition. These are essential prerequisites for success, especially (but not only) economic.

In the case of Argentina, as well as in the case of Czechoslovakia and the DPRK, it was just the lack of freedom, motivation and competition that led to economic decline and backwardness. Communism is based on denial of these values ​​in the political as well as in the economic field. The leading role of the Communist Party, central planning, nationalization of all enterprises, lack of market incentives and competition is tightened up to absurd proportions.

Conversely, in the case of the Asian tigers and Ireland, just pro-market reforms based on freedom, motivation, and competition triggered strong economic growth, which in the course of two decades pushed those countries among the most developed and richest nations. These are reforms based on low taxes, limited state intervention into economy, free movement of capital, goods, and services, and protection of intellectual property rights, low corruption and a flexible labour market and efficient public administration. Such reforms are what lead to higher economic growth and higher economic growth in turn leads to a rapid growth of wealth. This is clearly evidenced by the "Index of Economic Freedom" published annually by Heritage Foundation and The Wall Street Journal. I recommend for example to compare the positions of the South and North Korea. Although there is no direct causality between the degree of freedom and degree of wealth of the nation, but it exists between degree of freedom and opportunity to maintain or gain the position of rich nation. Especially for poorer countries with the ambition to be amongst the rich it is just one of the most important conclusions.