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Trade Deficits and the Health of the Economy-8: Dialog with Nikola Gruevski, former Minister of Finance of Macedonia

Sam Vaknin, Ph.D. - 3/20/2006

SV: If the government decides to finance exports directly, it can, indeed, do so through export subsidies or through credits provided by a specialist bank or through the general banking system, as you suggest. I think it is wrong. But I agree with you that the best source would be the proceeds of the privatization of the assets of the state. These are one off income items. Normally, the proceeds of the sales should be kept off the regular budget (extra-curricular). Most governments sell their capital (=the companies that they own) and use the money for current budgetary expenditures, not for development. This is very wrong. The money should be used either to finance infrastructure or to support the reconstruction of the economy, as you have delineated. Your approach is a bit "Reaganomic", though. You believe that if money is injected into the economy fiscally it will translate to bigger tax receipts in due course. History does not support this (apparently reasonable) assumption. During the eighties, the USA was engaged in supply side economics. Money was injected by the government (including introduction of the biggest programs ever for encouraging exports). The result was a quadrupling of the national debt and chronic budget deficits. By the way, the USA engaged, during this period in mass privatization. For instance, it sold its airwaves to private telecoms operators, the air control system, prisons, hospitals and numerous other state enterprises.

NG: I must explain because I noted that I was not understood. My idea was not the idea of the protagonists of supply side economy, because I don't think that with the reduction of taxes, investments will increase, the total (macro) revenues will increase, and so on. The idea was much simpler: lower tax rates for those which produce products for export in order to stimulate the others , which do not produce or export, or which produce but not export, or which just started in business, to get them to be oriented towards export projects. This doesn't mean that a reduction of the taxes of exporters will increase the investments, rather that it will motivate potential and actual producers to think more about exports as a more profitable business (we agreed that exports are very important for any country). But all these matters must be within a pre-defined period (in which the companies must begin to work), because if this is a long-term standing opportunity, the exporters can become inefficient, non-competitive and a problem for the country.

In the whole system, the most painful point is the fact, derived from past experiences, that the individual always succeed to con the state and to abuse its "big ideas". The big ideas sometimes are like big old trees – they make more shadow than they give fruit. That means that, even before we embark upon this policy, a control system and an efficient penalty system, geared to tackle abuse of the functions, the laws and cases of corruption, should be created (or copied from countries in which they were implemented successfully). For as long as the corruption is very deep inside the system, no project stands any theoretical chances to succeed, even one which brings development and prosperity to the state. The dilemma in this situation, is the state guilty or the individual, isn't a dilemma anymore – it is the state. The individual's psychology is to earn more (especially in times of crisis) even at the state's expense, when everyone else does the same. This psychology, if one wants to preserve civilization, is changeable only by the introduction of an efficient penalty system with multi-level control. For as long as the state creates a system, which applies to all, but not to "us and ours", it doesn't stand a chance for success, no less because RM is small country and most people succeed to find a way to belong to the group of "ours". The system, which the state creates, determines the business etiquette and culture, the mode of thinking, the environment and the habits, both negatively and positively. The state first has to make order with a multi-level control system of penalties, and only many years after that will follow the spontaneous creation of "moral shame" associated with the acts that I am talking about. Maybe the penalty isn't always justified, but it serves to block a hundred other evil deeds. Who doesn't punish evil, provokes it. So, first is fear and than shame will join it. The shame after discovering the act of deceiving the state is almost not present in RM. Some people perhaps don't even understand the meaning of these words. This is the way new habits and customs are created among people, and also the transformation, from the roots, of the individual's psychology in view of its responsibilities towards the state. About the fear and especially about the system of shame, much can be learned from the Japanese system, certain parts of which can serve as an interesting example for RM and for the people who live in the Balkans. In Japan the court is not a very frequented institution. In the USA statistically there is one lawyer per 323 citizens. In Britain 723, in Germany 1345, in France 2099, and imagine in Japan 8200 citizens to one lawyer. In Japan the lawyers are not very rich people. But, to reach this level, a long evolution, also a tradition, which it is obvious that the Japanese will not retract, are needed. We will get back to Japan later.

SV: There is always time for some philosophy in an economic discourse. I maintain that economics is a branch of psychology. Your thesis is so nicely put (seriously) that I have nothing much to add to it. I think, though, that to guilt and shame one can add a third force: utility. In general, therefore, I believe that human societies can be divided to Fear-driven, Shame-driven and Utility (or agreement)-driven. The first type of societies is characterized by a constant battle between the state and other institutions and the individual. Brute force, subtle force, threats, intimidation, censorship are applied by the state to its citizens. They react with sabotage, crime, subterfuge, subversion, dissidence and terror. Shame-driven societies apply peer pressure and consensus building mechanisms to their members. The individual is subjected to a barrage of ethos, myths, conformity, social do's and don't's, social sanctions, social rewards, stereotypes and is in a constant trial by his compatriots, colleagues, peers, suppliers, clients, family, social stratum and so on. The individual reacts by losing a big part of his identity and adopting a surrogate identity instead. In due time this leads to extraordinary cruelty and violence or to milder forms of sadism. The revolt exists but it is more disguised and it does not involve open defiance, dissent, sabotage, or terror. The third category of states is the most stable, enduring, flexible, adaptive, functional and ideal for wealth creation. It involves an agreement between the individual and the state. Both parties acknowledge the supremacy of individual utility (money, pleasure, comfort, entertainment) over any other consideration or constraint. Individual utility supersedes even the utility of the state in most cases (with a few exceptions, such as taxation or army service). Both parties retain the right to remedy any breach of the agreement through predetermined mechanisms of arbitration. The attitude is businesslike and game-like. Nothing is sacred, everything is subject to review. Mutual belief in the good (read: rational) intentions of the parties prevails. Violations are punished severely because they constitute not only a breach of contract but the undermining of sacred trust.

The USA is a supreme example of such a country.

(continued)