Friday, April 02, 2010

Are there crypto-minarchists at the World Bank?

I didn’t know there were crypo-minarchists in the recent World Bank mission to Latvia and I am still not sure if  I am being unfair in saying so.  However, their latest recommendations (leaked to the LETA news agency, where I work) seem to point in that direction.
First, my definition of a minarchy is government that has three functions -- defense, police and the courts (to the extent that these functions cannot be otherwise privatized). In a minarchy,  there is very low government spending and extremely low taxation.  Market forces (buying and selling) and social cooperation (voluntary pooling or allocation of resources) dispose of most of the gross domestic product of such a society.
I have written before that the drastic government spending cuts imposed on Latvia by international lenders are pushing the country headlong toward a kind of twisted and rushed minarchy. Some of the World Bank proposals seem in line with this.
What worries me the most is are the proposals to drastically reduce so-called budget-financed studies at Latvian universities and, essentially, make most students (and their parents) pay tuition. In the long term, this may be a viable solution, but not together with the massive unemployment and drastic salary cuts that Latvia is experiencing and will continue to experience over the next (my estimate) three to five years. With plummeting living standards, there will simply be a drop in the number of those who can afford higher education and, for some, the lack of opportunity, combined with existing doubts about the quality of Latvian higher education, will be a powerful argument for student-aged people, if not whole families, to emigrate.
Reducing the capacity of a nation to educate its population amounts to a form of external futuricide -- the killing of the future.  The futuricidal aspects of the World Bank recommendations read as follows:
-- Reduce the number of budget-financed places by 50% in all higher education institutions (including the institutions under ministries other than the MOES--Ministry of Education and Science).
-- Reduce the level of budget financing for each student place by 50%, and make up the difference with 50% co-payments by students in budget-financed places. 
There certainly will be some savings, but the end result, at the end of the decade, will be a dumber, somewhat youth-depopulated Latvia.
Like all of the defacto head-over-heels rush to minarchy plans imposed and proposed by the international lender, none says a word about how any of this will lead to economic recovery in Latvia. Instead, all this points to an increasing reduction of domestic purchasing power (ensuring continued stagnation) and reduced capacity to export (emigration of skilled labor and reduction of future skills needed for export industries and new enterprises).  At the same time, what I could call returnless taxes will stay steady or increase as income cuts, emigration, and economically logical tax avoidance and evasion degrade the tax base.
In making private investments, we all look to a return on investment and get out when the return diminishes. We are forced to pay taxes and should at least think about the options when the return (public services, health care, education, pensions) starts to deteriorate. In Latvia, the deterioration is already severe and will get worse with no credible end in site. This is not to say that the World Bank’s suggestions that public services (reducing unnecessary hospital beds, etc.) aren’t reasonable. However, bureaucracy and inefficiency are endemic in Latvian public administration and I don’t give much credibility to predictions that this will change. I just spoke to a woman whose daughter turned 18 (which “pops up” in the electronic Register of Inhabitants) and should be taken off the list of dependents at the State Revenue Service (which checks with the Register of Inhabitants to avoid taxing the dead and emigrated), but she was asked to bring a physical notice of her daughter’s legal maturity from one state agency to the other.  Maybe the Latvian state administration can be fiscally bashed into changing, but the side effects could be worse than the symptoms.
Latvia still faces budget cuts of around LVL 1 billion (about USD 2 billion ) over the next two years (and that may not be the end of it). The country’s government hallucinates that it will be able to adopt the euro in 2014 (try 2020 instead, if the PIGS won’t have torn the single currency to tatters by then). Not a santim of those LVL 1 billion in savings will go back into the economy, there will be no tax cuts, few new businesses will form, another 100 000 or more will emigrate as the rest of Europe recovers. Higher education will be unaffordable, with all that implies (the World Bank also wants student loans tightened and reduced).
Worse yet, it is too late for an alternative scenario of letting the Latvian currency float and carefully printing enough of it so that domestic wages and purchasing power at local prices are not savaged. That is water under the bridge...
There may be a path to making Latvia or any other country into a prosperous minarchy, but it will take years, if not decades of slow tax cuts and reduction of government, strong economic growth, and a society educated enough to govern itself largely through voluntary, cooperative institutions. The World Bank’s proposals are a form of pernicious, destructive crypto-minarchism.