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Newsletter summer 2019

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Portuguese Institute for Economic Freedom - Newsletter Summer 2019

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Newsletter summer 2019

  1. 1. Portuguese Institute for Economic Freedom Office: Praceta Outeiro da Vela, 135, 3rd Floor – E 2750-455 Cascais Tel: (351) 214 821 544; (351) 214 821 563; (351) 214 841 028 Fax: (351) 214 821 566 E-mail: economicfreedom@mail.telepac.pt Blog: www.institutoliberdadeeconomica.blogspot.com Newsletter – Summer 2019 POLAND’S ECONOMIC SUCCESS 1. Introduction In fifteen years1 , Poland's GDP per capita approached (almost) 23% of the EU-15 average; 22% of EU-28; and 14% higher than the average for the 2004 enlargement countries. This makes Poland an excellent example of success. What are the graphs that synthesize it? What are the causes? And why is it so important to spread it? (continue on next page...) 1 Date of entry in the European Union. PORTUGUESE INSTITUTE FOR ECONOMIC FREEDOMLibertas INDEX: Page I. Message from the President .............................1 II. Figures ..........................12 III. Sentences......................14 IV. Articles………………………......15 CHECK OUR BLOG AT www.institutoliberdadeeconomica.blogspot.com Professor at Swiss Business School/ AESE(IESE)/ Lisbon Univ. Linked In: linkedin.com/in/vasconcellosesa Twitter: twitter.com/VasconcelloseSa Website: www.vasconcellosesa.com Articles and diagrams: economiadasemana.blogspot.pt I. Jorge Sá MBA Drucker School PhD Columbia University Jean Monnet Chair
  2. 2. 2 Libertas 2. Poland compared to three standards The most appropriate way of assessing Polish performance is by comparing it with similar countries, which enjoy similar circumstances, since, as Ortega y Gasset put it: I am myself and my circumstances. That means comparing Poland with the other European countries. And let's do it with an increasing level of demand. First, comparing Poland with the other enlargement1 countries. Next with the EU-28 (which includes those and the richest). Then (maximum degree of requirement) with the EU-15, the hard core of the richest. 2.1. Comparing Poland with enlargement countries Figure one2 illustrates the convergence, i.e. the approximation of Poland to the average (of GDP per capita) of the nine other enlargement countries. (continue on next page...) 1 The other nine countries that entered the EU together with Poland in 2004: Czech Republic, Hungary, Slovakia, Slovenia, Lithuania, Estonia, Latvia, Cyprus and Malta. 2 In this and all subsequent graphs, the value of the horizontal line of 100 does not, of course, mean that the value of the corresponding variable (in this case the GDP per capita of the enlargement) is assumed to be constant. But only that in each year this value and taking into account its annual variation is set at the 100% level for the purpose of easier assessment of Poland's progress in percentage terms. This applies naturally to all subsequent graphics.
  3. 3. 3 Libertas In 2004, the Polish per capita wealth was ± 74% of the average of the other countries; fifteen years later, it was almost + 14% reaching 87,8% (a compound annual growth rate1 of 1,2%), indicating that Poland grew significantly more than the other countries that in the same year of 2004 joined the European Union. Despite the accelerated convergence, the fact that the starting point in 2004 is low (± 3/4 of the average) means that the current Polish GDP per capita is still below the average for the enlargement countries. Malta, the Czech Republic, Cyprus and Slovenia are the richest countries. Latvia and Hungary the poorest (see figure two). (continue on next page...) 1 Compound annual growth rate = ( 𝐺𝐷𝑃 𝑓𝑖𝑛𝑎𝑙 𝑦𝑒𝑎𝑟 𝐺𝐷𝑃 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑦𝑒𝑎𝑟 ) 1 𝑁º 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 − 1
  4. 4. 4 Libertas 2.2. The convergence of Poland with EU-28 This comparison is naturally more demanding, since the EU-28 includes the group of the richest European countries. Here, the starting point for Poland in 2004 was lower than figure one, only 50% - half of the average European GDP per capita. However, comparatively, the progress was even greater, having converged almost 22% with the European average in only fifteen years (see figure three). Poland's annual convergence rate was of 2.6%1 . (continue on next page...) 1 Compound annual rate.
  5. 5. 5 Libertas 2.3. The convergence of Poland with EU-15 What about the "club" of the richer countries? The EU-15? Here naturally the starting point in 2004 was even worse, only 44% of the average. But as figure four illustrates, the progress has been even greater, with Poland converging 22.8% with the European average in just fifteen years. The annual (compound) rate was 3%. (continue on next page...)
  6. 6. 6 Libertas 2.3. Summarizing the Polish Success Looking at figure five which compares the GDP per capita of the twenty-eight European Union countries, and concludes that the Polish is (still) the seventh lowest of the EU-28, we risk ignoring the enormous progress made by Poland. With regard to the enlargement countries (± 14% convergence in 15 years); still higher with respect to the EU-28 (± 22%); even higher comparatively with the EU-15 (± 23%); and maximum against Portugal (30%). This is what is summarized by Figure six and has allowed Poland in world terms to move from (in 2004) 57th in the ranking of the GDP per capita to 48th (in 2018)1 . In the competitiveness index, Poland has progressed from 39th to 37th, although the number of countries analyzed has increased from 104 to 140 (almost 40%)2 - see figure nine. (continue on next page...) 1 International Monetary Fund, April 2019 2 World Economic Forum, Global Competitiveness Reports 2004-2018.
  7. 7. 7 Libertas 3. The causes of success This is not the time for an in-depth analysis of the causes (and consequently the lessons) of the Polish success. Therefore, we will analyze only three variables: - transparency (absence of corruption); - economic freedom; and - the quality of management1 (continue on next page...) 1 Empirical research shows that there are other variables statistically related to economic development, for example: - Trust, work ethic (sense of responsibility, initiative, zeal, etc.) and business ethics; - The political system (democracy restricts the concentration of power which, when it exists, tends to go beyond politics to the economy and reduce competition between companies and consequently consumer sovereignty: economic freedom); - Education (either in quantity -% of population - or in quality).
  8. 8. 8 Libertas 3.1. Transparency Nobel laureate M. Friedman said that corruption is a tax on economic development. The reason is simple. Resources are scarce so they must 1) be applied to the greatest opportunities and 2) used as efficiently as possible. Corruption places resources in the hands of those who do neither of those things. And consequently it uses resources in an unproductive way. That is why the correlation between the absence of corruption and the country's GDP per capita is very strong1 : the most transparent countries on the NGO Transparency International list (Denmark, New Zealand, the Netherlands, etc.) are also the richest; and at the end of the transparency list (Yemen, Syria, South Sudan, etc.) are naturally also the poorest. In 2004 Poland was 67th in the ranking of transparency among 145 countries in the world. In 2018, despite the number of countries increasing to 180, Poland improved 31 places, becoming 36th in the world (figure eight below). (continue on next page...) 1 0,8 with zero chances of being due to chance.
  9. 9. 9 Libertas 3.2. Economic Freedom This variable analyzed by the NGO Heritage Foundation measures the degree to which in each country the consumer is sovereign and free to apply its money where as he/she pleases. Just as in the political sphere with democracy he places his vote where he prefers. However, in order to have consumer sovereignty it is necessary that there is a lot of competition in the generality of the economic sectors (and oligopolies, dominant positions, etc.) and so that there is effective freedom of choice. There being a lot of competition, every day companies are encouraged to give their best and when this does not happen they are penalized with bankruptcy and exit from the market. That is why economically freer regions and countries (Hong Kong, Singapore, New Zealand, Switzerland) are also the richest. And at the bottom of the list are the poorest: Venezuela, North Korea, etc.1 And Poland? In 2004 (out of a total of 155 countries) it was 80th in the world. That is, below the half of the table. And in 2019, despite the number of countries surveyed increasing by 25 to a total of 180, Poland increased to 46th, i.e. it improved 34 places (figure nine). (continue on next page...) 1 The correlation is 0,5 with 1% chance of being due to chance.
  10. 10. 10 Libertas 3.3. The quality of management One way of computing GDP is by adding up the value added of enterprises1 . The value added to be divided by resources (employees, etc.) gives productivity. The objective of management is to increase productivity, i.e. the ratio between outputs (price and quantity sold by an organization) and inputs, the resources used. It is intended to maximize (the value of) production with scarce resources. Hence the countries with the best management are the richest and vice versa. Just remember to which countries belong the biggest global brands. And make an effort to find a renowned brand among the poorest countries. You get it here and there, but it's hard. There is no global ranking for quality management in global terms, but there is for innovation that is one of the symptoms of quality management. In 2006 Poland was in 44th place in the world (in 125 countries). By 2018, it had improved by 6 places (it was 38th) although the number of countries surveyed increased to 180 (an increase of almost 50%) - figure ten. (continue on next page...) 1 Revenues minus external costs.
  11. 11. 11 Libertas 4. Conclusion The Polish economic success can be summarized in the figures of its progress/convergence (in 15 years) vis-à-vis the enlargement countries in 2004, EU-28 and EU-15: 14%; 22%; and 23%, as per, see figure below, which also indicates the causes.
  12. 12. 12 Libertas Comment: In 2004, Portugal had a GDP per capita ± 4/5 (80,6%) of the EU- 28 average. And that of Poland, half (50,1%). Fifteen years later, Portugal has diverged, that is, it moved away from the average 3% (80,6 – 77,6), while Poland converged, approaching the average 21,6% (71,7 – 50,1). (continue on next page...) II. FIGURES Comparing Poland with Portugal
  13. 13. 13 Libertas Comment: If the past was a prologue, i.e. if the past growth rates (since 1995) remain equal in the future, both for Portugal and for Poland, the latter will overpass Portugal approximately in 2022, that is, roughly within three years.
  14. 14. 14 Libertas Freedom consists not in doing what we like, but in having the right to do what we ought. Pope John Paul II (Polish) With freedom, one ignores what the next government will be like. Without freedom there is no next government. Michal Kalecki (Polish Economist) III. SENTENCES
  15. 15. 15 Libertas We thank the Heritage Foundation and the European Centre for International Political Economy for the articles they have sent and enable us to share with our readers. By Oscar Guinea Picture the 100 meters final in the Olympic Games. 30 meters before the end, Usain Bolt starts to slow down. With five meters to go, all the runners hold hands and cross the finish line at the very same time. This is sport without competition. A world where the 100 meters record will be far above 10 seconds and sport will not be fun to watch. While this is easy to understand in the realm of sports, some European leaders have trouble applying the same logic to Europe´s industrial policy. Following the sports analogy, some will be happy if we cancel the European Championships all together and start sending one or two European hand-picked firms to compete internationally. (continue on next page...) SUBJECT FROM (22nd March 2019) 1. Standing up for Competition Index of the articles 1. Standing up for Competition, Oscar Guinea, European Centre for International Political Economy (ECIPE), 22nd March, 2019 (pag. 15) 2. Spain Can—and Should—Improve Its Economic Freedom Ranking in Europe, James Roberts and Daniel Lacalle, The Heritage Foundation, 28th March, 2019 (pag. 16) 3. A Framework for Advancing U.S.–Polish Relations During President Duda’s Visit, Daniel Kochis, The Heritage Foundation, 11th June, 2019 (pag. 24) IV. ARTICLES FROMSUBJECT
  16. 16. 16 Libertas This would be clearly wrong. Any industrial policy that is really fit for the 21st century should have the promotion of competition at its core. This is fundamental because market competition in Europe is on the decline and has been for decades. Market concentration is substantial in many service and manufacturing industries. For example, in Germany, the ten largest companies control 75% of the information and service activities. In Italy and Spain, the ten largest temporary employment agencies control 70% and 63% of the market. And the growth in market concentration has not passed unnoticed by incumbents. Businesses have been able to harness market power and raise their markups, at the expense of consumers. Many service sectors such as tourism, legal and accounting, or advertising show some of the highest margins across the EU. Over time, the auto industry, chemicals, and construction sectors have experienced the fastest growth in markups. Regulatory barriers have a direct impact on competition. We estimate that regulatory restrictions lead to more market concentration and market power. Any change in competition policy should take account of the level of regulatory restrictiveness and market contestability in each sector. Otherwise, European Champions will squeeze every little drop of innovation, ingenuity and competition that is still left in Europe. The evidence is clear and compelling. Competition is the true source of European competitiveness. If you are still unconvinced read our latest ECIPE Occasional Paper by Oscar Guinea and Fredrik Erixon. By James Roberts and Daniel Lacalle Summary Although economic freedom has expanded somewhat in Spain, only seven of the 28 member countries of the European Union scored lower than Spain in The Heritage Foundation’s 2019 Index of Economic Freedom. (continue on next page...) SUBJECT FROM (28th March 2019) 2. Spain Can—and Should—Improve Its Economic Freedom Ranking in Europe
  17. 17. 17 Libertas Under the 2011–2018 center-right government of Prime Minister Rajoy, Spain slashed its fiscal deficit, expanded exports, reformed financial and labor markets, contained public debt, moderated government spending, and cut taxes. Unfortunately, the current socialist government of Prime Minister Sánchez has reversed some of those policy achievements, putting the Spanish recovery in jeopardy and weakening the economy. Spanish voters could elect a new government on April 28, 2019, that will pursue the additional needed reforms outlined in this Backgrounder: deeper public spending cuts, elimination of redundant central and regional governmental systems, and further labor market and fiscal reforms. If voters do so, they will help to put Spain back on track to become an economic freedom leader in Europe. Key Takeaways In the midst of economic decline in Europe, Spain’s 2019 ranking in the Index of Economic Freedom has demonstrated encouraging improvement. But Spain’s current socialist government is threatening to undo those gains with higher taxes and harmful minimum-wage increases. The next government of Spain must be adamant about sticking to a reformist agenda and avoiding past errors. Full Article The 2019 edition of the annual Heritage Foundation Index of Economic Freedom shows moderate slippage in the economic-freedom rankings of some eurozone economies. This is a concern, especially as this trend coincides with the peak of the largest monetary stimulus in European Union history, the goal of which was to provide EU economies with opportunities to modernize, and to implement important structural reforms aimed at delivering more robust growth, more sustainable job creation, and the generation of higher-quality jobs. In the midst of this decline in Europe, Spain’s 2019 economic freedom score has demonstrated encouraging improvement. It rose from 65.1 in 2018 to 65.7 (of a maximum 100) in 2019, making the Spanish economy the 57th-freest in the 2019 Index, aided by a significant increase in fiscal health after tax cuts in 2015 and 2016 helped to boost the economy while preserving budgetary stability. (continue on next page...)
  18. 18. 18 Libertas While Spain is ranked 28th among 44 countries in the Index’s entire European region, only seven of the 28 member countries of the European Union scored lower than Spain in the 2019 Index (Slovenia, Portugal, Hungary, Slovakia, France, Italy, and Croatia). Spain’s overall score is below the regional European average of 68.6, but it is above the world average of 60.8. A Role Model for Europe Under the government of former Prime Minister Mariano Rajoy, which was in power from 2011 to 2018, Spain became something of a role model for how a country can implement significant and vitally necessary structural reforms during a financial crisis. Its labor-market reform was a key factor in stopping the massive increase in unemployment, and other crucial reforms also played an important part in the country’s rebound. Spain’s subsequent recovery from its worst economic crisis in decades was impressive, especially because relatively few international observers expected the country to deliver consistent above-trend growth and rapid job creation. Between 2012 and 2017, Spain recovered more than half of the jobs lost during a crisis that was initially: (1) denied by the previous Socialist administration of José Luis Zapatero (in office from 2004 to 2011); and (2) then exacerbated by Zapatero’s misguided policies, deficit spending, and mounting structural imbalances. Since then, Spain has slashed its fiscal deficit by 70 percent and brought what had been a dangerously high trade deficit nearly into balance. The fact that exports have risen to 33 percent of gross domestic product (GDP) is also relevant, as Spain’s largest trading partners have remained stagnant or in recession during the same period. External factors have helped, of course. Support from the European Central Bank (ECB), low interest rates, and cheap oil prices support the economy, but those factors should have also helped other EU economies, such as Italy, which are similarly vulnerable to volatile energy prices and interest rates. Nevertheless, it has been Spain that has created more than 1.5 million jobs in the past three years—the second-highest country in the EU in terms of full-time job creation. The main reason for the difference in performance of Spain relative to neighboring EU countries has been the achievement of a very ambitious set of structural reforms: (continue on next page...)
  19. 19. 19 Libertas a financial reform that helped change the perception of risk in the Spanish financial system; a labor-market reform that turned around a seemingly unstoppable trend of rising unemployment and recovered jobs and salaries; a moderation in government spending without reducing social expenditures; and a fiscal reform in 2015 that reduced corporate and income taxes. Public debt, although elevated, has been contained relative to GDP in the past three years. These have been the deciding factors that have driven a recovery under which inflation was non-existent and global trade growth was slowing down. These structural reforms were achieved at a high political cost, however, as has been the case in numerous other EU countries where tough decisions had to be made to achieve greater economic freedom in the long run, such as in Ireland. In the case of Spain, the Rajoy government paid that political price when it was unable to secure an absolute majority in the elections in 2015 and 2016 and, ultimately, was forced from power in 2018. A weak minority socialist government under Prime Minister Pedro Sánchez replaced it and proceeded to unleash a variety of damaging internal forces that, together with some negative external developments, could put the Spanish recovery in jeopardy and weaken the economy again. For example, Forbes reports that, at the end of 2018, the Sanchez government “approved the largest increase in the minimum wage since 1977, raising the minimum wage to €900 ($1,030) per month, representing an increase of 22 percent.” Policy backsliding triggered by the implementation of these sorts of socialist policies is the main reason why a significant improvement in economic freedom is necessary. If this higher minimum wage is permitted to continue under a new government, the negative effects will include a spike in inflation and many companies avoiding the hiring of more expensive permanent workers. In fact, in the months since the minimum wage increased, the number of unemployed workers in Spain has risen. January and February of 2019 have been the worst equivalent months for employment in Spain since 2013. A Complicated Political Landscape In 2018, still under the Rajoy government, Spain saw tax receipts rise more than nominal GDP and achieved record revenues after much-needed tax cuts. (continue on next page...)
  20. 20. 20 Libertas Corporate tax receipts rose 29 percent after the nominal corporate tax rate was cut to 25 percent. Unfortunately, the socialist Sanchez government has been dependent on the votes of radical left and nationalist parties, whose policy priorities are generally to increase spending, raise taxes, and run budget deficits. These historically bad policies alone will make pushing for more economic freedom in Spain a bigger challenge if another left-of-center coalition manages to win the April 28, 2019, election and form a new government. Spain has had deficits every year since 1980 except during the years of the real estate bubble—2005 through 2007—that preceded the crisis. Relying on tax increases and revenue measures has historically been a bad choice, however, because when spendthrift governments whose leaders are seeking to buy votes are in power, government spending consistently rises above those revenues and revenue estimates tend to be optimistic, as the ECB has pointed out in its paper on “Fiscal Forecasting: Lessons from the Literature and Challenges.” Calls by Prime Minister Sanchez’s government to re-introduce previous rigidities and eliminate the Rajoy government’s 2012 labor-market reform will also not solve Spain’s structural problems. Spain has had an average of 17 percent unemployment since 1980, with three different periods where it rose above 20 percent. Temporary jobs were already more than 25 percent of all contracts before the crisis. Going back to the mistakes of the past will not solve a long-term problem that has more to do with low productivity and the inefficiency of many small and medium-sized enterprises (SMEs). Promising greater workers’ rights will do more harm than good in that context. Solving Spain’s unemployment problem can only be achieved by creating an economic climate conducive to the creation of many more private companies, attracting more investment, and allowing micro-enterprises to grow into SMEs, and SMEs to grow into large firms. This goal can be achieved by removing perverse, government-imposed incentives for firms to remain small and non- competitive—such as through punitive tax and labor code provisions that increase interventionist government measures once a firm reaches an arbitrary threshold of more than one million euros in revenue or more than 10 full-time employees. There are also external forces looming on the policy horizon that could threaten growth and job creation. The International Monetary Fund is requesting that Spain raise some value-added-tax (VAT) rates (“tranches”), which could hinder nascent growth of consumption. (continue on next page...)
  21. 21. 21 Libertas Additionally, Brussels seems adamant on pressuring Spain into adopting anti-growth measures by returning to the old mistake of raising taxes. This pro-higher-tax policy of the EU reflects the desperation of Brussels bureaucrats as they ponder how to confront the massive future unfunded spending liabilities resulting from decades of over-promising generous welfare state benefits to European voters. Brussels is also pushing the Organization for Economic Cooperation and Development’s (OECD’s) “anti-tax base erosion” project with the aim of increasing tax collections. Policymakers in Spain cannot and should not ignore the global trend to decrease, not increase, corporate taxes. It is well established that reducing the tax wedge has a direct positive impact on investment, job creation, and attraction of capital. Likewise, Spanish policymakers cannot ignore that the positive effects of labor- market reform have been recognized even by France, notorious for decades of labor- code inflexibility, which is currently planning labor-code reforms similar to Spain’s in order to boost job creation. The bottom line that the next Spanish government must face is that the imbalances of the Spanish economy (an elevated public debt, a large deficit, and still-high unemployment) will not be solved by looking to the past, but by improving economic freedom. The imbalances can be solved through supply-side reforms, attracting foreign investment, allowing companies and families to keep more of their money, and improving public-sector efficiency while retaining a strong but sustainable social component. In this way, Spain can grow faster than the rest of the European Union in 2019 and beyond, and faster than the forecast 2.5 percent in 2019 (as it has done in the past two years). Spain has proven that it can create more than 500,000 jobs a year. To do so, however, the next government will have to overcome the vast array of powerful forces mentioned above that would put the brakes on additional job creation. Perhaps, as a start, it would be instructive for socialists in Spain to study the recent “success” enjoyed by so-called progressives in New York City, whose unrelenting anti-business demands effectively killed the creation of 25,000 new high-paying jobs in that city by Amazon. (continue on next page...)
  22. 22. 22 Libertas Assuming that saner heads prevail and a pro-free-market government takes power, how can it position Spain within the eurozone so that the country’s economic freedom score improves from its current “acceptable” level and the country makes the leap into the ranks of continental and even global leadership? Recipe for Success A careful analysis of the Spanish economy reveals the minor, but important, adjustments that can be made to increase the attractiveness of the economy. Prudent Fiscal Policy and Spending Cuts. Spain is a country of SMEs. Ninety percent of Spanish companies fall into this category. However, these Spanish companies tend to be smaller than those of peer countries. Furthermore, the vast majority of SMEs, almost 87 percent, are micro companies (fewer than nine employees, annual sales of less than two million euros). This corporate structure means that the Spanish economy is very vulnerable to economic cycles, and it means that unemployment can rise much faster than in other countries because more than 80 percent of jobs are created by SMEs. Better tax policy could reduce this vulnerability. The Spanish tax wedge on companies is too high and ranks among the nine most onerous tax regimes for businesses in Europe. This substantial tax wedge is a very significant obstacle to growth and prevents many companies from transitioning from an SME to a larger size. The Spanish tax system adds to their burden, since it is oriented toward trying to increase revenues at any cost, even if that makes companies weaker and more cyclically dependent. Taxes on labor are particularly high as well. An average salaried worker in Spain pays almost 40 percent in taxes. Social contributions are among the highest in the OECD, and this works as a deterrent to job creation, as the cost for employers is almost twice what the worker receives as net salary. As a result, many employers and employees have been driven into the country’s large, informal economy. In addition to the heavy tax burden, Spain retains an obsolete system of subsidies and deductions that could be reduced in order to make the tax system simpler and clearer. A simple, lower, and attractive tax system can be implemented, and it would help to boost receipts as economic activity rises and companies become more robust and grow in size. (continue on next page...)
  23. 23. 23 Libertas Government public spending in Spain could be significantly more efficient by eliminating the duplication and “parallel administrations” created by some regional communities. The savings from these cuts could be used to implement a large and innovative tax cut to boost productivity and growth. Additional Labor Market Reforms Through Administrative Reorganization. In addition to the reforms advocated above that are essential to reduce unemployment, further reforms and re-organization are necessary in the bureaucracies that administer Spanish labor laws, in order to reduce the costs to employers of hiring and employing Spanish workers. The Spanish economy is held hostage by a tangled web of separate regional, local, and national labor regulations that make it very difficult for companies to manage such a complicated system when trading or conducting business between regions. An effort to normalize rules and regulations as well as a high-priority campaign to cut this red tape would benefit the economy enormously. The Spanish legal and regulatory system is needlessly complex, too. It aims to contemplate all possible scenarios and tries to provide guarantees for any eventuality. However, it ultimately fails to deliver the job security it promises, and instead acts as a burden on growth and economic development. The next government should make the cutting of red tape and regulations “Job Number One” in order to boost competitiveness and attractiveness of the economy. Conclusion Spain can lead economic freedom in the eurozone by implementing the policies outlined in this Backgrounder. The next government should also study similar pro- market and pro-growth reforms and policies undertaken by Ireland, which have helped that country grow faster and attract more investment than other economic freedom leaders in the European Union (such as the U.K., the Netherlands, Denmark, and Estonia). Thanks to the reforms implemented by successive Irish governments over the years, Ireland is now one of only six countries in the world, and the only EU country, that ranks as “free” in the 2019 Index of Economic Freedom. It is time to avoid the temptation of relying on low interest rates and falling into the trap of increasing imbalances, which has been Spain’s historical mistake. Every time that conditions start to improve, Spanish governments seem to backslide into a destructive pattern of excessive spending, more debt, and rigidity. (continue on next page...)
  24. 24. 24 Libertas The foundation for a more sustainable growth and higher job creation has been set. As was the case in 2012, however, the next government of Spain must be adamant about sticking to a reformist agenda and avoiding past errors. It will be challenging and difficult for all parties to agree, certainly, but they must not forget history: Raising taxes and spending never adds spice to a recipe for success. It ruins the dish. By Daniel Kochis On June 12, Polish President Andrzej Duda is scheduled to visit the White House. The visit will mark the 20th anniversary of Poland’s membership in NATO and the 30th anniversary of the fall of communism. Poland is situated in the center of Europe, sharing a border with four NATO allies, as well as a long border with Belarus and Ukraine, and a 144-mile border with Russia alongside the Kaliningrad Oblast. Poland, because of its large size, geographic location, and historical experience has become the lynchpin of security in Eastern Europe since joining NATO on March 12, 1999. The Trump Administration has focused on rebuilding ties with the Polish government and sought new avenues of cooperation, including defense procurement and energy. One of President Trump’s first visits overseas as President was to Warsaw in July 2017. Poland is a net security provider who continues to meet NATO spending benchmarks, hosts hundreds of American troops, and actively seeks deeper ties with the U.S. President Trump and President Duda may even reportedly announce the establishment of a permanent U.S. presence in Poland at their meeting next week. During President Duda’s visit to Washington, the U.S. should further engage on a host of important issues, including liquefied natural gas (LNG) exports, Poland’s inclusion in the Visa Waiver Program (VWP), and the security risks resulting from Chinese infiltration of Poland’s telecommunications infrastructure. (continue on next page...) SUBJECT FROM (11th June, 2019) 3. A Framework for Advancing U.S.– Polish Relations During President Duda’s Visit
  25. 25. 25 Libertas A Valuable Ally In 2018, Poland was one of only seven NATO allies who spent 2 percent of gross domestic product (GDP) on defense and one of 16 allies that reached the benchmark to spend 20 percent of their defense budget on equipment. Last year, Poland spent 2.05 percent of GDP on defense and 26.54 percent on equipment. Not content with 2 percent, in October 2017, Poland legislated defense-spending increases that will culminate in the nation spending 2.5 percent of GDP on defense in 2030. Poland has often prioritized purchasing American equipment. In March 2018, Poland signed a $4.75 billion deal for two Patriot missile batteries—the largest defense procurement contract in the nation’s history. In February of this year, Poland signed a $414 million deal to purchase 20 high-mobility artillery rocket systems from the U.S. for delivery by 2023. These procurements are good news for the U.S. Not only is Poland investing in improving its capabilities and, by extension, the capabilities of NATO, when a government buys American military equipment it not only receives battle-tested equipment, it also gains a deeper military relationship with the U.S. The U.S. and Poland continue to enjoy strong military-to-military links. Poland has partnered with the Illinois National Guard through the State Partnership Program since 1993. Today, the U.S. serves as the framework nation for NATO’s Enhanced Forward Presence (EFP) in Poland, contributing 889 U.S. soldiers stationed in Orzysz. In addition, the U.S. deploys part of a rotational armored as well as a rotational aviation brigade to Poland, along with the rotational Atlantic Resolve Logistical Rotation Sustainment Task Force based in Poland. However, Poland continues to seek a permanent U.S. presence, offering to contribute $2 billion to assist in its establishment. Additionally, Poland contributes towards NATO’s Ballistic Missile Defense: A second Aegis Ashore site is currently under construction in Redzikowo, Poland. Although Poland’s focus is territorial defense, it has contributed to missions outside the nation—including deploying 303 troops to Afghanistan as part of NATO’s Resolute Support Mission. Poland’s air force has taken part in Baltic Air Policing eight times since 2006, most recently from January through May 2019. (continue on next page...)
  26. 26. 26 Libertas Poland also is part of NATO’s EFP in and contributes 100 troops to NATO Mission Iraq. It maintains a Polish frigate as part of the Standing NATO Maritime Group and has 240 troops taking part in NATO’s Kosovo Force mission. Continue Solidifying U.S.–Polish Relations Poland is a crucial European ally and one that sees eye-to-eye with the U.S. on the threat from Russia. One recent survey found that 77 percent of Poles believe Russia to be a significant threat to their country. The same poll found that 87 percent of Poles believe that NATO and allies are the key to Poland’s security, with low support for a potential EU army. Poland will continue to be a key pillar of security in Europe, and an important gateway for U.S. engagement with central and eastern European nations. There are other important issues in the U.S.–Polish bilateral relationship. including Poland joining the Visa Waiver Program, the importance of the Three Seas Initiative, and concerns over Chinese companies taking part in 5G networks. What the Trump Administration Should Do During his visit with President Duda, President Trump should address these issues by: Announcing the Establishment of a Permanent Military Presence in Eastern Europe. U.S. basing structures in Europe harken back to a time when Denmark, West Germany, and Greece represented the front lines of freedom. The security situation in Europe has changed, and the U.S. should account for this shift by establishing a permanent military presence in allied nations further east, including the Baltic states and Poland. A robust, permanent presence displays the U.S.’s long- term resolve to live up to its NATO treaty commitments. Recognizing that Permanent Forces Provide Far Greater Deterrence Value than Rotational Forces. In addition to providing greater deterrence value, permanently stationed forces in Europe are better prepared, better able to exercise, build greater interoperability with allies, and are more cost-effective. In addition, permanently stationed forces may be better for morale. (continue on next page...)
  27. 27. 27 Libertas Reassuring NATO Allies that New Deployments Are Additions and Not Subtractions. The U.S. should be transparent with other NATO allies that any new deployments to Poland will not come at the expense of pre-existing deployments to countries such as Italy and Germany. Continuing Robust Defense Cooperation with Poland. The U.S. should continue its already robust defense cooperation with Polish forces, including taking part in exercises in the region. The U.S. should also, when appropriate, promote the export of U.S. defense equipment to Poland. These exports not only improve Polish—and by extension, NATO—capabilities, they provide for long-standing engagement and cooperation across time in the form of exercises, maintenance, interoperability, training, and periodic upgrades. Committing to Including Poland in the VWP. The VWP pays security dividends as countries in the program share information on serious criminals, terrorists, and lost and stolen passports with the U.S. in exchange for visa-free travel up to 90 days. In addition, the VWP smooths business travel and tourism between foreign countries and the U.S. and further strengthens the transatlantic bond. Remaining Engaged—But Pushing for Results from the Three Seas Initiative. The Three Seas Initiative launched in 2016 to facilitate the development of energy and infrastructure ties among 12 nations in Eastern, Central, and Southern Europe. Poland was one of the two founders of the Three Seas Initiative. In 2017, President Trump set an important precedent by attending the Three Seas Summit in Warsaw. Secretary of Energy Rick Perry led the U.S. delegation to this year’s Summit in Ljubljana, Slovenia, from June 5 to June 6. The U.S. should continue supporting the Three Seas Initiative while encouraging tangible results from the four-year-old effort. Taking Advantage of the Economic Opportunities in Eastern and Central Europe. While in Warsaw in July 2017, President Trump stated, “We support your drive for greater prosperity and security. We applaud your initiative to expand infrastructure. We welcome this historic opportunity to deepen our economic partnership with your region.” Eastern and Central Europe represent a significant economic opportunity for American businesses. The Administration should encourage U.S. firms not to overlook Poland and the wider region for future investments and business opportunities. (continue on next page...)
  28. 28. 28 Libertas Working with Poland to Lessen Russia’s Grip on Europe’s Energy. Poland is working to diversify its supply of energy, including with an LNG import terminal in Świnoujści and through a planned second LNG import terminal at Gdansk. In addition, a planned pipeline between Norway’s gas fields and Denmark/Poland appears on track for completion in 2022. Last November, a Polish state-owned oil and gas company, PGNiG, signed a 24-year deal with U.S. gas company Cheniere for delivery of LNG. Under the deal, Poland will receive 700 million cubic meters of gas from 2019 through 2022 and 39 billion cubic meters from 2023 through 2042. The U.S. should continue increasing efficiency to export LNG, while publicly supporting projects such as Poland’s LNG import terminals. Pushing Back Against Nord Stream II. The Nord Stream II pipeline project that would connect Germany with Russia is neither economically necessary nor is it geopolitically prudent. Rather, it is a political project to greatly increase European dependence on Russian gas, magnify Russia’s ability to use its European energy dominance as political trump card, and specifically undermine U.S. allies in Eastern and Central Europe. The U.S. should work with like-minded nations such as Poland to oppose the project and recognize Nord Stream II’s danger to future European security. The U.S. and Poland should work to bolster the resolve of nations such as Slovakia, who are increasingly being targeted by Russia to take part in Nord Stream II and another pipeline project, Turkstream. Firmly Presenting Concerns over Chinese Threats to 5G Telecommunications Infrastructure. Chinese company Huawei already controls over half of the Poland’s telecommunications infrastructure. These vulnerabilities were laid bare in January, when a Polish counterintelligence official and a Chinese executive who worked for Huawei in Poland were arrested on espionage charges. President Trump should make clear the U.S. views Chinese companies as a security threat to telecommunications networks and should communicate: which legal frameworks, activities, and business practices will result in exclusion from U.S. 5G infrastructure, services, and other emerging-technology integrations. Further, the U.S. should encourage other nations to adopt these standards as a way of maintaining pressure on countries and companies working against U.S. and allied interests. (continue on next page...)
  29. 29. 29 Libertas Conclusion Poland is a net security contributor and a valuable ally in Europe. The Trump Administration has made significant strides since taking office in rebuilding the U.S.– Polish relationship. The U.S. should utilize President Duda’s visit to Washington to further economic and security cooperation with Poland, while recognizing and addressing the threat from China and Russia faced by the transatlantic community.
  30. 30. 30 Libertas Thank you for reading our newsletter If you have any suggestions do contact us at: Portuguese Institute for Economic Freedom Address: Praceta Outeiro da Vela, 135, 3rd Floor – E 2750-455 Cascais Phone: (+351) 214 821 544; (+351) 214 821 563; (+351) 214 841 028 Fax: (+351) 214 821 566 E-mail: economicfreedom@mail.telepac.pt And don’t forget to check our blog at: www.institutoliberdadeeconomica.blogspot.com Thank you.

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