ONE of the problems of organising a large conference or meeting is that decisions have to be made well ahead of time. In setting a theme, it is difficult to predict what will be the most important topic at the time the event actually takes place.
The World Economic Forum annual meeting will open next week at its traditional location in Davos, Switzerland. The theme for the meeting is Great Transformations: Shaping New Models and picks up the rise of developing economies, the influence of new technologies and social media, demographic pressures and the economic challenges facing "rich" countries.
There are some very important implications to what Nobel laureate Michael Spence has described as the "next convergence": the rapid rise of per capita incomes in the developing world, particularly China and India. As he notes, the "(developing) economies are now the main engine of global growth. The advanced economies face slow growth, high unemployment, fiscal distress and a lengthy period of unwinding high levels of debt."
There are some very important implications to what Nobel laureate Michael Spence has described as the "next convergence": the rapid rise of per capita incomes in the developing world, particularly China and India. As he notes, the "(developing) economies are now the main engine of global growth. The advanced economies face slow growth, high unemployment, fiscal distress and a lengthy period of unwinding high levels of debt."
But any meeting held in Europe at this time will be unable to escape intense discussion of much more specific questions about the existential crisis that is affecting the eurozone countries, the common currency and the EU more generally. Most eurozone economies are now in recession, with unemployment on the rise. As yet another EU summit is wound up and the ratings of nine eurozone countries, including France, are downgraded the prospect of a strict fiscal union providing the basis for salvation remains remote.
There are simply too many unanswered questions. Can all the EU countries, bar Britain, technically commit to the new fiscal rules? What are the implications of Britain's decision to stand aside, in terms of a new treaty? Are the new rules even feasible for a number of countries running large deficits and with huge government debt? Will the punishment for non-compliance ever be imposed? Will fiscal rules be sufficient to restore the EU countries to a growth path?
Most commentators side with the proposition that the Sarkozy-Merkel proposals now on the table will allow the eurozone countries to muddle through only for a while. The history of fiscal rules - the EU's Stability and Growth Pact, for instance - is that they are observed more in the breach than the observance.
The real question that a number of European and other countries should be asking themselves is this: what should be the role of government in terms of providing an environment for economic prosperity and security? There is absolutely no doubt that the size of the public sector and the intrusion of government have grown to excessive proportions in a number of these countries.
A pervading sense of entitlement - on the part of retirees, welfare recipients, parents, university students, public servants and others - has been encouraged by these governments, but now threatens to block reform.
Faced with unhelpful demographic trends - the population of older people (over 60) is growing at twice the rate of the population as a whole - it is pretty clear that fiscal rules will be insufficient to cure the raft of ailments afflicting many of the EU countries. What is required is a complete rethink of the role of government.
Of course, no one is saying governments do not have important roles to play, in terms of the economy and society more generally. According to the Rahn curve, the rate of economic growth initially increases with government spending (as a proportion of gross domestic product). Establishing and funding a quality judicial system, defending a country, ensuring the safety of citizens, funding (but not necessarily providing) some basic services: these are legitimate functions of government.
But beyond a certain point (about 20-25 per cent of GDP) long-term economic growth tends to fall as government spending rises. This is the zone - well above 25 per cent in most instances - in which EU countries find themselves. Governments become involved in all sorts of activities that crowd out the private sector or remove individual responsibility from citizens.
There are a number of reasons why the size of government really matters. After all, government spending has to be paid for by taxes, and almost all taxes reduce rewards for effort. Government spending can lead to higher interest rates. Moreover, government spending is often not subject to rigorous cost-benefit analysis in the same way private spending is.
There are some components of government spending that undermine citizens' incentives to save and invest. Guaranteeing universal and generous aged pensions is a case in point, although in some EU countries these guarantees may prove illusory. Public-sector monopolies in health and education are harmful in terms of thwarting efficiency and innovation.
The discussion of the size of government should not be confused with the Keynesian case for stimulus spending. Irrespective of whether this type of spending is effective, Keynesians would argue government spending should be reduced once the economy has recovered. Their case is about increasing and decreasing government spending to smooth the business cycle, not about systematically increasing the size of government.
The trouble with the Keynesian prescription, in practice, is that governments find it very difficult to reduce spending, even if the economy is improving. Politics will inevitably intrude and turning on and off the spending tap to fine-tune the economy is an unrealistic proposition. Take Australia's Building the Education Revolution program, in which school halls and the like were being constructed well after the worst of the economic slowdown had passed. The history of EU economies in the past several decades is that most struggle to restrain the size of government. With few exceptions - Sweden is a case in point - government expenditures as a percentage of GDP have remained high or grown further. In the case of France, for instance, government spending makes up more than 50 per cent of the economy and has risen in recent years.
Without exceptionally strong political leadership and a root-and-branch rethinking of the role of government spending, there appears to be an inexorable drift to unfunded bigger government, with all its attendant economic drawbacks. We can even see this in the land of the free and the home of the brave, where the size of government is approaching that of Germany. It is a long way back.
The Australian - January 21
