Do We Need More State?

15. 3. 2017

The question of the size of the state is secondary to the question of the quality of the state. An inefficient small state is as much of a nuisance as an inefficient large state. It is a fact of modern life that the size of the state (in terms of public expenditures as a proportion of the GDP) is three or even four times bigger than it was one hundred years ago, but then so is the role of the state in areas like social welfare, environment, health care, education, and so forth. The proportion of the public expenditures in the richest countries of the European Union nears or exceeds 50%. It is about 5–10% lower in the new post-communist EU member countries but there, too, it increases as the GDP grows.

If these trends are extrapolated to their logical conclusions, the future looks bleak. It is a proven regularity that the size of the state increases with the GDP, only at a faster rate. Wagner’s law, which has been tested for a number of economies, including the OECD, the United Kingdom and others, holds that economic development is associated to more than a proportional contemporaneous growth in government spending. Obviously, the relationship cannot be linear, otherwise the state expenditures would ultimately account for the entirety of the economic output. Whether or not the Laffer curve can produce a specific optimal rate of taxation, it is clear that the state’s ability to appropriate the results of the work of its citizens in the form of taxes is not unlimited, certainly not in a democratic society. Moreover, if the observation of some analysts that the GDP growth rate tends to slow down as the size of the state increases is true, there would seem to exist some point, at which the size of the state as a proportion of the GDP could no longer increase. The bad news is that this point might be reached as the GDP growth rate approaches zero, condemning the currently richest economies to permanent stagnation.

The state is not only a great spender but also the largest employer in any country. In the Czech Republic it employs almost one million people, one fifth of the working force. Of these, however, a vast majority is performing the services provided by the state, especially in education, public health care, as well as in police, emergency services and the army. Only about 20 000 people actually administer the state at the government level. Their number has remained largely constant over the last ten years.

The problem then is not so much the absolute number of the state employees or its rate of growth but the widening gap in productivity, which is steadily growing in the private sector but remains more or less the same in the public sector. As a result, the quality of the public services stagnates in the face of expectations created by economic growth and improved standards of living. People, who have become used to better quality of service in shops and restaurants, will expect the same of the state.

One of the main reasons for the diverging trends in productivity is that while the information revolution has drastically altered the management and conduct of private enterprise, it has made only modest inroads in the public sector (whoever thinks that having a computer at one’s desk amounts to information revolution is proving the point above). Government is (ideally) nothing else than a huge information network and a complex expert system. There are huge efficiencies to be made from the pooling, sharing and aggregating of information. Because of institutional, and political barriers, this does not happen to a sufficient degree. To wit, the recent suggestion of renewing conscription in the Czech Republic, while worthy of consideration for reasons of bolstering the nation’s security, proposes to create a system for collecting data on would-be conscripts that are already available in other departments of the government. It seems that whereas in the private sector the Moore’s law reigns supreme, it is the Parkinson’s law that still holds sway over the public sector.

Although there is a broad range of views as to the effectiveness of the role of the government in various sectors of the society, most observers and studies agree that public investment in education is one of the most effective ways the state can contribute to prosperity and growth. The public spending on education in the Czech Republic is not low, amounting on average to about 4.5–4.7% GDP but is still one of the lowest among the OECD countries, and at the extreme low end as a proportion of all public expenditures. Moreover, the portion of spending on tertiary education, where most of the “added value” of education is derived from, is way below the OECD average.

A similar, though not quite as uniform consensus exists regarding the multiplication effects of state investment in public infrastructure. Twenty five years of modern state construction have brought mixed results in this respect. In the Czech Republic, it still costs twice as much to build a kilometer of motorway than in Germany; a high speed railroad, a potential boon for a country of our central location, is still a dream of the future; and large municipal projects such as the now-infamous Blanka tunnel have become a target of public derision, of suspicions of foul play, and a huge drain on public finances. At the same time, the number of huge logistics and distribution centers built by international private companies in the country has increased dramatically, signaling difficult bottleneck issues in the years ahead.

In the foreseeable future, large states are here to stay. What we need is not more state but smarter state, one that will be better able to make use of the talents of a small class of highly trained and well rewarded public servants to concentrate the limited public funds on the fundamental functions of the state, avoid increasing the tax burden on the population, and make use of the modern information technology to do things better, quicker and in a more impartial way. Several considerations play a crucial role in making this possible:

Defending the realm was originally the only function of the state, and it still remains one of its indispensable functions. Without adequate external and internal security and the rule of law, none of the other functions of a state can be adequately fulfilled. However, maintaining appropriate defense expenditure is difficult, because in peacetime it does not have enough of a constituency. The short-termism of both politicians and voters finds the concept of insurance for a rainy day difficult to grasp. Both moral leadership and political courage are indispensable in this respect.

A modern state needs to regulate some aspects of the economy, but over-regulation is a sin, bringing about unsustainable transaction costs, impairing competition and competitiveness with respect to external players and providing points of arbitrary decision-making that potentially serve as sources of rent.

E-government is the way forward. The efficiencies to be made, the cost savings and the user-friendliness benefits for the citizens are enormous, provided public procurement is kept in check. Most regulatory and public procurement decisions can be made more easily and more cheaply, by computerized expert systems without the risk of human bias, favoritism or corrupt influences.

A debt trap is to be avoided at all costs. Unlike a private company, a democratic state that spends a large proportion of the budget servicing its debt can neither easily afford cutting down on the services it provides, nor can it fire a proportion of the population to alleviate the burden. A constitutional debt-brake is a robust though not absolute weapon to avoid a debt trap.

Michael Žantovský

Michael Žantovský is the Honorary Board Chairman of the Aspen Institute Central Europe.

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