EU: Deregulate to Boost the Economy

The coronavirus pandemic is an extraordinary event that required many unique policy responses. While lockdowns, face masks, or compulsory social distancing and digitalization of our day-to-day life was something new we often hear recommendations that had been previously heard so many times. These proposals are repeated with every crisis at the national, regional, or global level and indicate that more government interventions are needed, that more regulations are necessary, and that only the state can protect us from bad things that may happen in the future.

Today, government regulations are common in many areas of human life. Moreover, many people cannot imagine what the world could be like without such regulations. Although there is no country without government regulations it is important to bear in mind that the level of these regulations may differ impacting economies and societies. There are many analyses and reports showing how economic freedom measured by indices such as the Fraser Institute’s Human Freedom Index or the Heritage Foundation’s Index of Economic Freedom is related to the growth and well-being of the people. In general, more economic freedom and fewer government regulations in the economy are good for economic development and improvement in living standards.

There are also many myths related to regulations and deregulation. Enthusiasts of government regulations sometimes try to demonize a vision of the world where governments are not regulating our lives. They speak of an alternative vision of an evil place without any rules which shows either their ignorance or deliberate use of highly emotional but fake examples. After all, it is not only the government that regulates human life. This is worth remembering in discussions about deregulation or more regulations that some people would like to see after COVID-19.

The most obvious regulator is human biology – we have to eat, drink or sleep. Work is one of the methods to fulfill our natural needs. Other important regulators are natural conditions or the forces of nature. What is more, they often influence the shape of institutions created by societies and authorities. But let’s move on to less obvious examples of non-governmental regulations.

A family plays an important regulatory role – it is the main regulator when it comes to, for example, raising children. Parents may influence their children’s behavior, education, and day-to-day activities, from what their children eat to how much time they spend on social media. Moreover, national policies determine the scope of parents’ regulatory activity. For example, many countries prohibit the consumption of alcoholic beverages up to the age of 18 and parents have nothing to say about this. In Germany however, a parent has the right to buy a beer or wine for their child from the age of 14 as long as it is consumed in the presence of the parent. Therefore the role of the regulator in this respect is played by parents. The regulatory activity of the family is not only a matter of upbringing and caring for minors. What is also important is the role of the opinions of our relatives. Even adults as part of their decision making may reflect on what their parents, grandparents, children or other family members will say and under influence of these opinions change their behavior.

Another popular regulator are norms, customs, and traditions prevailing in a given area that are not enshrined in the states’ legal systems. They often evolve naturally and are passed from generation to generation. It is also associated with the creation of taboos, that is, things are forbidden in a given community because they are shameful, controversial, dangerous, or unpleasant. For example, many people follow the basic principles of good manners that are not mentioned in any laws. The state does not force us to say good morning or thank you and yet we do it for some reason.

For thousands of years, human life has also been regulated by religions. Fear of eternal damnation or the hope of living in paradise has been an important regulator of behavior for many people. Religions are also based on sets of rules such as the Decalogue in Judaism and Christianity. The ethical principles that guide human behavior may also come from other sources. For example in the preamble to the constitution of the Republic of Poland, it is written that

“We, the Polish Nation – all citizens of the Republic,

Both those who believe in God as the source of truth, justice, good, and beauty,

As well as those not sharing such faith but respecting those universal values as arising from other sources.”

Of course, there have been many cases when religious principles and state regulations were close to each other or even the same, and politicians and religious leaders abused religions. Moreover, religions also influence the formation of many state regulations or legal codes.

Private regulations are also an important cause of non-governmental regulations. A good contemporary example of such regulatory bodies are the sharing economy platforms the development of which was possible thanks to new digital technologies. Many problems that were once supposed to be solved by government regulations such as protection against a dishonest taxi driver or determining the standard for rented accommodation are now solved by private platforms that include reputation mechanisms and tools that reduce transaction costs.

Many economic regulations of governments are today targeting problems that are largely out of date. No one is saying that all the examples of non-governmental regulations always work well. State regulations, despite their author’s intentions, do not work perfectly either. It is impossible to build a paradise on Earth. Centralized attempts by politicians to build a paradise in such a way have failed so many times in the past. As Tom Palmer once wrote in Self-Control or State Control? You Decide “Many have believed, and some still do, that order can only be created by force guided by reason and will. The planet is littered with the graves of the victims of that ideology. The reality of attempts to create heaven on earth through such planning has been not order but what the economist Ludwig von Mises called “planned chaos.” These words should cool down the aspirations of those politicians and their supporters who would like to impose their order on other people.

Moreover, governmental regulations may weaken the effectiveness of non-state regulations or even marginalize them. Additionally, excessive state regulations destroy the sense of human responsibility for oneself and for one’s relatives. It is a consequence of state paternalism which is a violation of the principle that everyone has the freedom to act to the extent that it does not infringe the freedom of others. Overprotective states through various types of regulations try to protect citizens from themselves thus depriving them of the freedom to decide about their own lives and taking responsibility for their choices. Deregulation understood as limiting the intensity of government regulations means at the same time strengthening human responsibility. Human decisions are influenced by many more things than regulations created by politicians.

All government interventions are not necessarily bad. Instead of the rule by regulations what government should provide is the rule of law. In indices of economic freedom, countries score well if they do not have excessive governmental regulations and when they provide a system with a high level of the rule of law. Therefore, the rule of law is an essential guardian of freedom. The rule of law is also an important element of a sound democracy in which political rights and civil liberties are respected and the powers of the government are constrained so we have a limited government. As Friedrich Hayek pointed out the rule of law thus implies limits to the scope of the legislation. It restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. The rule of law is needed to guarantee the existence of an individual’s freedom and protection from violations of this freedom by others. It is why our think tank, the Civil Development Forum has been for years very active in the field of the rule of law including responding to various attacks on the rule of law by politicians and current rule of law crisis in Poland. (learn more about Poland’s rule of law situation here)

The best response to the pandemic-related economic crisis is deregulation. The ongoing COVID-19 pandemic is a challenge not only for the health system but also for economies. After 28 years of uninterrupted growth, the Polish economy shrank for the first time in 2020. Returning to the path of growth is a great challenge. Given the aging of the population and the problems with over-regulation of the economy simply returning to the pre-pandemic state is not enough. The post-pandemic success of Polish entrepreneurs also depends on whether the state will allow them to unleash their potential through extensive deregulation and withdrawal of legislation that restricts economic freedom. In terms of economic freedom despite significant progress since 1989 Poland is still one of the worst-performing countries in the European Union and OECD. Therefore, there is still a lot to do to unlock the potential of Polish entrepreneurs.

Moreover, the current crisis creates a risk that many illiberal regulations introduce as responses to the pandemic will remain with us. We are witnessing many attacks on economic freedom and we are hearing voices about the advantages of state interventionism over free-market capitalism. The best response to the crisis is liberalization, lifting of both old and new regulations that restrict economic freedom. The regulation within the system based on the rule of law does not mean anarchy or chaos. It means growth and more prosperity. The coronavirus pandemic generated huge costs for doing business and day-to-day lives. We should oppose making the economic recovery after COVID-19 even more costly by new governmental regulations as responses to the current crisis.

Marek Tatala is Vice President and Economist at the Civil Development Forum (FOR Foundation) – a pro-free market and pro-liberty think tank in Warsaw.