Inflation and CBs 5: Capitalism Without Failure is Like Religion Without Sin

Capitalism without failure is like religion without sin. The statement is from a CATO scholar, Gerald P. O'Driscoll Jr., in his paper, "Treasury's Thieves". Perhaps people should keep that in mind before they conclude that the current financial turmoil in the US, which is spreading to financial markets abroad, marks the beginning of the "end of capitalism".

The current financial "meltdown" should happen. If the meltdown does not happen today, then it should happen tomorrow, or next week, or next year. And it should continue, if only to weed out the irresponsible corporate leaders and the cheaters.

What should not happen is a government bail-out of collapsing and imploding big banks and firms. In this case, the proposed US government bailout for the financial sector to the tune of $700 billion -- not counting the projected budget deficit of more than $480 billion by the end of 2008 of the federal government alone (many states, cities and counties have their own sets of budget deficits).

So why is government bailout not justifiable? Three important reasons.

One, make those responsible for a corporate collapse be accountable for their mistakes. Hence, they should pay the price for their irresponsibility and misbehavior. Those who should sink must sink. And taxpayers' money should not be used to bail out irresponsible corporate guys.

Two, governments by themselves have no money on their own to bail out failed enterprises except for what governments confiscate from the income and savings of the hardworking citizens in the form of various taxes, charges regulatory fees and fines, or by printing money endlessly through their central banks, which can push inflation upwards endlessly, and thereby rob again the responsible citizens of the real value of their income, savings and investments.

And three, the US Fed's and other central banks' (like the Europe CB) large-scale bailout pool and consequent monetary policies will be distortionary. In cases like this, producers and manufacturers are forced to watch the behavior of the Fed or any central bank on whether it will raise or lower or keep existing interest rates, or protect the currency from further depreciation or appreciation, rather than watch the behavior of consumers (if their preferences and buying pattern are changing or not) or the behavior of competing producers from other countries (if they are producing better quality goods and services or selling at lower prices or a combination of both).

High inflation is caused mainly by lower supply relative to demand. So to address high inflation, expand supply relative to the size of demand. But central bank bureaucrats think they can solve the world's price problem by centralizing monetary tools in their hands, and squeeze money supply by tightening credits and raising interest rates -- which in the process choke many entrepreneurs and producers, both big and small.

The term "socialism for the rich" (under a longer phrase, "profits are privatized but losses are socialized") is wrong. The proposed multi-billion dollar bailout can be aptly called "socialism for the irresponsible" because only irresponsible and envious people would love socialism. Under socialism, the lazy and the envious will still eat, will still have allowances, and will be entitled to free "quality" education, health care, housing, etc. because social equality is non-negotiable.

For the socialists or trying-hard socialists, personal and corporate responsibility or irresponsibility do not count much. What matters to them is more "government responsibility" . So, corporate irresponsibility of officials of those big firms don't count much, those firms are "too big to fail", they should not sink, and their officials need not go to prison.

Some people ask, "Who are the irresponsible? Who defines 'irresponsibility' and who should penalize them?" There can be a BIG political battle on the definition of "irresponsible" because among the most irresponsible institutions involved in the current financial "meltdown" is the BIG US government itself.

It is easy to spot an irresponsible guy or institution: they live beyond their means, consistently. They spend much bigger than their income or revenue, consistently. Or worse, they spend and ask for more subsidies even if they have no income, nor have any plan to work and have regular income. A person who in his late 20s or 30s still depends his parents' allowance is irresponsible. A bank that lends to many people, who it perfectly knows have no jobs or no stable jobs and income, is irresponsible. A government on budget deficit, for one, two, five decades or more, is irresponsible.

So, how should they be penalized? The penalties for cases like failed companies are already in the books of any country's legal system. Bank or corporate officials who lose their stockholders' money should go to prison, or the cemetery perhaps -- in the case of those unlucky to be caught by really mad and impoverished investors.

After the US government announced the huge bailout fund that it seeks from the US Congress, the US stock markets were battered once more, the US dollar was knocked down further, and even world oil prices were up once more.

Why? It's the distrust on the US government, distrust on any fiscal "stimulus" by a bailout scheme because of the big taxes and fees that will be confiscated from the pockets and monthly salaries of US citizens in the coming months and years.

A friend shared that the proposed Treasury bailout plan has this provision:

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Dictators hate for their work and decision to be reviewed and questioned. "Non-reviewable" clause by any court or any agency speaks of the absence of accountability and transparency, absence of personal and official responsibility, for any mistakes in the future. If they are not dictators, then they should be fully transparent and fully accountable for their actions and policy decisions. If they do not want to be accountable for any future mistake, then they should not initiate such bailout move in the first place.

The pattern and the dangers are there: individual responsibility is meaningless under a socialist or trying-hard socialist framework. Everything is "government responsibility" . The primacy of the collective over the individual, always. And in their books, to have order in the collective, each individual -- except the administrators and governors of the collective -- must surrender a big portion of their income, their savings and their personal liberty, to the collective. Then there will be order in society, harmony and equality. Perhaps equality in misery.

Again, corporate failures and bankruptcies, as well as expansion and becoming big, are part of the game under a capitalist set-up. Market failures almost always result in market solutions, unlike government failures that almost always result in more bureaucracies and offices to find out how much have been wasted and stolen already.

Here at home, if Metrobank or BDO or BPI would "collapse" someday for whatever reason, taxpayers should not support any bailout by the government, whether through the the central bank (BSP) or congressional appropriation. Let any big but misbehaving ship sink if it must -- that's fair game, and this alone will put enough pressure and discipline on existing banks, corporations and enterprises not to act irresponsibly. Government has little or no role on private contracts between stockholders or owners and corporate officials, except with its usual role of a parasite -- collecting high and dozens of different taxes when one or two taxes will suffice.

* See also: Inflation and CBs 4: Subsidies and Money Printing, August 17, 2008

US Debt 2: Private Sector Bailout of Government

On the subect of "bail-out", below is a short but good paper from a good friend, former President of Mackinac Center for Public Policy in Midland, Michigan, Larry Reed.

Larry is arguing that it's the private sector bailing out the national/federal government, not the other way around.

Meanwhile, now Mackinac Center President Joe Lehman made a comment a few years ago, that "While the Democrats want to bring us (Americans) to socialism on a train, the Republicans want to bring us there on a bus."

A friend here in Manila asked me, "After 8 years with Bush, does your friend in Mackinac change his statement?"
I said, "I think Yes. Probably he will say now, 'both Democrats and Republicans are bringing the US to socialism on a train.'"
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http://www.mackinac.org/article.aspx?ID=9829

Not So Fast!
by Lawrence Reed


"Thank God we had the federal government last week to bail out the private sector!"

That's what a rather statist friend of mine declared, almost gleeful that the financial crisis seemed to be proving how much we all need a massive federal establishment to both regulate and rescue us.

Never mind the federal government's own indispensable role as an enabler in the crisis, from its reckless monetary policy to its jawboning banks to make dubious mortgage loans. Never mind the long-term danger of its assumption of colossal new obligations and the moral hazard in the message its intervention sends. My response to my friend was of a more narrow focus. "Thank God we have the private sector to bail out the federal government not just last week, but every week!" I exclaimed.

Think about it. Taxes on the private sector pay a majority of the federal government's bills. For most of the rest, the government borrows by selling its debt obligations mostly to private sector entities - including banks, insurance companies and individuals.

The federal government is the world's biggest taxer and the world's biggest debtor. If those of us in the private sector didn't pay our taxes or didn't buy Washington's paper, the feds would have gone belly-up decades ago. We've rescued Washington to the tune of about $10 trillion and rising. A big difference between Washington bailing out the private sector and the private sector bailing out Washington is that the private sector has to work, invest, employ people and produce goods to come up with the cash. It can't print it like Ben Bernanke can.

Our friends in Washington have blessed us with future burdens almost too astronomical to comprehend. In the name of taking care of us in our old age, we are saddled with no less than $6 trillion in Social Security payouts over the next 75 years for which there are no presently-earmarked funding streams. According to Brian Riedl of the Heritage Foundation, the unfunded obligations for the new federal prescription drug program, enacted under President Bush total another $8 trillion. On and on it goes. The private sector has an awful lot of bailing out to do in coming decades.

If you have any doubts about the role played in the present crisis by the very federal government now posturing as our rescuer, take a look at this article from the Sept. 30, 1999 edition of The New York Times: http://tinyurl. com/3jdn9e. And then contemplate how deeply we taxpayers will have to dig in the not-too-distant future to pay the bills of our benevolent, compassionate and forward-thinking government.

* See also, US Debt 1: How Bloated is the US Govt? May 08, 2006

Rule of Law 1: Entrepreneurship and Government Permits

The World Bank and International Finance Corporation (WB-IFC) conducts an annual report, “Doing Business” and its 2009 Report was released last week. The goal of such report is to assess the 181 countries (178 countries in the 2008 Report) included in the survey on how easy or how bureaucratic they are for entrepreneurs and businessmen – who create jobs, who buy and produce various goods and services in society. It is a complex and delicate procedure, involving the inputs of top business consulting, auditing, legal and other companies in the countries surveyed.

After assessing the countries through assignment of a certain score, it ranked all the 181 countries. For this year, the 10 factors considered and measured in coming up with a composite score and where rankings are made, of “Ease in Doing Business” were: (1) Starting a business, (2) Dealing with construction permits, (3) Employing workers, (4) Registering property, (5) Getting credit, (6) Protecting investors, (7) Paying taxes, (8) Trade across borders, (9) Enforcing contracts, and (10) Closing a business.

So, how did the Philippines fare?

Rank in Ease of Doing Business, 2008

1. Singapore
4. Hong Kong
12. Japan
13. Thailand
20. Malaysia
23. Korea
61. Taiwan
83. China
88. Brunei
92. Vietnam
122. India
129. Indonesia
135. Cambodia
140. Philippines
165. Lao PDR

Again, for the nth time, the Philippines proved to be among the most bureaucratic of all supposedly “emerging economies”, ranking 140th out of 181 countries included in the survey! What pulled down its ranking were its scores on the procedures in Starting a business, also in Closing a business.

The top 10 countries with easiest procedures in starting a business – New Zealand, Canada, Australia, Georgia, Ireland, United States, Mauritius, United Kingdom, Puerto Rico and Singapore – only have one, at most 6 or 7, procedures to register and start a business, and each procedure does not take long to complete, and the fees are not plenty and high. In addition, the local governments hardly have any part in business registration procedures.

In contrast, the Philippines requires at least 15 procedures: 3 with the Securities and Exchange Commission (SEC); 4 with the barangay/village and city/municipality; 6 with the Bureau of Internal Revenue (BIR); 1 with the Social Security System (SSS); and 1 with PhilHealth. Registration with Pag-IBIG maybe optional, but most firms are required or advised to do so. Ask any serious entrepreneurs around, and most likely they will pinpoint at the local governments and the BIR that really give them difficulty if not hell.

The empowerment of local government units (LGUs) after the enactment of the Local Government Code (1991) was supposed to make the LGUs more responsive to the needs of the people in the locality. What happened in many cases, was the lives of hard-working and entrepreneurial people became more complicated, the less-responsible and less hard-working people were placated and subsidized, and personnel of the barangay/municipal/city halls were expanded and often pampered. Political decentralization and devolution did not mean less government but on the contrary, more government, as both national government agencies (NGAs) and LGUs take turns in slapping new regulations, new taxes and fees, to entrepreneurs who are deemed to have less political clout to the incumbent set of politicians.

The BIR will remain to be the nest of wastes and inefficiencies, if not large-scale corruption, because of the various powers and authority, whether transparent or arbitrary, given to that agency by various revenue laws sought by the Executive branch and granted to them by the Legislative branch.

Then there are many other NGAs that also require their own set of requirements, regulations and fees, on top of regulations, taxes and fees imposed and collected by the above-mentioned NGAs and LGUs. If a firm is manufacturing or distributing various food products, drinks, medicines and related products, it will have to get a license from the Bureau of Food and Drugs (BFAD) and/or the Department of Health (DOH). A friend of this writer who likes cooking produced different sauces for different type of barbeques. He invented around 20 different sauces, had his own packaging, already set up the marketing channels with selected local restaurants, shops, supermarkets, even a few outlets in the US. Six months have passed, 10 months, a year, and he still never got his BFAD license despite having submitted various samples for testing and re-testing. This experience plus some family concerns pushed him to abandon his business plan and migrated to the US instead.

If a firm is dealing with minerals extraction, it will have to go through a very long and complicated process in getting an Environmental Clearance Certificate (ECC) and other environmental permits with the Department of Environment and Natural Resources (DENR) and LGUs.

Friedrich Hayek observed in his book, The Constitution of Liberty, that government regulations “will always limit the scope of experimentation and thereby obstruct what may be useful developments. They will normally raise the cost of production or reduce overall productivity” (Chapter 15, Economic Policy and the Rule of Law). More regulations, more restrictions. Although such regulations may mean more revenues and more power for any national or local government body, they definitely kill certain innovative spirit and outcomes that some entrepreneurs may produce and develop.

The Rule of Law philosophy explicitly limits the arbitrary power of governments to create and enact too many rules, too many regulations and restrictions. Entrepreneurship and job creation is not a crime and harmful to people, especially those who need jobs, those who need new products and services. What often results with more restrictions, is that more ways and schemes are invented – and allowed in exchange for bribes – to circumvent and avoid those restrictive rules. This results in high levels of what are known as “informal” or “underground” economies.

For entrepreneurship and rule of law in the economy to flourish, the number of business regulations have to be drastically cut and reduced. Then entrepreneurship and job creation will be rewarded with freedom and prosperity, not penalized with endless regulations and taxation.

CSOs and State 5: Subsidiarity, Decentralization and Privatization

This paper will discuss some political concepts related to citizen administration and governance, including the role of civil society organizations (CSOs). Those 3 concepts in the title though will be the dominant themes.

The principle of subsidiarity

This principle states that the lowest and least centralized levels of administration and governance should handle the citizens’ various concerns. Only on concerns where the lower levels cannot handle that the next higher level of administration should take charge.

According to Wikipedia, “The principle of subsidiarity goes back to Pope Leo XIII in Rerum Novarum and holds that government should undertake only those initiatives which exceed the capacity of individuals or private groups acting independently. The principle is based upon the autonomy and dignity of the human individual… and emphasizes the importance of small and intermediate-sized communities or institutions, like the family, the church, and voluntary associations, as mediating structures which empower individual action and link the individual to society as a whole and holds that all other forms of society.”

This is a beautiful model of citizen administration because it encourages self-reliance, independence of action, and most importantly, it promotes and respects individual and parental responsibility in running people’s lives. Ultimately, society is made not mainly of government agencies and bureaucracies, but of individuals, households and their voluntary organizations. Such bodies range from churches, neighborhood or village associations, sports clubs, civic and charity clubs, professional organizations, advocacy associations, and so on. Government is only part of society and it is not the most important part, it is individuals and people.

Decentralization

Decentralization of political power, from the central or national government to the sub-national or local government, is a move that affirms the beauty and practicality of the principle of subsidiarity. This is after people have realized the ugliness and impracticality of central planning under a socialist government set-up or any of its derivatives characterized by a big and centralized government that is supposed to provide and subsidize everything but also takes everything from the people.

So certain social and economic functions are devolved to local government units (LGUs), functions that used to be handled by the central government and its various line agencies. Decentralization in this sense, is good because the LGUs are able to bridge the gap between a powerful and often less-sensitive central government, and ordinary citizens and their private enterprises and civil society organizations. Such civil society organs are mostly "apolitical" (like cooperatives, neighborhood associations, churches, sports clubs, civic and charity clubs, etc.), where people just want their individual choices and organizational freedom be respected. The citizens often feel “powerless” in relation to a centralized and very often bureaucratic, national government.

Local government function in this respect can approximate the competition among private enterprises and/or individuals in providing the needs of society. When certain functions are provided by the central or national government alone, there is no competition, there is only monopoly. And a monopoly very often creates lots of waste and inefficiencies because a monopolist thinks its “consumers”, the people, have no other options anyway.

Competition is possible among local governments. Neighboring towns and/or cities attracting lots of investors, local or multinationals, are forced to compete with each other in terms of better infrastructure, lower crime rates, lower local taxes, easier business registration, and so on. This competition among neighboring cities is happening in some of Metro Manila’s LGUs (composed of 17 cities and municipalities), and the result is generally good. Provinces and cities or municipalities that have good white sand beaches, or beautiful waterfalls or lakes and mountain resorts, will be competing with other provinces and cities or municipalities that have the same natural attractions. The LGUs in this situation will be compelled to improve their infrastructures like airports, seaports, roads, power supply, etc., as well as improve the peace and order situation, if they are serious in attracting more tourists and visitors to come. More tourism, more business and employment opportunities to local residents.

With this background in mind, can one conclude that local governments  automatically provide more democracy? NO. While it is true that LG is closer to the citizens and can identify their needs more than a central government, LG can also introduce its own set of economic distortions through new regulations, taxes and fees on top of those implemented and collected by the national government.

Note for instance, those small economies with very small local governments like Maldives, Singapore and Hong Kong: they charge only 1, 4, and 5 different taxes respectively, for medium-sized companies. In contrast, economies with plenty of local governments like the Philippines, Indonesia and India, even with decentralization, charge 47, 51 and 60 different taxes and fees, respectively, to medium-sized enterprises. Data from the World Bank and Price Waterhouse Coopers (WB-PWC) study, “Paying Taxes 2008: The Global Picture”.

Will decentralization always lead to better governance and poverty alleviation? NO. Decentralization can lead to better governance because LGUs competing with each other can improve services to the public, but this is not always the case. As discussed above, LG can introduce new rules and regulations, new taxes and fees, even create new local monopolies, etc. on top of existing regulations, taxes and monopolies administered by the central government. The end-loser of this situation are the citizens.

And will fiscal decentralization ensure equality among regions? Again, NO. There is no assurance for equality among regions, provinces, cities and villages because each locality has physical, geographical and population characteristics that are different from the other localities. Finally, local governments should NOT aspire for equality among each other. An island-province that is mountainous and volcanic cannot aspire to become equal with a flat, cosmopolitcan and urbanized island-province. The former can develop eco-tourism or geothermal energy as main development path.

Splitting of function

The main task for the national government in the opinion of this writer, is maintenance of (a) armed forces against external aggression, (b) foreign affairs and international diplomacy, (c) infrastructure and public works not covered by the private sector through franchise or build-operate-transfer, build-own-operate and related schemes; (d) judiciary, both lower and higher courts to settle disputes among people, their enterprises and organizations, (e) legislature, to amend or abolish antiquated laws, create or consolidate new laws, and (f) revenue collection and budgetary disbursement body.

The rest of social functions – the police, fire protection, basic and secondary education, primary health care, garbage collection, others – can be devolved to LGUs. The purpose is to instill competition among LGUs – better roads, airports, other infrastructure; better peace and order; better education and training of people, etc. So that people can “vote with their feet”, if their current LGU is behaving like a giant hold-upper and providing mediocre services, people can leave and move to other provinces or cities. With such splitting of function, I can hardly think of other disadvantages.

Levels of local government

Local government takes many forms in many countries. In the Philippines, LGUs range from the province, down to city or municipality, down to the barangay or village, as the lowest and most basic political organ. A province is composed of municipalities and cities. A city is more “prestigious” than a municipality because the former connotes bigger economic activities and hence, bigger revenues. All LGUs have a share of internal revenue allotment from the national government, and have powers to create and collect their own set of local taxes and fees.

In theory and in the law, those barangay leaders should be “non-partisan”; hence, they cannot join the established political parties. In reality, they are highly partisan to any opposing candidates for city or municipal mayor. Nonetheless, barangay leaders are usually the most sensitive to citizens’ concerns.

In the experience of this author as a private citizen, and living in a “non-gated” village or subdivision, the most important function of a local government, the barangay especially, is the maintenance of peace and order in the locality. The barangay does this mainly through good street lighting in the evening, and having very alert and mobile barangay patrols. When some neighbors become noisy at nighttime, disturbing other people’s sleep, just one phone call of the barangay, the barangay patrol comes in a few minutes, and the noisy neighbors suddenly become silent. Any roving thieves and robbers are also afraid to come near the neighborhood in the evening because they can easily be seen and recognized due to good street lights.

When there is peace and order in the community, people can be productive. They can work late if they want, or start work very early in the morning, knowing that their house, their family, are generally safe. Of course, households should still secure their house and other property properly.

Getting good people for local governments

Bad politicians run for local (and central) government mainly to steal, or to create restrictive and protectionist policies to favor and protect themselves, their businesses, and their friends’ economic and political interests. But good people also have the same incentives to run for the same position, mainly to block the victory or capture of political power by the bad politicians. Hence, “recruting good people for local governments” is not a problem because there is always an incentive for some well-meaning people to join the government, both at the local and national levels.

The main problem though is the credibility of the electoral process. Good politicians are not likely to cheat in elections and to bribe election officials just to win. It is the corrupt politicians who have all the incentives to cheat in elections, bribe voters, bribe election inspectors, bribe election officials. And it is this lack of credibility of the electoral process in the Philippines and many other developing countries that is the main hindrance why many good people are discouraged from entering politics. There is deep feeling that one will be compelled by circumstances to engage in some election cheating, or bribery of election officials, from limited to large level, if only to minimize the damage and reduce the effect of large-scale cheating by the bad politicians and unprincipled political parties. This alone turns off many good people from entering politics and they prefer to be in private business, where there is less political controversies, where life is more peaceful.

There are at least 2 ways to help remedy this situation. One is a major reform in a country’s electoral system towards more transparent, more modern system like computerized voting and counting. And two, to have a strong political party with very distinct and principled political and economic philosophy, and the party and its leaders will provide political, financial and moral support system to good politicians not to lose heart and be more brave.

The usual campaign of “fighting corruption”, “good governance” and related mottos may no longer catch the imagination of the average citizens because almost all political parties, almost all politicians, whether from the administration or the opposition, are saying the same thing. There is a big potential for a political party that advances the principle of subsidiarity, classical liberal and related philosophies of less government, less taxes and regulations, and advancing individual responsibility. A political party that strongly believes in the “rule of law” in the Hayekian definition of “the law applies to everyone and exempts no one”.

Liberalism

This philosophy, according to wikipedia, considers “individual liberty to be the most important political goal”. Putting this definition with the above definition of subsidiarity principle, it can be said that the individuals and their family, their private enterprises, their voluntary and civil society organizations, are the lowest levels of citizen administration and governance, and not the local government. Only in cases and functions where the households, the private enterprises and civil society organs cannot handle, that local governments up to the central government should take charge.

The advantage of relying first with the individuals and their voluntary organizations for self-administration and self-reliance, is that various goods and services are produced and exchanged in a voluntary way. When a locality has lots of rice, vegetables, fruits, animal products, but no fishery products, a fisherman or aquaculture farmer, or a small firm producing and trading fishery products, will provide said products to the people. And when people have lots to eat but no or little entertainment areas, another firm can put up a mall with moviehouses, or theme park, and so on.

When people exchange goods and services in a voluntary manner, as in free trade and free market, very little forcible contributions, i.e., taxes and fees, will be needed. The government’s role, local governments especially, is to watch out and discipline lazy and bully people who engage in stealing, cheating and various crimes. The protection of the citizens’ right to life, right to private property, and right to liberty and dignity, remains a very important function of government, both the central and local government.

Privatization

Here in the Philippines, the proliferation of private security guards is noticeable. All malls and department stores, all residential and office buildings, all banks and convenience stores, all schools and universities (except government schools at elementary level), all hospitals, all villages and subdivisions, even airports, seaports and bus terminals, are guarded by private security guards. In a sense, one can say that the peace and order function has been privatized, and so far it is working. And that it is an indicator of citizen distrust of the capacity and sincerity of the government policemen. The police effectively has limited function but big budget, and some of them are tainted with links to organized criminals.

Private schools at the pre-elementary, elementary and secondary levels are plenty in the Philippines. Which again is an indicator of citizen distrust of the capacity and quality of government-run schools, despite the Department of Education (DepEd) having the biggest annual budget among all departments and agencies. There are plenty of private clinics and hospitals too, some expensive but many are offering competitive prices. People have choices  depending on their budget and type of services demanded.

If peace and order function can be privatized, and private security companies are competing with each other in offering good services, many other social functions can be privatized too.

Privatization is consistent with the principle of subsidiarity. If private enterprises can provide the needs of the people, say education, restaurant, buses, hospital, haircut, then both central and local government should stay away. This also reduces the rationale for high and multiple taxes and fees. And privatization works best if the economy is deregulated and demonopolized. When a state enterprise is privatized, it should be “one of the many” enterprises in that sector. If privatization happens while the economy is over-regulated and monopolized, then it will just be a transfer from government monopoly to private monopoly, and citizens will not feel much the difference. When citizens say private enterprises are better compared to government monopoly, it’s because in the former, they have a choice. They can patronize one company and boycott the others. This scares all other enterprises, and they are all forced to improve their services.

Some services becoming expensive after privatization can be expected, and some services becoming cheaper after privatization can be expected too. This is because of “product differentiation” and “price segmentation” by competing enterprises. When an airline is a government monopoly, fares can be either low (due to subsidy) or high (due to wastes) but services can be lousy because the monopolist knows that the riding public have no other airlines to choose anyway. After privatization coupled with deregulation and demonopolization, various airlines come in and compete with each other. Airline A will field new and modern planes, provide free food and drinks to passengers and charge expensive fares. Airline B is a budget airline, no food and drinks and charge low fares. Airline C also gives no food and drinks but offer some perks on participating shops and hotels and charges fare midway between those of airlines A and B. That is how product or service differentiation and price segmentation work and it is one result of competition.

It is important that local government leaders should recognize the practicality of the principle of subsidiarity and privatization, that local governments can only be a transition stage to a condition of civil society, and not an end in itself in citizen self-administration and empowerment. Informed and responsible people know what they want, and what they do not want. This creates diversity in needs and aspirations of people, but such diversity should be respected, not discouraged by forcing equality in society.

* See also CSOs and State 4: Local Government and Civil Society, August 12, 2008

Climate change and more government regulations

While the UNFCCC had a meeting in Accra last week, there was also a big conference in Manila last week, August 27, on "Energy, Climate and Food Security Conference", the program you can view at http://www.policy.aim.edu/downloads/Energy,%20Climate,%20and%20Food%20Security%20Conference/Programme_Final.pdf

The main sponsoring organizations were the Asian Institute of Management-Policy Center, Konrad Adenauer Foundation (KAF), International Alert (UK) and the World Food Program (WFP). About 300 people came including media, quite a big and well-organized conference.

The second session was on "Climate Security" and 2 of the 3 speakers were climate alarmists: a Japanese academic from Waseda U, and from International Alert, The 3rd speaker was a provincial Governor, he talked about what his government did, little alarmism discussed.

I did not stay long, but I caught the presentation of the first speaker on the 3rd session, "Food security", a guy from the WFP and he talked as alarmist as the 2 speakers in the previous session. Things like "with global warming, we expect more food security problems".

Among the new "fight global warming" moves and proposals here in the Philippines are the creation of a new bureaucracy called "Climate Change Commission" -- with its full army of commissioners, employees, travels and conferences, offices, etc. It's still in Congress debates. Another is requiring local corporations to reforest xx hectares before their business registration can be renewed. A friend who told me about this was working in a local environmental group "Haribon", and I guess they could be making money since they are positioning as "mediators", they will reforest some denuded mountains in behalf of those corporations, for a good fee I guess. I don't know of other new government regulations and interventions, but there should be more.

Tree planting and reforestation is fine, but it should not be made mandatory that will further increase the operating costs of enterprises. If the cost of reforestation are tax deductible, that should be fine. But if government taxes and fees remain high, then government creates another regulation to increase the operating costs of companies, that's additional distortion in the economy.

If tree planting and reforestation is a "must do", then companies that engage in forest plantation either for the wood industry or for eco-tourism (say develop mountain resorts) should be spared of paying corporate income tax (currently at 35% of profit) and other fees. But you don't hear such kind of move from the government. Only new and additional regulations and costly compliance.

Decentralization 2: From Local Government to Civil Society

A German political scientist, Dr. Monika Ballin, wrote a short paper entitled “Local Government and Civil Society.” That paper is mainly for the participants of an online seminar of the same title, sponsored by the Friedrich Naumann Foundation for Liberty. The seminar started last week, running for two more weeks, and I was lucky to be selected among the 68 participants from many countries, mostly from Asia, Latin America, Africa, and a few from Europe.

I like a number of definitions and points raised by Dr. Ballin in her paper. Among these are the following:

One, local government is a local, non-national authority, with local responsibility and limited autonomy and is part of the organizational structure of the State. But local government with a high degree of autonomy is always in strong opposition to centralistic political movements and authoritarian structures.

Two, the principle of subsidiarity applies: responsibilities as much as possible should be done at the lowest level, and only when a responsibility exceeds the capacity of one level that the next higher level should be entrusted.

Three, decentralization and privatization: responsibilities need to be shifted from the top down, and responsibilities which are not in the national or local sphere have to be privatized. Local authorities must have their own sources of funding to assert their fiscal autonomy.

And Four, civil society is the final stage of a functioning local government. If all means of decentralization, deregulation and privatization have been implemented and citizens have been involved as comprehensively as possible, civil society has emerged. There will be a “Lean State” where State structure exists only where it is absolutely necessary, and the State at any level is not carrying out any task and duty which private businesses or citizens themselves can do for society.

I say “Amen” to all four points, especially the last one. The four core advocacies of our think tank, MG Thinkers, Inc. – small government, small taxes, free market, individual responsibility – unsurprisingly fit in these ideals and goals of civil society. Less government responsibility (and less taxes and bureaucracies), more individual, parental and enterprise responsibilities.

The purpose of political decentralization and devolution is to shift some responsibilities from the national to local governments. Unfortunately, for many countries, this did not result in greater individual freedom and citizen empowerment and self-administration, but greater power, regulation and intervention by local governments. I do not think this is consistent with liberalism philosophy.

In a number of economic competitiveness studies done by various institutions, like “Economic Freedom of the World” (EFW) by Fraser Institute, or “Doing Business” annual reports by the World Bank and International Finance Corporation (IFC), or “Paying Taxes” annual reports by the WB and Price Waterhouse Coopers (PWC), it’s those small economies with small local governments units (LGUs) that have the fewest taxes and business regulations, like Hong Kong, Singapore and Maldives. While some countries with plenty of LGUs, even though they have decentralization or devolution law like the Philippines, have the most number of taxes and business regulations (eg. http://www.doingbusiness.org/documents/Paying_Taxes_2008.pdf).

This is because of duplicating business requirements, taxes and fees being collected, by both the national government and LGUs (provinces, cities or municipalities, and barangays or villages). The devolution of certain social services from the central government to LGUs like public health care, basic education and agricultural extension has emboldened many LGUs to create new taxes and fees, new rules and regulations – on top of taxes and fees, rules and regulations created and collected by national government agencies.

From the discussion by Dr. Ballin, to which I fully agree, the spirit of attaining a condition of civil society is not decentralization per se, but “degovernmentization” of many social functions, of ridding government and State intervention when individuals are free and responsible enough to be fully accountable and answerable for their actions and inactions. This is consistent with Friedrich Hayek’s observation that freedom and responsibility are closely intertwined, that a person cannot enjoy freedom unless he is ready to take responsibility for his life, his family and his community. That fear of responsibility is fear of freedom itself.

When I first mentioned the term “degovernmentization” to some friends here in Manila, their immediate reaction and question was “Are you proposing abolishing government?” No.

“Decentralization” does not mean abolition of the central government, but merely the transfer of some functions from the central to local government. “Deregulation” does not mean abolition of all regulations by government, but reduction of too many regulations, liberalizing the economy to facilitate entry of new economic players. “Demonopolization” does not mean abolition of the incumbent monopoly corporation, but allowing other players and competitors so that the previous monopolist becomes one of the many players. So “Degovernmentization” does not mean abolition of the government, but reduction of many functions and responsibilities currently handled by national or central government, and local governments, and giving such responsibilities back to the citizens, as individual and parental responsibilities.

There will always be a role for the State, a function that individuals and small communities cannot perform effectively. In its most basic and limited role, the State has the function to protect the citizens’ right to life, right to private property, and right to liberty. There will always be bullies, lazy and irresponsible people who will attempt to sustain their existence and that of people close to them by robbing other people their three rights mentioned above. These are the terrorists and murderers, robbers and hold-uppers, carnappers and pirates, rapists and kidnappers, and so on. Thus the State exists to become a “bigger bully,” better armed and equipped, than this group of people. The State also needs to maintain a credible and independent justice system that can render impartial and quick judgment on cases that involve critical disputes between and among the citizens.

The concept of “civil society” though is among those most misunderstood in the world today. Many people who regard themselves as belonging to civil society are actually in the forefront of advocating for more government regulations, trade protectionism, and higher taxation (the usual slogan, “tax the rich!”). In their hearts and mind, there is deep hatred of markets and big corporations, deep suspicion of assigning individual and parental responsibility, deep disrespect of inequality and diversity among people. So what those “civil society leaders” want is an even bigger government, and prevent the emergence of real civil society where citizens’ self-administration of their own lives, households, communities and workplaces, are respected and encouraged.

On another note, the ongoing renewed military conflict between the secessionist Islamic army and the government armed forces in southern Philippines, is mainly a result of never-ending claims by the former for political and economic control of many provinces and cities that they claim to be their “ancestral domain.” Political decentralization under the Local Government Code (1991) did not work to solve this problem. Another law and political structure, creating the Autonomous Region in Muslim Mindanao (ARMM) was enacted and implemented, but after more than a decade, the same problems resurface.

The ultimate goal of the rebel Islamic army in the south is a separate State, an Islamic State with its own geographical area of control. It does not want decentralization or a stronger and “autonomous” local government because it will still be part of the administrative apparatus of the Philippine State.

Asserting a “civil society agenda” at this time in the current conflict in the south is a secondary issue. Because the main issue is the assertion of the Islamic rebels to have their own central government, while the central government of the existing Philippine State is ambivalent at least, or opposed to this move at most.

Civil society by nature relies on the voluntary acts of citizens for self-administration. Even the financial backbone to sustain voluntary organizations (from corporations to cooperatives, labor federations, student councils, neighborhood or village associations, churches, sports clubs, civic clubs, etc.) comes from voluntary contribution. Civil society therefore, is pacifist and non-coercive. And it is this non-coercive nature that directly and explicitly separates it from organs of government, where almost all of them were created and sustained by non-voluntary means through taxation.

Both sides in the south, the Islamic rebels and the Philippine State, though fighting, have a common trait: to foster or expand the coercive nature of their respective governments, and in the process, kill or stop the emergence of civil society.

WHO’s advancing modern health socialism?

Socialism as a system of government has lost its attractiveness to many people who have seen and personally experienced it for several decades. That is why socialism collapsed in the early 90s in the former USSR, former East Germany and other Eastern European countries. Here in Asia, the two biggest socialist economies, China and Vietnam, are socialist only in the sense that they still have a one-party state, the Communist Party, but economically, they are mostly market-oriented.

The main defect of socialism lies on the fact that “a government that’s big enough to give you everything you want is also big enough to take everything you’ve got”, and “free people are not equal, and equal people are not free”. See Lawrence Reed’s Seven principles of sound public policy.

Individual and parental responsibility do not count much under socialism. It's all "government responsibility". Thus, one can have a dozen children and drink every night, and when he becomes poor and miserable, the State is supposed to provide quality education, quality health care, quality housing, quality employment, quality social protection, etc. for him and his family, for free! The state gets money by confiscating a big portion of the income and savings of the productive and responsible people, especially those “greedy rich people who expropriate the surplus value of the workers”.

And if one’s liver and intestines are punctured by too much alcohol, or his lung is blackened and mutilated by too much smoke, he still has the right to demand "quality healthcare" regardless of his incapacity to pay. That is why socialism is appealing to the irresponsible and free-riders; they find it a very humane social system because it cares for everyone and ensures that everyone is equal. Equally miserable, with the exception of the leaders and friends of the socialist state.

But it’s not only the irresponsible, free-riders and dictators who are attracted to socialism. Some of the world’s bright minds working in tax-funded institutions also love the ideology, although they are not explicitly advocating it. And while they may call people who advocate free market and more individual responsibility as “neo-liberal”, maybe they can be called as “neo-socialist” or “neo-communist”. But I hate labels such as neo-neo, so I will call them as plain socialists, although they may not admit it.

The other day, the World Health Organization (WHO) through its Commission on Social Determinants of Health, released its new report, “Closing the Gap in a Generation: Health Equity through Action on the Social Determinants of Health", and it boldly declared that “inequities are killing people on a ‘grand scale’”. And as such, the Commission is proposing “health equity” on a grand scale through more government intervention and subsidies, an implicit call for advocating health socialism. You can read the Executive Summary (40 pages long) or the Press Release here.

Why did I say the Commission is implicitly calling for health socialism? Consider its recommendations on having “Equity from the start” alone, the first of 3 over-arching recommendations:

One, make sure that all children, mothers, and other caregivers are covered by a comprehensive package of quality early child development programs and services, regardless of ability to pay.

Two, provide quality compulsory primary and secondary education for all boys and girls, regardless of ability to pay; abolish user fees for primary school.

Three, manage urban development to ensure greater availability of affordable housing; invest in urban slum upgrading including, as a priority, provision of water and sanitation, electricity, and paved streets for all households regardless of ability to pay.

Four, ensure full and fair employment and decent work for all; strengthened representation of workers in the creation of policy, legislation, and programs relating to employment. Quality work with a living wage that takes into account the real and current cost of healthy living.

Five, progressively increase the generosity of social protection systems to a level sufficient for healthy living for all; social protection systems include those normally excluded: those in informal sector and household or care work.

Six, build quality health-care services with universal coverage, focusing on Primary Health Care. Strengthen public sector leadership in equitable healthcare systems financing, ensuring universal access to care regardless of ability to pay.

Notice the repeated use of “regardless of ability to pay”. That means that if people are poor, they are still entitled to quality child care development programs, quality primary and secondary education, quality housing and sanitation, quality health care, and so on. If a household is poor because of natural calamity (their farms and villages were wiped out by a strong typhoon or tsunami or earthquake, etc.) or because of some emergencies (say the breadwinner perished or became physically and mentally invalid for productive work after an accident), it will be understandable. But what if a household became poor because of personal and parental laziness and irresponsibility? What if thousands, if not millions, of households became poor because of government corruption, high taxation and bureaucratic regulations that kill entrepreneurship and job creation?

Unfortunately, the bright guys who live off on taxes and propose more and higher taxes (where else will they get the money for more government subsidies and welfare?) do not make any distinction about causes of poverty. Perhaps one can say that these people implicitly favor more personal and parental irresponsibility, more government wastes and irresponsibility, because these two factors are the biggest determinants and causes of poverty. More poverty, more “role” for WHO, the various health ministries and departments of governments around the world, more subsidies, more taxes, more salaries and perks for people working on those national and international agencies and bureaucracies.

Responsible individuals and parents do not wait for dole-outs and subsidies. They work hard to give their family and children good education, good housing and sanitation, good health care, good personal protection, and so on. They do their work well as employees, or they get out and become employers and create jobs for other people. Such employers are forced by circumstances to give high “living wage” and other benefits to ambitious and skilled workers; otherwise, the latter will leave them and move somewhere else. But said employers are also forced by circumstances to give low “living wage” to less ambitious and unskilled workers. If they will be compelled by the State to give high wages, said employers will not hire less ambitious and unskilled workers, and the latter will remain unemployed and poor indefinitely.

Now the document is out and disseminated to all member-states of the WHO. It is not automatic that all member-states will adopt the recommendations of the Commission. But the more socialist-leaning governments will be more than eager to follow and implement the recommendations of the Commission. The report will be an additional ammunition for them to retain existing high and multiple taxes and fees, if not create new taxes and fees, new regulations and orders. The report will also be a good excuse to retain, if not expand existing public bureaucracies and subsidies in health, education, housing, employment, social security, and in virtually all other social and economic sectors of the State, both at the national and local government levels.

Citizens who value their individual freedom, who value personal and parental responsibility, should watch their governments. While governments who are not enamored by socialist ideology and its forced equality dreams should keep their economies free. So that hard-working people who cannot stand the re-birth of socialism in their countries can move out and go to the free market economies to pursue their dreams and aspirations as free individuals, and as responsible parents.

CSOs and State 4: Local Government and Civil Society

A German political scientist, Dr. Monika Ballin, wrote a short paper entitled “Local Government and Civil Society”. That paper is mainly for the participants of an online seminar of the same title, sponsored by the Friedrich Naumann Foundation for Liberty (FNF). The seminar started this week, running for 3 weeks more, and I was lucky to be selected among the 68 participants from many countries, mostly from Asia, Latin America and Africa, a few from Europe.

I like a number of definitions and points raised by Dr. Ballin in her paper. Among these are the following:

One, local government is a local, non-national authority, with local responsibility and limited autonomy and is part of the organizational structure of the State. But local government with a high degree of autonomy is always in strong opposition to centralistic political movements and authoritarian structures.

Two, the principle of subsidiarity applies: responsibilities as much as possible should be done at the lowest level, and only when a responsibility exceeds the capacity of one level that the next higher level should be entrusted.

Three, decentralization and privatization: responsibilities need to be shifted from the top down, and responsibilities which are not in the national or local sphere have to be privatized. Local authorities must have their own sources of funding to assert their fiscal autonomy.

And Four, civil society is the final stage of a functioning local government. If all means of decentralization, deregulation and privatization have been implemented and citizens have been involved as comprehensively as possible, civil society has emerged. There will be a “Lean State” where State structure exists only where it is absolutely necessary, and the State at any level is not carrying out any task and duty which private businesses or citizens themselves can do for society.

I say “Amen” to all 4 points, especially the last one, by Dr. Ballin. The four core advocacies of our think tank, MG Thinkers, Inc. – small government, small taxes, free market, individual responsibility – unsurprisingly fit in these ideals and goals of civil society. Less government responsibility (and less taxes and bureaucracies), but more individual and parental responsibility.

The purpose of political decentralization and devolution is to shift some responsibilities from national to local governments. Unfortunately, for many countries, this did not result in greater individual freedom and citizen empowerment and self-administration, but greater power, regulation and intervention by local governments. I do not think this is consistent with liberalism philosophy.

In a number of economic competitiveness studies done by various institutions, like “Economic Freedom of the World” (EFW) by Fraser Institute, or “Doing Business” annual reports by the World Bank and International Finance Corporation (IFC), or “Paying Taxes” annual reports by the WB and Price Waterhouse Coopers (PWC), it’s those small economies with small local governments units (LGUs) that have the fewest taxes and business regulations, like Hong Kong, Singapore and Maldives. While some countries with plenty of LGUs, even though they have decentralization or devolution law like the Philippines, have the plentiest number of taxes and business regulations (see for instance, http://www.doingbusiness.org/documents/Paying_Taxes_2008.pdf).

This is because of duplicating business requirements, taxes and fees being collected, by both national and LGUs (provinces, cities or municipalities, and barangays or villages). The devolution of certain social services from the central government to LGUs like public health care, basic education and agricultural extension has emboldened many LGUs to create new taxes and fees, new rules and regulations, on top of taxes and fees, rules and regulations created and collected by national government agencies.

From the discussion by Dr. Ballin, to which I fully agree, the spirit of attaining a condition of civil society is not decentralization per se, but “degovernmentization” of many social functions, of ridding government and State intervention when individuals are free and responsible enough to be fully accountable and answerable for their actions and inactions. This is consistent with Friedrich Hayek’s observation that freedom and responsibility are closely intertwined, that a person cannot enjoy freedom unless he is ready to take responsibility for his life, his family and his community. That fear of responsibility is fear of freedom itself.

When I first mentioned the term “degovernmentization” to some friends here in Manila, their immediate reaction and question was “Are you proposing to abolish the government?” No.

“Decentralization” does not mean abolition of the central government, but merely the transfer of some functions from the central to local government. “Deregulaton” does not mean abolition of all regulations by government, but reduction of too many regulations, liberalizing the economy to facilitate entry of new economic players. “Demonopolization” does not mean abolition of the incumbent monopoly corporation, but allowing other players and competitors so that the previous monopolist becomes one of the many players. So “Degovernmentization” does not mean abolition of the government, but reduction of many functions and responsibilities currently handled by national or central government, and local governments, and such responsibilities were brought back to the citizens, as individual and parental responsibilities, through various civil society organizations (CSOs).

There will always be a role for the State, a function that individuals and small communities cannot perform effectively. In its most basic and limited role, the State has the function to protect the citizens’ right to life, right to private property, and right to liberty. There will always be bullies, lazy and irresponsible people who will attempt to sustain their existence and that of people close to them by robbing other people their 3 rights mentioned above. These are the terrorists and murderers, robbers and hold-uppers, carnappers and pirates, rapists and kidnappers, and so on. Thus the State exists to become a “bigger bully”, better armed and equipped, than this group of people. The State also needs to maintain a credible and independent justice system that can render impartial and quick judgment on cases that involve critical disputes between and among the citizens.

The concept of “civil society” though is among those most misunderstood in the world today. Many people who regard themselves as belonging to civil society are actually in the forefront of advocating for more government regulations, trade protectionism, and higher taxation (the usual slogan, “tax the rich!”). In their hearts and mind, there is deep hatred of markets and big corporations, deep suspicion of assigning individual and parental responsibility, deep disrespect of inequality and diversity among people. So what those “civil society leaders” want is an even bigger government, and prevent the emergence of real civil society where citizens’ self-administration of their own lives, households, communities and workplaces, are respected and encouraged.

On another note, the on-going renewed military conflict between the secessionist Islamic army and the government armed forces in southern Philippines, is mainly a result of never-ending claims by the former for political and economic control of many provinces and cities that they claim to be their “ancestral domain”. Political decentralization under the Local Government Code (1991) did not work to solve this problem. Another law and political structure, creating an Autonomous Region for Muslim Mindanao (ARMM) was enacted and implemented, but after more than a decade, the same problems resurface.

The ultimate goal of the rebel Islamic army in the south is a separate State, an Islamic State with its own geographical area of control. They do not want decentralization or a stronger and “autonomous” local government because they will still be part of the administrative apparatus of the Philippine State.

Asserting a “civil society agenda” at this time in the current conflict in the south is a secondary issue. Because the main issue is the assertion of the Islamic rebels to have their own central government, while the central government of the existing Philippine State is ambivalent at least, or opposed to this move at most, since this will reduce its scope of power and geographical area that it currently controls.

Both sides in the south, the Islamic rebels and the Philippine State, though fighting, actually have a common trait: to foster or expand the coercive nature of their respective governments, and in the process, kill or stop the emergence of civil society.

Civil society by nature relies on the voluntary acts of citizens for self-administration. Even the financial backbone to sustain voluntary organizations (from corporations to cooperatives, foundations, professional associations, labor federations, student councils, neighborhood or village associations, churches, academic clubs, sports clubs, civic clubs, etc.) comes from voluntary contribution. Civil society therefore, is pacifist and non-coercive. And it is this non-coercive nature that directly and explicitly separates it from organs of government, where almost all of them were created and sustained by non-voluntary means through taxation.

For believers of civil society in the classical liberal tradition, local government should be a transition stage from central government to civil society. It is to be expected though, that many local government officials and personnel will object to this philosophy. For them, local government is an “end” by itself, and not just a “means” to an end. Only a few of the current local government leaders, in the Philippines or elsewhere, are open-minded enough to entertain the final emergence of civil society. In this case, therefore, it will be a situation of “local government vs. civil society”.

The principle of subsidiarity does not automatically mean that local government is the “lowest” level of citizen administration and empowerment. On the contrary, the “lowest” but most practical level of citizen administration is the family, not a government-run village (“barangay” in the Philippines) or municipality or county. Responsible parents produce responsible children who will become responsible adults someday, accountable for their actions and inactions, people who understand the corresponding reward or punishment in society.

Below is the paper of Dr. Monika Ballin.
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Local Government and Civil Society

By Dr. Monika Ballin

August 15, 2008

Local government and civil society - What's that?

Local government is political action with respect to public affairs at a local level. In different countries, the meaning of the term "local level" varies greatly. It may mean a village or borough, a city, a district or county and sometimes even a province. It all depends on the organisational structure of a country and also of the density of the population.

What is important for the definition of local government is that at a lower, non-national level, there should be a local authority which acts self-responsible with limited autonomy and is part of the organisational structure of the state.

The development of local government

Local government developed on the basis of city privileges which already existed in antiquity and on the basis of subsequent self-administration privileges. Elements of local authority freedom have survived in Switzerland to the present day. Citizens' assemblies and referenda up to the cantonal level ensure the direct involvement of citizens in political decisions.

The state-formulated principle of self-administration as applied in Prussia in the 19th century by involving citizens in municipal affairs on a voluntary basis also introduced some local government elements. In England, local government produced strong local independence during a long historical period in very small steps, first concentrating on social duties. And up to the present, the English local authorities are highly dependent on financial supply by the central state government. France, Spain and Italy however provided little scope for local decisions because of their centralistic mentality.

Local government was constantly influenced in all countries by political developments which either increased or decreased centralisation related to political constraints and crises. The political element of local self-administration was overridden in Europe by increasing state legislation not least in the context of wars and crises. Dictatorial regimes removed any vestige of political independence on a local level.

But in Germany, for instance, after WWII the main political authority lay on the local level, because the state structure had been destroyed and the political personnel on the state level was not trusted in because of their Nazi-background. This situation empowered the federal structure of the German governmental system with a strong local authority.

Prerequisites for a functioning local level

a. Trust the people

Local government with a high degree of autonomy is always in strong opposition to centralistic political movements and authoritarian structures. National government can only accept local government if it has trust in the citizens' abilities, sense of responsibility and willingness to achieve political development and preserve a political system of freedom. It is this trust that forms part of liberalism since liberalism is based on the idea that a local decision will benefit most from widely distributed knowledge and competition of different ideas. The decision which is best for and best understood by the citizen is taken locally because it is close to the people.

b. Ability to take decisions

Therefore, liberalism calls for local decision-making. This requires the state to provide a framework of forms and procedures in the shape of local constitutions. Further, it must be ensured that inhabitants and citizens have a choice and a chance to co-decide. This can be done by elections and other forms of direct involvement in decisions.

c. Clear definition of responsibilities and subsidiarity

In order to function, local government responsibilities must be clearly defined. Here, the principle of subsidiarity applies. This means that as much as possible should be done at the lowest level. It is only when a responsibility exceeds the capacity of one level that the nexthigher level should be entrusted with it. The result is that, a priori, the local level is in charge of everything. If it turns out that this level cannot cope with the job, it is shifted to a higher level.

d. Decentralisation and privatization

However, reality today is different. In the course of time, the state level has usurped many responsibilities which could easily be delegated to the local level and perhaps even to private players - often even carried out in higher quality. Therefore, responsibilities need to be shifted from the top down, i.e. decentralisation is necessary. Responsibilities which are not in the national or local sphere have to be privatised. However, along with decentralisation, the ability to decide freely must also be devolved. This is the only way to delegate responsibility. In fact, this happens in many countries of the world during the last two decades, but not because of reason but because of lack of state finances.

e. Sufficient finances

This leads to another important aspect of a functioning local government. It requires that those elected to office decide freely on issues in their area. But often they can only decide if there is sufficient funding. Financial resources must not only derive from transfers from the national level; instead, local authorities must have their own sources of funding and - within limits - they should decide themselves on the size of funding by allocating own taxes and fees.

f. No overburdening by the state

It is necessary and useful to shift certain duties from the state to local authorities in order to be close to the citizen. But, along with this, there must be some cost reimbursement for that. In addition, local authorities must have enough scope for their own activities. If all the staff is busy doing state work, local government as defined above is no longer possible.

Civil society - the final stage of a functioning local government

If all means of decentralisation, deregulation and privatisation have been implemented and citizens have been involved as comprehensively as possible, there is nothing to stop the definitive self-administration of citizens. A civil society has emerged.

It would also mean that the governmental system reaches the status of a Lean state, which by definition is, that there is only a state structure left where it is absolutely necessary, the state on any level is not carrying out any tasks and duties which private businesses or the citizen themselves can do for the society.

A full stage of a civil society certainly is a vision since part of the responsibilities must remain in the state's hands because they cannot be discharged in small units. But the vision of the civil society must be the ultimate goal in defining and shaping liberal local policies.

* See also CSOs and State 3: Poverty and Public Education, February 12, 2008