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The Great Works at the Acton Institute Open House

Tuesday, Nov. 30 - 4pm to 8pm

These remarks were delivered at “Centesimus Annus and the Future of Europe,” part of the Centesimus Annus Lecture Series , on May 4, 2006 in Rome, Italy.

It is a real honor for me to speak here in Rome on the anniversary of the famous encyclical Centesimus Annus of Pope John Paul II.

As you probably know, I come from Estonia, which is a Lutheran country. Nevertheless, when Karol Wojtyla was elected pope, we felt in Estonia that he was our pope too. The message of Pope  John Paul II – “Do not be afraid” – shook the pillars of the Soviet Empire and built the base for its defeat.

Soviet totalitarianism was built on terror and fear. To create absolute fear huge numbers of people were killed, often for no reason. Such terror created an atmosphere of fear, which allowed communists to control the society even when the massive terror campaigns ended. To defeat communism, this fear had to be removed. This was a reason why the message of Pope John Paul II, “Do not be afraid,” created ground for the Solidarity movement in Poland, the Singing Revolution in the Baltic states, the Velvet Revolution in Czechoslovakia, and the fall of the Berlin Wall in 1989. When the people conquered their fear, they became free.

So in 1991, like many other nations in Central and Eastern Europe, we Estonians were free again. But what was this freedom? Estonia was ruined, our economy was in shambles, the spirits of our people spoiled by socialist heritage. Shops were entirely empty because the goods and money did not have any value anymore. The four-year struggle for independence had not left enough time for effective economic reform. Even in the times of the Great Depression of the U.S. in the 1930s, industrial production had not declined by more than 30 percent over two years, real wages fallen by some 45 percent, fuel prices risen by more than 10,000 percent over the same period, while inflation was running more than 1,000 percent per year. Forecasts for the unemployment rate ran at 30 percent. People stood hours and hours in lines to buy food. Bread and milk products were rationed.

And what was worst, 50 years of communist domination had seriously damaged the souls of people. The heaviest heritage of communism was that the people were made dependent on government. They were deprived of something they could call their own. They were taught not to make choices. From creative people, they were turned into servants of the state.

To change all this, to make people really free, to change their minds and hearts – this turned out to be the biggest challenge of transition. This was not easy. People were used to different habits. To wake them up was a difficult task.

The encyclical Centesimus Annus was targeted at nations facing such a transition. Some countries have followed the principles written in Centesimus Annus, while others have not. Looking now back on 15 years of transition and analyzing what was achieved, it must be said that this encyclical made a big difference. Not every country has made a successful transition. There are many reasons for this, but one among these is that they followed a path different from the one presented by Centesimus Annus.

Some countries tried to build up a modern Western welfare state, or as John Paul II says, a “social-assistance state.” They avoided radical market-oriented reforms and preferred a “gradual approach,” which looked to be softer and not so socially damaging. Privatization was postponed or slowed down and the role of the state kept high, markets were not opened and were protected by high tariffs. Prices were not liberated but rather were kept under government control.

Others decided that the best way to get out of their existing miserable conditions was to turn to some kind of “wild capitalism,” where are no rules and no morals and the only limiting factor is the market. The rule of law, property rights, and the build-up of democratic institutions, such as an independent court system, were not so important. The free market had to regulate all. Reformers in these countries thought that even when the first millions are earned in an illegal way, afterwards these same businessmen will start to behave as good citizens.

Both ways have led to failure. In some countries almost no reforms were made. Old economic and political structures were kept intact. The main slogan was to “take care of working people” and “protect social values.” This has in some countries, such as Moldova, led to economic catastrophe, and in other countries, like Belarus, to quite ugly dictatorships.

In “wild capitalism” countries, political reforms were not made. In the economy fast privatization was made along with some other liberal economic reforms. The rule of law and the build-up of democratic institutions received no attention. This led to the birth of a kind of highly corrupt and ineffective crony-capitalism, which has made a few very rich and left most people in poverty.

Pope John Paul II was critical of both ways. What he offered was not some kind of “third way,” but rather the right way. He offered a return to the basics, namely a market economy based on firm moral principles, largely founded on Christian thinking. In this context it was absolutely understandable that at the same time as Centesimus Annus criticized the left-wing socialist “social-assistance” model and preferred the market economy, John Paul II was not in favor of “wild capitalism.”

Centesimus Annus stressed that the market economy could not work without such classical values as rule of law and fixed and clear property rights. Stability of currency and open economic models were supported. These were actually very modern ideas in 1991. Most foreign experts did not talk so much about this at that time. Most attention was given to purely economic matters.

But the greatest difference of Centesimus Annus compared to state or government-oriented theories was that it relied on people. A clear break with the communist past and habits was demanded and some kind of moral revolution supported. The government's task in this difficult situation was to wake up the people, to encourage them to make decisions, to be active and creative. To empower people, tax reforms were supported taking the government's hand out of the people's pocket and allowing them to decide how to live.

Estonia has been one country that tried to go on this way. Estonian reforms were started in 1992 with the monetary reform based on a currency board system. We have balanced our budget and opened our country for competition. In 1992, Estonia abolished all import tariffs and became one big “free trade zone.” Foreign competition pressed local enterprises to change and restructure their production. At the same time Estonia stopped all subsidies, support, and cheap loans to enterprises, leaving them with two options: to die or to begin working efficiently. Surprisingly, a lot of them chose the second option.

From the first days of reform we stressed the importance of the rule of law, making a clear break with the communist past and launching reform of the judiciary. Corruption was fought and necessary legislation for honest business was introduced.

To energize our people we introduced radical tax reform, based on the understanding that if somebody works more and earns more he would not be punished for this. We sharply decreased the taxation level and introduced a flat-rate, proportional income tax. The flat-rate tax has been an important part of the Estonian success story. It is easy to collect and easy to control. The only losers in this kind of tax reform were the tax lawyers.

As a result of this, Estonia has become a country with the fastest economic growth in Europe. We have attracted more foreign investments per capita than other countries in Central and Eastern Europe. Living standards in Estonia have improved quickly. Estonian economic growth is nearly 10 percent a year. We are hoping to reach the average living standards of European Union countries in 15 years. Poverty has dramatically decreased in Estonia.

Estonia became the first former communist country rise to the status of a “free economy” as rated by the Heritage Foundation's annual Index of Economic Freedom. And even more remarkable, it is not merely a “free economy,” but one of the freest in the world. Estonia is ranked fourth place in the index and is Europe's most free-market oriented economy. Similar policy has provided good results in other countries too, moving them out of misery and allowing a return to Europe.

Does this mean that Centesimus Annus has lost its value, that it is not necessary to study it? Absolutely not. Encyclicals are not written to be relevant for months, years, or decades but for significantly longer periods of time. Their message is universal. The countries which have answered the first challenges and gotten out of the economic and social catastrophes created by communism are now facing new challenges. And I must say that sometimes these are even harder than the first ones.

Centesimus Annus describes very precisely the problems of modern capitalism and the dangers facing us in a modern globalized world. One of them is consumerism, which makes money and success the new god. We have seen the same picture described in the Bible, so there is really nothing new under the sun. At the same time consumerist values undermine faith and eternal values in the same way as communism did.

It was actually even easier to fight the evil of communism. Then the frontline was clearer; now everything is mixed and unclear. Consumerism is connected with attempts to develop “democracy without truth.” By this description Pope John Paul II means a system that has became so tolerant of the evil that is ready to fight everyone who raises their voice against it. The idea of “democracy without truth” must be understood as the reason why even a hint of Christianity was ousted from the draft of the new European Constitution.

Interest only in material values supports the creation of the welfare stare, which through permanent state interventions and interruptions discourages people's natural creativity and activity. People are not ready to take risks or take care of themselves or their lives. They are taught to rely in all aspects of life on government. Such policy creates higher and in some countries quite permanent unemployment, which is in one source of poverty and in other ways works against human dignity.

Looking on the current problems of Europe, we can say again, how right Pope John Paul II has been. Centesimus Annus opposed attempts to build new barriers between the nations. It stresses that one of the most effective ways to fight poverty is free trade. The rich nations must not only give aid to the poor nations, but must open their markets for trade. Unfortunately, “Fortress Europe” has not done this. Europe is continuing protection of its markets and is heavily subsidizing its agricultural products, undermining the efforts of developing countries to get their products to world markets. Every cow in Europe today is “earning” two U.S. dollars a day in subsidies, while at the same time nearly 20 percent of the world's population is living under this income level. Such a situation is not only immoral but economically devastating, as well.

Centesimus Annus urges governments not to invest in cows but in people. Creativity is understood by Pope John Paul II as one of the greatest gifts of God and must be supported. In Centesimus Annus the importance of quality, skill, and innovation is stressed. These are the words we can today see in the program called the Lisbon Strategy. The aim of the Lisbon Process is to make the European economy the most competitive in the world by stressing innovation, education, and market oriented reforms. Unfortunately, the Lisbon Process has not been successful. The national governments of “old Europe” have not implemented the necessary reforms. After five years, the only result of the Lisbon Strategy is that the economic differences between the U.S. and Europe have grown.

The message of Centesimus Annus is not a message of Left or Right. It is a universal message of hope. We can see these same ideas in most groups working on the future of Europe. The only problem is in finding political leaders ready to implement them in reality.

As Poe John Paul II says, politics in Europe is unfortunately “determined not in accordance with justice and morality, but rather on the basis of the electoral or financial power of the groups promoting them.” Politicians today are more and more interested in how they stand in the polls and not whether or not they are doing the right thing. The necessary, future-oriented reforms are not made because they are afraid to lose votes now. Offering to the public panem et circensis, European leaders are acting like the leaders of the Roman Empire before its fall.

In this moment the message of Pope John Paul II is especially important. Current leaders must remember to “be not afraid.” They must have the courage to make the necessary decisions even when these are unpopular at the moment. They must not be afraid to raise their voices to protect human dignity and freedom in the countries where these are still oppressed. Only by standing on the side of truth we can create a better world and preserve it for our children and grandchildren.

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Dr. Mart Laar was the prime minister of Estonia from 1992-1994 and 1999-2002. Laar's free-market reforms took Estonia from a country devastated by Soviet economics to one of the most vibrant in Europe, with a 7% rate of growth and 90% of all enterprises in private hands. He currently lectures all over the world about the flat tax and Estonia's renaissance.