MM: Could it be also that there was no real example of countries that had significantly cut the size of the state? 
  
RL: Yes, somewhat. The other thing is we've had some very interesting sort of experiments now in countries where economic growth and prosperity has rebounded nicely. Now, with emerging countries like Singapore and Hong Kong, there's quite a bit of diversity in terms of government spending, but other things also, in terms of regulation, etc. But on the other hand, among the western industrial democracies, we're seeing less diversity among countries, because we have fewer socialist countries. And by socialist I mean centrally-planned economies.  
  
How to reverse state growth 
  
MM: Do you have an explanation of the phenomenon of state growth, of how we got there? Are there specific reasons from a more technical point of view? 
  
RL: In the early part of the century, it was the maturation of the economy, the better accounting standards that made it easier to tax. That was one sort of technological thing that made the growth of government easier, simply the fact that we had better accounting. Recently, though, say post-World War II, where you've seen governments grow a lot, the explanations, there are a lot out there. Certainly the most important one is the idea that interest groups use the political process to further their own interests. If everybody does this, the size of government grows. That's what makes reducing government now so difficult. It's because we have a situation in which everybody has an interest in having a big government.  
  
MM: Except the ordinary taxpayers who are not organized into lobby groups. 
  
RL: Individual taxpayers, of course, are very unorganized, very spread out. But if you look at them as members of interest groups, their stake in cutting taxes is not as great as their stake in whatever their pet project is.  
  
MM: How do we manage to change that? 
  
RL: You need a couple of things. You need a leader, a Margaret Thatcher, a Ronald Reagan – although the cuts that Reagan made were more symbolic than real. That's one way to do it. If you look at a lot of the emerging market economies in the world, they're not democracies. Hong Kong never was a democracy and in order to make Hong Kong a market economy, all you had to do was convince one person, the British governor. Same thing of course with the dictatorships like Chili. It's easy to imagine how you change, you just convince one person, Pinochet. In our cases, it's more difficult. I think the examples in democracies show that it usually requires a crisis. You look at New Zealand, when deficits tend to become uncontrollable, when Moody's calls and threatens to lower you credit rating. Unfortunately, it's not out of any ideological conviction.  

MM: Are you confident that this could happen? 
  
RL: I think it is happening, it is happening worldwide. Look at the United States and Canada, neither of whom has radically cut government. But notice it hasn't grown. In fact, in both countries in the 1990s, government spending as a share of GDP is a little bit lower than it was at the beginning of the decade. 
  
Competition will force governments to act 
  
MM: There was a financial crisis in Canada at the beginning of the decade, that's why Paul Martin decided in his 1994 budget to seriously tackle the deficit. But most polls in Canada still show that people want more spending on health care before any cut in taxes. 
  
RL: Yes, but I think polls notwithstanding, the problem is that Canada has to worry about the United States, and the United States has to worry about... Thailand. And the new global economy is putting increasing pressure on governments, they're forced to ignore their socialist leanings.  
  
MM: Competition between the economies, between the states, is going to force them to act? 
  
RL: Yes, the competition, the global capital markets, I think, is the best thing going for more liberal markets. It's forcing governments to worry about these things. I know in the United States, this is happening among the states. The governor of Michigan has to worry about competition with Indiana or Ohio. And now he also has to worry about competition with Hong Kong or Thailand. That competition means that if you're the premier of Quebec, even if the polls tell you to increase spending, and suppose your ideological instinct tells you the same, but your financial advisors tell you: if we increase spending, we're going to lose this many companies who are going to move to Ontario... 
  
MM: It's a bit of a pessimistic point of view though, that free-market theory cannot win on its own as the best explanation but that people will be forced to move towards it just because of the circumstances. 
  
RL: Ideology matters, convincing people matters, but the real world probably matters more, and ideology sometimes follows, it doesn't necessarily lead. What I'm thinking probably is happening is that as countries, out of necessity, not out of any desire, but out of necessity, as they cut taxes and liberalize labour markets, what happens is now ideologies are changing, the people in those countries... 
  

« We weren't poor in 1900 because governments were small, we were poor because productivity was low, technology, know-how, was low. We've gotten rich despite the growth of government. »

MM: When we look at your list of countries, we notice that English-speaking countries, Great Britain, the United States, Australia, New Zealand, Ireland, Canada to a lesser extent, are the countries where the size of the state is lowest, whereas if you look at continental Europe especially, you get into the upper 40, 50 or even 60% of GDP spent by governments. Does this mean that if there is no major change, if we look at the next twenty or thirty years, the English-speaking countries will remain the major economic forces in the world and that this trend will become even more pronounced? For a society like Quebec, this is a crucial issue I would say! Should we hitch ourselves to the rest of the continent or look to other models? 
  
RL: Well, clearly, English legal institutions really matter. Going to the other study, the economic freedom study, of the top eight countries, seven of them have English legal traditions. I include Singapore and Hong Kong because for a long time, as colonies, they were under English administration. So the English common law and so on really do seem to matter. These countries are rich. The average English-speaking nation is richer than the average continental country, richer than France, Spain, even Germany. There are always exceptions, you have India, they've done terrible because they didn't follow the 19th century English model, they followed the mid-twentieth century English model which has repudiated most of these legal traditions.  

So I don't know that speaking English makes you rich, I'm sure it doesn't! But it's not the speaking of English or anything like that that matters, it's these institutional arrangements, the English common law, the protection of property, enforcement of contracts and so on. You and I have a contract, if it cannot be enforced by law it's very difficult to run a business. In many parts of the world, business contracts are de facto unenforceable, so businesses don't follow contracts. It's really not rocket science. In large parts of the world, land titles don't exist, so you can't borrow money. If you don`t have a land title, no banker will lend you money. These are what I call the core functions of government, the provision of a system for recording titles.  
  
Some of my libertarian friends will tell me about private alternatives to that, and those are great. But the fact is governments historically have provided those basic functions. I guess the point is we can have too little government here too. And in many ways, countries like India have both: they have too little government, too little of the good kind, the good kind being the one that enforces contracts, and too much of the bad kind, the bad kind being the redistributive kind. Too little of the good kind, too much of the bad, so worst of all worlds. 
  
What's good about the English-speaking countries is that even if governments have grown well beyond what is advisable, they still do the necessary things. In England, the United States, Australia, Canada, the contracts are basically enforced. Despite nationalized health care, and despite all the interventionism, those societies still function.  

  

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