ADAM SMITH BULLETIN
LEAD ARTICLE ASI Proposes Funded Welfare
FUTHER ARTICLES IN THIS EDITION: ISOS rings the changes
Publications Portuguese practices | Good fortune | Hail Caesar! | Not necessarily
Conferences Private Finance | Regulation of Utilities | Investing ln Azerbaijan | Mont Pelerin Society | Privatizing Latin America
THE NEXT GENERATION GROUP Fourmost
Adam Smith advises the World Municipal privatization in Bulgaria | Competition and utility regulation in Vietnam | Privatization in Guyana | Deregulation in Ecuador | Enterprise reform in Belarus | Policy development in the Czech Republic | Electricity regulation in Guatemala


ASI PROPOSES FUNDED WELFARE

Fortune Account sets the agenda

Nearly two years after the Adam Smith Institute started the discussion with its landmark paper, The End of the Welfare State, the ASI has set out a viable successor to state welfare. The Fortune Account, published in December 1995, set out how a funded system could operate, and how the transition from the present welfare state might be achieved.

The basis of the ASI proposal is that individuals and employers would pay money into individual accounts which would be the property of the holders, and that these Fortune Accounts would provide for both the insurable needs such as disability and unemployment, and the savings needs such as retirement.

There has been a debate since The End of the We!fare State about the need to replace the present system. The ASI's case was that the unfunded welfare system is not only insupportable financially as the population ages; it is also characterized by what the ASI called social pathology. It destroys not only Incentives, but the moral values which any society must depend on.

Since The Fortune Account made its appearance, several economic commentators have taken up its case that the time has come for a fully funded system supported by personal savings to replace the income transfers, promises, and claims on future taxpayers which the present system represents. Not only that, both major parties have begun to look beyond the current welfare state. The Labour Party, urged to "think the unthinkable" have been looking to see how Fortune Accounts might be phased in under the aegis of government. Conservative thinkers have directed their attention to how private firms might be brought in to reduce government involvement to a residual safety net.

The Institute has taken the decision to highlight welfare reform in 1996 through a series of publications, seminars and lectures. It has been designated as the ASI's top priority for the year.

One of the stars of the show will undoubtedly be José Piñera, the Minister who successfully turned pensions in Chile into a fully funded system in the early 1980s. He will be coming over to address ASI seminars In mid-May, including testimony to the House of Commons committee. Another guest of the Institute will be Roger Douglas, architect of major reforms as finance Minister of New Zealand.

ASI publications will highlight not only the success in Chile, but reforms In Singapore, in which Labour shows strong Interest, and new moves in Australia and New Zealand. In addition the Institute will be holding lunch time meetings and half-day seminars to develop further ideas on the subject, and to give further impetus to the proposals. The Institute predicts that both major parties will have moved to backing a fully funded system by the end of the year, and will be giving them equal access to its reports and activities.

ISOS rings the changes

The Independent Seminar on the Open Society has been held since 1978. The Institute decided to make a few key changes to the 18th ISOS, held in mid-December. First of the changes was to appeal to slightly younger participants. Traditionally aimed at first and second year university and college students, the latest ISOS was pitched for final year school and first year university.

The second innovation was to cast the net much wider than the London area. ISOS was advertised to schools all over the UK, and saw its students more dispersed geographically. Some four dozen, mostly in late teens, assembled for the twelve lectures, the reception, quasar game and final dinner.

A conscious effort was made to introduce the students to new and younger speakers, as well as to the more famous lecturers who regularly feature on the programme. Conservative leadership challenger John Redwood spoke, as did Dame Barbara Shenfield, former head of the WVS. First time speakers Included Dr Jan Lester, Fabian Tassano, John Le Cocq and Matthew Young. The general consensus among the students confirmed the popularity of the new format, and the opportunity for sixth-formers to participate In a course helpful to their A-levels in Economics, Politics & Social Studies, and to encounter arguments and ideas they might not otherwise encounter during their studies.

Publications

Portuguese practices

The Lisbon meeting of the EU might have set minimum rates for alcohol duty, but it thereby consolidated distortions between different products and different countries, according to ASI author Keith Boyfleld. His Letter to Lisbon argues that European duties on alcohol and tobacco should be cut across the board, and tax harmonization achieved by cross border competition. The logic of Keith Boyfield's case is so impeccable, it was taken up by several economic writers. The EU finance ministers have so far been slower to respond.

Good fortune

The ASI's definitive account of a successor to state welfare is based on individual "Fortune" accounts, opened at birth, with the state chipping in the first 1,000 pounds. They can only be drawn on for designated welfare purposes, but relatives & friends can pay money Into them tax free, and any residual balance can be passed on to one's heirs. The key facts about The Fortune Account is that it Is a real fund. and is the property of the individual.

Part of the fund, managed by any approved private handling group, is put to Insurance, providing not only funds for the holder during such mishaps as disability and unemployment, but continuing to meet the payments into it. Part is designated as savings, building up a fund to draw upon for retirement needs. Fortune Accounts will replace both welfare and state pensions. The present system, which spends today's contributions on today's claimants, will be replaced by one in which people meet their own future needs and those of their families through funds. These funds will represent a massive investment pool, and permanently alter the British savings ratio.

Hail Caesar!

Tax Freedom Day is the day of the year when we cease to work for the government and begin to work for ourselves. It constitutes the fraction of our income taken in tax, represented as a fraction of the year, and is a very dramatic way of highlighting just how much government takes from us. Author Gabriel Stein calculates that Tax Freedom Day comes one day earlier in 1996. It looks like good news, that we discharge our obligations a day earlier, but there Is a catch. The burden is the same, but 1996 is a leap year. We thank Julius Caesar who gave us leap years, not Kenneth Clarke who gave us taxes.

Not necessarily

The general assumption that the European ex- Communist nations will line up one by one to meet EU requirements and patiently wait to be admitted is challenged by Michael Bell. In The Eastern Market he suggests that EU membership will be a long time in coming for most of them, and that meeting its conditions and rules will damage their growing economics. They might do better, he suggests, to go the free trade, free market route, and find themselves more in tune with the coming global order than they would by following the protectionist, restrictionist course from which the EU so far refuses to be shaken.

Michael Bell's notion will come as a dash of cold water to those Western commentators who assume that the EU represents a golden future for all. It might also give pause for thought to some of the ex- Communist states who have thus far seen the EU as a model of capitalist modernity. As a former EU insider, the author has few illusions about how far its reality diverges from its rhetoric.

Conferences

Private Finance

The Private Finance Initiative was put under the spotlight at a November ASI conference to see how far theory has been turned into reality. The conclusion was "up to a point, Minister." In other words, a great deal more needs to be done to turn words into concrete. Shadow Chief Secretary Andrew Smith spoke for Labour, with Transport Minister John Watts from the government side.

Individual case studies put under scrutiny featured the National Health Service, the Immigration & Nationality Department of central government, and PFI projects in property. There was general consensus that the PFI could be turned into an excellent and useful tool, but that its workings in practice were too much subject to whittling down and delay. The ASI intends to make changes to the PFI one of its 1996 initiatives, and learned a great deal from the conference.

Regulation of Utilities

The December conference might well have been called the Utility of Regulation, in that it examined the whole development of the regulatory system and the options and strategies for change. It looked at the key areas of pricing, investment and competition. The implication of takeovers and mergers for regulation prompted a lively session after last year's developments. There were case studies of electricity generation and distribution, the expansion of a water company into waste management, and an REC's move into telecoms.

Margaret Becket represented the Labour View, with Minister Tim Eggar putting the government case. Industry regulators included Stephen Littlechild of OFFER, Ian Byatt of OFWAT, Claire Spottiswoode of OFGAS, and Sir Bryan Carsberg, now of the International Accounting Standards Committee, but who made history as the first regulator when appointed head of OFTEL. There was a general perception that a regulatory regime, which has grown very much on an ad hoc basis as new industries have been added, needs to be codified and standardized so there Is a clear perception of its duties and powers.

Investing ln Azerbaijan

The Adam Smith Institute's successful Investment Window on Ukraine July conference was followed by one at the end of December which turned the focus onto Azerbaijan. Investment Window on Azerbaijan saw a very high-powered delegation from the government of Azerbaijan. President Haydar Aliyev led the team, which included Fuad Kuliyev, the Prime Minister, Fikret Yusifov, Minister of Finance, Samed Sadygov, Minister of Economy, Irshad Aliyev, Minister of Agriculture, and Elman Rustamov, Chairman of the National Bank.

Sessions focused on the political and economic background, the regulatory environment, and the progress of privatization policies in Azerbaijan. There were special sessions honing in upon industry and commerce and the oil sector, and an exhibition running alongside the conference to cover some of the opportunities for investment and participation. Prince Michael of Kent took part in an official reception, while the Ambassador of Azerbaijan. Mahmud Mamed-Kuliyev, welcomed the delegates.

Mont Pelerin Society

The MPS, founded by Nobel Laureate F A Hayek in 1946 to combat the world's intellectual drift to Socialism, met in Cancun, Mexico in January, with the Institute's directors, Dr Madsen Pirie & Dr Eamonn Butler (both members) in attendance. F A Hayek was until he died chairman of the ASI's panel of scholars.

The papers included an excellent address by the US scholar Walter Williams, which the Institute intends to make available in Britain. The economist Israel Kirzner featured on the programme, as did Chilean ex-Minister José Piñera. The meeting was useful, as always, in exchanging information across national borders about innovations which have been tried successfully in different countries.

Privatizing Latin America

After many false dawns, the privatization of South and Central America is now moving purposefully ahead, with initiatives in most countries. Stars of the show are Chile and Argentina, but others are catching up. Adam Smith Institute teams have assisted the process in countries as diverse as Ecuador and Guyana. A World Bank conference on Privatization In January featured Institute President Dr Madsen Pirie, delivering a paper on popular share Issues as a means of extending ownership. As in all such World Bank conferences, the emphasis was on the nuts and bolts of detail, and there was a large collection of information about what has been achieved and planned in the hemisphere.

THE NEXT GENERATION GROUP

Fourmost

The Adam Smith Institute's February event for The Next Generation, the 16-33 age group, took place for the first time somewhere other than the ASI offices. The Institute decided to hold a reception for the group in the House of Commons, meeting as usual on the first Tuesday of the month. Nigel Evans MP acted as host in the Jubilee Room of the Palace of Westminster. The venue change was not the only new departure. No less than four members of the Cabinet turned up to greet the group and to talk with them.

In addition to 100 members of TNG. those present included Virginia Bottomley (Heritage), William Hague (Wales), Michael Forsyth (Scotland), and Peter Lilley (Social Security). Several MPs were present, including John Redwood, Peter Bottomley and Nerj Diva. Not surprisingly, the event was described by many who attended as one of the best ever. TNG members present included a new batch who had joined at December's ISOS seminar.

Adam Smith advises the World

The invisible hand of Adam Smith has been very visible recently in a wealth of different parts of the world where the Institute's International Division is providing advice and training to help countries make a more effective transition to the market.

When this Bulletin was prepared in early 1996, the International Division had in place assistance programmes to ten countries around the world - Bermuda, Belarus, Bulgaria, Ecuador, Georgia, Guatemala, Guyana, Mongolia, Romania and Vietnam.

Municipal privatization in Bulgaria

In Bulgaria a team is developing and helping to implement a municipal reform programme for the Black Sea port of Varna. The first phase of the project has been completed with the Implementation of the first major municipal privatizations ever to be carried out in Bulgaria, Involving a range of enterprises from newspapers to construction companies. Next, the programme will be extended to other municipalities.

Competition and utility regulation in Vietnam

In Vietnam the Institute is running training courses for senior government officials and other policy makers and opinion formers on the subject of competition policy, utility regulation, and private investment in infrastructure. The training programme is being run in conjunction with Vietnam's Central Institute for Economic Management, the government's main policy-making body.

Privatization in Guyana

In Guyana, the large but sparsely populated South American nation, the Institute is directing a large programme to privatize 23 state enterprises, ranging from one of the world's largest bauxite mines to a printing works. Some enterprises have already been wholly or partly privatized, including a distillery, a retail chain, and a ship repair and wharf company.

Deregulation in Ecuador

In Ecuador the Institute is devising a comprehensive deregulation programme for the government of that over-regulated Andean country. This involves creating a comprehensive deregulation programme, as well as strict rules for approval of new regulations. Advice on the creation of executive agencies and the introduction of service standards is also part of the assistance programme.

Enterprise reform in Belarus

The assistance to Belarus, which follows a direct request from the Speaker of the Parliament of Belarus, concerns the reform of its enterprise sector, including improved corporate governance procedures and demonopolization. The first phase of the project has been completed, and a new framework for corporatization, demonopolization, and governance of state enterprises prior to privatization has been agreed by the government. Institute advisers are currently braving freezing conditions in Minsk to assist the government with implementation of the recommendations, which will greatly help Belarus to speed up Its privatization programme.

Policy development in the Czech Republic

The Institute is running a series of policy development workshops for the top executives of the Czech Ministry of Privatization. These focus on the issues that will be faced by the Czech Republic after implementation of its successful mass privatization programme. The workshops, which take place in Prague every second Thursday, include the subjects of healthcare financing and development of competition policy.

Electricity regulation in Guatemala

In Guatemala the Institute Is advising private sector companies on reforms to liberalize the electricity sector and to introduce a regulatory framework.

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Updated: 29/05/96