What development strategy, then, is recommended to the transformation countries in this publication? After having stated, that migration is not the best strategy, what alternatives remain for the periphery and the semi-periphery? Generally, we at least partially share the optimism regarding the chances of European development, recently expressed by Wallerstein (1998). Already Coleman (1965) and Lipset (1994) started from the assumption of ‘equality as the ethos of modernity’ (see also, So, 1990). Or is there in reality no reason for optimism at all? Re-reading our earlier analysis of the contradictions between globalization and European integration, there would be practically no chance for an optimistic scenario (Tausch, 1998).

On the level of European social policy, it is the concentration on the reduction of poverty and on the formation of human capital, which, in the end, will yield the most long-lasting and thorough results, and that would transform Poland and the other East Central European applicant countries into a really successful new EU member country. Such a success, however, would pre-suppose a true re-orientation towards European, and not ‘Atlantic’ social policy ideals, especially on the part of Polish decision-makers:

Table 3.1: Poverty indicators for industrial countries

Sources: UNDP Human Development Report, 1998, BMAGS, Bericht über die soziale Lage 1996

UNDP HPI 2 = UNDP Human Poverty Index 2 (UNDP, 1998). Includes EU/OECD measure, functional illiteracy, long-term unemployment, and age 60 survival data

death age 60 = percent of people not surviving age 60.

long term unemployment = percentage of unemployed (>12 months) per total active population

EU/OECD poverty line = percentage of population with an income below 50% of the national average

UNDP 14.40 $ = percentage of population with an income below 14.40 $ PPP

real GDP poorest 20%

maternal mortality rate per 100000 life births

infant mortality rate per 100000 life births

UNDP HDI Index = human development index

Table 3.2: relative poverty (best country = 100) in the OECD countries

Data provided by the Austrian Federal Ministry of Labor (1997, Bericht ueber die soziale Lage) show the following connection between social security expenditures and poverty in the countries of the European Union.

The research materials, reported in Tausch, 1998, strongly supported dependency theory. There were 19 variables and processes of development measured there. 14 variables were explaining different aspects of development. MNC penetration significantly and negatively affected 15 of the 19 dimensions reported, the rest - life expectancy increases, the greenhouse index, ethno-warfare, and the existence of war and political destabilization in a country, were still affected in a fashion, as predicted by our theory, but not significantly.

MNC penetration also increased significantly poverty, as measured by the new UNDP 1996 CPM poverty measure. International system participation age - or early statehood - was an important control variable in the whole process of the explanation of post-1982 growth and development/stagnation. It significantly enhanced the increase of life expectancy over time, gender empowerment, and the educational and employment record of a given country (the strong points of long established nations), while it significantly failed to block the deforestation process, especially due to the divergence between professed ideals and dire realities in the long-established nations in Latin America and in Eastern Europe. Terms of trade had a significant effect in the expected direction on the process of maternal mortality, and life expectancy. Table 3.3 and 3.4 now shows the Pearson-Bravais correlations of social security benefits expenditures with poverty indicators in the world’s industrial nations and on a world level. Social (security) expenditures are of enormous importance in combating mass poverty, early death, and underdevelopment:

Table 3.3: poverty indicators and social security - the correlation evidence on the level of the industrialized countries

Table 3.4: the correlation evidence on the world level

Legend: Our data base is documented in the Appendix. The income difference t20%/b20% measure was designed by the UNDP (1996) and is an indicator for the absolute income difference between the richest 20% and the poorest 20%. Social security: social security benefits expenditures per GDP, 1993, UNDP 1996-98; education expenditures: public expenditure on education as % of GNP, 1992, UNDP 1996-98; health expenditures: as percentage of GDP, 1990, UNDP 1996-98, Fischer Weltalmanach and UN data on state sector expenditures per total GDP. Capability poverty: our estimates of the capability poverty measure, according to UNDP; growth 1960-95: real growth per capita and year in the long run (UNDP, 1998); early death (death at age 40, UNDP, 1998); top 20% - our measure of the share of the richest 20% in total incomes; infant mortality (UNDP, 1996 infant mortality rate); human development (UNDP 1996 Human Development Index); labor force participation rate: labor force participation ratio, UNDP, 1996

Some important effects, studied by the wealth of literature in the tradition of Bornschier and Chase-Dunn, up to Kentor’s recent long-term study of world capitalism since 1940, are again shown to be valid in this research design, while other effects are relatively new and link up with the socio-liberal theory tradition, presented in Tausch and Prager, 1993. And in addition, as time progresses, the old-age crisis of especially the Eastern and Western European economies with its negative effects on growth is manifesting itself already. Thus, those visions of dependency research that stress the role of accumulation, population resources, and growth, receive an enhanced importance in future research (Singer, 1971; So, 1990; Ross and Trachte, 1990; Tausch 1991b):

Scheme 3.1: the long-run success of development strategies

We have already shown on the basis of our multivariate analysis in Chapter 1 of this work, that - high FDIs per GDP (UNCTAD, 1997), hence, a high foreign capital penetration, are significantly related to:

• the still existing prevalence of early death at age 40 (UNDP, 1998)
• the still existing existence of poverty, measured by the capability poverty measure of the UN (UNDP, 1996)
• the lack of a satisfactory human development performance, measured by the Human Development Index (UNDP, 1998)

This still does not preclude that foreign direct investments contribute to (unequal) growth. But it is the (sole or almost exclusive) reliance on them, that makes the difference, and that produces socially polarizing results. In the case of the industrialized countries, dependence on foreign capital and hence, a high FDI per GDP score, is today complicated by the effects of ‘run-away’ capital, so that the non-linear negative growth-effects are fairly clear (R^{^2} = 53.9%). Countries with relatively low MNC penetration grow fast, because dependence does not bloc development. Center countries with a very high MNC penetration grow rapidly, because their MNCs earn enough profits in the periphery that fuel growth back home. Middle range penetrated center countries, however, grow slowly, because their MNC capital tends to flow abroad towards run-away-industries. By contrast, the trade-off between FDI penetration and growth in the periphery and semi-periphery is shaped like an inverted ‘U’. The countries with a high coefficient of penetration grow slowly, because dependency blocs their development. And only the medium range penetrated countries still reap the benefits of the first dynamic years of MNC penetration, while the countries with a low penetration score are the ‘marginal’ countries of the majority of Africa, Asia, and Latin America:

Table 3.5: foreign capital penetration and economic growth

The graphical presentation of these relationships is the following:

Graph 3.1: dependency and economic growth

Also, the bivariate analysis of economic growth leads to important conclusions. To attempt the realization of socio-liberal human-capital-oriented development strategies is never wrong, even in the age of globalization:

Graph 3.2: dependency’s consequences by comparison: the determinants of economic growth , 1960-95

Graph 3.3: the determinants of income concentration at the level of the top 20% of the population

Graph 3.4: the determinants of poverty (CPM-poverty)

Graph 3.5: the determinants of human development

Thus it has been established that a human-capital, re-distribution, and human rights oriented approach will benefit economic growth, human development, and poverty reduction. Some important trade-offs between the variables above with inequality are also shown in the non-linear functions below. State sector expenditures re-distribute incomes only up to a certain limit, as would be expected anyway by the socio-liberal development paradigm (Tausch and Prager, 1993):

Graph 3.6: the determinants of inequality

In the long run, public education expenditures re-distribute incomes towards the poorer sectors of the population. Poland’s and some other countries’ - by international standards - still highly educated workforce would suggest, that there is a way out - the continuation of a path of human capital oriented growth. For that reason, we are at least partially optimistic in the long run for the Polish case, provided that the decision makers in Warsaw and Brussels seize the chance for a human-capital-oriented development strategy. Poland, in fact, could reach a position where it soon could outperform several countries of Europe’s South, that received the lions share of the Brussels subventions over the last years. Re-directing EU finances towards a more human-capital-oriented development strategy will become one of the prime tasks of future integration policy in Europe:

Map 3.1: mean years of education in the world system

Legend: The EXCEL 5.0 program provides for a 5-level classification of the countries of the world, ranging from best level (darkest) to lowest level (lightest color). The political implications of our data are far-reaching indeed:

level 1: center countries: EU members in Northern Europe, NATO members in Northern Europe, USA, Australia, Japan, NZ, Israel, South Korea, Argentina

level 2: semi-periphery 1: EU members Ireland, Spain, Italy, Greece; EU candidates Poland, Cyprus, Baltic States, Bulgaria, Romania, Russia, Belarus, Colombia, Chile, Uruguay, Panama, Cuba, Philippines

level 3: semi-periphery 2: EU member Portugal, Moldova, Ukraine, Albania, Costa Rica, Jamaica, Colombia, Ecuador, Venezuela, Peru, Guyana, Malaysia, Brunei, North Korea

level 4: periphery 1: Transcaucasia, former Soviet Central Asia, Jordan, Lebanon, Iraq, Mexico, Honduras, Paraguay, Dominican Republic, China, Vietnam

level 5: periphery 2: EU candidate Turkey, Syria, North Africa, Iran, Brazil, Bolivia, Indonesia, Thailand, Myanmar, Kampuchea, Laos, Papua-NG

The data for this map are:

Table 3.6: mean years of schooling, adult population > 25 years in the world system

Source: UNDP HDR, 1994

Also, early death at age 40 as the most direct poverty indicator should be kept in consideration, when trying to design an optimal development path for the EU-accession countries in East Central Europe:

Table 3.7: early death in the world system (death at age 40)

Source: our own compilations from UNDP, HDR, 1997

The picture is even more optimistic, when we compare Polish human capital stocks only with other European countries, leaving aside the nations on the Southern and Eastern rim of the Mediterranean:

Map 3.2: European center and European periphery

Legend: the EXCEL 5.0 program was requested in this case to draw the 5-level structure for the European map only.

Again, Poland’s performance at least would warrant some longer-term optimism, as the following map shows. The real sinners against human capital formation in the EU are the UK, Belgium, Luxembourg, Germany, Italy, Spain, Portugal and Greece:

Map 3.3: public education expenditure in Europe

Legend: 5-layer classification of European education expenditures per GNP, EXCEL 5.0 with UNDP 1996 data.

Our analysis furthermore shows

• the close interrelationship between the UNDP capability poverty measure 1996, which combines lack of access to health personnel during birth, underweight children, female illiteracy, and real per capita income in purchasing power parity rates
• the UNDP Human Development Index 1998, which combines life expectancy, adult literacy, educational enrollment, and real per capita income in purchasing power parity rates
• the UNDP 1998 measure of early death at age 40 in % of total population
• mean years of schooling of the adult population (UNDP, 1994)
• and the respect for human and political rights as a precondition for successful development.

More traditional concerns of development theory, like FDI per GDP (dependency theory), state sector size (neo-liberal theory) and military expenditures (peace research) have no real direct and strong influences on the avoidance of early death. However,

• early nationhood has a positive influence on the development perspectives of a nation, while the newcomers and states with a long state socialist tradition after 1970 find it harder and harder to find their place in world society

The graph below also summarizes the properties of the three measures of poverty and development, used in Table 3.3 and Table 3.4, above:

Graph 3.7: measures of poverty and measures of development. The UNDP Human Development Report measures and their relationships to some of the main variables of this analysis

Graph 3.8 now analyzes the trade-off between years of UN membership and economic growth. This trade-off is important, because it is central to the analysis of the recent increase in the number of nations and their growth chances in the capitalist world system. We have to distinguish the process of de-colonization (that itself greatly increased the number of member nations of the UN in the late 1940s, 1950s, 1960s, and early 1970s) from the process of decomposition of states. One might still argue, whether or not the break-away of the non-European republics of the former USSR can be classified under the first or the second heading, but certainly the disintegration of Pakistan into West Pakistan and Bangladesh in 1971 provided the turning point, to be followed by the ever faster shifting of international borders in the late 1980s and the 1990s. The serious and systematic analysis of the interrelationship between the number of states and the Kondratieff long economic cycles is as yet to be undertaken, but it can be argued that B - phases increase separatism, while A - phases increase national unity. The world capitalist system released a great number of states into independence - while their growth chances are the more miserable, the younger they are. Also, nations with a very long history of communism are practically marginalized in world society:

Graph 3.8: national independence, communist history, and economic growth

Legend for the last graph: years of communism in power (x-axis) and economic growth (y-axis). Countries with a history of more than half a century of communism in power have the bleakest perspectives of economic growth

While in these nations a return to some kind of authoritarian models in between the drug cartels of Colombia, Getulio Vargas’ or Juan Domingo Peron’s ‘populismo’ - or - for that matter - a slide into chaos and anarchy are real possibilities, we would like to share at least partially Wallerstein’s qualified, recent optimism concerning European development in the capitalist world economy, perhaps against our own scholarly convictions. Is it just an empty hope, in view of all what we have said in our earlier electronic publication (1998)? Asia learnt the bitter lessons of globalized capitalism in the turbulent months of 1997, 1998, and 1999; Russia and Latin America saw, how the system works in 1998, if not in the 500 years before that date, at the latest. In the long run, these regions will have had enough of the model, practiced in the 1990s. Perhaps more by good luck than by intention, the Euro, in the long run, will contribute to the fact that at last America realizes that it has current account balance deficit. Before long, the losers of globalization will realize, who at present disproportionately benefits from the system. This is also true for the so-called ‘new world information order’ (see especially, Gabriel Kolko, Le Monde Diplomatique, 15.5.1998; Philippe Queau, LMD, 12.2.1999). In the long run, Asia’s recovery is inescapable, while America’s hegemony will be more and more confronted - around the world - by the forces of de-legitimization. A European army, Wallerstein and Amin are again correct, is one of the imperatives of European integration in the 21^st Century, and it is time to restore international law and the United Nations as guiding principles of the international system.

Not before too long, the European Union can and must say good-bye to the present stage of the neo-liberal dogma, develop its own world political weight and its own European army, try to integrate the orthodox European East, and try to be a mediating force in the Middle-East conflict (Wallerstein, 1998; on the last point, see already Amin, 1994; see also Bornschier, as early as 1988; see also Samir Amin, 1999 in Al Ahram Weekly, issue 428, at http://www.ahram.org.eg/weekly). The present backlash, so aptly described in the April and May 1999 issue of Le Monde Diplomatique (http://www.monde-diplomatique.fr/), 1999, could still turn out to be a mere episode, which could soon be breaking up under the pressures this model creates. Such a renewed and true perspective of a European left position would also imply a certain critical distance towards the Southeastern expansion of the European Union under present conditions - implying all the dangers of human rights violations, and organized crime in Turkey, the key country for the present, American concept of European and Middle Eastern policy (for recent debates, see again the current issues Le Monde Dilpomatique and its complete, freely available French-language archive at http://www.monde-diplomatique.fr/, as well as Mother Jones at http://www.mojones.com).

The pipeline from the Caspian Sea to the Turkish port of Ceyhan is indeed the key project of United States foreign and economic policy for the next Century, and to achieve this aim, all other considerations threaten to be relegated to second or third place, including the concern for human rights. No one else than the US State Department, at its own official website, duly informs about the problems of human rights and justice and home affairs in that part of the world, especially Turkey. But good allies are never bombarded, to set a human rights record straight. Whether Europe has the power, the good luck and the resources to save Russia from the abyss, cannot be determined here, but at least the first wave of the ‘eastward extension’ of the European Union could become an ‘extension with a human face’. At present, we gain the impression, that ‘Ceyhan’ is much more on the minds of the transatlantic elites than the cohesion of the European model.

In the end, the future decline of America has also important social and military aspects. Social, because with all the talk of the ‘market economy superstar’ notwithstanding, 1 out of 5 children in America grow up in poverty, and African American young men, aged 18 - 25, are to be encountered more frequently in prison than in the educational system (IFRI, 1998: 66). Bill Clinton was elected for his second term in office by only 49% of those less than 50% of Americans, who bothered to vote - a sign how democracy is concentrated more and more in white, suburban America, composed by 89% white population (IFRI, 1988: 67). The 253 billion $ spent on defence in 1996 do not deliver the military power on the ground, that a real world policeman would need. Therefore, also in military terms, there are absolute limits to US power. With all the talk about ‘rapid deployment’, the 12 amphibious ready groups of the US Marines, the 82^nd airborne division, with company readiness in 4 hours and brigade readiness in a week, and the ability to send 17000 marines in 6 days to any point around the world, America and NATO up to now found only one answer to the military challenge on the Balkans - to bomb from the air, while, militarily speaking, the weakness on the ground is glaring indeed. Remember, that this is only a comment in terms of military power capabilities of the world hegemonic nation, and not a moral judgment. Airborn, instead of marine transport of supplies was perhaps already one of the basic weaknesses of the allied operation in Kuwait; this ground-force weaknesses will be an invitation for small and medium challengers with sufficiently strong ground troops around the globe to probe the resolve of the remaining superpower. Military observers correctly remark, that these logistic and transport problems of the US Armed Forces were not significantly improved after the Gulf War (IFRI, 1998: 64). That just 24 Apache combat helicopters were sent to the Balkans only a week after the initiation of hostilities, tells us nothing valid for our moral judgment on the NATO intervention, but a lot on the military planning deficiencies of the entire Kosovo operation in 1999. On Sunday, 11^th of April 1999, General Hoffmann from NATO HQ admitted bluntly during the BBC World Service Television 10.00 CET o’clock news bulletin, that the political aims of the intervention were - up to now - not achieved. And even a 4 million strong US Army and US defence outlays to the tune of 400 or 500 billion $ will not resolve the basic contradiction, that conflicts erupt in the periphery and semi-periphery (see also, Mary Kaldor, in a kind of prophetic article, written in 1986), and that these conflicts cannot be controlled by air power and rapid deployment forces alone. And even more so, even such military outlays won’t be able to create whatever kind of order, where disorder is likely.

Samir Amin proposed thoughts about a necessary European counter-project already in 1994, repeated in his Al Ahram piece in 1999 (http://www.ahram.org.eg/weekly) and these thoughts were extended by analyzing the constellation of interests around the Caspian Sea oil fields and the Kosovo crisis with the help of such papers as the Los Angeles Times and the Washington Post, on file from http://www.dialogselect.com. Instead of concentrating on the details, let me just spell out here the general conclusions. More and more people realize, that America’s geo-strategy - as we already mentioned above - for the entire region of Europe and the Middle East now rests on the following central assumptions:

• access of the US-multinationals to the oil fields of the Caspian Sea
• security for the pipelines from these oil-fields to Ceyhan in Southeastern Turkey
• early accession of Turkey into the EU (‘we have the pipeline, but you Europeans carry the costs of Turkish membership’) as a strategy to appease the Turkish elites and to keep Turkey stable
• continued use of the US air force base at Incirlik in Turkey and an international policy power axis Washington - London - Ankara - Tel Aviv, that marginalizes other European interests, i.e. of extended cooperation and dialogue with the Orthodox and Islamic world in the ‘backyard’ of Europe
• retention of the Mediterranean command of NATO in US hands (because of its importance for US power projections into the Middle East)
• the further weakening of Russia as a kind of Latin American early 20^th Century client state of international capitalism
• an ‘Euro’ that does not de-throne the US $ from its central role in the world economy
• the further Americanization of European policies and institutions, i.e. their adaptation to the neo-liberal Anglo-American socio-political creed
• the blocking of further ‘Gaullist’ attempts at European integration; i.e. the prevalence of NATO over European security and defense structures

There is a danger, that not the left, but the right will - in the end - realize such a ‘Gaullist’ European project after the demise of Blairism in a few years or months time. The fate of the multilateral agreement on investment, that center piece of the US project for hegemony in the 21^st Century, will tell us a lot on the future measure of control and power, that American influence still wields in the world system.

The monopoly of US world power could give way to a trilateral structure, dominated by the USA, Japan, and Europe. Here, our analysis is totally in agreement with such diverse authors as Samir Amin, Giovanni Arrighi, Christopher Chase Dunn, Andre Gunder Frank, Joshua Goldstein, and Immanuel Wallerstein. The forces of contention, unleashed by unfettered globalization, meanwhile will be more than a motive for challengers of the existing power structure - and not only these odd half a dozen military dictatorships and old/new neo-stalinist regimes around the globe. The costs of continued, challenged hegemony will rise for the US, while Europe will be left to have a chance to re-center its integration process around democratization of the European structures and the human capital factor. The forces in Europe, opposed to the political project of unfettered globalization, would do well to concentrate their energies, then, on the following key areas

• a Tobin tax in international economic relations
• democratization of the structures of the European Union. There is a federalist variety (with a greatly strengthened European parliament) and a national parliamentary variety (with increased national parliamentary control powers against the Commission in Brussels) under debate here
• a long-term strategy for the Euro that sufficiently recognizes the interests of export industries in the South and East and not only wealth owners in the North
• a slowing down of the process of unfettered globalization, especially regarding financial markets, also in view of the threats posed by money laundering and by international criminal groups
• a harmonization of European tax policies, social dialogue and social policies
• the creation of a European foreign and defence policy
• a dialogue with democratic forces in the Islamic world and the non-violent opposition in Turkey
• the insistence on a true peace in the Middle East
• and active human rights policy and solidarity with the victims of regional conflicts and ethno-politically motivated denial of minority rights in the Sudan, in Turkey, in Central Asia, in Indonesia (East Timor), and in much of Africa and in parts of Latin America
• finally, a strengthening of the United Nations and the return of the observance of international law, with the aim of establishing democratic world government by around 2030 at the latest

Once again - the issue of pension reform and transformation

To wind up our review of accession strategies, we also should deal on pension reform. An absolutely insufficient number of scholars around the world realized how far turbo-capitalism already went in designing projects even to draw out from your own pockets in a compulsory manner a given amount of income to the benefit of private capitalist firms, which, one day it is hoped, will pay a pension for you in exchange for their present privilege to be able to speculate with your money on the financial markets. Does European recovery then depend on this ‘Cartagena’ model? Poland is among the first countries in Europe to fully introduce such a World-Bank-three-pillar-pension model. The contrast of such a social security reform model in the ‘Cartagena Declaration’ tradition to the classic European model could not be more pronounced (Emerging Markets Debt Report, March 6, 1998, Vol. 11; see also Die Presse, 07.05.1998; 25.04.1998).

A classic European pension model of the ‘Bismarck’ type, like in Austria, presupposes that you work and/or are socially insured for a certain minimum number of years. Usually, a retiree needs to have accumulated a certain number of insurance years (say, 15 years contributory periods plus fictitious qualifying periods) within the last 30 years prior to the desired time of retirement. Persons, not meeting these criteria are nevertheless entitled to a pension, when they have accumulated 15 contributory years (without fictitious qualifying periods) or 25 insurance years in the course of their life. All recipients of incomes among the working population pay a certain percentage of their income, say 22.8%, into the social security fund. Upon reaching retirement age, say 65/60 years, the average income of your last 15 or so work years is being calculated as the basis of assessment, and after some algebraic operations with certain factors for the year 15, 14, 13 et cetera, the assessment base is multiplied by a certain factor (say 0.019) for each contributory year, to arrive at your monthly pension to be paid. There are maximum and minimum pensions, and special privileges for special groups. The pension in Europe is most often the basic result of a generation contract between those who are in retirement and those who work. Some countries, however, base their pension system entirely on their budget and finance it from taxes. This is also a solution, but it is not the Bismarck-type of solution.

Critics of the Bismarck system, in Poland, I am afraid, the majority, pointed out the weaknesses and exploding costs of the particular Bismarck type of model here in Poland. Generous early retirement provisions, an exploding demographic proportion between those who work and those who are out of work by 2005 and after, special privileges for the police, for the armed forces et cetera were among the most glaring weaknesses of the system. Only employers, and not employees paid contributions to the ZUS, the social security institution, and the peasant retirement scheme, known as KRUS, is up to today a huge single deficit-creating machine, with no reform whatsoever in sight. But to be just, several weaknesses of the old system were tackled by the World Bank solution, that was put in place recently. The only relevant question is, whether or not the system could survive with these reforms, without a ‘second pillar’. Many of the special privileges could be abolished, the necessary social insurance time was standardized, and the retirement age was pushed up to 60 years (female) and 65 years (male).

The solution, worked out in Poland, that is in place from January 1^st 1999 onward, combines generous reforms of the still existing ‘pillar 1’ (Bismarck) with compulsory payments of all workers and employees into ‘pillar 2’ (World-Bank-funds). Each employee receives an account number, a credit-card-format social security card, and has to choose between about a dozen private funds, having the possibility to switch from one to the other in the course of development.

In the end, about 50% of the mandatory retirement system will be financed by the classical ‘Pay as You Go’ system, while the rest - 50% - eventually will be funded. Gora and Rutkowski mention the following rates to be paid from gross incomes, to be in force:

Old ‘Bismarck’ will receive a Swedish type of overhaul, basically derived from a ‘devaluation’ factor, calculated against too high pensions, when life expectancy is rising over time. The procedure boils down to the simple arithmetic, that, the higher the life expectancy is in a given year, when you reach retirement age, the lower will be the pension for the rest of your life.

Beside pillar 1 (‘Bismarck’, the classical system) and pillar 2 (the new pension funds, that will receive 9% of the gross income of all workers and employees, which will invest the capital in the market but will have to pay pensions in exchange) there will be also a pillar 3 - private and enterprise pensions, that will correspond to the demands of the market (Gora and Rutkowski, 1998). The arguments for and against this system are manifold. Suffice to mention here, that Gora and Rutkowski themselves calculate the rising losses to the state budget, caused by the new pension system during the first years of operation. Since the former 45% social security contribution paid in Poland, has to be - in a rising proportion - divided between ‘Bismarck’, the various other funds (like accident insurance etc.) and the new capitalized funds, money going to them will be lacking in the state coffins, until, well - until the moment that these funds start to dynamize economic growth (at least this is hoped). The losses will amount to 0.68% of GDP in 1999, rising to 1.68% in 2003, and only then they should be declining. We should emphasize, that these huge costs were also existing in Chile, the model country number 1 of the new system. Real earnings per employee grew from 1970 to 1980 by +8.1%, although in this period we had the recession of the Allende experiment years, and the harsh neo-liberal economic recovery program of the IMF after 1973. During and after the introduction of the system, in the 1980s, real earnings declined by 0.3% per annum, however. Such a leveling of the burden on the shoulders of the wage earners was - at a time of 3.6% real growth during 1980-93, practically only possible in a military dictatorship (UNDP, Human Development Report, 1998). It should also be recalled, that, technically speaking, privatization in Chile was well advanced already at the beginning of the 1980s, with a full-fledged private banking and insurance sector in place, dating back to long years of ‘normal’ capitalist development in a country of the Southern cone of Latin America, where capitalism and democracy existed for decades in a framework of admittedly still existing social poverty of sections of society, interrupted by a very brief socialist experiment in the years 1970-73. In Poland, many of the funds, that form part and parcel of the very structure of the Second Pillar, still have to undergo privatization. Thus, let us be clear, there will be a fantastic redistribution of incomes away from wage earners to pension funds to the tune of several percentage points of GDP each year, until - in the end - a pay-off in favor of pensioners will take place (if at all; if all private pension funds disappear at once to the ‘Cayman Islands’, the state has to pay out pensions from the meager 36% insurance base, and not, like today, from a 45% insurance base):

Graph 3.9: The World Bank model of pension reform in Poland leads to astronomical economic losses during the first years of operation

Source: our own compilation from Gora and Rutkowski, 1998

In terms of the budget, this will mean an additional annual deficit of, say, 1-2% that has to be coped with. The proceeds of privatization will be used to prop up that additional hole in the budget, that - ceteris paribus - would face up to all the existing difficulties of the second phase of the transformation process (steel, coal, agriculture, EU accession). An implicit additional deficit to the tune of almost the Maastricht criteria of up to two percent per annum is considerable. No funds for schools, human capital, research and development, rural regions, the fight against crime etc. are then available from the proceeds of privatization - the income from the privatization process have to be used to cover the deficits incurred in favor of a dozen privileged oligopolistic private firms, called private pension funds.

In view of the many perceived or real challenges to the present ‘Bismarck’ system, critics have maintained that a large part of the savings of society are being withdrawn. The costs of the system will reflect the relative privilege or under-privilege of the pensioners in society. Defendants of the system will maintain, that mass demand, inter-generation re-distribution and solidarity in the family are enhanced by generous pensions, and that poverty among the aged works against a high life expectancy. The relationships between social security benefits expenditures and poverty reduction are startling indeed.

In line with a certain re-birth of a human-capital oriented Keynesian thinking we dare to say, that it would be the concentration on the reduction of poverty and on the formation of human capital by the Polish government, which, in the end, would yield the most long-lasting and thorough results for stable economic growth, which would transform Poland into a really successful new EU member country. Poland’s decision makers should also re-consider the staggering rates of poverty, existing in the neo-liberal model country number 1, the United States of America, already discussed above.

The social performance of several EU member states suggests, that a thorough change in the European model could be necessary. Data provided by the Austrian Federal Ministry of Labor (1997, Bericht ueber die soziale Lage) show the following connection between social security expenditures and poverty in the countries of the European Union:

Graph 10: social security benefits expenditures and poverty reduction in industrial nations

Legend: social expenditures per GDP, 1994; percent of the total population endangered by poverty, 1993. Compiled by the Austrian Federal Ministry of Labor.

Social security creates the mass demand that is necessary for mass consumption; decent pensions are an enormously successful instrument for the social cohesion of society, and enhance the savings rate as well as a kind of redistribution from the grandparents to their grandchildren. Pensioners from the First Pillar, and not Pension Funds, are among the most stable and best consumers in Europe.

As the Austrian Karl Polanyi, in contrast to his fellow Austrian Friedrich A. Hayek - who simply tended to oversee the political and social consequences of the Great Depression - so correctly foresaw, it is society, that somehow will defend itself against the unfettered mechanisms of the market, and - in the end - the social protection of the poor and the aged will determine the future stability of society. The elimination of poverty among the aged, a clear and decent ‘Pay as You Go’ pension system without too many loopholes and a clear policy of unemployment insurance, health insurance, and a tax and redistribution system in favor of the disabled remain thus the basic pillars of a world economically successful social welfare state.

While the monopoly position in the international system, as expressed by years of membership in the UN, together with the social security effort are a significant positive contribution to long-run growth, human rights violations and population density rates are significantly blocking long-run economic growth. The second equation listed below even more optimistically mentions social security expenditures, mean years of schooling and the Human Development Index as a precondition of absolute income growth. In between them, our predictor variables account for over 80% of the real, absolute income growth in the world system between 1960 and 1990:

Table 3.8: the absolute real income increase from 1960 to 1990 in the world system (n=123 countries)

Legend: first row: unstandardized regression coefficients, second row: standard errors, last row: t-Test. The values immediately below the standard errors are R^{^2} (third row, left side entry), F, and degrees of freedom (fourth row).

Alternatively, one might also express:

Table 3.9: the social preconditions of world growth, 1960-90 in 123 nations

Legend: As in all EXCEL 5.0 outprints in this work, first row: unstandardized regression coefficients, second row: standard errors, last row: t-Test. The values immediately below the standard errors are R^{^2} (third row, left side entry), F, and degrees of freedom (fourth row). Absolute real income increase is understood to be the difference between PPP $ income in 1990 to PPP $ income in 1960

Time will show, that the Polish system, adopted now, will prove to be costly and a highly risky approach. Thus, from the viewpoint of an Austrian social scientist, closely linked to the very Austrian social security institutions, the labor movement, and the Ministry, that built up a social welfare state after the Second World War, the critique of the three-pillar-model could not be harsher:

• the model country of the system, Chile, today shows, that the funds are in deep crisis. As people like professor Salvador Valdes Prieto from the Catholic University in Santiago have spelt out, only 2.5 million of the 5.6 million strong labor force are in the system at all, and difficulties of the system were mounting in recent months (Economist, October 24, 1998; Quarterly Review of Economics and Finance, 38, 3, 1998 (M. D. Ramirez); UNDP, Human Development Report, Chile, 1998 (the UNDP report ran a survey, according to which the majority of Chileans expressed dissatisfaction with the present day retirement system; see also: Chips, September 07, 1998); Jonathan Kendall in Institutional Investor, 31, 6, 1997: ‘the funds are now ... underperforming or performing moderately’.) Administrative costs of the system are rising enormously, 5 of the 15 AFP pension funds - as they are called in Chile - are currently making losses, the returns on assets under management have declined dramatically since 1994. Professor Carmelo Mesa-Lago from Pittsburgh University, one of the world’s most famous Latin America specialists, says: ‘the costs of transition (i.e. from the old system to the three pillar system) are enormous’ (Nation’s Business, Volume 85, 5, May 1997). Carmelo Mesa-Lago also observes that low-income earners try to avoid payments for the ‘Second Pillar’, so that they depend entirely on Pillar number 1 - the poor man’s social insurance. The poorest 20% have a real income of 1558 $ (PPP per capita GDP), while the richest 20% get away with 27145 $ (UNDP, Human Development Report, 1998, Table 7)
• state guarantees for funds, going bankrupt, will entice fund managers to pack the 9% of gross earnings of working people received together, and fly out with full suitcases of money to Caribbean Islands
• compulsory payments to private dozen or so funds will increase the monopoly power of insurance institutions and banks in the economy; in fact, structurally, the system, thought to the end, very much works like il pizzo paid to the mafia in Sicily in the 1960s in return for their specific kind of ‘protection’. They also take away by compulsion money and invest it somewhere else. The system will become a powerful mechanism to discriminate between the ‘ins’ (the dozen or so funds) and the ‘outs’ (the rest of the banking and insurance market). It will create a privileged zone of a dozen firms, that can rely on the regular incomes of the working population, and will work against competition in the insurance and banking sector. Even for a neo-liberal, the alarm clocks should ring when looking at the Polish system - several of the banks and insurance companies that are already accepted parts of the Second Pillar, still have to be privatized, and it is entirely possible, that the pension system will in fact block the process of privatization, since the state-class owned banks and insurance companies will now have ample funds at their disposal. Another, very bleak scenario thus seems to be entirely likely: the huge costs of the introduction of the system in the first years - admitted even by Gora and Rutkowski - will be carried not by the proceeds of privatization, but by the weaker segments of society, which will be politically powerless in the struggle for the distribution of budget money, compared to the state-class-owned banks and insurance companies, with the very best of links to Sejm and Senate deputies, ministries, and other structures of power.
• The system - in my view - also fundamentally contradicts the principle of consumer sovereignty of those wage earners, that would like to invest the 9% of their gross income in the Third Pension Pillar and not in the Second Pillar. I also doubt, whether the system as such - with it’s element of compulsion - is compatible at all with European Union law. Once, being a member, a Polish citizen, forced to pay 9% of his wage for a Second Pillar fund instead of investing it in a Third Pillar institution of his own choice, could test this out at the European Court of Justice
• the model is very much tied to the present-day logic of the liberalization of financial markets; in order to make profits, the funds will have to be engaging in the kind of speculative behavior that dealt a death-blow to the former real growth region in the world, East and Southeast-Asia. The funds will greatly increase the kind of casino-capitalism, that pushes up real interest rates. It is estimated, that Latin American pension funds alone will have accumulated by 2004 a wealth of $40 billion (Latin American Law and Business Report, February 28, 1998, Vol. 6).
• Henry Aaron, an economist from the Brookings Institutions, spelt out the entire logic that is behind the system: it can only work well, if the rate of interest is higher than the nominal increase in the wage bill, i>g, the so-called Aaron condition (see also, Laski, 1998). The consequence is, amongst others, a pushing up of interest rates, and thus a strangulation of full employment, that leaves ever larger and larger holes in the public budgets, to the detriment of ‘Bismarck’ pillar 1
• the international constellation, that pushes the model, most certainly is tied to well-known ultra-neoliberal institutions in the USA, like the Cato Institute. It might be safely assumed that their main line of argument is absolutely incompatible with what I would like to call le espace social. The Cato Institute (funded, amongst others, by Netscape Corporation and the two well-known US industrialists Charles and David Koch) is closely linked to the ultra-neo-liberal ‘revolution’ of the politically by now late Newt Gingrich, and for it, the privatization even of the police in modern society would be a tolerable alternative (EIU ViewsWire, October 31, 1997; Observer, August 30, 1998, page 4; US News and World Report, 125, 7, August 17, 1998). But with Poland having completed its Cato-inspired social security reform, another, and also important question remains: is the new legislation compatible with the European systems?