The State Versus Market Debate

Updated: Jun 16 2004, 05:30am hrs
For much of the 1990s, the debate in India gradually shifted against a major role for the State in the economy and for primacy to the market and private enterprise. Even services like water and electricity were considered for transformation into private market-driven enterprises. Dr Ravi Kanbur of Cornell University pointed out in a recent lecture at ISEC in Bangalore that this shift was not confined to India and had occurred during the 1980s in Latin America, Africa, Asia and the old Soviet Union and its satellites. The stimulants were the collapse of the Soviet Union and the rise of the Chinese economy as a powerful driver of world trade and investment. Economic opinion saw a shift in the pendulum from the primary role for the State in the economy in the 1950s and 1960s to a dominant role for private enterprise and the market.

This shift in the relative roles of the State and private enterprise took place first in the US and UK. When the first archconservative American Presidential candidate Barry Goldwater in the 1960s preached less government, few took him seriously. His disciple Ronald Reagan as President introduced policies and programmes that were to the right of Goldwater. He embraced the Laffer curve and cut taxes, increased defence spending to record levels, pushing the Soviet Union into economic breakdown as it tried to compete, and raised deficits to unprecedented levels. Todays President Bush is outspending Reagan, has cut taxes and threatens more, and has converted a huge budget surplus into a mind-boggling deficit. Yet nobody calls him as they did Reagan, a slave of voodoo economics.

The Washington consensus represented a standard programme laid down by the International Monetary Fund for countries that came to it for emergency assistance when their economies had reached such unsustainable levels of borrowing that they were unable to service their debts. It called for cutting deficits, raising domestic taxes and cutting import duties, opening the economy to foreign investment and moving towards a convertible currency. The most indebted nation in the world has a ballooning deficit. But the prescription has not been applied to the US.

When the dollar is the reserve currency for the world, everyone wants to trade with it, its economy has vast resources, enormous innovation and rising productivity, it is the only superpower in military and economic terms and people want to keep their money there. So long as international funds keep flowing into the US for investment in Treasury bonds and other financial and physical assets, the US can, as it does, finance current consumption using the savings of foreigners.

That is why the Washington consensus applies everywhere but in Washington. The US today has rising inequalities, growing poverty, the rise of robber barons among companies and their paid managers, the collapse of pension funds that are primarily invested in equities and lack of health care to a growing number of the aged and poor. Unemployment is rising, inflation rearing its head. The extreme rightward swing of the economic policy pendulum in the US is bound to swing leftwards in future years.

In comparison, India remains left of centre. Not only is our currency not tied rigidly to the dollar in a currency board as many others are, it is not even fully convertible. Import duties are still among the highest in the world. Income tax slabs are so low that even in purchasing power parity terms, those who do pay taxes are probably among the most heavily taxed in the world. State-owned enterprises if one takes account of infrastructure and other services account for a much larger proportion of the economy than just public enterprises that have been the object of on-off disinvestment.

After the last elections it has been argued that technocratic solutions must be tempered by political realism. This is the rationale for the move against disinvestment and more investment in physical and social infrastructure by the State. Ownership does not matter. What does is that they are run efficiently and competitively, producing a good return on investment for the State. There is a crying need to redress the declining public investment in agriculture for almost two decades and to spend more to achieve health and education for all. But the real issue is the ability of the State to spend more, to do it efficiently and effectively deliver health, education and other social services to those for whom they are intended.

Economists must rethink the extent of sustainable deficits, the degree of acceptable inflation and the means to manage the economy so that these can be controlled as desired. But getting their relationships right is part of the technocratic solutions essential to prevent harm as we resume a greater role for the State in the economy. The swing must be carefully calibrated so that we are able to build on the gains of the last decade.

The author is Chairman, Institute for Social and Economic Change