The return of the state

Written by Paul Kattuman | Updated: Jul 1 2008, 03:33am hrs
When Michael Spence, chairman of the Commission on Growth and Development got his Nobel Prize in 2001 for work on the informational structure of markets, he was asked by a journalist whether it was true that he could be awarded the Nobel Prize in Economics for simply noticing that there are markets in which certain participants do not know certain things that others in the market do know. When the Commissions Growth Report: Strategies for Sustained Growth and Inclusive Developmentwhich purports to gather the best understanding there is on policies and strategies that underlie rapid economic growthwas released in May, the so what is new question recurred. Not from journalists though, but from a fellow academic. William Easterleys critique was provocative, holding that growth simply occurs in decentralised and spontaneous ways through the efforts of free individuals seeking better lives.

It is not surprising really that the intellectual discipline of economics, concerned as it is with the everyday business of life, seems to go round and round in circles. Valuable insights most certainly follow from serious and coordinated attempts by talented and insightful people (in the case of the Growth Commission, policy practitioners of the highest order, and two Nobel laureates) to pin down the understanding of critical economic phenomena. But often results of careful analyses can be made to look and sound obvious at a superficial level. It takes appreciation of the history of analysis to see what is new.

That the Growth Report repudiates the one-size-fits-all 1990s principle is noteworthy. The report notes that not only did high growth economies manage stable macro-economies, but they also had capable governments. In the high growth Asian economies, such as Korea, governments intervened heavily with impressive results. Pragmatic governments have crucial and active roles, even at the risk of corruption, capture, and even occasional ineptitude. This is a clear departure from the earlier consensus, and ushers the developmental state back in.

The fact, of course, is that governments of the US and UK were not laissez-faire purists, even as late as the early 20th century. In the early years of their growth and enrichment they had used active policies designed to protect and nurture domestic manufacturers, to climb the technological ladder and diversify exports. This argument has been made most forcefully by Ha-Joon Chang, the development economist who wrote an expose of the secret history of capitalism. In his 2007 book, Bad Samaritans, Chang insists that rich countries that insisted that poorer ones follow neoliberal prescriptions were hypocrites, holding out solutions they themselves did not follow.

Changs argument is deliberately provocative: that developed countries, under the guise of recommending good policies and institutions, actually make it difficult for the developing countries to use policies and institutions that had allowed them to develop economically in their day. He harks back to the criticism by Friedrich List of the British in the middle of the 19th century for preaching of the virtues of free trade to countries like Germany and the USA as an attempt to kick away the ladder, with which Britain climbed to the top.

Isnt it ironic then that it is now, after developing countries have opened their markets to world trade very substantially, and indeed with demonstrable national aggregate level gains, that there has grown a clear tendency among developed economies to raise up drawbridges and shut their gates It actually seems to be the counterfactual that proves Changs thesis. Lawrence Summers has expressed concern at the effects of globalisation on the unskilled and semi-skilled workers in the US. The hardening protectionist stance in Europe can be clearly detected.

Berlusconi notwithstanding, it would be glib to dismiss these tendencies as merely populist. In recent opinion polls in the US, the majority of respondents felt themselves potential victims of liberal trade policies. There is an undeniable groundswell of resentment among large segments in developed countries against a trade system that seems to bypass them. Of course, globalisation cleaves open the divide between those who are able to take advantage of global markets and the rest, in all countriesin India and China and other developing countries, just as much as in the US and Europe. The real point is that it is not feasible in democratic countries to push on with policies that large groups believe are not in their interests. In democracies, politicians commit themselves to the policy preferences of the median voter, and the median voter in the West (as in India) has a decided preference for less insecurity and for a greater share of the gains from globalisation. The much bandied inclusive globalisation is a key median voter concern. A daunting and critical global issue, and again, one for the state to grapple with. Time for another independent commission of insightful practitioners from government, business and policy!

The author is reader in economics at the Judge Business School, University of Cambridge, and fellow of Corpus Christi College