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Old Monday, August 24, 2009
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Govt intervention and competence

By Shahid Javed Burki
Monday 24, August 2009

ECONOMISTS have once again turned their attention to the role of the state in managing not only the macro but also the micro economy.
The state should not only be involved in minding the fiscal and monetary policies but can – in fact should – take over firms and the entire sectors of the economy whose demise could seriously hurt the national economy.

It took a major economic crisis in the West to recognise that the state could not be shoved on to the back burner. President Ronald Reagan’s statement a couple of decades ago that government was not the solution to economic problems but the problem itself seems so out of place now. That point of view was shared by Prime Minister Margaret Thatcher of Britain and the two working together were able to put in place an entirely different set of policies aimed at managing the economies not only in the developed but also in the developing parts of the world.

These sentiments led to the formulation of sets of policies that together came to be called The Washington Consensus. They represented a consensus among a bunch of economists who were worked at a number of economic and financial institutions based in Washington. The policies the Consensus promoted touched upon two things in particular. One, the state should leave most economic decision-making in the hands of the private sector. Even the regulatory aspect of economic management should be handled by the state as the last resort. It was in the interest of the private sector to regulate itself. If it did not, it will lose the respect of the market place and suffer economically.

Second, the economies should be open to the world outside. Movement of trade and capital should be as free as possible. The state should not be allowed to place obstacles in the way of these flows. The same theory should have been applied to the movement of people. But here an exception was made. The owners of most capital and a significant proportion of tradable products were the world’s richer countries. It suited them to advance the view that capital and tradable products should go to the markets where they fetched the highest return. This would increase general welfare and everybody would benefit Exactly the same logic should have been applied to the movement of people. However, since the bulk of the world’s people lived in poor countries, the world’s richer countries had no problem in deviating from the philosophy of openness that was being sold in the case of other types of flows. As the world became increasingly open in trade and capital flows, more and more constraints were applied to the movement of people.

The deep economic malaise that began in August 2007 in the United States and quickly engulfed the rest of the world, brought the state back to the front burner. The state is no longer seen as the problem; it has become the solution. America had gone the furthest in expelling the state from economic matters. Now reversing the course, it is the most aggressive in bringing the state back. President Barack Obama has succeeded in getting the state involved in recapitalising the financial sector.

Without public money going into the banks, credit would have remained frozen and the economic slump deeper. The American government also rescued the automobile industry from going out of business. Washington is now the largest share holder in General Motors, its largest automobile company.

Now the state is being used all over the world to save the private sector from its greed. Governments have poured extraordinarily large amounts of money to save their economies from slowing down and bringing with it increased unemployment. This has been done not only in the countries such as the United States and Britain that were at forefront of the earlier thinking on economic matters. It is also being done in several large emerging economies.

China showed great boldness in pumping large amounts of public money in building infrastructural projects so that more people will not lose jobs. India, although with a large fiscal deficit to manage, it also used a stimulus package to keep the economy growing at a pace needed to keep more people going into the already large pool of poverty. Indians are also using public finance to provide support to the people who can’t find work in the private sector.

Even before the Indian state got involved in helping the economy maintaining the rate of growth at a reasonable level, it was active in saving the collapse of Satyam, one of its largest IT companies. The state took over the company temporarily and then engineered its sale to another company engaged in the same business. This intervention helped to save the reputation of the IT sector on which so much of the Indian economy depends, particularly for bringing large amounts of exports and for also attracting foreign direct investment.

But Pakistan has not taken this route of active state participation in economic revival. To the multilateral financial and development institutions and bilateral donors that are involved in helping Pakistan navigate its way out of the current economic crisis, it is clear that the state is much too weak to handle some of the tasks that are being done by it in other parts of the world.

The Pakistani state in its present form can’t be trusted to handle the distressed economy. It is clear that Islamabad needs to focus on its present economic difficulties and prepare for the future. Why is the state weaker than is the case with the state in other countries at the same stage of development? The answer comes from a careful study of the country’s economic history which is beyond the scope of this article.

The state is exceptionally weak for the reason that it has seen so many different hands that have guided it in the past 60 years. Work on rebuilding it has to be given a very high priority now that a new political structure has begun to take shape. The work should start immediately.
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