THE more I study the
Indian and Chinese growth models, the more I
realise that the current debate over the state versus the market is a
false dichotomy.
Both the state and the market are
social
institutions that are not independent of each other. Indeed, they are
inseparable, interactive and interdependent.
Human development or evolution is a complex interaction or feedback between the two. In
Small is beautiful author
EF Schumacher's view, “Maybe what we really need is not either-or but the-one-and-the-other-at-the-same-time”.
India
and China could not have become global powerhouses of growth, without
the leading role of the state in planning for development. But those
states that have worked with markets have succeeded better than those
that worked against markets.
London Business School Prof John Kay
defines the market as a relatively transparent, self-organised,
incentive-matching mechanism for the exchange of goods and services,
usually in monetary terms.
In plain language, the market helps to
match willing buyer, willing seller under certain rules of the game to
determine market price. The market clears when it functions properly,
but
market failure happens when the market is imbalanced.
Kay
reminds us that capitalism is less about ownership than “its competitive
advantages its systems of organisation, its reputation with suppliers
and customers, its capacity for innovation”.
Because of
globalisation and technological change, we are living in a situation of
change within change, as if the national state is not in total control
of our destinies. Because of the global economy, state policies such as
monetary, exchange rate and trade, cannot be independent of what is
happening globally.
No man, no company, no state is an island. Globalisation has changed the rules of the game irreversibly.
Why is the state so much bigger and more powerful than before?
In
the 19th century, most governments were not larger than 15% of
GDP. By
1960, the size of governments in
OECD countries had doubled to 30% of
GDP. Today, the average has increased further to 40% of GDP.
The
state has grown because there has been demand for more and more state
services, but there is also concern that bureaucracies tend to grow to
perpetuate itself.
I find it useful to think about the state as a
market-like institution for exchange of power (in non-monetary terms).
Power comes from social delegation the people give the power to the
state to protect them and to fairly enforce social rules and laws.
Hence, the “state as market” has the same dilemmas as the market
information asymmetry and the principal-agent problem.
In large
countries like India and China, there are many levels of government
central, provincial, city, town, village and rural governments, each
with their own departments and even enterprises. Most citizens find it
difficult and confusing to deal with complex bureaucratic power. The
Peruvian economist Hernando de Soto was one of the first to point out
that rural poverty exists, because the poor's property rights are not
protected adequately and their transaction costs are extremely high
because of complex government.
In other words, markets are
efficient and stable when the state is efficient and stable. It is not
surprising from recent experience that financial crises are results of
governance failures. As the
European debt crisis amply demonstrates,
financial markets cannot clear when the fiscal condition of the state is
on shaky grounds, and there is no mechanism to make fast, simple, clear
decisions.
Finding the right balance between state and market is
the real challenge in all economies today. As 20th century British
philosopher Bertrand Russell reminded us, “people do not always remember
that politics, economics and social organisation generally belong in
the realm of means, not ends”.
Today's demands on the state to
provide stability, growth and social equity are complex, because recent
dominance of free market ideology has ended up with serious problems of
wealth and income disparities and environmental degradation.
Realising
that large states with geopolitically significant human and ecological
footprints cannot consume like the
United States or Europe on a per
capita basis, China and India are embarking on ambitious 12th five-year
plans to change their growth models to become more environmentally
sustainable economies with greater social inclusiveness.
But
large economies with many layers of government struggle between
centralisation and decentralisation of people, resources and power.
For
systems to be stable and sustainable, they have to be adaptable to
complex forces of change from internal and external shocks.
To
maintain integrity, there are complex trade-offs between winners and
losers in each society. Such rules and bargains are difficult when the
causes and effects of losses are unclear (such as crisis) and when
vested interests resist change for fear of losing what they have. Vested
interests are often unwilling to change because they value present
gains far more than uncertain futures. Politics is the compromise of
contending interests.
The belief that markets are always right
assumes that markets always balance. The market cannot balance when the
state cannot balance the contending interests. The main reason for the
advanced country debt crisis is because their consumption has happened
today by postponing the costs to future generations.
This raises a fundamental problem. Whichever way you term it, central bank quantitative easing is ultimately state intervention.
The
rise in Spanish bond yields, despite ECB long-term refinancing
operations, suggest that the markets are saying there are limits to the
growing euro public debt.
At the same time, global financial
markets are watching carefully whether inflation in China and India will
rekindle global inflation.
In other words, the anchor of global
financial stability rests on state debt stability. The state cannot
escape being priced by the market.
THINK ASIANBy ANDREW SHENG - Andrew Sheng is president of the Fung Global Institute.
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