Government for growth

Oct 05, 2008 Features / Columnists, Ravi Dev

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Four years ago, we critiqued the Government’s reliance on the market fundamentalism implicit in the World Bank’s conditionalities under which Guyana’s economy was being mannered, er, managed.

The present necessary massive intervention of the US (and the European) governments to correct market failures make the points raised then, relevant once more.

MARKETS
There is no one shoe (or recipe for growth) that fits all. The World Bank, or anyone else, can’t just say that the “free markets” alone must be used to fuel our development.

There isn’t anything as pure “free markets” alone running any economy. In every country, production and productivity are functions of the right mix of three institutions – the market, the state and the community.

Markets function through competition, using prices as the mechanism to coordinate our production and consumption – they are based on self-interest – which can get out of control. It is very efficient mechanism from a production point of view – people will produce to make a buck.

But one of the premises for its success is there should be enough people willing to take the risks etc., to make that buck (entrepreneurs). What do we do when there aren’t? Hold our breath?

STATE
The state also coordinates our activities – through command and coercion. It is supposed to be acting for the common good. The state passes laws and makes regulations that affect our economic activity every day.

In Guyana, the state determined that cars’ items should have taxes and duties that amount to more than one hundred percent. That decision of the government determines to a large extent the transportation habits of Guyanese.

The Government also intervenes to buy “excess” money floating around in our banks, thus influences interest rates and consequently our decisions to borrow and spend. In the modern world, we can’t wish the government away.

COMMUNITIES
Our communities also structure our activities – through voluntary cooperation engendered by close personal ties and relationships. They work through trust. This has been a most neglected aspect in our development efforts.

Let’s take the rice industry. A crucial feature of rice cultivation is the control and allocation of water. In Asia where there has been intensive cultivation for centuries, the communities have evolved intricate local, non-government sanctions and rewards that ensure the most efficient use of water.

Compare this with our situation in Guyana where farmers downstream are never willing to wait for water in their turn, and they either surreptitiously open regulators or “talk” to their friends in authority.

Everyone ends up frustrated and costs go up when they have to pump water. China’s and Vietnam’s ability to produce rice at one quarter of our costs isn’t just due to low labour costs! We have to work on this.

The task of governments is not to stand on dogmas but to tailor the right mix of these three institutions to suit their concrete conditions.

The Western countries developed through a high level of dependence on markets but let us not forget that their governments and communities played and continue to play crucial roles.

They took a couple of hundred of years to get where they are. Japan, on the other hand, because of its unique societal values, depended much more on the role of the community and trust. Their development to catch up with the West took one century.

Without question, state and markets also played crucial roles but compared to the West, the State played a much greater role in guiding and fostering development.

After WWII, we have seen Taiwan, South Korea and Singapore take only a half a century for their development to catch up – but again, not relying totally on market mechanisms and determining their unique institutional mix of markets, state and community to coordinate their economic activities. China has done even better since 1978. This is what we have to have the courage to do in Guyana.

CATALYSTS
We suggested pragmatically that the cause of our underdevelopment is to some extent strategic rather than structural. Korea and Singapore were right where we were fifty years ago, if not behind us, not only statistically but structurally.

Look where they are today. Their governments, as catalysts, set strategic goals and then did what was necessary to back into them.

Take for instance one reason why the “import substitution strategy” model of development – the last round of government intervention – practiced by so many countries, including Guyana, failed.

They assisted and protected domestic industries that became inefficient and non-innovative since the market forces fostering competition were destroyed.

We had companies with a captive market that had no reason to improve. The consumers suffered because they had to buy inferior products at inflated prices.

The only persons who benefited were the owners of the protected businesses and the government bureaucrats who had to be bribed to keep the credits and licences coming.

Korea and Singapore, however, followed the Japanese example and explicitly tied assistance to selected private industries based on their commitment and ability to export.

This strategic decision had two significant and faithful results that differed from the “import substitution strategy”. Firstly, the assisted firms were subjected to the market discipline of the competition of international trade.

This was the most intense competition and ensured that efficiencies and productivities had to be raised to the highest levels.

These firms not only couldn’t afford to be fat and lazy like the protected ones in Guyana, they had to become world class – and they’ve remained world class.

The second benefit, of course, was that the exports brought in foreign exchange and there was no need to ban anything to save foreign exchange.

In summary, markets may successfully orient individual agents to allocate resources efficiently but they are not sufficient to coordinate individual actions over a long period of time and, most importantly for our purpose, towards desired social goals such as specified rates of growth. Markets can also fail spectacularly.

Market orientation is not sufficient to generate market coordination toward collective prosperity. This is where the catalytic function of the State comes in. After all, collective prosperity is why we have the state to begin with, isn’t it?

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