Catalytic State Leadership

Oct 23, 2011 Features / Columnists, Ravi Dev

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One of the enduring refrains in this space has been the need for the state to become more directly involved in the economic development of the country. The private sector alone will not provide the robust growth rates necessary to make a radical impact on our standard of living. We have called for the creation of a “Catalytic Entrepreneurial State” (CES). Such a state would firstly, and obviously, have to be a very legitimate state, with a strong commitment to the development of all communities.
We understand the background to the government’s reluctance to adopting a more dirigeste approach. Guyana, as with many other third world states, had a disastrous experience with state involvement in development during the ‘70s and ‘80s and this has obviously soured enthusiasm for such policies. The flawed premise of this fear, however, is to assume the form of the state itself has to be constant, as it is used to perform larger and more diverse tasks.
The Guyanese state was always a very centralised. Evidence from across the world, however, has shown that a strong state does not have to be a centralised one. Federalism can address the fear while delivering the needed performance. The functions of the state can be distributed into multiple layers and segments so as to deliver a greater likelihood of success of development goals.
Even with the unitary state, not all state actions are negative, and in fact, there may be the necessity for government interventions when the free market or community coordinating mechanisms are stymied for one reason or other – market failure or community breakdown. This is clearly exemplified by the fact that since 1997, the Guyanese banks have been awash with money and yet cannot translate that into investments, creating a liquidity problem.
The actions of the developed countries in the wake of the world financial crisis have confirmed our thesis. The expansion of the role of the state, however, does not mean that Guyana has to repeat the mistakes of her past.
Guyana’s State Capitalism during the ‘70s and ‘80s destroyed the market and community forces necessary for competition and other coordinating activities necessary for sustainable growth. The dogmas undergirding those development policies were inimical to market orientation and self-reliant communities and spawned a culture of special interests seeking to benefit from the state policies (rent seeking). The World Bank’s insistence that Guyana minimise the downside risks of such policies is not unreasonable. But we cannot ignore the fact that no country in the modern era has risen out of poverty on loans from World Bank/IMF and without directed government intervention.
By now we hope that it is self-evident that providing a stable macro-environment will not automatically attract sufficient investment for high economic growth. Apart from the fact that there may be other, non-economic, factors inhibiting investment – such as political instability from elements calling for “protests” – investment and the consequent economic growth is not just a question of creating institutional environments, but rather one of creating institutional arrangements.
Theory must be guided by successful practice. Even theory supports this position. The efficacy of markets depends on the presence of markets for all contingencies, i.e. that markets are complete. The important point is that when some markets are missing, they will not clear, and the resulting allocation can be improved on.
The history of Europe and the US and the Far East has shown that the state played a major role in their development, “by mobilising savings, providing infrastructure, shaping sectoral priorities, and in many cases forcing individual agents to engage in market-oriented activities through taxation.” It is rather ironic that some have eschewed any meaningful role for the state in achieving desired growth rates, in the face of such evidence. The litmus of proposed activities would be for the state to implement policies that strengthen market and community coordination to promote growth and development.
A pragmatic approach to development is necessary because 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. Their Governments, as catalysts, identified and set strategic goals and then did what was necessary to back into them.
For instance, rather than the “import substitution strategy” model of development we followed in the ‘70s, Korea and Singapore adopted 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 at levels that created a virtuous cycle of exponential growth.

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