The Issue of the Developing Countries - Essay Example

Economists and social scientists have long debated whether the has primacy when it concerns development or the market is important. This debatehas polarized the school of economics and economic thought with each camp (one for the state and the other for the market) sticking to their respective positions. Economists in the so-called Renaissance era were of the unsatisfying condition of humankind and hence sought fresh thinking and an approach towards development that involved a role for the state as a superstructure under which the market performs (Cooke & Kothari, 2001). In their conception of things, the state is needed to define property rights, act as a custodian of the public good (or work for what was known as the “common good”) and regulate markets so that optimal conditions are met (Cooper & Packard, 1997). However, with the dawn of the 20th century, there was an overriding emphasis on the primacy of the markets over the state where development was concerned and this reached its zenith starting with the Thatcher administration in England and the Reagan presidency in the United States. The thinking during the 1980’s and subsequent decades went along the lines of “the government is the problem” and “less government is better government”. The implication (of this school of thought known as neo-liberalism) was that markets could be relied upon to solve economic problems and since market mechanisms are efficient in allocating resources and making optimal use of capital, they should be left alone free from governmental intervention. This was the dominant thinking in the West ever since World War Two ended and accelerated during the 1980’s (Cowen & Shenton, 1996). Turning to the issue of the developing countries and whether they should let the state tower over the economy or whether they should let the market forces determine the developmental agenda, a survey of the literature would find that those countries that have adopted a mixture of the state and market approach have done well for themselves whereas those that have relied on a single approach of either pursuing a centrally planned economy or a completely market oriented economy have somehow failed to achieve the developmental goals set for themselves (Martinussen, 1997). The reasons for this would be discussed in detail later in this paper. Suffice to say that many countries that followed the Bretton Woods dictated model of development that emphasized privatisation, deregulation and opening up of their markets for foreign investment had to face the effects of such policies in the form of increased indebtedness to western donors, collapse of the public sector and erosion of living standards of the people in general (Edwards & Gaventa, 2001). Prominent examples of these countries would be Argentina, Thailand, Indonesia and more recently Greece (McNally, 1998). These countries have had to bear the brunt of sovereign debt crises and fall in the values of their local currencies as well as deterioration of living standards for the common people. Though there are other reasons for these crises (including crony capitalism – Thailand - and outright financial speculation – Greece) the fact remains that even other countries that have followed the dictates of the Bretton Woods institutions or the “Washington Consensus” had to endure economic and social misery (Philips, 2008). When one contrasts this with the examples and experiences of countries like China and India that have allowed market economies to exist under conditions of strict supervision by the state, we find that the performance of these economies has been relatively better as compared to the examples taken in the previous paragraph (Kothari & Minogue, 2002). The point here is that this paper takes the position that an economy that is market based but at the same time the state plays a guiding role as well as an interventionist role is something that should be the paradigm that needs to be adopted. The fact of the matter is that the state is needed in matters of social issues where the market does not always deliver optimal results (Leys, 1996). When considered in the light of the fact that many of the developing countries had high rates of poverty and economic deprivation, the state is indeed needed to play a prominent role in the economy. Given the fact that the ongoing global economic crisis has laid bare the faults in the primacy of the markets hypothesis, it is no wonder that many economists are now questioning whether the “Washington Consensus” is valid as a theoretical construct and a practical solution (Lapavistas & Pincus 2006). In the developing world at least, the state retains its importance because of the sheer scale of the social problems that cannot be tackled by market forces alone. It is for this reason that many developing countries have been hesitant to allow the market to take over their economies (Hickey & Mohan, 2004). Talking about the ongoing global economic crisis, it is clear that the gospel of efficient markets is no longer considered a truism. Ever since the “Lehmann Shock” of 2008 and the subsequent global economic meltdown, it has become amply clear that markets do not work without some support of outside support and this is where the state has a role to play (Philips, 2008). When one considers the fact that it took massive governmental intervention to prop up the banks and other financial institutions not to mention the auto majors, it becomes clear that the primacy of the market alone is no longer accepted and without the governmental interventions, it is clear that the economies of many countries would have collapsed. Of course, there is also the theory that lack of oversight, adequate regulation and excessive risk taking that was left unchecked contributed to the global economic crisis. All these causes of failure point to the need for the state to be relevant in the economic discourse and not wash its hands off the economy. If the governments of the world had not acted in a coordinated and effective manner, it is clear that the global economy would have gone into a tailspin. And the lack of regulation and oversight was mainly due to the prevalence of Thatcherism and Reagonomics which followed a path of progressively withdrawing from the economic realm. Hence, it is by no means clear that market forces alone can occupy the commanding heights of the economy and the state is needed for regulatory oversight and supervision (Power, 2003). The “invisible hand” of the markets needs to be “steadied” whenever it falters. The other aspect of the state versus market debate is over allocation of resources for social issues. The overriding principle of the neo-liberal proponents is to attack the welfare economics and insist that the state has no role to play in social issues like education, healthcare and provision of safety nets like social security and pension funds. And this is where the dynamic processes of capitalism have produced faultless victims who have lost their jobs and their livelihoods threatened (Escobar, 1995). Though the intentions of the neoliberals and the Chicago school of economists (led by the late Milton Friedman) in pursuing aggressive market based solutions might not have been to deprive the masses of their incomes and pensions, the effect of such policies are there for all to see (Avdeychik, 2009). Research after research has proved that the income gap between the rich and the poor has widened significantly since the 1970’s (when these economists and their policies first came to the scene), accelerated during the 1980’s and 1990’s and peaked at the time of the Great Recession which resulted in the loss of millions of jobs, particularly those of the blue collar variety. Hence, the disastrous effects of neoliberalism are being felt in the West (from where they first originated) (Harvey, 2005). Neoliberals argue that markets are the best allocators of resources and hence they must be left free from governmental intervention. And this view has gained ground ever since the demise of the erstwhile USSR and the end of the cold war. Once the Soviet Union collapsed, the market economists seemed to have won the day because the centrally planned economies of the Soviet Union and its allies were found to be cesspools of inefficiency (Harvey, 2005). And with the advent of globalization and integration of the world economy, it seemed inevitable that Western style market economies with democratic political institutions would be the norm and the standard for other countries to follow. However, there have been many critics of this neoliberal approach who argue that “unfettered capitalism” is as bad as state sponsored communism and the only difference between the two is that instead of operating under the guise of democracy, communism follows an authoritarian approach. Further, the prognosis of “one market under god” meant that the one size fits all approach of markets as the arbiters of all economic problems took centre stage with the result that there was too much of risk taking and not adequate regulation and supervision (Frank, 2009). Given the fact that markets fail because of asymmetries of information and the very fallible human nature, we need alternatives to global capitalism. The emerging fields of neuroeconomics that concentrates on the human motivations for economic actions and does not assume perfect rationality is a pointer to the direction that economics ought to take in the future. Coupled with the fact that the conditions of perfect competition that underpin neoliberal thought are often found to be unrealizable in practice, the failures of a completely market driven approach become evident (Barratt, 2005). Returning to the developing countries that were lectured upon to adopt market reforms and privatize, many of these countries found to their dismay that opening up their markets to foreign investment, allowing global capital into their economies or the so-called “foreign finance fetish” meant that they were vulnerable to the vicissitudes of the global financial markets and the “electronic herd” which could literally destroy their economies at the click of a button (Willis, 2005). This was the case with the Asian Economic Crisis in the late 1990’s and the debt crisis in Argentina (in the early decade of the 21st century). These crises were wake up calls to other developing countries on blindly following the dictates of the Bretton Woods Institutions and adopting the “Washington Consensus” as the dominant paradigm for economic development. An example of a country that has managed to avoid the financial shocks wrought about by unregulated global capital has been India that has weathered many a economic and financial storms mainly due to the cautious approach that it followed when opening up its economy (Reddy, 2010). Though many economists criticize government incompetence and corruption rather than market failures as the reason why developing countries often seem to suffer economic crises, the experiences of countries like Thailand, Indonesia and Argentina have convinced Indian policy makers about the need to go slow and not make the state withdraw completely from the economic realm. This is indeed indicative of the emerging trend towards making the state recapture some of the commanding heights from which it has retreated over the last few decades. (Lapavistas & Pincus, 2006) The point that this paper has developed as a line of argument is that the state matters and that issues of governance and correcting market failures remain at the heart of the debate over whether the state should take primacy or whether it should leave the market to do its work. Since governance is what the state does, there must be a role for the state in these matters from which it should never withdraw. The intention of this paper is not deride the market for everything and the numerous examples cited in this paper show how the state and the market can work in tandem to resolve social and economic issues. The point here is that markets fail for a variety of reasons (some of which were already discussed) and one of them is the issue of flawed incentives. Given the rather knotty aspect of incentives and what is the optimal level, the state can have a role to play in guiding the markets towards optimality by ensuring that incentives are proper and reasonable as well as allocating resources to other sectors (like education and healthcare as well as pensions and safety nets) which the markets sometimes fail to do. This is crux of the debate over whether the state can solve social issues or the market can be left free to solve them in the market logic that it applies to other matters of economic policy. The failure of the Soviet Union was trumpeted as a victory for the market to allocate resources to social issues as well. Conversely, the ongoing global economic crisis has turned the wheel around and is being seen as a repudiation of the market philosophy (Philips, 2008). However, the fact that many countries that have emerged from communism or socialism (like Russia and China – communism and India –socialism) have not been quick to revert to their earlier economic systems and have reaffirmed their faith in the market philosophy means that the role of the market is not being written off yet (Garnaut, 2010). This is indicative of the fact that many policymakers around the world recognize the need for a balanced approach and as the example of China shows, top down policymaking with a committed bureaucracy (at least till the middle) is crucial to make markets work. The reason for mentioning the bureaucracy is because many neoliberals view it as the essential stumbling block to growth and the main reason why the role of the state has to be curtailed (Garnaut, 2010). Ironically, India which has resisted global capital for long suffers from a lethargic and corrupt bureaucracy that has hindered the pace of development. Hence, the conclusion here is that while economies that have a mixture of the state and market have not drowned themselves during the recent economic crisis, the fact remains that they are barely staying afloat which can be seen as a validation for the need to rein in the state as well (Williams & Chrisman, 1994). Before concluding the paper, it would be in the fitness of things to restate some of the key points made so far. One, the markets cannot be the final arbiter of economic and social issues and given the myriad reasons why they fail, governments have a role to play in intervening to correct market failures. Two, the retreat of the state from the commanding heights of the economy ought to be halted or slowed down and especially to solve the social issues like provision of education and access to healthcare as well as maintaining safety nets, the state has a role to play. Third, the ongoing global economic crisis has proved that markets alone or for that matter the state alone cannot solve all problems on their own and hence they need to work in tandem to achieve optimal solutions. Finally, the emerging fields in economics like the ones that emerged during the renaissance offer a fresh look at the unsatisfactory state of humankind (in the same way that such thinking came to the fore at that time) and therein lies hope for humanity. To quote a famous poet, “Out of generous dreams come beneficial realities. Utopia is the principle of all progress, and the essay into a better future.” (Anatole France (cited in Fuz, 1952)).Hence, what we dream now can become a reality tomorrow. References 1. 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Development Policy in the Twenty-First Century: Beyond the Post-Washington Consensus. London: Routledge. 12. Harvey, D. (2005) A Brief History of Neoliberalism. Oxford University Press. 13. Hickey, S. and Mohan, G. (eds.) (2004) Participation – From Tyranny to Transformation? London: Zed 14. Martinussen, J. (1997) Society, State and Market, Zed 15. Williams, P. and Chrisman, L. (eds.) (1994) Colonial Discourse and Post-Colonial Theory – A Reader. New York: Columbia University Press. 16. Avdeychik, V. (2009) "Pensions and Derivatives: The Post-2007 Financial Crisis and Its Regulatory Impact on Pensions Utilization of Derivatives." JOURNAL OF PENSION BENEFITS: 19-22. 17. Garnaut, R. (2010) Chinas New Place in a World of Crisis. Canberra: ANU Press, 2010. 18. McNally, D. "Globalization on Trial: Crisis and Class Struggle in East Asia." Monthly Review (1998): 1-5. 19. Philips, K. (2008). Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. New York: Penguin 20. Fuz, J.K. (1952), Welfare Economics in English Utopias from Francis Bacon to Adam Smith, Martinius Nijhoff, The Hague, p. 1. 21. Frank, T. (2009), One Market under God. New York: Routledge. 22. Reddy, Y.V. (2010) India and the Global Financial Crisis. New Delhi: Penguin. Read More