State and Markets

7/29/2019 State and Markets

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State Controls, Markets and

Washington Consensus


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States, Markets, and the GoodSociety

Milton Friedman: there are only twoways to coordinate the economic

activities of millions. One is central

planningby the government; the otherdepends on the voluntary cooperation of

individualsthe techniques of the

marketplace.

Key question: what balance betweenstates and markets (political economy)

most enhances peoples capability and

contributes to the good society?


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Market systems Market system = an economy in which production for

profit is intended for and coordinated through private

exchanges between buyers and sellers Productive assets are privately owned and employed to

earn profits for their owners

Production is geared to produce commodities, goods forsale in the market

Prices are set through market forces, supply and demand

Over time, the market system has become moreextensive (involving more international transactions)and more intensive (involving more social transactions)

States determine how extensive markets are Taxation on imports

Regulations on foreign investment

Controls on currency

Trade treaties/international organizations

States determine how intensive markets are Restrictions on what is/can be for sale in the market


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States and Markets Charles Lindblom: Like the statethe market system is a

method of controlling and coordinating peoples behavior.

Market systems require states and cannot exist without them

States make market system possible, making ground rules

that permit the system to work

States create common currency, facilitate trade and exchange,

enforce contracts, supply public goods (transportation, police,

courts, etc.), which markets cannot provide

Visible hand of state supplements invisible hand of market

Market freedom requires state compulsion

Markets only as good as rules states make to support them

Political economy = balance between political and marketforces, critical to creating conditions for the good society

As with political institutions, it is important to get economic

institutions right


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Economic Planning Central Planning Vs Market Economy

Central Planning has been criticized a lot due to

inherent weaknesses and inefficiencies in political and

administrative (bureaucratic) structures.

Market inefficiencies compel states to intervene to

safeguard the well being of the masses.

Planning then and now

Indicative/Directional Planning (Process Approach)

China (National Development and Reform

Commission)

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Advantages of Market

Systems Extraordinarily dynamic

Promote new products, more efficientproduction methods and technologies

Competition and profits encouragesinnovation

Enormously productive Leading to rising incomes and living

standards

Enhance prospects of democracy and

political rights; does not ensuredemocracy and political freedom Market systems separate economic from

political power (potentially countervailing

tendencies)


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Dark Side of Market Systems Highly volatile

As we know all too well at present, susceptible to periods of boom

and bust

Volatility can be socially destructive

Unemployment, wasted resources, reduced investment, reduced

incentives for re-training

Can lead to sense of powerlessness, insecurity

Generate extraordinary inequality

Depresses earnings of those without valued skills; undermines

bargaining power of unskilled workers; market position of low skill

workers declines

Expands power of those who control scarce resources (skills,

capital); market position of those with market power increases

Create harmful spillover effects (externalized costs)

Markets encourage participants to adopt a narrow perception of

interests; encourage participants to avoid the costs of their

decisions and to pass them on to others, to the detriment of

society; examples: pollution, global warming/climate change


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Shifting Balance Market systems require rules enforced by the state to work

Effective rules reduce uncertainty that contracts will be honored, money will retainvalue, consumers wont be cheated

States also steer economies toward certain goals States intervene in the market

Counteract disadvantages: welfare systems, pollution controls, even out swingsin business cycle, etc.

Degree to which states should intervene in the marketplace a sourceof conflict in most societies

Boundary between what should be left to market and what should be determinedby states shifts in response to political pressure, and has shifted over time inresponse to changing circumstances

Post-WWII, state intervention (mixed economies) considered appropriate indeveloped and developing countries

By 1970s, recession created grounds for new groups (in particular, the businesscommunity) to challenge mixed economies; gave rise to market advocates (e.g.,Reagan, Thatcher) who criticized the state for spending, taxes, and regulation

Whereas advocates of mixed economies pointed to market failures, free-marketeers pointed to political failures Growth slowed because welfare state undermined work ethic

Regulations limited entrepreneurialism

Taxes diverted too much income

Public enterprises did not perform


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Globalization Globalization = increasing flow of money

(investment), people, skills, ideas, and goods

(trade) across borders (market extension) While there has always been trade, investment, and

cultural exchange across borders, there is aqualitative difference today in the volume ofinternational exchange, breadth/depth ofconnections/transformations, and speed

In part, result of technological change (transportation,communications)

Also promoted by MNCs, governments, internationalagencies

Washington consensus (neoliberalism) Balance budgets, cut spending, open markets to

foreign trade/investments, privatization of industries

Supported by large MNCs, US, and World Bank/IMF Made economic assistance dependent on adoption of

neoliberal policies


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Neoliberalism Prescription (to promote efficiency, productivity, growth, rising

incomes)

Too much state regulation

Control inflation, limit debt, balance budgets

Rely on private enterprise

Free trade (reduce tariffs, barriers)

Race to the top (countries integrate themselves into global economy)

Neoliberalisms critics

Leads to increasing inequality between and within countries

Economic crises

Environmental destruction

Rationale for promoting interests of powerful individuals and corporations atexpense of poor people and disadvantaged states

Race to the bottom (countries compete to have lowest wages, taxes, fewestregulations to attract foreign investors)

Empirical record of neoliberalism Uneven at best

Chile a success story; most are not (e.g. Haiti)

Many successful countries diverged from model (e.g., India, China, S. Korea,Taiwan)

Even World Bank now concedes one-size-all prescription of balanced budgets,open markets, and privatization inadequate


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Effects of Globalization On developing countries

Rudra finds greater integration brought more job opportunities for

workers in countries at all levels of development; workers in lessdeveloped countries at highest levels of economic developmentbenefited most

Effects of globalization on workers in less developed countriesconditional upon countrys level of economic development andeconomic/political institutions

Consequences of globalization varies for developed countriesas well Exaggerated differences among them in terms of government

spending as proportion of GDP, union density rates, provision ofwelfare

Various outcomes a function of different institutions andgoverning coalitions

Some countries have political capacity to take advantage ofglobalization, others failed to develop it

Only countries that have supportive institutions and governingcoalitions can take advantage of it and ameliorate its effects


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State Intervention: Fiscal Policy

Fiscal policy manipulation of budgets; overall

revenues and expenditures Budget deficits (spending more than revenues) enables

states to increase money supply, demand for goods,

business investment, and reduce unemployment

Budget surplus (spending less than revenues) enables

state to reduce money supply, cool economy, and reduceinflation

States vary greatly in how much they tax and how much

they spend

States that tax more (capture larger proportion of GDP)

have more influence over how national income is used and

distributed in society; states that tax less have less

influence over how income is used and who receives it


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Monetary policy Monetary policy manipulating rates of

interest, cost of borrowing money High interest rates discourage borrowing and

spending (used to counteract inflation)

Low interest rates encourage borrowing and

spending (used to fight recession)

Central banks issue currency and manage value

in foreign exchange

States vary in influence/control over central bank

Some are insulated from political influence (e.g., U.S.)

Some are state controlled (e.g., China, S. Korea in

1970s)


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Regulatory policy Regulatory policy explicit rules of

behavior that firms must follow (managecompetition, set industry standards, require

certain business practices)

States vary in how much they regulate firms to

direct behavior Standard measure: number of days it takes to

start a new business

Another measure is labor relations (rules

regarding relations between owners andworkers)

U.S. one of the least regulated in the world;

American firms have significant power in

deciding how to manage their workforce


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Nationalization

Nationalization state-owned and

controlled public enterprises

Enables states to control strategic assets,

and to inject social criteria into economy

Examples: Mexico and oil industry (PEMEX);Chinas public enterprises (jobs/services)

States vary in degree of nationalization

Socialist states own and control all means of

production (e.g., Cuba, N.Korea) More free-market systems have few public

enterprises (e.g., U.S. and Chile)


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States and Markets Fiscal policy, monetary policy, regulations, and public enterprises

only some of the ways states influence/intervene in the economy

In Japan, the state once promoted mergers and cooperation among firmsto create firms large, efficient enough to compete internationally

In Germany, the state has brokered agreements among union and

employer organizations

Each country works out a balance between states and markets

through political struggle

In general, where markets play a greater role

States do not redirect as much of the countrys income through its budget

States do not exert much influence on central banks

State regulations are not intrusive

Public enterprises are small

When states play a more powerful role in determining who gets what

States redirect more of the countrys income through taxes and spending

States exert greater influence over central banks

States regulations are pervasive and directive

Public enterprises control economys strategic industries


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Markets and Capability Market-based economies may improve capabilities

a bit, but not consistently so Democracy may be weak among state-led economies, but

not necessarily strong among market-led ones

Countries with market-led systems are not necessarily the

most literate

Conditioned by intervening variables (religious and culturalnorms)

Countries with market-led systems are no safer than those

with state-led economies

Market-based systems do appear to correlate with life

expectancy, but with significant exceptions

Markets are not a panacea; must be supplemented

to increase capabilities

Challenge: to develop a balance between states and markets that

promotes best qualities of markets (innovation, productivity), whileavoiding worst effects (instability, inequality)


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What is the Washington Consensus?

The concept and name of the Washington Consensuswere first presented in 1989 by John Williamson, aneconomist from an economic think-tank inWashington, D.C.

The term Washington Consensus was used tosummarize the commonly shared themes among policyadvice by Washington-based institutions at the timesuch as the International Monetary Fund, World Bank,and the U.S. Treasury Department

It was a set of Structural Adjustment Policies(SAPs)/economic policies which countries must follow inorder to qualify for new World Bank and IMF loans andhelp them make debt repayments on the older debtsowed to commercial banks, governments and the WorldBank

Wh h W hi


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Why was the Washington

Consensus developed?

The Washington Consensus wasbelieved to be necessary for the

recovery of Latin America from the

financial crisis of the 1980s.


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Augmented WashingtonConsensus

the previous 10 items, plus:

1. Fiscal discipline

2. Reorientation of public

expenditures3. Tax reform

4. Financial liberalization

5. Unified and competitive

exchange rates

6. Trade liberalization

7. Openness to DFI

8. Privatization

9. Deregulation

10.Secure Property Rights

11. Corporate governance

12. Anti-corruption

13. Flexible labor markets14. WTO agreements

15. Financial codes and standards

16. Prudent capital-account

opening

17. Non-intermediate exchange rate

regimes

18. Independent central

banks/inflation targeting

19. Social safety nets

20. Targeted poverty reduction

Original Washington Consensus

There was once a Washington Consensus .


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What are the elements of the

Washington Consensus?

There were 10 broad sets ofrecommendations

1. Fiscal policy discipline (This often result in deepcuts in programs like education, health and social

care).2. Redirection of public spending from

indiscriminate subsidies toward broad-basedprovision of key pro-growth, pro-poor servicessuch as primary education, primary health care

and infrastructure investment. (Many IMF andWorld Bank loans call for the imposition of userfees charges for govt-provided services likeschools, health clinics and clean drinking water.For very poor people, even modest charges mayresult in the denial of these services).


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Washington Consensus? Cont.

3. Tax reform broadening the tax base andadopting marginal tax rates

4. Interest rates that are market determinedand positive (but moderate ) in real terms

(Higher interest rates exert a recessionaryeffect on national incomes, leading tohigher rates of joblessness. Smallbusinesses find it more difficult to gain

access to affordable credit, and often areunable to survive).

5. Competitive exchange rates


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Washington Consensus? Cont.6. Trade liberalization liberalization of imports,

with particular emphasis on elimination of

quantitative restrictions (licensing, etc.); any trade

protection to be provided by low and relatively

uniform tariffs (the elimination of tariff protectionfor industries in developing countries often leads

to mass layoffs. Eg. In Mozambique the IMF and

World Bank ordered the removal of an export tax

on cashew nuts. The result:10,000 adults, mostly

women, lost their jobs in cashew nut-processing

factories. Most of the processing work shifted to

India, where child labourers shell the nuts at

home).


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7. Liberalization of inward foreign directinvestment

8. Privatization of state enterprises (SAPscall for the sell off of government-owned

enterprises to private owners, often

foreign investors. Privatization is typically

associated with layoffs and pay cuts forworkers in the privatized enterprises.


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9. Deregulation abolition ofregulations that impede market entry

or restrict competition, except for

those justified on safety,environmental and consumer

protection grounds, and prudent

oversight of financial institutions10. Legal security for property rights

The Santiago Consensus


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The Santiago Consensus1. Development must be market-based, but there are large market

failures that cannot be ignored.

2. Government should not be in the business of direct production,

3. But, there is a broad, electric role for government in

Providing a stable macro environment

Infrastructure, though in few sectors than thought necessary in thepast public health

Education and training

Technology transfer (and, for advanced LDCs, the beginnings oforiginal R&D)

Ensuring environmentally sustainable development, ecologicalprotection providing export incentives.

Helping the private sector to overcome coordination failures

Ensuring shared growth acting to reduce poverty and inequalityand ensure that as the economy grows, the poor sharesubstantially in the benefits

Continued if more moderate regulation and support in financialsectors

Provision of fundamental public goods, such as legal structure,including the protection of property rights


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Conclusion

The Washington Consensus took a one size fits allapproach and failed to look at economic and

cultural differences between countries which has

not allowed for industrial deepening and structural

transformation of many developing countries.Adjustment with a Human Face tried to address

this by incorporating basic human concerns and

seeing vulnerable groups as central objectives in

economic growth and development. Without public

action directed at the poorest and most vulnerable,

there is no guarantee that economic growths and

improvements in social indicators and poverty will

automatically decline.

State and Markets

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