1 Udviklingsøkonomi grundfag Lecture 26: The role of the state Based on Irma Adelman’s chapter 2 in Finn Tarp (ed) Introduction Why is it important to discuss the role of the state?

2 3 phases in thinking on the role of the state State as prime mover phase (WW2-1979) Government as a problem phase ( ) Government rehabilitated phase (1996-?)

3 The role of government in economic history (Adelman and Morris 1988) Protectionism in Great Britain and the US during their industrialization Governments had an active technology policy (import/export prohibition on key technicians) Government financing of railways, canals, and other transport Follower countries on the continent also actively used public policy to catch up Interventions and results depended on the political structure (feudal or modern states)

4 What was the role of the state in the post war period (Adelman and Morris 1967) -at the time, there were three groups of countries: 1.Low growth countries (Africa, parts of Northern Africa) 2.Middle group 3.Relatively better-developed countries (Latinamerica, some countries in the Middle East and a few in East Asia)

5 Low growth countries Subsistence agricultural economies Big tribal influence Compares to medieval Europe Role of the state (ideally) –Social development –Create modern institutions –Promote better agricultural technology –Export orientation –Agricultural commercialization –Invest in education and infrastructure

6 Middle group Had begun modern economic growth already in the 1960s Social tensions and political intability The role of the State: –Create conditions for industrialization to begin –Incentives and policy must promote (private sector) industrialization –Invest in transport og energy sectors –Increase savings, promote private investments

7 The advanced group Long period of national sovereignty Good level of education (at least for some people…) Some degree of industrialisation already in the 1960s Adelman distinguished between governments with and without political commitment to development (”developmental state” in modern jargon) Role of the state: –Promote industrialisation –Active industrial policy. Policy shifts necessary to create and develop dynamic comparative advantages –Improve the productivity of agriculture

8 Developed countries When institutions are in place, and the private sector saves sufficiently, the role of the state can be reduced The role of the state is now: –Stable macroeconomy –Social security net –Interventions where there are negative externaliteter (for example environment)

9 Important factors for development – economic history and development experience teach us: 1.Institutions that can promote modern capitalist development are necessary. The state often creates these institutions (courts, money, standard weight and measurement units, market information, financial institutions….) 2.Promote technical progress and export orientation in industry and agriculture. 3.Investment is important. Both overall investment rate and investment in human capital, transport and industry Education (for all) Transport (also to promote agriculture) 4.Trade policy is important. Adelman argues for export orientation (better than a neutral trade regime)

10 Important factors for development (continued) Economic policy matters and ”makes a difference” The role of the government changes dynamically: flexibility is important Concludes that the neo-liberal Washington consensus would have slowed down the Asian miracle

11...but, The government needs autonomy, capacity and credibility (possibility for a regime shift) A strong and interventionist state that pursues the wrong targets is worse than a neutral state The State needs autonomy from domestic and foreign pressures –problem with free capital movements that monetary autonomy disappears

12 Postscript: checklist for proposed interventions Before you propose an intervention, consider if the government has –the budget to do it? –The capacity to do it? –The information to do it? –The willingness and incentives to do it?