Growth & The Role of the State LT Jeff Betz Comparative Economics Professor Looney

Questions  Which is a better indicator of growth  Economic or Political Freedom  How should the role of the state/International Institutions evolve due to globalization  Case Studies: India & China  Which is a better indicator of growth  Economic or Political Freedom  How should the role of the state/International Institutions evolve due to globalization  Case Studies: India & China

Objectives  Determine what are contributing factors to growth  How to properly manage those factors in global economy  Role of government  Examine specific cases for evidence  Determine what are contributing factors to growth  How to properly manage those factors in global economy  Role of government  Examine specific cases for evidence

Theoretical Approaches  Neo-Classical Theory: individuals and firms make rational decisions to maximize utility and profits, these actions drive the economy through the law of supply and demand  Neo-Liberal Theory: Extension of Neo-Classical where rational actions should be free from any constraints. The market will maintain itself and any government interference will only hamper growth  Neo-Structural Theory: Stucturalism with elements of Neo-Liberalism. Some government intervention is required to correct market flaws and protect the public.  Neo-Classical Theory: individuals and firms make rational decisions to maximize utility and profits, these actions drive the economy through the law of supply and demand  Neo-Liberal Theory: Extension of Neo-Classical where rational actions should be free from any constraints. The market will maintain itself and any government interference will only hamper growth  Neo-Structural Theory: Stucturalism with elements of Neo-Liberalism. Some government intervention is required to correct market flaws and protect the public.

Economic vs. Political Freedom  Which is better determinant of growth?  Robert Barrow - Economic Freedom  Joseph Siegle - Political Freedom  Robert Looney - Neo-Structural elements are required  Which is better determinant of growth?  Robert Barrow - Economic Freedom  Joseph Siegle - Political Freedom  Robert Looney - Neo-Structural elements are required

Robert Barro  Examined issue from both sides  Effects of democracy on growth “moderately negative”  Led to his theory concerning “non-linear” relationship between democracy and growth  Effects of growth on democracy significantly positive  Concludes that West should export economic system over political system, because economic freedom with lead to growth, which will then lead to democracy  Examined issue from both sides  Effects of democracy on growth “moderately negative”  Led to his theory concerning “non-linear” relationship between democracy and growth  Effects of growth on democracy significantly positive  Concludes that West should export economic system over political system, because economic freedom with lead to growth, which will then lead to democracy

Joseph Siegle  Rejects “development first” theory supported by Barro  Poor democracies grow faster than poor autocracies because they are more stable  Throws out cases like China and Singapore as the exception rather than the rule  Rejects “development first” theory supported by Barro  Poor democracies grow faster than poor autocracies because they are more stable  Throws out cases like China and Singapore as the exception rather than the rule

And the Winner Is…  Economic freedoms  Siegle overlooks the importance of corruption and rule of law, which is factored into Barro’s regressions (considered elements of economic freedom)  Countries that have scored low on EFW in corruption are growing faster - regardless of democracy or autocracy  Empirical data suggests that economic freedoms alone should be enough for growth  Economic freedoms  Siegle overlooks the importance of corruption and rule of law, which is factored into Barro’s regressions (considered elements of economic freedom)  Countries that have scored low on EFW in corruption are growing faster - regardless of democracy or autocracy  Empirical data suggests that economic freedoms alone should be enough for growth HOWEVER …

Robert Looney  Example of Iraq  100% economic freedom for reconstruction - that has failed miserably  Poorly implemented, more government control needed to correct the flaws in the market (Neo-Structural)  Illustrates that economic freedom alone is not enough - stability is required  Example of Iraq  100% economic freedom for reconstruction - that has failed miserably  Poorly implemented, more government control needed to correct the flaws in the market (Neo-Structural)  Illustrates that economic freedom alone is not enough - stability is required

Role of the State  Established economic freedoms imposed in stable corruption free environment most effect path to growth with proper involvement of the state in economy  How do we define proper?  Neo-Liberal vs. Neo-Structural  Washington Consensus vs. Post-WC  Vito Tanzi vs. Josephy Stiglitz  Established economic freedoms imposed in stable corruption free environment most effect path to growth with proper involvement of the state in economy  How do we define proper?  Neo-Liberal vs. Neo-Structural  Washington Consensus vs. Post-WC  Vito Tanzi vs. Josephy Stiglitz

Vito Tanzi  Pro-Washington Consensus  Too much state involvement  Economic decisions for political reasons  Loss of efficiency and growth  Too much govt. spending = too much taxation, hurts economy  Govt spending can be reduced w/o drop in standard of living  Current spending policy and “fiscal termites” on collision course  Pro-Washington Consensus  Too much state involvement  Economic decisions for political reasons  Loss of efficiency and growth  Too much govt. spending = too much taxation, hurts economy  Govt spending can be reduced w/o drop in standard of living  Current spending policy and “fiscal termites” on collision course

Joseph Stiglitz  Post Washington Consensus  WC is incomplete and improperly implemented  Used as “cure-all” w/o regard for particular condition of a state  Failure of WC in East Asia Crisis  Too much focus on inflation and deficits not on macro-economic stability  Govt must intervene in economy to compliment it and make it healthier  Post Washington Consensus  WC is incomplete and improperly implemented  Used as “cure-all” w/o regard for particular condition of a state  Failure of WC in East Asia Crisis  Too much focus on inflation and deficits not on macro-economic stability  Govt must intervene in economy to compliment it and make it healthier

Conlcusions  Both agree state should serve a strong regulatory function  Both agree that state is too large and needs to focus on “core responsibilities”  Tanzi describes very narrowly  Stiglitz includes social elements such as environment and education  This is where they diverge  Neither addresses issues of global governance  Both agree state should serve a strong regulatory function  Both agree that state is too large and needs to focus on “core responsibilities”  Tanzi describes very narrowly  Stiglitz includes social elements such as environment and education  This is where they diverge  Neither addresses issues of global governance

Kaushik Basu  Expands upon Stiglitz  Discusses issues of global governance  Assumption of Rationality  Rethinking global democracy  Expands upon Stiglitz  Discusses issues of global governance  Assumption of Rationality  Rethinking global democracy

Assumption of Rationality  False assumption that is in-grained into Western economic thought  Moral code against physical theft  But what if someone is outwitted  No moral code against being “tricked” out of property  No safeguards against this has led to unfairness in global contracts and unwillingess of state’s to do business because of this fear  False assumption that is in-grained into Western economic thought  Moral code against physical theft  But what if someone is outwitted  No moral code against being “tricked” out of property  No safeguards against this has led to unfairness in global contracts and unwillingess of state’s to do business because of this fear

Re-Thinking Global Democracy  IMF current arrangement  Countries who pay more, have more say  Widely seen as fair by the West  IMF current arrangement  Countries who pay more, have more say  Widely seen as fair by the West BUT… What if I said Bill Gates should get more votes in domestic politics because he pays more taxes?

Kaushik Basu  Argument highlights need for global governance  Standards in fair trade, environmental protection, etc.  Issues that effect all countries should be addressed globally  Would increase overall stability and welfare  Argument highlights need for global governance  Standards in fair trade, environmental protection, etc.  Issues that effect all countries should be addressed globally  Would increase overall stability and welfare

Case Studies  1st Question examined economic vs. political freedoms  2nd Question examined where boundary of state involvement should lie  3rd Question case study to bring all this theory to bear on reality  1st Question examined economic vs. political freedoms  2nd Question examined where boundary of state involvement should lie  3rd Question case study to bring all this theory to bear on reality

China vs. India  Autocracy vs. Democracy  Economic freedom vs. Political Freedom  So why has China grown faster  Economic Freedom  Heavy regulation to reduce corruption  Complimentary involvement of state in economy  Started on path to economic reform first and has more human capital  Autocracy vs. Democracy  Economic freedom vs. Political Freedom  So why has China grown faster  Economic Freedom  Heavy regulation to reduce corruption  Complimentary involvement of state in economy  Started on path to economic reform first and has more human capital

China vs. India  Why has India grown slower  Too much regulation  Too much government involvement in economy  Protectionism  Inconsistent economic policy due to politics  Has not invested in human capital  Education  If consistent reform is implemented constraints to India’s growth would be removed and already high growth rate would accelerate further  Why has India grown slower  Too much regulation  Too much government involvement in economy  Protectionism  Inconsistent economic policy due to politics  Has not invested in human capital  Education  If consistent reform is implemented constraints to India’s growth would be removed and already high growth rate would accelerate further

Questions?  Or that uneasy silence that follows oral presentations?