Monday, May 18, 2009

Big Government and development

William Easterly writes that "Development doesn't require big government", and he is as wrong as his ideological opposites who claim the supremacy of the "big government". The likes of Prof Easterly emphasise the importance of the market over Government in pulling nations out of poverty. They argue that development can be achieved by promoting entrepreneurs and freeing the space for innovators, and unleashing the enormous creative potential of poor people.

It is plain misleading to attribute the "homegrown success in Botswana, the East Asian tigers, India, Chile, Turkey and China" as victory of the market-led development strategy. Far from it, the respective governments played aggressively interventionist roles in both proactively allocating resources ("picking winners", to use the much abused phrase), across sectors and classes of peoples, and creating the opportunities that enabled the market mechanism to succeed. Development comes neither from exclusively following either state-planned investment nor from government vacating space for the market forces to play itself out.

For a start, let us take Prof Easterly's example of entrepreneurs. Entrepreneurs require access to capital, technology and skills, both for himself and his labour, apart from an enabling legal framework that can help enforce contractual obligations in his commercial transactions. All these are absent or at best have marginal presence in many of the least developed nations.

It is now universally accepted that governments should provide rule of law. Over and above that, examples from across history - the US, Europe and more recently Japan and Asia-Pacific - show the critical role played by governments in directing capital, catalysing or developing and sharing technology, and supplying skilled labour and professionals. In fact, there are no known examples where the market has played the dominant role in the provision of all these ingredients during the inital stages of development.

From the supply side, where are the market and its participants in these least developed economies? In all these economies, the market is in its incipient stage, limited in its depth and breadth. In fact, it is inconceivable that the private sector can provide these linkages in any of these developing nations, for any time in the near future.

In this context, it is also important to subject to closer scrutiny the romanticised notions of the poor and ordinary people and their "peculiar aptitudes for solving the problems of their own time and place". Yes, everyone has entrepreneurial drive and it is important that we have in place policies that promote them. But mere promotion, without having in place the other ingredients, will, at best open up and diversify the opportunities for survival, as the example of Self Help Groups (SHGs) in India have shown. The same example also gives ample evidence of the limitations of such strategies, as discussed here and here.

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