Growth & The Role of the State

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

2. 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

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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 HOWEVER…

9. 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

10. 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

11. 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

12. 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

13. 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

14. Kaushik Basu • Expands upon Stiglitz • Discusses issues of global governance • Assumption of Rationality • Rethinking global democracy

15. 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

16. Re-Thinking Global Democracy • 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?

17. 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

18. 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

19. 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

20. 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

21. Questions? • Or that uneasy silence that follows oral presentations?