Government intervention should not be written off

Source:Global Times Published: 2017/7/3 21:33:39

Illustration: Peter C. Espina/GT

Economic development has always relied on both the market and the government, and both should play their necessary roles. I think we should establish efficient markets and competent government at the same time. Thus, an organic system can be created.

In 1970s and 1980s, the outside world generally believed that the slow development of economies in developing countries was probably caused by "inferior" market economy systems, in which distortions were created by too much government interference in the market. Thus, after the 1980s, all the development assistance, whether from developed countries or multilateral institutions, was conditional. That is, the recipients were told that they must have market reform before getting the aid.

Although the developed countries were well-intentioned, the countries that implemented such reforms generally ended up with various economic problems. Some recipient countries faced stagnation, crisis and even economic collapse. In fact, in the last two decades of the 20th century, the average economic growth speed in developing countries was slower than in the 1960s and 1970s, and crises occurred more regularly. Therefore, the so-called advanced model of the developed countries actually failed.

There are two reasons for this. First, there are some industries with very low efficiency that would collapse without government subsidies. Although these industries may be inefficient, a large number of people are employed in them, and if subsidies are canceled it leads to severe unemployment and political instability. Second, there are also many phenomena that may look like distortions to developed countries but that are not necessarily abnormal. This is related to countries' different development stages.

In short, the system used by developed countries is not necessarily suitable in developing countries, but the international community did not consider this several decades ago. In fact, we should clearly recognize that economic development is a process, in which economic competitiveness must be ensured at each stage of development and on top of that there needs to be capital accumulation, industry upgrading and technological innovation.

Second, the government should take measures when the market encounters failures. After the financial crisis in 2008, there was much reflection on the development plan implemented in the 1980s. The market and government are two important aspects of economic development. The market fundamentalism that says markets can solve everything is no longer an adequate or persuasive solution.

The market may sometimes lose its ability for self adjustment, especially during the process of economic transition and industrial upgrading. The market is not capable of managing resource allocation all by itself. In order to endow entrepreneurs with the best incentives, help from the government is undoubtedly needed.

Of course, we are also afraid of excessive government intervention resulting in distortion, so a competent government should always keep market effectiveness in mind. If this is not perfectly balanced, two trends will emerge. The first is government inaction. If all governmental intervention is treated as misbehavior, the government will be inactive. The other possibility is overreaction. If lacking in professional understanding of the current context, the government may take excessive or improper action in the market. I am convinced that proper consultation is vital for the government.

Industrial policy is also the same. The implementation of industrial policies in most of the countries has proven to be a failure, but we have not seen any country that has successfully caught up with other countries without implementing an industrial policy. Against this background, as scholars, our responsibility is to study the reasons and principles that led to both the failure and success of the industrial policy so that we can contribute to the further design of industrial policy.

Currently, there is an opinion that it is wrong for the government to take measures in the market, and that industrial policies should also be avoided. But if all government intervention is counter-productive, we would not have seen such achievements in industrial development and economic transformation over the years. When we see the potential for future improvement, we should also recognize previous successes.

The article is a translated version of a Phoenix Weekly article earlier this year, which was compiled based on an interview with Justin Lin Yifu, honorary dean of the National School of Development at Peking University.


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