Published in the Telegraph-Journal 21st May 2013
A strong and activist state is a fundamental precondition for sustainable economic growth. That is not to say that the state is a sufficient condition, but it is a necessary condition. The converse of this fundamental precondition has been illustrated in every age and across geographies. State breakdown can result in civil war or interstate conflict but other, equally malignant versions can bring a slow economic degradation leading inevitably to political and social distress. There is a veritable library detailing the negative consequences for growth that spin off from the decline of the authority, influence or legitimacy of the state and its institutions.
But if the state and its institutions are so critical to the health of economies, why is so much energy being expended on reducing the scope and scale of government and its agencies at precisely the time when they are most needed? And what is the function of strong governance in the face of rapid and relentless change?
Commentators have emphasised that the reasons for the loss of confidence in the state has its roots in the rise of conservatism and libertarianism. Academics have additionally argued that the defining features of liberal and conservative thought have become blurred. Political parties increasingly have emphasized the importance of employment and economic growth in the face of global pressures while the role of ideology has declined.
An important implication of the resurgence of the conservatism in the late 20th century is not merely that its adherents energetically seek to repeal the fundamental laws of math and economics. This resurgence began with Ronald Reagan in the 1970s. Before he became president and in his first term as governor of California, Reagan froze government hiring, signalling his early commitment to reducing the size of government. Reagan’s move would hardly register on the scale of contemporary conservative and libertarian anti-government initiatives. But in the 1970s, political expectations had been conditioned by the optimism of Lyndon B. Johnson’s “Great Society”, which highlighted the role of government in promoting civil rights, public broadcasting, medical care, environmental protection and aid to education. Johnson’s “War on Poverty” was predicated on the pervasive role of government as the engine of economic growth.
The decline of Johnson’s liberal America has taken generations to take hold. But the weaknesses of liberal thought have always had their origins in history. There is a substantial literature linking good governance to economic growth where governance means institutions building, rule of law and democracy. The problem is that it is difficult to isolate the correlation between governance and growth. Some argue that good governance is the product of economic growth. If that is so, a key explanation for weak governance in some jurisdictions is that they cannot afford the political institutions that backstop strong governance. Others argue that it was good governance that was responsible for growth.
This leaves open the matter of how changes in governance are initiated. The corrosive forces of globalization — trade liberalization, demographic shifts, changing capital flows and rapidly changing technologies — are placing increasing stresses on political leaders to focus on near-term economic solutions, even as societies are at enormous risk as a consequence of global warming. To reduce expenditures now, in the midst of the turbulence of an ongoing crisis precipitated by free-market ideology and that has resulted in widespread unemployment and the destruction of up to a decade of growth, would inevitably prolong the crisis.
The challenges presented by globalization should have precipitated an evolution of political and economic institutions to create new mechanisms of governance. That we have failed to do so speaks volumes about the urgent need to match the political, social and economic challenges of the 21st century with their appropriate governance institutions.
The idea that economics is subject to forces that exist in social and historical context or even that history matters is a recent amendment to the conventional body of economic thought. Only in the past two decades have governance institutions been viewed as worthy of study by economic development historians. And only more recently have institutions emerged to give this field of study the prominence it deserves.
Photo courtesy Yoichi Okamoto.