Transcript Jeff Betz
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 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 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. 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 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 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 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… 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 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 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 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 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 Kaushik Basu 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 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? 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 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 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 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 Questions? Or that uneasy silence that follows oral presentations?