Download State Intervention – Growth and Development

State Intervention – Growth and Development
Brazil
The Brazilian government has established development programmes where active state intervention is seen
as crucial to achieving inclusive growth. In 2009 the former President Lula da Silva was quoted as saying:
“If the global financial crisis put any development model on trial, it was the free-market or neoliberal model,
which emphasizes a small state, deregulation, private ownership, and low taxes. Few developing countries
consider themselves to have fully adopted that model.”
Some elements of their programme include:
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Direct intervention in the currency markets to prevent the Brazilian Real from appreciating and
making Brazilian industries uncompetitive in world markets
Strong regulatory control of their banking system and controls on capital flows in and out of Brazil
A targeted industrial policy picking likely winners in emerging industries and subsidising them)
Conditional cash transfer policies as part of their welfare system
South Korea
South Korea is one of the most notable development success stories of recent times – it has made
impressive progress in escaping the middle income trap and becoming a highly successful member of the
OECD. Their development policies have moved away from the standard Washington Consensus model.
Ha Joon Chang from Cambridge University has written
extensively about the South Korean development model. Ha Joon
Chang is known as a heterodox economist who challenges
conventional views on policy for example in the areas of trade,
macro policy and industrial policies. His main argument is that the
South Korean development miracle was achieved under policies
that combined the market with a high degree of government
involvement. Indeed he argues that there is no such thing as
the free market and that most countries – including the USA and
the UK – relief heavily on active state intervention and industrial
policies when they were in their fast-development stages. From
South Korea’s experience he picks out some of the following
features:
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Extensive use of selective industrial policy – actively
looking for growth potential industries
Combining protectionism with export subsidies
especially in the early stages of growth
Tough regulations on foreign direct investment – moving
away from the free flow of capital
Active but selective use of state-owned enterprises
Bolivia
Ha Joon Chang
“Development used to be about the
transformation of the productive
structure and the capabilities that
support it, and the resulting
transformation of social structure
(e.g., oil-rich countries, Germany
after WWII)
Now, development is about poverty
reduction, provision of basic needs,
individual betterment, and the
sustenance of the existing
production structure”
Bolivia has chosen a development path that involves partial renationalization of businesses / industries that had formerly been
privatized. The aim is to keep in government hands the revenues
and profits from extracting natural resources. Nationalization has taken place in hydrocarbons, electricity
generation and transmission, telecommunications and smelting.
In 2012 for example, Bolivia nationalized two electricity distribution companies owned by Spanish utility
Iberdrola. The danger is that ad hoc nationalization of assets will frighten off future private sector foreign
investment because of the high risks of state appropriation of private wealth.
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Case Study: Argentina – State Interventionism and Protectionism to achieve Growth
Argentina - Growth, Inflation and Interest Rates since 2000
50
40
40
30
30
20
20
10
10
0
0
-10
-10
Per cent
50
-20
-20
98
99
00
Real GDP Growth
01
02
03
04
Consumer price inflation
05
06
07
08
09
10
11
12
Money market interest rates
Source: Reuters EcoWin
Argentinean President Cristina Fernandez leads a left-wing government prepared to use unorthodox policies
and frequent use of state-intervention to achieve economic and political goals. Argentina is a relatively
isolated country because of her politics – although it has been accepted into the Group of 20 leading
economies. Here are some examples of state intervention in Argentina – they represent an inward-looking
growth and development strategy.
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Argentina has a managed floating exchange rate policy designed to keep the peso competitive
There is high state spending on subsidies including energy supplies to households.
A conditional cash transfer programme for low-income households, similar to Brazil’s Bolsa
Familia aims to cut extreme poverty
The government nationalised private pension funds in 2008
The central bank funds state borrowing – for example there is the use of billions of dollars in
Central Bank reserves to service interest payments on the National Debt
In 2011, the government introduced currency controls to stop capital flight
The government decides on annual corn and wheat export quotas
In 2012, Argentina shocked European businesses and governments by seizing shares of the
Spanish firm Repsol that were held in the Argentine energy company YPF
A new law limits land sales to foreigners
A 15% tax on the use by Argentinean citizens of credit cards in foreign countries
Commercial banks are obliged by law to lend to local businesses at favourable rates with a
negative real interest rate
Argentina now requires importing businesses to sell something – anything – to foreigners worth as
much as what they buy from them.
The state is forcing Argentinean insurance companies to invest some of their funds in production
and infrastructure projects to boost sluggish economic growth.
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Resource Nationalism and Development
The Rise of Resource
Nationalism
“Resource nationalism has
become a contagion impacting
the mining & metals industry
across the globe. The industry
needs to become more engaged
in the analysis and management
of this risk which can place a
heavy burden on existing
operations and influence future
decisions on where to invest.”
Andy Miller, Global Tax Leader —
Mining & Metals, Ernst & Young
Examples of Resource
Nationalism in Action
South Africa (Coal and Platinum)
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50% windfall tax on
super profits
50% capital-gains tax on
sale of prospecting rights
Ghana (Diamond and Gold)
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35% company tax
10% windfall tax on
super-profits
5% royalties on output
Australia (Iron Ore, Nickel, Coal)
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Government plan to
implement a Mineral
Resource Rent Tax
(MRRT) on iron ore and
coal. Set to raise $8bn a
year.
Peru – Copper
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Use it or Lose it’ - With a
fall in commodity prices
companies tend to have
lower capital expenditure
which can lead to a
revoking of their license
Since the financial crisis of 2008 many countries have struggled to
maintain manageable budget deficits as their economies contract.
With revenue down from reduced economic activity and increasing
expenditure on items such as social welfare, governments around
the world are either tightening their belts or finding new sources of
revenue. In a number of producer nations, concerns over ‘Dutch
disease’ or two-speed economies have led to plans to tax
resource extraction more heavily, and provide tax relief or
subsidies to other sectors.
The Dutch Disease refers to the fact that once countries start to
export oil or other natural resources their exchange rate
appreciates making other exports uncompetitive and imports
cheaper. At the same time there is gravitation towards the natural
resource industry which drains other sectors of the economy,
including agriculture and traditional industries, as well as
increasing its reliance on imports.
Those that have natural endowments such as minerals and
other commodities have been continually assessing how they can
acquire more revenue from these resources. This could be done
by various means – taxes, royalties or full-scale stateownership – however they need to be vigilant in that significant
charges to overseas companies might inhibit foreign direct
investment (FDI) which is crucial to many countries that have
plentiful natural resources.
Furthermore the initial capital investment in mining, etc., is usually
substantial and governments have to be careful not to implement
drastic revenue-making means that curtail further investment. This
is especially common when you consider the volatility of
commodity prices and the cyclical nature of the mining sector.
In 2011 accountants Ernst & Young identified at least 25 countries
that increased or intended to increase government revenue by
taxing those companies involved in the commodity industry. On
average at recent commodity prices these increases have raised
the average effective tax rate by approximately 5%. According to
their research, nationalism places a large cost burden on mining
and metals companies and can influence the decision of where to
invest in a particular country.
Today Governments are searching for new ways to extract more
out of foreign-owned firms that are doing very well financially from
what lies beneath the soil. Those countries that are prepared to
implement higher rents and taxes on overseas mine companies
run the risk of the loss or the reduction in some long-term
investments. Although existing mines are not mobile the level of
extraction, reinvestment, and expansions are and the temptation
to divert resources to another country are highly plausible when
you consider the mobility of capital resources.
A lot of this depends on high commodity prices which encourage
the exploration of potential sources of commodities. However, with
lower prices and increasing government fiscal demands there is
the possibility that capital investment will be fleeting.
Source: Mark Johnston, EconoMax, March 2012
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Two Economists Debate Market-Led Development
Danny Quah
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Market led development is built on a family of three foundations or
principles - appropriate incentives, private property and a stable
macro-economic environment.
Development is the processing of empowering people to give them the
capacity to pursue goals to improve their well-being, their environment
and their destiny.
Empowerment requires putting capital and labour together to create
products that add value. Market-led development means leveraging this
and influencing how productive factors accumulate. Incentives are vital
for market forces to operate properly. Private property and stability
matter too because without them, promised rewards fail to materialize.
China has worked out how to implement a market based economy. Over 600 million people have
been brought out of extreme poverty and the country has become a key source of growth for the
world economy. Median wages have doubled every decade In contrast to a real and relative decline
in median wages in the United States. China is leading the world in innovating towards green
energies. Much of this is happening through a market led development process even though it does
not have a western style liberal democracy.
Market economic systems inevitably carry baggage - notably social injustice and rising
inequality and the power of extractive elites enjoying monopoly profits - these have to be
addressed for trust in the market system to be maintained
Ha Joon Chang
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Development is a difficult process, markets are the most powerful vehicle
yet invented for delivering economic progress but it needs to be properly
regulated
Markets are means not ends. A well-functioning state is needed to
promote sound markets and the consumers and producers that inhabit
them.
The market rules that exist can have different effects. For example.
Import protectionism, tax relief on investment, restrictions on speculation
on property. The rules are politically constructed and decided, the state
ultimately sets the boundaries for where markets can exist and can
influence the final outcomes of markets such as the share of income that
goes to the top 1% of income earners or the share of national income
allocated to investment.
Motives and capabilities matter hugely in the growth and development process.
Motives: When producers are creating outcomes that threaten to harm development the state can
and should intervene on pragmatic grounds e.g. Land reforms, progressive taxation, direct provision
of public and merit goods. Rules can govern CEO pay or corporate takeovers, the use of pesticides
in farming.
Capabilities: Fledgling industry protection tries to create the space from which developing countries
can build capabilities, the state needs to invest in productivity enhancing factor inputs. Development
can be sustained by investing in social capabilities, some of which might require constraining certain
parts of the market
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