It’s not just emerging markets that benefit from the state’s visible hand

State guidance of the economy is not just a tool for emerging markets, but also for developing economies that wish to maintain their technological advantage. mckaysavage

As governments rushed in to prop up collapsing economies in response to the 2008 financial meltdown, the myth of free-market capitalism was suddenly put to the test and found wanting. But it has been the rapid rise of China and other emerging giants, India and Brazil – the so-called BICs – that has done more to challenge the Washington Consensus idea that state activism is always inimical to economic prosperity. (BICs - as opposed to BRICs - is now widely used to distinguish the well-functioning emerging markets from the more problematic gangster capitalism of Russia.)

As some economists and political scientists fall back on labels like “state capitalism” to make sense of the alliance of free markets and unfree politics in China, others have revived the idea of “state-guided capitalism”, a model once associated with Japan at the height of its economic prosperity.

What lies behind these recent labelling efforts is the assumption that the developmental experience of the newly emerging giants is somehow wholly at variance with that of the advanced countries as they themselves industrialised. Yet nothing could be further from the truth. In spite of some obvious differences that arise from history and international context, both developing and developed countries share at least one major feature in common – namely, state efforts to protect and promote industrial development.

State “guidance” of the economy, in the broadest sense, is the shared history of all countries that have successfully industrialised. When climbing the ladder of development, even Britain and the United States used tariffs to protect infant industry, copied or appropriated foreign intellectual property wherever possible, and placed a variety of controls on capital and technology markets.

At various times, for example, Britain banned the transfer of technology – including the migration and overseas recruitment of skilled workers – as well as the export of all tools and machines and implements related to the textile industries. Since these and other industry protecting policies are precisely the ones developing countries are told they must avoid or abandon, they have evoked the image of “kicking away the ladder”.

The state has had a significant role in engineering China’s sky-high economic growth.

So what is different today? One difference of course is the greater technological complexity of the modern economy, encapsulated in the notion of knowledge-intensive or high-technology industry. Another is the emergence of global value chains. Contrary to the belief that these changes make state activism less relevant to economic advancement (a belief that policymakers take more or less seriously across different parts of the developed world), globalisation has belped to reinforce and valorise the state’s economic role.

One striking – and historically repetitious – example of the state’s valorisation can be seen in the way the destabilisation of national economies by financial globalisation has called up a vast panoply of state responses. Another example is the boom in sovereign wealth funds as resource-rich nations hedge against vulnerability to global fluctuations in commodities markets.

And still, a third important example is the state’s race to secure high-technology and ensure a place in the growth sectors of the future. Thus the knowledge-intensive sectors (particularly IT, biotech, nanotechnology, and clean energy) have become the new arena of a high-tech infant industry policy – but this time instituted by and for the advanced countries. Although free-market orthodoxy may seem to reign, the reality is that these sectors do not need the simple tariff protection against imports of yesteryear. Rather, the knowledge-rich sectors need more costly and complex support, including investment subsidies at the high-risk end of development. It should come as no surprise, then, that it is the advanced countries who are currently the leading actors in this particular race.

So it would be hard to maintain that the use of state tools by the BICs – such as China’s state-guided investment and five-year plans, or Brazil’s state-owned oil corporation Petrobras as an instrument for developing a national oil industry – is in some way inconsistent with the experience of the now-developed countries; or indeed that it is at odds with the practice of advanced countries in seeking to maintain their technological lead.

It is not that one set of countries practise “free-market capitalism” while another set practise “state-guided capitalism”. It is closer to the truth to point to the differing ways in which all economies – whether emerging or advanced – draw on state involvement in guiding and shaping development. It is recognition of this point that is long overdue in mainstream economic and political thinking.