In defence of public policies

Aldo Ferrer

The current global financial crisis has triggered a lively debate on the role of the state in the shape and development of market economies. The free-market paradigm that prevailed prior to the crisis has now been swept away, just as it was in the 1930s following the Great Depression. The path to economic recovery will only be established through public policies. When considering the precise responsibilities of the state in this context, it is important to remember that these will vary depending on the level of economic development of each country. The recent economic history of Argentina, in particular its recovery from the 2001-2 crisis, provides important lessons for other developing countries attempting to respond to the challenges of the current crisis:

Observe public policies in successful emerging economies
States in highly industrialised countries bear three principle responsibilities: first, to oversee the functioning markets; second, to sustain stability of demand, production and employment; and third, to ensure social protection i.e. the creation of so-called “welfare states”. States located on the global periphery must fulfil these functions but many others too. Developing countries should therefore observe the experience in the most successful emerging economies (South Korea, Taiwan, China, India and post-war Japan) rather than focusing their attention on the most highly industrialised and technologically advanced economies of the world.

Strengthen capacity to generate and manage knowledge
States bear additional responsibilities in developing countries above all as a result of the weakness of the capacity of their societies to generate and manage knowledge, understood as the ability to make use of worldwide scientific and technological innovations for the betterment of society and economic growth. This in turn is the result of various factors, including fragmented societies, weak political institutions, and a narrow industrial base. Until developing countries are able to strengthen their capacity to generate and manage knowledge, the terms of their incorporation into the global economy will continue to be unfavourable. This increases the responsibility of states in developing countries to play an active role in generating growth.

Avoid indiscriminate market de-regulation
From the mid-1970s until the end of the century, Argentina followed an economic development path inspired by the dominant neo-liberal paradigm. This period witnessed the indiscriminate opening of markets, deregulation, and widespread privatisation of public services. The appreciation of Argentina’s currency weakened the competitiveness of its domestic production, resulting in massive unemployment, excessive indebtedness and the selling-off of the country’s principle assets to affiliates of trans-national corporations. These were the worst 30 years of Argentina’s economic history, culminating in the default and economic crisis of 2001-2.

Restore the role of the state
Consequently, the bankruptcy of the neo-liberal economic model, which we are witnessing on a global scale today, was experienced by Argentina as early as 2001-2. The Argentinean state emerged out of this crisis, restoring its fiscal and monetary policies; recovering its redistributive functions (through salaries, taxes, subsidies etc); establishing the regulatory framework for private economic activity, including by foreign companies; and strengthening its capacity to manage public services and take control of private sector activity, when the latter violates contractual responsibilities. Today, Argentina has a state that can carry out these functions; our current challenge is making this state work as transparently and efficiently as possible.

Institute public policies that balance stability and growth
Argentina’s experience reveals that it is the responsibility of the state in developing countries to ensure economic stability and growth. This will require three key sets of policy measures. First, ensure balanced macro-economic policies to mobilise domestic resources and savings and make sure that economies remain relatively protected from external shocks; second, support the competitiveness of tradable goods sectors of national economies, to guarantee stable flows of domestic investments complemented by foreign ones; and third, strengthen investment in education, technology and social justice. None of this, in reality, is new as – contrary to neo-liberal tenets – countries remain responsible for their own future. Indeed, each country experiences the type of globalisation (and the economic crises) it deserves, according to the quality of its public policies. Briefly, it is necessary to ensure a sustainable form of development which balances growth alongside a general expansion of education and social inclusion.

Aldo Ferrer is professor of economics at the University of Buenos Aires and director of Enarsa