Activist state must play role in economic revival

Under the pressure to reduce Government's Budget deficit and contain the escalation in public debt, Jamaica has embarked on yet another round of policies to scale back the role of the State in the economy.

These policies are underpinned by specific conditions in the standby agreement with the International Monetary Fund (IMF) and loan agreements with other multilateral agencies that call for the divestment of state entities that have run up massive losses over the past decade or so. But it would appear that the restructuring that will take place is not geared to creating a developmental state with the kind of apparatus needed to drive economic growth.

Ironically, in an editorial on July 27, the London Times, normally an advocate of free-market economics, in commenting on Britain's underinvestment in infrastructure and energy, drew attention to the need for "a more activist approach to industrial policy" by the government. While the Obama administration has not framed the issue of America's development problems in these terms, its proposal for an infrastructure bank reflects the position of the advocates of an activist state, as does the National Infrastructure Plan put forward by Britain's Liberal-Conservative coalition government.

changing times, perspectives

According to The Times, the view that long-term development matters should all be left to the markets is no longer tenable as "... the world has changed, and even some of the diehards on the laissez-faire wing of the Conservative Party are changing their minds. They recognise that governments need a vision for the economy and must take an active role in making it a reality. Other countries do. And so must we, if we want to compete with the likes of Singapore, let alone China".

In Jamaica, we have hardly shown any interest in debating the issue of the appropriate role for the state within the current economic context. This is so except for comments from some critics that the PNP's Progressive Agenda document is premised on the state playing a minimalist role. But defining a role for the state that is consistent with the execution of the long-term development plan that has been promoted by both Government and Opposition [Vision 2030] is critical to the success of the plan.

At the beginning of the 1990s when Michael Manley launched the programme to accelerate the liberalisation of the economy, there was active debate about the role of the state. In a paper titled The Economy and the Role of the State presented at a University of the West Indies symposium to honour Professor Carl Stone [November 1992], I had argued, "The main functions of the state must be directed towards transforming the Jamaican economy to achieve self-sustaining growth and development." The functions identified were strategic planning and initiation of structural transformation, regulation of markets, and mediation of the class struggle.

Judging by the successful emerging economies like Brazil, not much has changed in terms of the main tasks that I identified for the state as they relate to its role as strategic planner and initiator of structural transformation. They included establishing and maintaining a stable macroeconomic environment; developing industrial policy and strategic plans to guide the reorientation of production from primary products; and operating a dynamic and flexible system of fiscal incentives to this end.

more reform needed

Jamaica has made significant progress in its anti-inflation drive and in monetary policy since 1992, but sustaining those gains will not be easy in an environment where businesses still rely on price increases to generate profits rather than productivity gains. Some elements of an industrial policy were implemented, resulting in a sharp increase in investment activity, particularly foreign direct investment in tourism, telecommunications, and physical infrastructure. But this was not translated into strong economic growth. And reform that would create a dynamic fiscal incentive system has been long delayed.

Another critical task outlined in my 1992 presentation was that of formulating and driving rapid training programmes required to develop the management and technical skills needed to support the production structure of the economy. It was also recognised that the state needed to be active in promoting, coordinating and financing for new industries, and research and development which carry risks beyond the capacity of private capital to undertake, or that require, long-term, 'patient' capital.

As I argued, a critical underpinning of any long-term development plan is "an appropriate partnership between the state and private enterprises". Attempts to create this partnership were led at first by the state as a supporting element for the implementation of the National Industrial Policy in the 1990s, but it proved illusive. The initiative has been taken in more recent years by the private sector and the trade-union movement, and it seems that some progress is being made.

It should be clear that the shift in investment and production that is required for long-term economic development cannot take place without such a partnership and one that involves an activist role for the state. This is true of most successful economies today, a reality now accepted by the London Times.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.