Economic direction and role of government — I

When the Great Depression hit the world in the first half of 20th century, John Maynard Keynes correctly highlighted the importance of government in reviving demand. The active role of government through the New Deal policies of Franklin D. Roosevelt, and the Marshall Plan to rebuild Europe after WWII proved all successful examples of greater role of government in improving economies. Thereafter, the ascendancy of Neoliberal policies during the last four decades or so relegated the government’s role to mainly as a market fixer – providing weak or limited regulation, in turn - and a private sector facilitator. The growth that was generated not only significantly increased income inequality, but also weakened the institutional capacity of governments in general to provide leadership for more equitable and sustainable economies.

Years of virtually unfettered markets under weak government regulations allowed private sector to continue to follow market signals that while catered to the goal of profit maximization by private sector and provided gains in economic growth in the short-term, but also seriously jeopardized long-term equity and sustainability concerns. Two glaring examples of this thought-process blowing-up into the faces of governments following this Neoliberal mantra from roughly Thatcher-Regan era, first came in the shape of Global Financial Crisis of the late 2000s.

Here, risky lending primarily led to banking and overall financial crisis on a global scale, and it was only after heavy bailouts that the financial collapse was stopped through massive liquidity injections on the basis of taxpayers’ money. Hence, while private banking and overall financial sector, under over-riding motivation for expanded and short-term gains, threw caution to the winds for the long-term economic interests, were on the other hand were ‘too big to fail’ in terms of both economic footprint and pressure group political, in terms of financing expensive election campaigns for instance. So, while taxpayers’ money bailed them out, a significant number of indebted taxpayers, who had defaulted on their loan repayments, were left without much direct government support.

Having said that, this crisis was not enough to jolt governments and multilateral institutions out of their neoliberal thought process of limited government and austerity measures in general, especially when it came to bailing out the taxpayers themselves; those small but numerous fish in the economic pool. But with Covid-19 outbreak, years of under-investment in government capabilities meant that they were just not prepared or capable enough to effectively deal with this pandemic. Private sector in the shape of pharmaceutical companies, on the other hand, while ignoring the coronavirus signals coming since the days of SARS in early 2000s, had not invested as such in reaching or developing vaccines. One wonders how much more worse outcomes could there had been for the world, if the pandemic had originated in a country with much weaker government role under neoliberal mindset, than China with overall strong role of government, and well-invested public health sector.

Pakistan’s policymakers, both under the IMF (International Monetary Fund) and otherwise have mostly remained committed to this neoliberal policy framework. This may have to do with both the educational and professional grooming of policymakers in this mainstream, Washington-consensus philosophy, and also because IMF programmes are based on the same assumptions, and for obtaining such programmes required subscribing to neoliberal, Washington-consensus based conditionalities. Also, it may have to do with the inherent support these conditionalities provide to limiting the control of government and regulation of private sector and markets, in turn, allowing the politico-economic elites’ extractive institutional design to perpetuate.

The problem with Budget 2021/22 is that while it talks of taking a bottom-up approach, lack of correction of the neoliberal policy mindset does not allow the institutional environment that breaks elite capture on one hand, and properly brings in the role of government. Without it, a stimulus being provided through the budget is most likely to work sub-optimally for the masses in general, with the possible consequence of greater indebtedness of the loan-takers.

To bring greater understanding on this, Mariana Mazzucato in her talk with Rob Johnson, President, Institute of New Economic Thinking, with regard to her recent book ‘Mission economy: a moonshot guide to changing capitalism’ pointed out the following:

‘We could do better than just make a list of kind of great sectors to finance it, really needed to learn the lessons from the internet where the internet was a solution to a problem… So, it wasn’t just that DARPA [Defense Advanced Research Projects Agency] financed it. DARPA was trying to solve a problem, which was getting the satellites to communicate. So, this idea of putting, you know, on the front-end of policymakers’ minds, what are the problems you’re trying to solve, and how can you then use a problem-based, a purpose-drive, what I call a mission-driven approach, to get as many sectors in your economy to innovate, to collaborate, to invest, and literally put that into the design of procurement, grants, loans, and industrial strategy, to crowd-in kind of that bottom-up experimentation.’

(To be continued)

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021