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Development: Meaning, Measurement and Strategies - Part three of ten

Dr Y Subba Reddy, Faculty, Institute for Financial Management and Research (IFMR), Chennai.

Development Strategies

Having examined the concept of development let us now turn to the study of development process and development strategies.

At the end of 1990s, some common trends are emerging in the economic policies of governments throughout the world. Former socialists are increasingly embracing capitalism and many state-owned enterprises are being privatized. Another striking trend is the rolling of red carpet to multinationals that these countries had expelled a few decades ago. These developments have thrown up new opportunities and challenges all around the globe. The shift in policy from the expansive welfare state to markets has also engendered for many new anxieties and insecurities. As markets and economies become increasingly integrated and intertwined, the fear of shocks percolating from all around looms large in the minds of all as has been highlighted by the turmoil in international capital markets in Latin America in 1995 and in South East Asia in 1997.

The matter of where to draw the frontier between state and market has never been settled and has been a bone of contention over this century. What are the realm and responsibility of the state in the economy, and what kind of protection is the state to afford to its citizens? What is the preserve of private decision-making, and what are the responsibilities of the individual? This frontier is not well defined. It is constantly shifting and ambiguous. Despite this, for most of the present century, the state has been ascendant, extending its domain further and further into what had been the territory of the market. This process was facilitated by revolution and two world wars, by the Great Depression, and by the ambitions of politicians and governments. This movement was given further impetus by the demands of the public for greater security in industrialized countries, by the efforts for progress and improved living conditions in developing countries, and by the quest for justice and fairness.

The race between the two competing models namely, the unbridled US capitalism and the anti-thesis of it, the socialist model of the former USSR, ended with the conclusion of the World War II, tilting in favor of the socialist model. Inspired by the success of planning models and the successful defense of the Nazi aggression by former USSR, many countries in the Europe, Asia and Latin America favored a greater role for state in economic activity. For many the Nazi aggression represented the greed of capitalism and the excesses of the market. Many industrial countries of the West and in large parts of the developing world, the model adopted was the mixed economy in which government plays a significant role without stifling the market mechanism.

In the post-World War II years, the advance of state seemed to be inexorable. The state would reconstruct, modernize, and propel economic growth as well as it would deliver equity, opportunity, and a decent way of living. By the beginning of the 1970s, the mixed economy was virtually unchallenged and government continued to expand. Even in the US, the Nixon administration sought to implement a massive program of detailed wage and price controls.

Japan and other East Asian economies have adopted a variation in their economic policies. They have technically followed the US model but with a role for state intervention in the marketplace. They have practiced financial repression and kept the interest rates at an artificially low level.

In early 1990s, with the disintegration of the former USSR and the fall of communism in the East European countries, it was the state that was retreating. Communism had but all disappeared in what had been the Soviet Union and had been put aside at least as an economic system in China. In West, led by Thatcherism in UK, governments were shedding control. Instead of market failure the focus now turned to government failure. The issue has again been highlighted with the East Asian crisis in 1997. This time around it was the Japanese model, which stood discredited.

The popular perception of policy has undergone many changes in the last century. The policy wheel has completed a full round with the economic policy favoring in turns the markets, the state and finally the markets. These developments raise a number of questions. Why the move from the state to market? Why, and how, the shift from an era in which the state sought to occupy and control the 'commanding heights' of economy to an era in which the ideas of competition, openness, privatization, and deregulation have captured the imagination of policy makers? Are these changes irreversible? What will be the political, social, and economic consequences and prospects of these fundamental changes?

[To be continued]