About us Disclaimer	notjustinfo.com	Home Feedback
	Knowledge centre for MBA students.

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

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

Winds of Deregulation in the US

The Great Depression of 1930s led the US to embark on the New Deal - a far reaching program of experimentation and expansion of government authority over the economy. Though the Tennesse Valley Authority was a great experiment in public ownership, but for the most part, government would seek to control the key parts of the economy not through ownership but through a distinctly American approach of economic regulation. Thus this contrasted with the Europe and other developing world. But still government had significant influence over the market. In the American context of the 1930s the regulatory idea became the solution to the problems of the marketplace. This idea would maintain its grip for decades until new economic disruptions and a growing intellectual critique undermined the consensus. By 1960s, the real scrutiny of regulatory system began. By then it was entrenched, inefficient, and overloaded with cases that it moved through with none of the vigor envisioned by its New Deal framers. Absence of an overall regulatory policy and the deterioration of the quality of regulatory personnel made delay the hallmark of federal regulation. Despite this, the Nixon administration carried out a great expansion of regulation into new areas, launching affirmative action and establishing Environmental Protection Agency, the Occupational Safety and Health Administration and the Equal Employment Opportunity Commission.

The 1970s in the US were overall characterized by chronically poor economic performance with inflation reaching the highest level since the end of the World War I and unemployment stood at 9.2 percent. Many attributed these problems to the increases in state activity. In those two decades government spending, government taxes, government deficits, government regulation and government expansion of the money supply increased rapidly. All this brought to the fore the consequences of the system of regulatory capitalism. The system seemed to have bogged down. It was too rigid, too slow, too distorting. It hobbled technological and commercial innovation and most importantly by replacing the decisions of the market with its own decisions, it denied the market the salutary effects of competition. It froze relationships, shored up cost levels and institutionalized inflation. Conditions warranted a change, and America was ready to go in a new direction. The specter of market failure had shaped four decades of government economic policies. But the message of the 1970s was that government could fail, too.

Third Worldism

Most of the countries in third world faced a gigantic task of turning a colony into a nation. Mixed economy as a strategy of development had been the main plank of economic policy in these countries.

The policy makers in India thought that competition was bad and generally showed contempt for the price mechanism. Instead they believed that central planning; strong state control, and government knowledge would do a better job of allocating investment and determining output than would many millions of individual decision-makers. Bureaucratic dictates were better than the give-and-take of prices in the marketplace. Very often, the focus was on investment itself rather than on the productivity of the investment and the quality and value of what was produced. The expansion of the public sector was carried out with great enthusiasm in India. The state would control some sectors exclusively, in others, the then existing private enterprise was allowed to survive, but the state would take charge of all new undertakings. Hosts of new public companies were created which ranged from power utilities to chemical plants to automobile assemblies, even hotel chains along with state-owned banks. These various companies would be national champions, the economic embodiment of India's independence and would demonstrate India's skills and capabilities to the nation and the outside world and they would help the new nation together.

The changes were also most striking in Africa. Almost everywhere, the government retained ultimate responsibility for currency, defense and foreign affairs. As momentum gathered, local governments expanded their scope of responsibility. The pessimism about markets is greater in Africa than elsewhere. Lack of regard for local education, health or infrastructure under colonization tainted capitalism with racism and contempt. It seemed, people were not in a position to participate in the market. The new scheme of African socialism, according to the African leaders, would somehow combine modern growth and traditional values. One of the main tools of control adopted by the African countries in general and Ghana in particular was the marketing boards, which were responsible for buying crops from farmers and reselling them for export. In Ghana, the Cocoa Marketing Board grew in size, staffing, and power. It was joined in short order by marketing boards for timber and diamonds, and a host of other state organizations aimed not only at exports but also at regulating local trade in foodstuffs, fish, and household goods. The pervasive involvement of the state in almost every aspect of investment and commerce made Ghana a paragon of development economics. With the influence of Soviet Union, Ghana had also adopted a rigid seven-year plan. State-owned companies and public authorities mushroomed in all fields as also the mismanagement and graft. The price was most painfully felt in the countryside as state used cocoa revenues controlled by the cocoa marketing board, to cover the growing losses of public companies. The imposition of unrealistically low cocoa prices combined with bloated organization of marketing board, devastated the industry. Many farmers switched crops and Ghana lost its mantle as the world's largest cocoa producer. Its currency reserves depleted, it fell back on barter trade and loans from the Soviet Block.

The problem of national control was most acute for the great many countries that depended for survival on exports of primary products, whether agricultural or mineral. The choice seemed to be whether foreign multinationals would capture all the rents from these products or whether a national firm could step in. If multinationals found it cheaper to export raw materials than to invest in a processing plant, what hope was there that the producer countries would ever turn their plantations to modern agro-industry? It was perceived that multinationals brought economic distortion, not growth in economy. This belief led to expulsion of multinationals from many countries. In India IBM and Coca-Cola, which refused to share, their technology with local companies were asked to pack their belongings and leave the country.

At the end, in many of the countries of Latin America, Africa and South Asia, ordinary people were not getting better off. Unable to profit from the pervasive reach of the state sector, they suffered from shortages, decaying infrastructure, bureaucratic harassment, petty corruption, and the continual postponement of promised investments. State-led development was falling short of its promise. Corruption and waste from dubious investments were all too common.

[To be continued]