Tuesday, December 11, 2012

Economic growth can't be left to the market

After the financial crisis, the case for regulation of the financial sector has grown stronger; most people believe that leaving things too much to the market was part of the reason for the crisis. Still, not many would argue for a role of the state in promoting economic growth. The wider view is that the state should take care of law and order, infrastructure and efficient financial markets and leave the rest to entrepreneurs.

Chinese economist and former World Bank chief economist, Justin Lin argues otherwise in his recent book, The Quest for Prosperity. He makes the point that nations have seen sustained and strong growth all owe it to strong support from the state- very often, support for particular sectors. The proposition is not new. Robert Wade and others have pointed out that the East Asian miracle was pretty much state-led. But, the earlier thesis was that the state should generally support firms that were in competitive businesses, especially those that were trying to win in export markets. Lin goes further. He wants the state to target particular sectors and guide private investment into those areas.

This is really a strong form of what used to be called 'industrial policy'. Lin shows that this sort of thing is not unique to East Asia. It happened to all the advanced economies of the west earlier. What is more, the advanced economies practise this even today, although sometimes in not so obvious ways.

More in my ET column, How the state can boost growth.