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Redefining the role of the state

There has been a succession of bad news over the last few weeks. The announcement of the recession in the United States was presaged by a United Nations forecast that world output could grow by a mere one per cent in 2009. Among the responses, the setting up of a Commission of Experts on Reforms of the International Monetary and Financial System headed by Nobel Laureate Joseph Stiglitz has a clear message — the crisis calls for a rethink of existing economic structur es. The projected slowdown in world output growth would trigger declines in production, wages, and consumer spending. Arresting the slide calls for bold fiscal interventions, and it turns the spotlight on the economic role of the state. Given that economic activity is a dynamic process, one-off interventions by the state during times of emergency are not enough. There are deeper systemic inadequacies that need correction. A recalibration of global and national economic systems is in order.

If the call by the Doha Review Conference on Financing for Development for a fair and equitable international financial system is to be effective, structural changes are required. Although developed market economies shaped the present course of events, the fallout is global, with 100 million people already pushed into poverty. Redefining the role of the state and multilateral economic institutions is the most critical corrective needed if the world is to emerge more stable. The unsustainable path of states withdrawing from economic activity, easing their regulatory role, and making themselves facilitators and passive onlookers of economic activity is now evident. Also apparent from the massive bailout packages across the world is the state’s ability to muster economic strength and come to the rescue whenever warranted. This economic agility will be more productive if shown on a continual basis, rather than in spurts in times of crisis. While moving towards a more active role, the state should check itself from becoming an absolutist regulator in a way that hampers growth. Multilateral economic institutions need to re-evaluate their working in the light of the new economic difficulties as conditional assistance, often set close to free-market principles, distorts the ideals of equitable economic growth. The world will be richer from an ideal mean that balances market-economics and state-supported, inclusive economic growth.

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