Saturday, March 14, 2009

States Strike Back

Not long ago, many economists were talking about the demise of nation-states under the forces of globalization. Now many are calling for the states to play a bigger role in regulating and rescuing the economy. In the US, Obama has announced the plan to increase government spending and raise tax on the rich. China's government also made plans to add trillions of yuan to government spending and requested government-owned banks to expand loans.

Although I have been criticizing unbridled market economy, I'm worried that wrong kinds of government interventions could protract the recovery of the economy now. When you talk about the role of the State in China's context, you have to recognize the gap between the policies made by the central government and the execution of local officials. In the past, a large part of government spending has been wasted on redudant infrastructure, luxurious government buildings and excessive heavy industry. Not to mention the money slipped into the pockets of corrupted local officials. China is already having the problem of over-production, given the dwindling external demand. If more money are invested in infrastructure and products that people cannot really use, the problem of over-production will get worse. So it's better to put those money from the government directly into people's pocket through tax cut and welfare. That way people can spend their money on what they need, and the industries will produce according to the true demand.

In the US's context, I think Obama is doing the right thing. In the past decade, the US government has been leaning towards putting money in the people's pockets, particularly the rich people's. It reached the stage that people start putting easily available money into real estate and financial instruments, rather than engaging in everyday consumption and productive activities. So it's a good idea that the government will now lead the way in renewing infrastructure and developing green technology, which the private sector hasn't showed enough interest in.

But even democratic governments need to consider voter sentiment and narrow national interests. So you often see protectionist policies come with government stimulus packages. Obama has the "Buy America" line, Sarkozy required French car factories not to move to Eastern Europe, and Brown pandered to the "British jobs for British Workers" protests. What's worse, as the states are trying to draw more resources to their own countries, poor countries suffer more.

My skeptism about the effectiveness of government interventions makes me contemplate on what role the civil society can play for this recession...

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