Lect .6 State

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School of Management

Lecture 5The State and National Competitiveness1st November 2011

MN330:Modern Business in Comparative Perspective

Ailson De Moraes

Email: [email protected]

Office: MX1191/30/2012 1


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Lecture outline

1 Role of government in economic management

2 Policy options for state economic intervention

3 Examples of state intervention in leading economies

4 Regional dimensions to state activity

5 Role of the state in context of increasing globalisation

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Lets revise our basic economics

Economics is about the allocation of resources

The market is a system for allocating resources

demand, supply and prices define how much

of each good is produced and at which prices itis eventually commercialized

Howeveris the market and its invisible hand

the best way of organizing economies?

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Does the market allocate all resources

efficiently?

Market failures:

Goods that benefit everyone but that nobody iswilling to pay for individually defence, police,

judiciary How about hospitals and clean water in poor

countries?

What is the economic cost of malaria? Having a

large share of the workforce infected, and henceable to work for fewer years, and in need of costlycures?

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What is the Role of the State

The state can (and should) provide

public goods, which benefit

society and the economy as a whole

(including enterprises), but that the

market by itself would not generate.

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Can countries develop without a

functioning state?

Somalia no clear authority, different groups claim to bethe legitimate government

Somalia has been without an effective central government

since President Siad Barre was overthrown in 1991. (BBC

News, 20 October 2011)

Scene of Africa's worst humanitarian crisis:

aid agencies warn that millions face starvation

No effective government since 1991

Islamist militia and UN-backed transitional

government compete for control of countryThe self-proclaimed state of Somaliland and

the region of Puntland run their own affairs

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Broad categories of state intervention (1)

State activity reflects established institutions and practices ways ofdoing things

Role of govt in economics reflected in different varieties of

capitalism

liberal market capitalism e.g. US, UK

- regulation of economy through market mechanisms- individualism a dominant characteristic

- state does not overtly attempt strategic planning of economy- dominant philosophy of shareholder value & short-term

returns on investment

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Broad categories of state intervention (2)social market capitalism e.g. Germany

- higher premium placed upon collaboration between different actors in theeconomy

- broader identification of stakeholders beyond merely the owners of capital- state as a mediator and provider of welfare

developmental capitalism e.g. Japan

- state plays a much more central role(although not usually in terms of public ownership of productive assets)

- state sets substantive social and economic goals- explicit industrial strategy

communist-capitalist system China

- combination of highly centralised political system & increasingly opencapitalist market

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Interpreting the role of the state (1)Porter

- idea of national competitive development cites examples of successfulstate intervention

- but, the diamond sidelines the state as relatively unimportant

Chandler- prime interest in managerial personnel and structures, so little focus on role

of government- others stress role of law, regulation & state encouragement in emergence of

the modern corporation

Late Development or Late Industrialization Thesis- emerging economies cannot rely on markets & firms to achieve first

breakthroughs in industrialization- given ability to import technology & imitate business systems, there is

incentive to speed up the process of industrialization- state concentrates sparse capital resources, enhances training & skills, and

promotes growth of lead firms & industries

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Interpreting the role of the state (2)

The State and Economically Determined Markets

- successful economies depend on innovations in products,

technology, and business systems e.g. UK, USA, Germany, Japan

- innovation needs entrepreneurs & firms to have freedom

through markets to develop businesses e.g. Strong in the USAand UK

- market mechanisms depend upon political stability, just legal

systems, and non-corrupt govts

- govt role is therefore to make policy decisions on behalf of

the general good(e.g. D.C.North, Institutions, Institutional Change and Economic Performance, 1990).

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The State and SociallyConstructed Markets

- also stresses role of national institutions in shaping

business systems

- but puts more emphasis on firms than markets, bothbeing socially constructed within each nation

- key role for the state in shaping business strategy,market exchanges and inter-firm networks

- highlights the social and political, as opposed to

economic, origins of business systems(e.g. R.Whitley, Divergent Capitalisms: The Social Structuring and

Change of Business Systems, 1999)

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The Developmental State Model

- active role of govt in promoting economic development

(e.g. Japan & East Asia in 1980s)

- different to central planning, and opposite of

decentralised market mechanisms

- state creating and extending the role of markets

(developing firms with the competencies to compete)

- link between ideas on the developmental state with

those of late industrialization

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Areas of state policy intervention in economicmanagement (2)

Trade policy

- tends to be restrictive towards imports and stimulatory towardsexports

- imports policies e.g. tariffs, quotas, import surcharges, health & safetyregulations, customs procedures etc.

Foreign direct investment (FDI)- outward investment by domestic enterprises and inward investment by

foreign enterprises- inward investment encouraged by: screening investment proposals,

excluding foreign firms from certain sectors, compliance with national codesof business conduct or employment laws, investment incentives

Industry policy- boundaries between trade, FDI and industry policies are increasingly

blurred- various stimulatory or regulatory mechanisms applied across

industries or in particular sectors or firmse.g. labour market policies, investment incentives, merger &

competition policy, environmental regulations

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Areas of state policy intervention in economicmanagement (3)

Competition policy

- increasing in leading economies over the last two decades

- govts examine links between many factors that will influence nationalcompetitiveness, including education, taxation, investment and R&D

incentives, infrastructure, monopoly and fair trade regulation, growth rates,

exports and FDI (growth of competitiveness commissions)- world-wide trend since the early 1980s towards deregulation and the

privatisation of state assets

(consequence of competition policy and a greater dependence onmarket mechanisms)

Other key areas- technology policy, education & training, infrastructure supply, laws

and regulations

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State interventions across leading economies (1)

States histories embed elements of path dependency

Persistence of different varieties of capitalism

Japan

- the archetypal developmental state

- high level of consensus between major interest groups on need to create adynamic national economy- reflects cultural characteristics of Japanese society, and poor physical endowmentof the country- state had central role in guiding operation of highly competitive domestic marketeconomy- post-WW2 key govt institution was the MITI, renamed Ministry for Economy, Trade &

Industry (METI) in 2001- METI assisted by high degree of consensus and mutual decision-making between big

business and the state bureaucracy

- industrial policy not state-directed industrialization, but industrialization negotiated

& agreed by business and officials

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Japan model a combination of protectionism, directed savings within a controlled

finance sector, export-orientated industrialization, and state-business cooperationin the development of new technologies, products and whole industries

- Japan transformed from low-value, low-skill economy to a high-value, capital-

intensive economy

- clearly-targeted and selective industry policy and a strongly protected domestic

economy

- FDI extremely tightly regulated post-WW2- outward investment grew rapidly in 1970s & 80s, consistent with METI policy of

internationalising the economy

- slow growth since 1990, need for reform of Japanese business system, challenging

need for industrial policy

- Japanese companies believed they had acquired organizational capabilities to

compete freely & without govt guidance

- Japan had become a net exporter of technology, so METI moved from direct planning

towards a policy of facilitation

- currently much debate about whether Japan can recover its dynamism, and what kind

of role govt can & should play

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United States

- basic philosophy of non-intervention by the federal govt in the

private economic sector

- regulatory role for federal govt, ensuring continuation of

competition, mainly via macro fiscal/monetary policies- post-WW2 policy towards international trade has been one of urging

liberalization, and the reduction of tariffs in

multilateral negotiations through the GATT/WTO

- since 1980s increasing willingness to develop bilateral trading

arrangements with other countries

- US now seen as having an increasingly unilateralist tendency, e.g.trade disputes (with Japan and the EU).

- general business and cultural bias for minimal government

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UK

- 1960s and 1970s Department of Trade and Industry weak compared

to the Treasury, which at critical times reasserted priorities of macro-

economic management

-1970s industrial policy associated with the rescue of lame

-ducks,i.e. firms in decline, and the nationalization of large industries e.g.

shipbuilding or vehicle manufacture

- since 1980s strong pursuit of policies of privatisation and

deregulation

- today UK has intermediate position between pure market capitalism

of US and social market capitalism of continental Europe- tendency in some areas (notably labour market policy) to be closer

to the US

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Germany

- German economy characterised by considerable competition

between domestic firms, and also high level of consensus between

various interest groups (incl. labour unions, major banks and industry)

-

post-

WW2 federal govt control of finance and banking industry, andstrict macro-economic policy

- powers of the Bundesbank now largely been passed to the Central

European Bank

- federal legislation on industrial relations and corporate governance

have also been significant

- strong established policy of social markets involves mixture ofmarket mechanisms (albeit supported by complex banking and inter-

firm networks) and welfare systems

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State interventions across leading economies (6)China

- decades of self-imposed separation from the world economy- now rapidly become an increasingly significant global player- massive economic potential based on sheer size (1.3 billion population)

- 1949 Communist Party came to power, from 1953 industrial plans accordingto Soviet model of command economy- but China remained a largely agricultural economy, continued mass povertyand at times famine- 1960s and 70s failings of industrial system revealed through misallocation ofgoods, stockpiling, rationing of clothes & food- state-owned enterprises (SOEs) lacked effective product development,management, workplace skills & technology

- 1976-79 political changes enabled new Chinese leaders to reform industrialsystem before it collapsed- 1979 began open policy of controlled trade and inward investment strategy- set within context of so-called four modernisations (agriculture, industry,education, and science & defence)

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China

- 1980s gradual decline in price controls, setting of employment rights &contracts, and greater emphasis on profit motive

- 1984 SOEs encouraged to operate in a freer and more market-orientated

system- lowering of state ownership in favour of market mechanisms and

decentralised managerial decision-making

- 1990s increasing pace of privatisation, growth in alternative sources of

finance (incl. private banks and stock markets)

- economic control shifted from central government to provincial governments- trade and protectionist barriers lowered, culminating in World Trade

Organisation (WTO) membership in 1992

- export-orientated industrialization encouraged- FDI supported (at first through joint ventures), bringing technology,

managerial know-how, new products & capital

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China

but despite massive inflows of foreign capital & technologies, China remainscentrally-controlled command economy in which SOEs dominate, and their

reform is a massive task

- institutional & geographical structure of China now in a state of flux- key will be internal power struggles between modernisers and those who

wish to retain a degree of isolation

- real test of success will be raising living standards for majority of Chinese,not just those in more developed areas

- role of the state in China remains large: close regulation of business;attracting and negotiating inward FDI; agreeing outward FDI; close controlof banking & capital investment; business group or industry-wide

planning through industrial commissions; technology policy; selection offuture growth sectors

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China What in the future?

- the direction of the trend in Chinas economic management is clear,

but describing the nature of this hybrid system is more difficult (given

Chinas size, and large internal diversity in levels of state ownership,

control, size, internationalisation, and technology levels).

Is China a Socialist Market Economy, or has it

become a Capitalist Developmental State?

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The regional dimension to state activity (1)

- states collaborate with other states to achieve specific economic andwelfare goals

- increasing number of regional integration agreements (RIAs)

- regionalism now a dominant feature of the contemporary global

economy

- basis of RIAs is the preferential trading arrangement (preferential

market access to other members of the regional group)

- liberalising trade between members whilst simultaneously

discriminating against third parties

- creates large markets for own producers whilst also protecting

them from outside competition e.g. EU

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- regional trading blocs have major influence on flows of investment bytransnational corporations

- removal of internal trade (and other) barriers leads firms to realign their

organisational structures to reflect regionalrather than strictly national markets (which diverts investment from some

locations in favour of others)

- regional integration can vary from free trade areas, to a common market, to

full economic union

- only one group, the European Union, comes close to being a trueeconomic union

-disproportionate share of global production, trade and investment stillconcentrated in so-called global triad of N America, Europe and Asia Pacific,

and RIAs in each of these three major regions ...

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Europe

- European Union easily the most highly developed and structurally

complex of all the worlds regional economic blocs

US

- much more shallow and fragmented attempts at political-economic

integration

- overwhelming dominance of the US in the region- most important RIA is North American Free Trade Agreement

(NAFTA) between the US, Canada and Mexico

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Asia Pacific

- much looser, informal and open arrangements, e.g. ASEAN(Association of South East Asian Nations)- intergovernmental institution to promote regional cooperation,

strong element of consensus, but rapid responses difficult

Ultimately any regional bloc originates from, and is given legitimacy

by, nation states, which continue to be extremely important building

blocks in the global economy

* China and Japan NON-Members

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Nation states and globalization (1)

- rise of Japan and East Asian nations post-WW2 led many to supportthe role of the developmental state

- as Japan emerged as an advanced and leading economy, itsbusinesses no longer sought or needed active state involvement- slow growth in Japan since 1990 & Asian Crisis of 1997 undermined

the case for the developmental state

- so too did success of the US and UK economies, which stressed amarket-based approach to economic management

- greater internationalisation of the world economy further limitedpolicies of protectionism and weakened the potential of self-

contained national industrial policies

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Nation states and globalization (2)

- some (e.g. Reich) thus concluded that governments could no longerenhance national competitiveness- TNCs gained competitiveness through global webs, not through their

geographical location- Ohmae even spoke of the death of the nation state in the wake ofinternationalisation and more powerful TNCs

- Fukuyama exaggerated with his claim to the end of history (i.e. debatesover political economy had ended as all nations converged along the USmodel)- central claim of hyper-globalisers is that we live in a borderless world wherestates no longer matter

- combination of revolutionary technologies of transportation and

communications, and the increasing power ofTN

Cs has, it is argued,shifted economic power out of the control of nation states

This is a highly misleading view - states capabilities are being reduced insome areas, but process is not simple or uniform

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Lect .6 State