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Politicizing Economic Policy

By Jayati Ghosh | Making It: Industry for Development | August 5, 2010

There are several reasons why we urgently need to think seriously about appropriate industrial policies. There are of course the old (or continuing) reasons: that the development project cannot really proceed without some form of explicit or implicit industrial policy; that static and dynamic economies of scale mean that late industrializers need to plan methods of achieving competitive scales in particular activities if they are to survive; and that market-driven investments in a context of economic inequality will simply not generate the required scales of production without some form of intervention.

But there are also newer, and possibly now more pressing reasons for industrial policy. These emerge from structural tendencies (in particular the more basic forms of market failure that relate to human interaction with the natural environment), as well as conjunctural ones (the fact that countercyclical fiscal policy has perforce increased the role of government spending in both mature and developing economies).

What we can now recognize as unsustainable patterns of production and consumption are deeply entrenched in the richer countries, and are aspired to in developing countries. But many millions of citizens of the developing world still have poor or inadequate access to the most basic conditions of decent life, such as the minimum physical infrastructure, including electricity, transport and communication links, sanitation, health, nutrition, and education. Ensuring universal provision of these things will inevitably require greater per capita use of natural resources and more carbon-emitting production. So, both sustainability and equity require a reduction of the excessive resource use of the rich, especially in developed countries, but also among the elites in the developing world, in order to adjust for the necessarily greater resource use of the world's poor.

Resource Consumption

This means that redistributive fiscal and other economic policies must be specially oriented towards reducing inequalities of resource consumption, globally and nationally. For example, countries' essential social and developmental expenditure can be financed by taxes that penalize resource-wasteful expenditure.

Some of the shift can certainly be met through "cleaner, greener technologies" of production, and this clearly requires proactive industrial policies to promote such technologies. But it also requires new patterns of demand, since it is no longer good enough to talk about newer forms of production that are based on the older pattern of consumption. Instead, we must think creatively about such consumption itself, and work out which goods and services are more necessary and desirable for our societies.

This is why the present focus on developing new means of measuring genuine progress, well-being, and quality of life are so important. Quantitative Gross Domestic Product (GDP) growth targets, that still dominate the thinking of regional policymakers, are not simply distracting from these more important goals, but can even be counterproductive. For example, a chaotic and polluting system of privatized urban transport, involving many private vehicles and congested roads, actually generates more GDP than a safe, efficient, and affordable system of public transport that reduces vehicular congestion and provides a pleasant living and working environment.

Strategic Thinking

Obviously, the shift cannot be left to market forces, since the international demonstration effect and the power of advertising will continue to create undesirable consumer demands, and unsustainable consumption and production. But public intervention in the market cannot be confined to knee-jerk responses to constantly changing short-term conditions. Instead, planning is absolutely essential—not in the sense of the detailed planning that destroyed the reputation of command regimes but strategic thinking about the social requirements and goals for the future. Fiscal and monetary policies, as well as other forms of intervention, will have to be used to redirect consumption and production towards these social goals, to bring about such shifts in socially created aspirations and material wants, and to reorganize economic life to be less rapacious and more sustainable.

Since state involvement in economic activity is now an imperative, we should be thinking of ways to make such involvement more democratic and accountable within our countries and internationally. Large amounts of public money are being used and (despite the current talk about exiting from stimulus packages) will continue to be used for financial bailouts and to provide fiscal stimuli in the near future. How this is done will have huge implications for distribution, access to resources, and the living conditions of the ordinary people whose taxes will be paying for it. So, it is essential that we design the global economic architecture to function more democratically. And it is even more important that states across the world, when formulating and implementing economic policies, are more open and responsive to the needs of the majority of their citizens.

Democratizing Policy

How is this to be achieved? In other words, how can industrial policy—and macroeconomic policy in general—be truly democratized? Obviously, the methods and mechanisms will differ across economies and societies. But some general principles can be listed.

First, the notion that economic policies belong to some technocratic realm that is above politics needs to be dispensed with. Since economic policies are also about income and asset distribution, they are also necessarily about politics, and this has to be recognized, with all the implications of particular policies being fully spelt out.

Second, this means that the economic policies of states have to be developed on a genuinely participatory basis, not in a centralized top-down fashion with some token "consultation" with so-called "stakeholders." This is not a simplistic call for decentralization, which has become another flavor of the month with international donors. Rather, decentralization of public service delivery to enable more control by citizens needs to be combined with a more nuanced and complex form of central control over critical macroeconomic decisions. Nationally elected bodies—not extra-national and unaccountable bodies like the Bretton Woods Institutions and multinational companies—should decide the nature of economic strategy. Balancing the needs and interests of different regions and strata of society would also ensure that the creation of well-paid and productive employment would have priority over GDP growth for its own sake.

Third, non-state actors who exercise inordinate influence over state policies and receive disproportionate benefits from states—such as large corporations or big financial players—need to be brought into the realm of public accountability much more explicitly. As the examples of the gas leak in Bhopal, India, more than two decades ago, and this year's Gulf of Mexico oil spill suggest, this should certainly include attributing responsibility for environmental damage. But it should also mean that corporations which receive implicit and explicit subsidies must function in what is seen as the broader social interest in terms of preventing excessive volatility, focusing on social goals like regional balance and job creation, ensuring quality for consumers, and so on.

Finally, the economic goals of society have to be broadened, moving away from the fixation on income growth and profits, to focusing on the generation of decent employment; the improvement of living conditions rather than just the accumulation of material objects; the ensuring of safety, security and a voice for all citizens; and the encouragement of human creativity. Simply put therefore, the new industrial policy is no longer just about industry, and instead will have to be all about generating human freedom.

© 2010 Making It: Industry for Development. Republished with kind permission.

Read More: Democracy, Development, Economy, Globalization, Governance, Poverty, Technology, Trade, Global

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