Institutions for Growth

first_imgThree years into its term, the PNC-led Government’s clearly accepts market fundamentalism as its guiding economic mantra. This is dangerously reductionist. In every country, production and productivity are functions of the right mix of three institutions – the market, the state and the community. Markets function through competition using prices as the mechanism to coordinate our production and consumption – they is based on self-interest – which can get out of control. It is very efficient mechanism from a production point of view – people will produce to make a buck. But one of the premises for its success is there should be enough people willing to take the risks etc to make that buck (entrepreneurs). What do we do when there aren’t? This government seems to believe we hold our breath?The state also coordinates our activities – through command and coercion. It is supposed to be acting for the common good. The state passes laws and makes regulations that affect our economic activity every day. In Guyana the state determined that cars items should have taxes and duties that amount to 100%. That decision of the Government determines to a large extent the transportation habits of Guyanese.Our communities also structure our activities – through voluntary cooperation engendered  by close personal ties and relationships. They work through trust. This has been a most neglected aspect in our development efforts. Let’s take the rice industry. A crucial feature of rice cultivation is the control and allocation of water. In Asia where there has been intensive cultivation for centuries, the communities have evolved intricate local, non-government sanctions and rewards that ensure the most efficient use of water. These lower costs but are missing in Guyana.The task of governments is not to stand on dogmas but to tailor the right mix of these three institutions to suit their concrete conditions. The Western countries developed via a high level of dependence on markets but let us not forget that their governments and communities played and continue to play crucial roles. They took a couple of hundred of years to get where they are. Japan, on the other hand, because of its unique societal values, depended much more on the role of the community and trust. Their development to catch up with the West took one century. Without question, state and markets also played crucial roles but compared to the West, the State played a much greater role in guiding and fostering development. After WWII, we have seen that Taiwan, South Korea and Singapore take only a half a century for their development to catch up – but again, not relying totally on market mechanisms and determining their unique institutional mix of markets, state and community to coordinate their economic activities. China has done even better since 1978. This is what we have to have the courage to do in Guyana.The cause of our underdevelopment is to some extent strategic rather than structural. Korea and Singapore were right where we were fifty years ago, if not behind us, not only statistically but structurally. Look where they are today. Their Governments, as catalysts, set strategic goals and then did what was necessary too back into them. They explicitly tied assistance to selected private industries based on their commitment and ability to export. This strategic decision had two significant and faithful results that differed from the “import substitution strategy”. Firstly, the assisted firms were subjected to the market discipline of the competition of international trade. This was the most intense competition and ensured that efficiencies and productivities had to be raised to the highest levels. The second benefit, of course, was that the exports brought in foreign exchange and there was no need to ban anything to save foreign exchange.In summary, markets may successfully orient individual agents to allocate resources efficiently but they are not sufficient to coordinate individual actions over a long period of time and, most importantly for our purpose, towards desired social goals such as specified rates of growth. Markets can also fail spectacularly. Market orientation is not sufficient to generate market coordination toward collective prosperity. This is where the catalytic function of the State comes in.last_img read more