Lessons of statism

The failure of various forms of statism in the Third World, the former Soviet bloc, China and Western Europe has forced a revision of the development paradigm in favour of a more limited state, and has emphasised the need to analyse which policies work and which ones fail to bring poor countries out of poverty, says the Wall Street Journal.

Statism -- the practice of giving a centralised government control over economic planning and policy -- is characterised by many features, including: a large state-owned enterprise sector, competition-stifling regulations and barriers to entry, import restrictions and rigid labour markets, poor protection of private property rights and fiscal irresponsibility, says the Journal.

Statism suppress markets and criminalizes entrepreneurship; but as post-communist countries move toward a market economy (a process called convergence), they are achieving better economic and non-economic results. This suggest three broad lessons:

No poor country has achieved lasting convergence with developed market economies under any of the statist or failed-state systems; systems that suppress, heavily limit and distort legal market competition produce economic losers.

Successful cases of sustained convergence have happened under more or less free-market systems or during and after the transition to such systems because the reforms increase output and productivity in previously repressed sectors.

Lastly, while all cases of lasting convergence have occurred under more or less free-market systems, or during and after the transition to such systems, not all market-oriented reforms have led to sustained convergence.

Moreover, market-oriented reforms may also fail if they are incomplete or are badly structured, but those are just hurdles to overcome on the path to a full-fledged market economy, says the Journal.

Source: Leszek Balcerowicz, The Wealth of Nations, Wall Street Journal, October 6, 2005.

For text (subscription required): http://online.wsj.com/article/SB112855775552361187.html

For more on International: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin 18 October 2005