The true developmental state is founded on liberty

At the recent ANC policy conference delegates expressed support for a “developmental state” that plays a more interventionist role in the economy than the state does at present by using state-owned enterprises to fast-track economic development. An interventionist state, in this view, is deemed necessary because supposedly the market alone cannot eradicate poverty, provide infrastructure, deliver housing, relieve skills shortages, and address underdevelopment.

If this were true, there should by now be no poverty in the world and recent history would have been much different: no tearing down of the Berlin Wall, no disbanding of the Soviet Union and no collapse of the socialist states of Eastern Europe. These former states were the ultimate form of the interventionist developmental state; their economies consisted entirely of state enterprises. But, instead of fast-tracking economic development and bringing prosperity to all, the interventionist developmental state paradigm impoverished every nation that adopted it.

Despite this lesson and the centuries-long struggle for liberty, the link between freedom and the improvement of the human condition remains largely unlearned. Frederic Bastiat, writing in the 19th century, made the following observation:

“On entering Paris where I came to visit, I said to myself – Here are a million human beings who would all die in a short time if provisions of every kind ceased to flow toward this great metropolis. Imagination is baffled when it tries to appreciate the vast multiplicity of commodities, which must enter tomorrow through the barriers in order to preserve the inhabitants from falling prey to the convulsions of famine, rebellion, and pillage… What is the ingenious and secret power which presides over the astonishing regularity of such complicated movements, a regularity in which we all have so implicit, though thoughtless, a faith; on which our comfort, our very existence depends?”

Bastiat’s observation is as valid now as it was a hundred and fifty years ago. Today many cities count their populations in the millions. But, in free countries, no state enterprises are required to produce and deliver food to the entire population, yet, at grocery stores, the shelves are filled with things to buy. Think about the complexity that is involved in the delivery of these products to the food stores: there are literally thousands of different food products, some perishable, some long-life, consumed by millions of people with different needs and tastes. There are so many variables that no single mind or committee, staffed with experts using the latest computer technology, could ever calculate what, for whom, where, and how much food production and delivery should occur. Yet, when you go to the grocery store the food is on the shelves.

There are, of course, countries where governments attempted to manage the production of food, with terrible consequences, ranging from interminable food queues and rationing to famine and death. For example, between 1959 and 1961 the combination of collective farm production and bad weather caused food production in China to fall so drastically that an estimated 30 million people died of starvation during the worst famine in human history.

Bastiat’s “ingenious and secret power” is freedom. Freedom allows human ingenuity to flourish. As a result, Paris gets fed, and today in South Africa, we get fed, and no one calls for the establishment of state enterprises devoted to food production and government food stores. In free societies there are no state enterprises producing shoes, cars, computers, windowpanes, clothes, and the myriad other products available in the marketplace. Yet there are no shortages of these commodities. In supplying our needs, private producers are guided by the profit motive and price system, which guides them to develop and provide goods and services to meet the needs of citizens. At the same time, profits and prices act to economise the use of scarce resources.

Economic development requires the prior creation of wealth, production and exchange, which is maximised under freedom. Bastiat’s insight of long ago is today confirmed by independent studies showing that people living in countries with high levels of economic freedom also have the benefit of greater levels of “human development” as measured by the United Nations. People who live in countries with high levels of personal and economic freedom are wealthier, healthier, and live longer than people in countries with low levels of economic freedom.

More importantly, the poor in economically free countries are substantially better off than those who live in less-free countries. Wherever and whenever a government removes the shackles that hold back individual effort and trade, rapid economic growth and wealth creation follows. China is one of the world’s latest examples.

Poverty remains the norm wherever economic freedom and the rule of law are absent. The world’s remaining communist states and dictatorships, with Africa providing many examples, prove that authoritarian socialism leads to human misery. African countries that have increased their levels of economic freedom and become more democratic have also become more prosperous. Tragically, many governments continue to ignore the evidence and their citizens suffer the consequences.

State enterprises are monopolies protected by laws that prohibit or limit competition in their fields of activity. They deny consumers the comparison and choice that is always available from competitive private providers. Not only do state enterprises reduce the options available to consumers, they also effectively reduce the level of economic activity in the country. The more state enterprises there are, the lower the rate of economic growth. Often, state enterprises end up doing exactly the opposite of what was intended, such as subsidising the wealthy. South African Airways, for example, receives billions of rands of taxpayers’ money to keep it in business and provide subsidised services to the wealthy.

The interventionist developmental state is an example of what Nobel laureate FA Hayek called "the fatal conceit", the idea that a government can do a better job than the private market to eradicate poverty, provide infrastructure, deliver housing, relieve skills shortages, and address underdevelopment.

The true developmental state is founded on liberty, which means secure property rights, freedom of exchange and production, and the rule of law.

Author: Johan Biermann is a planning consultant, policy researcher and is a Council Member of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 18 September 2007 - Policy Bulletin / 06 October 2009