By Kebour Ghenna
Last week my 18 year old niece wanted to know if PM Abye Ahmed is running a developmental or liberal administration.
Not having read Friedrich Hayek, Milton Friedman or understood Leon Walras, Vilfredo Pareto or even Rosa Luxemburg to understand the heart of many economic theories, I was careful not to say stupid stuff.
On a more realistic level we tend to miss that Developmentalism and economic liberalism are two forms of capitalism.
Yes Dear readers, capitalist societies will either be developmental or liberal depending on how they set their major institutions, namely the state and the market. Economic liberalism gives full primacy to an idealized free market, while developmentalism brings into play both state and market (supposedly) in a more balanced way. The two capitalist systems are also based on separate ideologies, one based on the role played by the market and the other on the role of moderate intervention by the state in the economy. You look closely at the two forms and you’ll obviously find many gradations and permutations in commitment to both creeds.
Personally let me confess that I have an ideological bias, and so would like to argue that developmentalism – the one that combines moderate but effective state intervention in production and in the distribution of income – is a more balanced form of coordinating capitalism than economic liberalism, and generates more growth with financial stability. It reflects the needs of aspiring industrializing nations like Ethiopia to catch up with more advanced capitalist economies. It rejects the self-regulating market ideal, and the individualism underlying it, calling instead for cooperative relations among government, business and labor under state leadership to increase substantially the material wellbeing of its citizens while also advancing key political objectives defined by modern societies: national autonomy, social order, individual freedom, social justice and protection of the environment.
On the other side the market is unbeatable whenever there is effective competition because it allocates resources more efficiently. Still the state is supposed to coordinate the non-competitive sector, such as, the interest rate, the inflation rate and the exchange rate, the distribution of income, and the protection of the environment –areas where there is no real competition and where the market fails to deliver.
One more thing, a developmental state is oriented towards social democracy, because it will limit the capacity of the rich to capture the state and buy prestige, political power and privilege. The social-democratic state has no objection to capitalists using their money to buy luxury goods and services but seeks to promote social justice within the framework of a representative democratic polity and a capitalist economy.
Now let me stop and try to reply to my niece.
Between developmental capitalism and liberal capitalism there is a grey area. There are moments when it is difficult to identify the character of capitalism because in some countries governments have turned liberal but the state continues to intervene in the economy.
As I said markets are an excellent institution, but the only thing that they do well is coordinate competitive activities. Given the complexity of the major modern economies, given the existence of non-competitive industries, given the repeated failure of markets to establish the right macroeconomic prices, neoliberalism cannot be a stage of capitalism. It failed in Eastern Europe. It suffered a definitive defeat in 2008 in the West. How could we then view neoliberalism as the best form of capitalism for Ethiopia?
Editor’s Note : This article appeared first on Kebour Ghenna’s Facebook page
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