School of Management

Lecture 5 The State and National Competitiveness

1st November 2011 MN330:Modern Business in Comparative Perspective Ailson De Moraes Email: a.moraes@rhul.ac.uk
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Office: MX119

Lecture outline
1 Role of government in economic management 2 Policy options for state economic intervention 3 Examples of state intervention in leading economies 4 Regional dimensions to state activity 5 Role of the state in context of increasing globalisation

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Lets revise our basic economics

Economics is about the allocation of resources The market is a system for allocating resources demand, supply and prices define how much of each good is produced and at which prices it is eventually commercialized Howeveris the market and its invisible hand the best way of organizing economies?

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Does the market allocate all resources efficiently? Market failures: Goods that benefit everyone but that nobody is willing to pay for individually defence, police, judiciary How about hospitals and clean water in poor countries? What is the economic cost of malaria? Having a large share of the workforce infected, and hence able to work for fewer years, and in need of costly cures?
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What is the Role of the State

The state can (and should) provide public goods, which benefit society and the economy as a whole (including enterprises), but that the market by itself would not generate.

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Can countries develop without a functioning state?

Somalia no clear authority, different groups claim to be the legitimate government Somalia has been without an effective central government since President Siad Barre was overthrown in 1991. (BBC News, 20 October 2011)
Scene of Africa's worst humanitarian crisis: aid agencies warn that millions face starvation No effective government since 1991 Islamist militia and UN-backed transitional government compete for control of country The self-proclaimed state of Somaliland and the region of Puntland run their own affairs

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Broad categories of state intervention (1)

State activity reflects established institutions and practices ways of doing things Role of govt in economics reflected in different varieties of capitalism liberal market capitalism e.g. US, UK

- regulation of economy through market mechanisms - individualism a dominant characteristic - state does not overtly attempt strategic planning of economy - dominant philosophy of shareholder value & short-term returns on investment

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Broad categories of state intervention (2)

social market capitalism e.g. Germany - higher premium placed upon collaboration between different actors in the economy - broader identification of stakeholders beyond merely the owners of capital - state as a mediator and provider of welfare developmental capitalism e.g. Japan - state plays a much more central role (although not usually in terms of public ownership of productive assets) - state sets substantive social and economic goals - explicit industrial strategy communist-capitalist system China - combination of highly centralised political system & increasingly open capitalist market

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Interpreting the role of the state (1)

Porter - idea of national competitive development cites examples of successful state intervention - but, the diamond sidelines the state as relatively unimportant Chandler - prime interest in managerial personnel and structures, so little focus on role of government - others stress role of law, regulation & state encouragement in emergence of the modern corporation Late Development or Late Industrialization Thesis - emerging economies cannot rely on markets & firms to achieve first breakthroughs in industrialization - given ability to import technology & imitate business systems, there is incentive to speed up the process of industrialization - state concentrates sparse capital resources, enhances training & skills, and promotes growth of lead firms & industries
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Interpreting the role of the state (2)

The State and Economically Determined Markets - successful economies depend on innovations in products,

technology, and business systems e.g. UK, USA, Germany, Japan - innovation needs entrepreneurs & firms to have freedom through markets to develop businesses e.g. Strong in the USA and UK - market mechanisms depend upon political stability, just legal systems, and non-corrupt govts - govt role is therefore to make policy decisions on behalf of the general good
(e.g. D.C.North, Institutions, Institutional Change and Economic Performance, 1990).

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Interpreting the role of the state (3)

The State and Socially Constructed Markets - also stresses role of national institutions in shaping business systems - but puts more emphasis on firms than markets, both being socially constructed within each nation - key role for the state in shaping business strategy, market exchanges and inter-firm networks - highlights the social and political, as opposed to economic, origins of business systems
(e.g. R.Whitley, Divergent Capitalisms: The Social Structuring and Change of Business Systems, 1999)

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Interpreting the role of the state (4)

The Developmental State Model - active role of govt in promoting economic development (e.g. Japan & East Asia in 1980s) - different to central planning, and opposite of decentralised market mechanisms - state creating and extending the role of markets (developing firms with the competencies to compete) - link between ideas on the developmental state with those of late industrialization

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Areas of state policy intervention in economic management (1)

Beyond broad regularities, precise policy mix depends upon: - political and cultural complexion, and strength of particular institutions and interest groups - size of the national economy, especially that of the domestic market - nations resource endowment, both physical and human - relative position in the world economy, incl. level of economic development & degree of industrialization Macro-economic policy - fiscal policy (raise/lower taxes on companies and/or individuals, and levels & recipients of govt expenditure) - monetary policies (adjust size of money supply, speed up or slow down rate of circulation)

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Areas of state policy intervention in economic management (2)

Trade policy - tends to be restrictive towards imports and stimulatory towards exports - imports policies e.g. tariffs, quotas, import surcharges, health & safety regulations, customs procedures etc. Foreign direct investment (FDI) - outward investment by domestic enterprises and inward investment by foreign enterprises - inward investment encouraged by: screening investment proposals, excluding foreign firms from certain sectors, compliance with national codes of business conduct or employment laws, investment incentives Industry policy - boundaries between trade, FDI and industry policies are increasingly blurred - various stimulatory or regulatory mechanisms applied across industries or in particular sectors or firms e.g. labour market policies, investment incentives, merger & competition policy, environmental regulations
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Areas of state policy intervention in economic management (3)

Competition policy - increasing in leading economies over the last two decades - govts examine links between many factors that will influence national competitiveness, including education, taxation, investment and R&D incentives, infrastructure, monopoly and fair trade regulation, growth rates, exports and FDI (growth of competitiveness commissions) - world-wide trend since the early 1980s towards deregulation and the privatisation of state assets (consequence of competition policy and a greater dependence on market mechanisms) Other key areas - technology policy, education & training, infrastructure supply, laws and regulations

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State interventions across leading economies (1)

States histories embed elements of path dependency Persistence of different varieties of capitalism

Japan - the archetypal developmental state - high level of consensus between major interest groups on need to create a dynamic national economy - reflects cultural characteristics of Japanese society, and poor physical endowment of the country - state had central role in guiding operation of highly competitive domestic market economy - post-WW2 key govt institution was the MITI, renamed Ministry for Economy, Trade & Industry (METI) in 2001 - METI assisted by high degree of consensus and mutual decision-making between big business and the state bureaucracy - industrial policy not state-directed industrialization, but industrialization negotiated & agreed by business and officials

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State interventions across leading economies (2)

Japan model a combination of protectionism, directed savings within a controlled finance sector, export-orientated industrialization, and state-business cooperation in the development of new technologies, products and whole industries - Japan transformed from low-value, low-skill economy to a high-value, capitalintensive economy - clearly-targeted and selective industry policy and a strongly protected domestic economy - FDI extremely tightly regulated post-WW2 - outward investment grew rapidly in 1970s & 80s, consistent with METI policy of internationalising the economy - slow growth since 1990, need for reform of Japanese business system, challenging need for industrial policy - Japanese companies believed they had acquired organizational capabilities to compete freely & without govt guidance - Japan had become a net exporter of technology, so METI moved from direct planning towards a policy of facilitation - currently much debate about whether Japan can recover its dynamism, and what kind of role govt can & should play

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State interventions across leading economies (3)

United States - basic philosophy of non-intervention by the federal govt in the private economic sector - regulatory role for federal govt, ensuring continuation of competition, mainly via macro fiscal/monetary policies - post-WW2 policy towards international trade has been one of urging liberalization, and the reduction of tariffs in multilateral negotiations through the GATT/WTO - since 1980s increasing willingness to develop bilateral trading arrangements with other countries - US now seen as having an increasingly unilateralist tendency, e.g. trade disputes (with Japan and the EU). - general business and cultural bias for minimal government

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State interventions across leading economies (4)

UK - 1960s and 1970s Department of Trade and Industry weak compared to the Treasury, which at critical times reasserted priorities of macroeconomic management - 1970s industrial policy associated with the rescue of lame-ducks, i.e. firms in decline, and the nationalization of large industries e.g. shipbuilding or vehicle manufacture - since 1980s strong pursuit of policies of privatisation and deregulation - today UK has intermediate position between pure market capitalism of US and social market capitalism of continental Europe - tendency in some areas (notably labour market policy) to be closer to the US

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State interventions across leading economies (5)

Germany - German economy characterised by considerable competition between domestic firms, and also high level of consensus between various interest groups (incl. labour unions, major banks and industry) - post-WW2 federal govt control of finance and banking industry, and strict macro-economic policy - powers of the Bundesbank now largely been passed to the Central European Bank - federal legislation on industrial relations and corporate governance have also been significant - strong established policy of social markets involves mixture of market mechanisms (albeit supported by complex banking and interfirm networks) and welfare systems

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State interventions across leading economies (6)

China - decades of self-imposed separation from the world economy - now rapidly become an increasingly significant global player - massive economic potential based on sheer size (1.3 billion population) - 1949 Communist Party came to power, from 1953 industrial plans according to Soviet model of command economy - but China remained a largely agricultural economy, continued mass poverty and at times famine - 1960s and 70s failings of industrial system revealed through misallocation of goods, stockpiling, rationing of clothes & food - state-owned enterprises (SOEs) lacked effective product development, management, workplace skills & technology - 1976-79 political changes enabled new Chinese leaders to reform industrial system before it collapsed - 1979 began open policy of controlled trade and inward investment strategy - set within context of so-called four modernisations (agriculture, industry, education, and science & defence)
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China
- 1980s gradual decline in price controls, setting of employment rights & contracts, and greater emphasis on profit motive - 1984 SOEs encouraged to operate in a freer and more market-orientated system - lowering of state ownership in favour of market mechanisms and decentralised managerial decision-making - 1990s increasing pace of privatisation, growth in alternative sources of finance (incl. private banks and stock markets) - economic control shifted from central government to provincial governments - trade and protectionist barriers lowered, culminating in World Trade Organisation (WTO) membership in 1992 - export-orientated industrialization encouraged - FDI supported (at first through joint ventures), bringing technology, managerial know-how, new products & capital

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China
but despite massive inflows of foreign capital & technologies, China remains centrally-controlled command economy in which SOEs dominate, and their reform is a massive task - institutional & geographical structure of China now in a state of flux - key will be internal power struggles between modernisers and those who wish to retain a degree of isolation - real test of success will be raising living standards for majority of Chinese, not just those in more developed areas - role of the state in China remains large: close regulation of business; attracting and negotiating inward FDI; agreeing outward FDI; close control of banking & capital investment; business group or industry-wide planning through industrial commissions; technology policy; selection of future growth sectors

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China What in the future?

- the direction of the trend in Chinas economic management is clear, but describing the nature of this hybrid system is more difficult (given Chinas size, and large internal diversity in levels of state ownership, control, size, internationalisation, and technology levels).

Is China a Socialist Market Economy, or has it become a Capitalist Developmental State?

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The regional dimension to state activity (1)

- states collaborate with other states to achieve specific economic and welfare goals - increasing number of regional integration agreements (RIAs) - regionalism now a dominant feature of the contemporary global economy - basis of RIAs is the preferential trading arrangement (preferential market access to other members of the regional group) - liberalising trade between members whilst simultaneously discriminating against third parties - creates large markets for own producers whilst also protecting them from outside competition e.g. EU

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The regional dimension to state activity (2)

- regional trading blocs have major influence on flows of investment by transnational corporations - removal of internal trade (and other) barriers leads firms to realign their organisational structures to reflect regional rather than strictly national markets (which diverts investment from some locations in favour of others) - regional integration can vary from free trade areas, to a common market, to full economic union - only one group, the European Union, comes close to being a true economic union - disproportionate share of global production, trade and investment still concentrated in so-called global triad of N America, Europe and Asia Pacific, and RIAs in each of these three major regions ...

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The regional dimension to state activity (3)

Europe - European Union easily the most highly developed and structurally complex of all the worlds regional economic blocs

US - much more shallow and fragmented attempts at political-economic integration - overwhelming dominance of the US in the region - most important RIA is North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico

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The regional dimension to state activity (4)

Asia Pacific

- much looser, informal and open arrangements, e.g. ASEAN (Association of South East Asian Nations) - intergovernmental institution to promote regional cooperation, strong element of consensus, but rapid responses difficult Ultimately any regional bloc originates from, and is given legitimacy by, nation states, which continue to be extremely important building blocks in the global economy * China and Japan NON-Members
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Nation states and globalization (1)

- rise of Japan and East Asian nations post-WW2 led many to support the role of the developmental state - as Japan emerged as an advanced and leading economy, its businesses no longer sought or needed active state involvement - slow growth in Japan since 1990 & Asian Crisis of 1997 undermined the case for the developmental state - so too did success of the US and UK economies, which stressed a market-based approach to economic management - greater internationalisation of the world economy further limited policies of protectionism and weakened the potential of selfcontained national industrial policies

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Nation states and globalization (2)

- some (e.g. Reich) thus concluded that governments could no longer enhance national competitiveness - TNCs gained competitiveness through global webs, not through their geographical location - Ohmae even spoke of the death of the nation state in the wake of internationalisation and more powerful TNCs - Fukuyama exaggerated with his claim to the end of history (i.e. debates over political economy had ended as all nations converged along the US model) - central claim of hyper-globalisers is that we live in a borderless world where states no longer matter - combination of revolutionary technologies of transportation and communications, and the increasing power of TNCs has, it is argued, shifted economic power out of the control of nation states This is a highly misleading view - states capabilities are being reduced in some areas, but process is not simple or uniform
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