In the sixth John Bonython Lecture, P.T. Bauer argues that wide-ranging state controls hinder the development of Third World economies. Instead, they generate and heighten political tensions (often between ethnic groups) by diverting resources into the search for government favours, and so render whole populations largely dependent on the state for their well-being.
State Control is still defended as necessary to achieve the goals of comprehensive central planning. Lord Bauer shows that the problems that planning is meant to solve can be better tackled by other means, and that planning does little more than concentrate power in the hands of public sector employees and their clients.
It is an honour and a pleasure to deliver the John Bonython Lecture. The issues I shall speak about are not of a philosophical nature. But they affect the well-being and the livelihood of many millions of people in the contemporary world.
Since World War II far-reaching state control over the economy has been conspicuous in the Third World, particularly in Asia and Africa, much more than before the war.
The scope and instruments of control differ between countries and vary through time. But there are few in the contemporary Third World where economic life outside subsistence agriculture is not subject to close state control. The principal controls include: state monopoly of major economic activities including export, import, trade, transport and manufacture; close control over all external transactions through foreign exchange control; extensive licensing of commercial and industrial activity; state-owned and operated enterprises; state-supported, organised and directed so-called co-operatives; price control and wage regulation; large-scale fiscal measures for the purposes of economic control rather than the performance of necessary governmental functions. Some of these measures, as for instance state buying monopoly over major agricultural products, large-scale taxation and extensive licensing, provide governments with close and direct control over the livelihood of much of the population. These controls were introduced in an ad hoc fashion under pressures emanating from special interest groups in both public and private sectors.
Some Effects of State Control
Some results of the controls that I have recited are familiar: partial divorce of output from demand; raising of costs through quotas and restriction of entry; creation of contrived scarcities with the resulting divorce of prices from the opportunity cost of resources; and the emergence of privileged incomes and windfalls unrelated to productive performance in the operation of extensive controls, such as import licensing and foreign exchange control.
These results are compounded by widely prevalent characteristics of the economies seen in Third World countries. Here are some of these characteristics. First, in many less developed countries (LDCs) there are pronounced ethnic, tribal or geographical differences in human and other resources so that measures which prevent or restrict movement of people between areas, jobs and activities or the expansion of efficient firms involve heavy costs to the people directly affected, as well as to society at large. Second, subsistence or near-subsistence agriculture is a significant part of economic activity in many Third World countries. Emergence from subsistence production is necessary for economic advance. Many of the state controls obstruct this process, and therefore keep people in poverty and backwardness; this is especially evident in much of Africa. Third, for political and administrative reasons in most Third World countries, effective price control at the retail level and effective rationing of consumers are difficult, even impossible. Hence, final consumers usually have to pay market-clearing prices. This ensures windfall profits for recipients of licences and controlled supplies. Therefore, attempts to control prices or to allocate supplies give rise to a scramble for licences and supplies, with an easy benefiting the final consumer. Charges of favouritism, profiteering, corruption and other forms of misdemeanour inevitably arise, and provoke tension and conflict, especially in multi-ethnic countries.
Government intervention also has a powerful agent of voluntary change in habits and attitudes, notably the erosion of attitudes conducive to industry and material progress. Restrictive licensing of activities, including international transport, is among the types of control which impede or prevent such mobility and its beneficial effects.
Participation in foreign trade and other transactions plays a similar role which is especially important for Third World progress. Such contacts and transactions serve as vehicles for the movement of human resources, including skills. They also encourage new ideas, attitudes, crops, methods of production and new wants. Indeed, these contacts often first suggest to people the idea and possibility of a change in the scheme of things, including the very idea of economic improvement.
External contacts make possible such changes by voluntary adjustment. They therefore do not require coercion. Coercive change not only involves hardship, but is apt to invite resistance and backlash, even revolt. If such coercive change is pressed home, it is apt to leave behind a lethargic and inert population.
Thus there are good reasons for insisting on the significance of external commercial contacts and on this corresponding damaging effects of their restriction which everywhere accompanies state economic control. It is notable that throughout the Third World the most advanced areas and sectors are those with the most extensive and diversified external commercial contacts. Large parts of the Third World have been transformed within a few decades under the impact of such contacts and opportunities. Witness the transformation of much of South East Asia and West Africa between the 1890s and the 1930s. The significance of these contacts and the consequences of their restriction are highly pertinent to any assessment of major types of state control.
How State Control Heightens Political Tensions
The controls bring it about that the economic opportunities of people and their living standards as producers, consumers, workers and traders come to depend largely on the decisions of the government, that is on the politicians and civil servants who run it.
This politicisation of life provokes and exacerbates political tensions because it becomes all important who has the government. The stakes, both gains and losses, in the fight for political power increase greatly, as wealth intensifies the struggle for power. This sequence is clearly explicable in terms of the political struggle. World War II in much of Asia and Africa. This sequence is evident in countries where formerly different communities lived together peaceably, as for instance in Malaysia, East Africa and West Africa, when state intervention in economic life was very limited. The emergence and intensification of separatist forces is another result of the increase in the gains and losses from the operation of political power. This too is readily observable in much of Asia and Africa. The emergence of ubiquitous, often bitter and violent civil conflicts in the Third World cannot be understood without the politicisation of life since World War II.
Recent developments in Malaysia throw this into relief. Before the War it was a well-known saying in what was then Malaya that the Chinese did not mind who owned the cow as long as they were allowed to milk it. This old saw embodied simultaneously a wide-spread misconception and an important insight. The misconception was that the prosperity of the Chinese, most of whom migrated to Malaya as penniless coolies, was somehow extracted from other people, especially the Malays. This was patently untrue. The incomes and wealth of the Chinese were not extracted from others; they were produced, earned by themselves. The insight was that when a country is relatively highly governed, ordinary people are not much concerned with who exercises political power because they are not much affected by it. Ordinarily folk are then contented with who has the government. Few Chinese in present-day Malaysia would say that they do not much mind who rules the country in which economic activity is subject to extensive licensing and where ethnic quotas operate widely in employment, education and economic activity. Not surprisingly ethnic tensions in Malaysia are far more acute than they were before the war. (There is an illuminating article on this subject by Professor Thomas Sowell: ‘Malaysia in Malaysia’, CIS Policy Report, August-September 1988, p. 28.)
When political action is all-important, the energies and activities of ambitious and resourceful people are necessarily diverted from economic activity to political life. This result is damaging to material progress, because the direction of the activities of able people necessarily affect economic performance in any society.
The Fallacies of Comprehensive Planning
As I have already said, these state controls were introduced in an ad hoc fashion under the pressure of special interest groups, but they have often been defended as being components of a comprehensive development plan. This has given them spurious legitimacy in view of the widespread acceptance of a central, purposive of planning. The comprehensive plan, the control of production and planning is indispensable for the progress of poor countries. This claim has often been advanced by prominent economists in unqualified uncompromising terms. Here are two examples.
In 1956 Professor Gunnar Myrdal, Nobel Laureate in Economics and Executive Secretary of the United Nations Economic Commission for Europe, and one of the most widely respected contemporary social scientists, had this to say in a much-publicised lecture.
The emergence of this common urge to economic development as a major political issue in all underdeveloped countries and the definition of development as a rise in the levels of living of the common people, the uncontested understanding that economic development is a task for the governments and that the governments have to prepare and enforce a general economic plan, containing a system of internally applied controls and impulses to get development started and to keep it going, is an entirely new thing in history…
There are all kinds of reasons why we should expect numerous mistakes and in many cases total failure. But the alternative to making the heroic attempt is continued acquiescence in economic and cultural stagnation or regression which is politically impossible in the world of today; and this is, of course, the explanation why grand scale national planning is at present the goal in underdeveloped countries all over the globe and why this policy line is unanimously endorsed by governments and experts in the advanced countries. (Myrdal, 1956:63 and 65; emphasis in original)
In 1964 Professor Kitamura of Tokyo University advanced the same argument more succinctly.
Only planned economic development can hope to achieve a rate of growth that is politically acceptable and capable of commanding popular enthusiasm and support. (Kitamura, 1964:202)
Nowhere these opinions of academic interest only. Mainstream development economics often insisted that development aid should be linked to development planning by the recipients. Official Western aid, both bilateral and multi-national aid, was often linked to formal development planning by the recipient. As I have argued, the various state economic controls in LDCs reflect pressure by special interest groups and especially that of politicians and administrators who benefit from close control over their subjects. But the academic insistence on comprehensive planning and its influence on Western opinion and on the allocation of aid has helped the establishment of state control in the Third World.
Advocacy of large-scale economic intervention as necessary or helpful for development is still alive and well. But for various reasons its presentation and tone have changed. The argument is often couched in technical jargon and mathematical notation. It has also become more muted and at times even combined with lip-service to the market system. This is especially so when the argument is aimed at Western taxpayers, particularly in the United States.
Gunnar Myrdal and other prominent advocates of comprehensive planning interpret this policy as government determination of the composition and direction of economic activity, notably in the market sector. It replaces the decisions of individuals, families and firms by the decisions of politicians and civil servants.
The claim that comprehensive central planning is essential for development is patently invalid. Comprehensive planning played no part in the development of Europe, nor in the development of America, Japan or Australasia. Indeed it played no part in the development of any one of the now highly-developed countries. Nor did central planning play any part in the advance of the many Third World countries which have progressed rapidly in the last 100 years or so.
Even if it is recognised that central planning is not necessary for economic advance, this still leaves open the question whether it promotes such advance. Does it do so? This is a rhetorical question because the answer is an unequivocal no. Look at the evidence. It is the Soviet-type economies that comprehensive state planning is of the essence of economic policy. After decades of its operation general living standards remain extremely low in those economies, including the Soviet Union itself; they are almost certainly much lower than they would have been under a less centralised economic system. Any lingering doubts about these conclusions should have been removed by now. The contrast between the development of living standards in East Germany and West Germany is perhaps especially telling because the countries stem from the same ancestry and are ethnically identical. More generally, in recent decades, Third World countries with relatively limited state control have progressed much more rapidly and more closely-controlled economies. Examples include Malaysia and Thailand compared with Burma and Indonesia.
It is not surprising that the claims made for comprehensive central planning have been refuted so clearly.
How Planning Concentrates Power and Wastes Resources
As I have just said, central economic planning replaces the decisions of private individuals and families by centralised decisions which direct production, consumption, saving and investment. Yet it is only the individuals, families and firms who know their own resources, capacities, circumstances and preferences. They take their economic decisions in the light of these determinants which they alone can assess. Central planners, on the other hand, cannot take cognisance of differences in resources, requirements, preferences and opportunities. Their decisions therefore obstruct the deployment of resources into directions yielding the highest economic return in terms of goods and services wanted by people. Development planning does not augment resources. It only concentrates power. It creates positions of power such as do not exist under a market system. Whatever their abilities, the politicians and civil servants who direct policy cannot create new additional productive resources. Yet the accrual of resources to the government or the development of a favoured activity are often treated as if they were additions to resources or output, without noting that the resources have been diverted from other uses. Once this is recognised it immediately becomes questionable why and how the overriding of private decisions should promote economic progress.
It is even less obvious why such a policy should increase the flow of goods and services which are desired by consumers and which constitute the standard of living. Yet a rise in general living standards is habitually instanced as the declared aim of development planning. Under state control much of output is unrelated to consumer demand and therefore to living standards. This divorce of output from living standards is by itself likely to retard a rise both in output and in living standards. This is so because the prospect of a higher and more varied levels of consumption is usually an important incentive to higher economic performance through additional effort, saving, enterprise and production for the market. This is notably so in poor countries.
I may at this point forestall an often-heard objection or reservation to the foregoing argument. It is often said that wide income differences confer great power on the rich, a power no different from that exercised by politicians and civil servants under extensive state control. Indeed, according to this argument the power of the rich is more objectionable than that of politicians and civil servants because it is not exercised in the public interest. This argument is misleading on several grounds. In a market system there are, of course, rich people and large corporations. But their wealth does not by itself confer on them power in the critical sense of enabling them to restrict the choices of their fellow men. They have such power only when it is conferred on them as a privilege by a government. The market process as such does not bring about this kind of power. Moreover, it is naive to suppose that the interests of governments and civil servants necessarily coincide with those of society at large. In any case, the notion of the interests of society at large is at best hazy and indeed inapplicable in many Third World countries made up of very diverse and often bitterly antagonistic groups.
In LDCs as elsewhere, there are major difficult and complex tasks which governments should perform. There may be legitimate differences of opinion about the extent of these tasks. But even a minimum list would include the protection of people’s lives and property (public security), the conduct of external affairs, the effective management of the monetary and fiscal systems, the establishment of a framework of law and enforcement of contracts. Adequate performance of these tasks would stretch human and financial resources of most LDC governments. It is notable that many governments preoccupied with economic controls and so-called development planning do not perform these basic tasks. Indeed, they often themselves undermine public security either deliberately (for instance, by persecuting their subjects) or indirectly as a result of their policies.
The performance of the basic tasks of government does not provide rulers with the same hold over their subjects as does close economic control or so-called development planning. This may indeed be the reason why so many LDC governments prefer state control to attention to their basic tasks. They aim to plan but do not govern.
