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Business News/ Opinion / Columns/  Opinion | Governments are retaking the ‘commanding heights’ of their economies

Opinion | Governments are retaking the ‘commanding heights’ of their economies

The covid crisis might upend an international political economy that has nurtured global peace and prosperity since 1945

People wearing face masks to protect themselves against the spread of the new coronavirus cross an intersection in the central business district in Beijing (Photo: AP)Premium
People wearing face masks to protect themselves against the spread of the new coronavirus cross an intersection in the central business district in Beijing (Photo: AP)

World wars, or global public safety emergencies, are opportunities to reshape the global political, economic, and social orders—for good or for ill. As World War I broke out in 1914, governments everywhere ditched the gold standard, which had provided remarkable monetary stability over the previous century.

After the war, and then accelerating after the stock market crash that initiated the Great Depression in 1929, nations engaged in a mutually-ruinous trade war that shrank global trade and worsened the depression. In 1945, the pre-World War I era of globalization, famously extolled by John Maynard Keynes in 1919, lay in tatters.

But, change can also be for the good. As World War II wound down, the soon-to-be victorious allies laid the groundwork for new global institutions that have continued to shape the world to the present day, despite tottering a bit in recent years—the United Nations system, World Bank, International Monetary Fund, and the World Trade Organization (originally the General Agreement on Tariffs and Trade). With these global institutions in place, there followed economic liberalisation at home, albeit with a lag—deregulation and a rebalancing away from the state toward the market, starting in the 1980s in the UK and US, and then spreading to other nations, first advanced, then emerging.

It must be added that an equally important by-product of the depression and war was the modern welfare state. This began in the UK with its Labour government that took power after the war, and in the US and elsewhere in the years and decades after the end of the war.

The liberal international global order that these institutions supported, along with an unleashing of free market capitalism within nations, firmly underpinned by good public education, health and infrastructure enabled by the welfare state, is what engendered the rapid reconstruction of Europe and Japan, prolonged economic growth in the West’s advanced economies, and allowed emerging economies to play catch-up after they opened up to the forces of globalization—starting with East Asia in the 1960s, China in the 1970s, and then India in 1991.

One might have thought that the horrors of 9/11 and the subsequent “war on terror", and the more recent global financial crisis, might have undone this global order. But that would be incorrect. They shook its foundations, but, somehow, the edifice stood—even under the most recent assault from mercantilist and protectionist leaders such as US President Donald J. Trump.

What 9/11 and the global financial crisis failed to do, the current covid crisis may end up doing: upending an international political economy that has nurtured global peace and prosperity (with notable gaps and exceptions) since 1945.

As I had warned in the last two instalments of this column, governments the world over see in covid-19 a perfect opportunity—or, rather, perfect alibi—to shift the balance away from the market and back toward the state. Individual choices and the decentralized functioning of free markets have been curtailed everywhere, with governments operating by decree, directing resources much as in a Soviet-style planned economy.

What is more, state capitalism, of a type seen in East Asia and China, but at odds with Anglo-American private capitalism, is increasingly important. Accelerating the trend of banks being taken over by sovereign governments, a legacy of the global financial crisis of 2008-09, we now see an uneasy alliance between government and business across many key sectors. In the US, for instance, the deal struck between the Treasury and the major private airlines on 15 March will give the federal government “warrants"—the right to buy airline shares at a pre-set price. If and when these warrants are exercised, the US public will become shareholders in these airlines, something unthinkable a month ago.

In India, by contrast, the intellectual, cultural, and social foundations for free market capitalism have been very thin to begin with, and, even before the current crisis, the Union government had begun slipping back to command-and-control methods reminiscent of the Licence Raj. The government’s recent advice to private employers not to sack their workers, nor to cut their wages, is inconsistent with how market economies work. There are better ways for a government to intervene if its aim is to achieve social objectives at minimal distortion costs to the economy.

Businesses in India are hurting—most were forcibly shut down by a three-week nationwide lockdown that was recently extended by 19 more days—and many are not in a position to pay their bills, as no cash is flowing in. If the government’s advice turns into a diktat, many businesses will have no choice but to close down altogether. This will be a far worse outcome in the medium to longer run. A better solution would be for the government to subsidize directly the poor and the unemployed, and not turn to the private sector to create a surrogate social welfare net because successive governments have failed to do so.

The world over, governments are retaking the “commanding heights" of their economies, under the cover of covid-19. They are not going to cede this ground easily even after the crisis has passed.

Vivek Dehejia is a Mint columnist.

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Published: 17 Apr 2020, 08:42 PM IST
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