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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Does a government promote faster development?

Does a government promote faster development?

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Global Moderator
By R.M.B Senanayake

The view that the prosperity of a country can be expanded more rapidly by government intervention and government investment took root in our country owing to the Socialist dogma preached by the leftists. But Adam Smith had said that government intervention was a hindrance rather than an aid to economic development. He argued that if men were given freedom to produce, trade and consume, productivity would rise and the consumers would be better satisfied.

The superior productivity of Capitalism was made possible by the division of labor. The incentive to work harder, save and invest was because of the certainty the people had to enjoy the fruits of their labor due to the new found freedom. The people were no longer dependent on their superiors – their landlord or their guild master (head of the association of craftsmen) and thus could enjoy the fruits of their hard work or inventiveness. Adam Smith pointed out that in earlier societies people were dependent on their superiors. They were also subject to arbitrary laws which made property rights insecure. The powerful were above the law and could confiscate the fruits of other people’s work on unreasonable grounds. With economic freedom came a great deal of prosperity. True, it was characterized by a great deal of inequality but the living standards of the poor improved. The early Marxists including Marx himself never doubted that the Capitalist system would produce enormous prosperity.

Dynamism of Capitalism

Here is what Engels said on the dynamism of Capitalism

``. . .the bourgeoisie shattered the feudal system, and on its ruins established the bourgeois social order, the realm of free competition, and freedom of movement, equal rights for commodity owners, and all the other bourgeois glories. The capitalist mode of production could now develop freely. From the time when steam and the new tool-making machinery had begun to transform the former manufacture into large-scale industry, the productive forces evolved under bourgeois direction developed at a pace that was previously unknown and to an unprecedented degree".

Marx and Engels saw the unprecedented development under Capitalism during the Industrial Revolution. Their objection to Capitalism was not that it didn’t produce fast economic development but that there was unequal distribution of the fruits of production. They argued that owing to this inherent weakness this tremendously dynamic productive system would eventually break down. The Capitalists were exploiting the workers paying them less than their contribution to the process of production and also replacing labor with capital as labor costs increased. Competition among the capitalists would lead to the falling rate of profit. Eventually the unemployed workers who were displaced by machines would stage a revolution. But the Capitalist system despite several periodic crises has not collapsed as predicted by Marxists. Leftists therefore had to revise their theories. Lenin argued that capitalism would lead to Imperialism and war which would bring down the system. Wars took place but capitalism has survived.

Is economic development faster under Socialism or Capitalism

The post Second World War Socialists came out with a new theory – that economic development would be faster under Socialism and central planning. Capitalism, with its emphasis upon free trade and free competition, came to be portrayed as a system that is useless if not harmful for any underdeveloped country that hopes to see its wealth increase. This dogma was accepted in countries like Sri Lanka, Myanmar, Cuba, and North Korea. But countries like Germany and Japan after the total destruction of their economies by war restored Capitalism and the free market economies. Other countries like South Korea, Singapore and later Malaysia too accepted the private sector as the engine of growth and downplayed the role of the state in development.

Hong Kong was a mere entrepot trade port for China during the colonial period. As a free port it had no protective duties or quantitative restrictions on imports; no import licenses or foreign exchange controls; no cumbersome procedures or delays to hinder the clearing of goods through customs; the Hong Kong dollar was stable and freely convertible. The Communist takeover on the mainland forced Hong Kong to re-think its role. It could no longer depend on the entrepot trade for survival. Refugees poured in from the mainland. No State planner decreed that Hong Kong should emphasize industry, but entrepreneurs realized that it was profitable to start manufacturing enterprises there since labor was abundant and cheap, taxes were low, red tape virtually nonexistent, raw materials and machinery could be imported freely.

In 1950, there were 1,752 factories employing 92,000 workers. By the end of 1963, there were 8,348 thousand factories employing 354,000 workers. The success of Hong Kong is due entirely to Capitalism. But here in Sri Lanka the intelligentsia still thinks development must be spearheaded by the State.

Communist States adopt Capitalism

Acute thinkers in the former Soviet Union realized that the Soviet economy was flagging in the 1960s. Professor Y.G. Liberman of the Economic-Engineering Institute in September 1962, suggested the introduction of the profit motive to the Soviet economy. Although the Liberman proposals were opposed by communist "conservatives" as being capitalistic, they were introduced in the Soviet Union on an experimental basis in July 1964. After Gorbachev they would be extended throughout the economy.

The Eastern European countries like Czechoslovakia also introduced the profit motive to their industries. It was recognized that under central planning quantity and not quality had been the result and that resources were being squandered, that goods produced were too costly and could not be sold abroad except at subsidized prices. Central planning could not enforce technological improvement and innovation since government officials as the managers were risk averse and played safe. So the Capitalist entrepreneurs had to be brought back. As there were no private capitalists government enterprises were sold to party bigwigs and the present system of crony capitalists emerged.

China adopts market forces

China during the regime of Mao Tse Tung was an economic disaster. Deng Tsiao Peng introduced market forces after 1978, first tentatively and later more boldly. Today China is a large economic power. China’s official economic policy is a "socialist market economy with Chinese characteristics." But in realty growth is driven by capitalists for after 1978 the Chinese economy opened up to allow foreign private enterprise. Since then private businesses and companies have sprung up and found considerable success amidst fierce competition. Deng Tsiao Peng set up four economic zones (later increased to include all coastal areas and the capital Beijing) and welcomed foreign private investment.

A specific appeal was made to the Chinese Diaspora, a community of 60 million Chinese in Taiwan, Thailand, Malaysia, Indonesia and even the USA to invest in China. In the early 1980s collective land worked by the communes was rented out on a long-term basis to peasant families and in the mid 1980s price controls were removed from the bulk of goods and services. Agricultural production grew rapidly and foreign investment started pouring in and is still continuing.

Is Chinese development due to Capitalism or Socialism?

The public sector accounts for only 30% of the GDP. A committed Italian Marxist journal called Falce Martello has criticized that since Den Tsiao Peng’s reforms China has steadily moved towards Capitalism. Stock Exchanges were opened in Shenzen and Shanghai. It says an official decision was taken in the 1990s to drastically reduce the weight of the state sector of the economy with mass layoffs and sackings, combined with a further opening up to foreign investment. State-run companies were turned upside down and inside out, with either the fusing of companies into one or the breaking up of others. The purpose of this was to separate the profitable sectors from the loss-making ones. The former were privatized and the latter were left to rot. As in Russia, the top party officials and their families grabbed the lion’s share. As a result of this process at least 70 million workers in the public sector lost their jobs.".

On July 1, 2001 the formal decision was taken to allow private capitalists into the party. In November of the same year China joined the WTO. Russia has just joined.

China has become the manufacturing hub of the world. Last year world trade grew by 5%, but 60% of this growth was Chinese. In spite of calls to impose protectionist measures against Chinese exports, these continue to grow because a large percentage (around 60%) are products made in China by US, European, Japanese, Taiwanese and Korean companies to be exported back to their home markets! 470 of the top 500 multinationals are operating in China. So is Chinese growth due to Socialism or Capitalism?

Post war Germany and Japan revert to Capitalism

In post war reconstruction of their economies both Germany and Japan opted for capitalism rather than any socialist form of planning. Both countries displayed tremendous economic dynamism in the postwar period, while remaining wedded to free enterprise. Both countries had been devastated by the Second World War. Japan recovered in less than a decade. Manufacturing output exceeded the prewar level in 1953. Six years later it had doubled, and by mid-1964 it had doubled again. Germany under Erhard removed all price controls and allowed market forces to function freely. These countries show in a striking way how dynamic a developing free economy can be. We have to remove the shackles on the private sector and depend on the private sector not the State as the engine of development with the State providing only a supportive role.

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