6 - Market Imperfections and the New Role of Government

Summary

As the debate continues about the policies that should be used to shift from state socialism to the market economy and from stabilization to growth, it has become the generally accepted opinion—if not a truism—that none of this can happen without proper government engagement (Fischer, Sahay, and Vegh 1995). Even extreme neoliberal zealots in government—not at all a rare occurrence in Eastern Europe—exercise vast amounts of interventionism. The laissez-faire ideology remains where it belongs, in the world of words, in the sphere of ideas and illusions. In the world of real politics and true policymaking, laissez-faire is not and cannot be a viable approach. The work of the market is being seconded by the active policies of government in financial, economic, and social matters (Kolodko 1998).

Though arguing appropriately in favor of the market, some authors stress that until not so long ago government intervention played a very positive role in development. State control of the economy worked well for a long while in traditional capitalist countries. In reference to the statist policies adopted after the Second World War, Yergin and Stanislaw (1998, 128) ask,

‘Who could deny the success of the experiment? From the end of the Second World War until the oil crisis of the 1970s, the industrial world enjoyed three decades of prosperity and rising incomes that sparked aspiration and dreams. It was an extraordinary achievement.’

And then they reach the conclusion (p. 129) that,

‘By the end of the troubled 1970s, a new realization had gained ground: More than daily management, it was the entire structure of the economy that had reached its limits. It was imperative to rethink government's role in the marketplace.’

If indeed the issue was the simple one of reaching the limits, then it is puzzling that almost the entire globe turned away from statism at almost the same moment, since at the time nations were at such varying stages of development. But the world was also turning away from other old habits around them. Why? Simply because one must follow the leader. When changes are being undertaken in countries that are leading the course of events, soon afterwards they can (or must) be carried out elsewhere. If a step has already been accepted and executed by a leader, then it is much easier to push the case for such a step elsewhere.