Sunday, March 15, 2009

Roberto Campos, Economic Development, and State Capitalism

Roberto Campos (1917-2001), once Brazilian Ambassador to the US and the UK, was probably the greatest Brazilian economic commentator of all times. In 1997 he wrote the following (HT Faria, my translation):

Natural resources, supposedly the object of imperialist greed, are not fundamental [for economic development], since Japan became wealthy without them. Education does not guarantee progress, since Russia collapsed years after adopting the formula of Lenin: education plus electrification. The saving rate is important, but only if investments are not wasted. Stable money is a necessary but not sufficient condition. Furthermore, capitalism is not enough, unless it is liberal and competitive, since state capitalism is disastrous.

The United States should pay heed to this advice before embarking in what could be its most ambitious state capitalism push ever, as explained by Bremmer and Roubini:

Politics [when it comes to this crisis] will make matters worse, primarily because governments in both the rich and the developing worlds are intervening in their economies more broadly and deeply than at any time since the end of World War II. Policy makers around the world are hard at work crafting stimulus packages filled with subsidies and protections they hope will breathe new life into their domestic economies, and preparing to rewrite the rules and regulations that govern global markets

Why is this dangerous? At the G-20 summit a few weeks ago, world leaders pledged to address the crisis by coordinating their economic policy responses. That's not going to happen, because politicians design stimulus packages with political motives -- to satisfy the needs of their constituents -- not to address imbalances in the global economy. This is as true in Washington as in Beijing. That's why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point in decades. Its politics that is creating the biggest risk for markets this year.

This is part of a worrisome long- term trend. In China and Russia, where histories of command economics predispose governments toward what we've come to call state capitalism, the phenomenon is especially obvious. National oil companies, other state-owned enterprises, and sovereign wealth funds have brought politicians and political bureaucrats into economic decision-making on a scale we haven't seen in a very long time.

Now the U.S. has gotten in on the game. New York, once the financial capital of the world, is no longer even the financial capital of the U.S. That honor falls on Washington, where lawmakers are now injecting populist politics into economics decisions. Companies and sectors that should be left to drown are being floated lifeboats. This drama is also playing out across Europe and Asia. As engines of economic growth, Shanghai is losing ground to Beijing, Mumbai to Delhi, and Dubai to Abu Dhabi.

It appears that we're bound to repeat the economic mistakes of the past, and nothing out there will stop us from doing so.

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