Next time, put both hands on wheel of the economy

PUBLISHED : Sunday, 14 December, 2008, 12:00am
UPDATED : Sunday, 14 December, 2008, 12:00am

Hardline Republicans in the United States Senate have succeeded in blocking, for now, a US$14 billion rescue for the Detroit carmakers. This is likely to be the free-market dogmatists' last stand. A bailout looks inevitable. However reluctantly, big government is coming to Washington. Carmaking has been such an integral part of the US economy that it is most unlikely the industry will be allowed to fail, assuming Chrysler and General Motors survive long enough for the next president to take office. Already, outgoing President George W. Bush is thinking of using part of a bank bailout fund to throw Detroit a lifeline.

The financial crisis has not only forced Washington, but other western governments, to decide which industries to save and which to let go. When the dust settles, many will own a portfolio of nationalised financial institutions. They will, in many cases reluctantly, have extended their tentacles into large segments of their economies. And, having completed the bailouts, they will have appointed powerful 'tsars' and imposed tough regulations on the industries they have decided to save. This is industrial policy by default.

Throughout the go-go years that have just ended, free-market ideologues derided state-directed industrial policies as the misguided efforts of developing countries to expand their economies. Now, as a result of the financial crisis, it has become the economic policy of choice in the west - but it dares not speak its name. The Republicans who voted down the rescue package for the US car industry understand this more than anyone. The package called for what has been dubbed 'a government car tsar' to assess the carmakers' finances, set benchmarks to evaluate their progress in restructuring and act as moderator in negotiations between carmakers and parts suppliers so everyone gets something and no one goes under. Such power would delight bureaucrats from Japan's Ministry of International Trade and Industry or China's National Development and Reform Commission.

Of the US$700 billion stimulus package that president-elect Barack Obama and his economic team have unveiled, infrastructure takes centre stage. About US$500 billion will be invested in roads, bridges and other essential infrastructure to improve rundown structures and transport networks, and to create 2.5 million jobs. It will rival the construction of the interstate highways from the 1950s. Another part of the Obama package will be used to reshape the energy industry by promoting 'green' energy and reducing dependence on fossil fuels.

Many developing nations have tried to build their way into an economic boom, often with bridges to nowhere and buildings left vacant. India and the mainland are still doing it now. It looks like the US will join their ranks. And why not, considering the US banking industry, and its lax regulation, have begot an epic financial crisis which has infected key economies? This has long been a speciality of boom-and-bust economies of the developing world. But there is a silver lining. The history of economic success in Asia and elsewhere has usually involved the highly visible hand of the state, rather than the much-touted invisible hand of the free market. In reality, it rarely ever works with just one or the other. Success usually involves the judicious use of both hands. After this crisis, the rule book of economic development will have to be rewritten for the 21st century.