After suffering significant political and/or economic crises all four BRIC countries embarked on a course of fundamental reforms during the 1980s and 1990s that transformed their economies and succeeded in boosting growth, largely by fomenting greater private-sector activity. By contrast, the financial crisis has strengthened the influence of the “statists” and increased the allure of what critics have labelled the “Beijing consensus”. The urge to extend the role of the state without a thorough analysis of the potential costs and benefits of doing so should be resisted.
During much of the post-WWII period, the BRIC economies have either been very or relatively closed to trade and they have tended to suffer from heavy state control and intervention. Naturally, the levels of state control and economic restrictions have varied dramatically. After all, China and the (then) Soviet Union used to run state-controlled command economies, while Brazil and India, in spite of significant economic restrictions and the important role played in the economy by the state, had functioning, if restricted, markets.
While Brazil’s and Russia’s development model came unstuck during the 1980s, China’s and India’s had never much “stuck” in the first place – at least judging by the two countries’ level of per capita income. Brazil and Russia experienced their high-growth periods during 1945-1980, before their economies and their respective economic models were engulfed in crisis. The causes for the ultimate failure differ somewhat, but both economies entered periods of stagnation because of “excessive” – if admittedly varying – degrees of state intervention and limited trade openness that ended up undercutting total factor productivity growth. China and India, by contrast, never experienced a comparable (per capita) growth take-off until they started reforming their economies in the 1980s and 1990s, respectively. India’s infamous “Hindu rate of growth” perhaps best captures the relative economic stagnation that characterised the four decades following WWII.
After having suffered significant political and/or economic crises all four countries embarked upon fundamental reforms that transformed their economies and succeeded in boosting growth. Brazil defaulted on its external debt in the early 1980s, after a decade-long external borrowing binge that had helped sustain the import-substitution industrialisation strategy beyond its expiry date. A “lost decade” ensued until the Cardoso administration (1995-2002) started implementing wide-ranging structural reforms, including trade liberalisation and privatisation, and managed to defeat hyperinflation. The Lula administration (2003-2010) finally managed to stabilise the economy for good, and economic growth started to move to a tangibly higher level following the 2002 “transition crisis”.
In Russia, following the break-up of the Soviet Union in 1991, reformist governments transformed the command economy into a market economy by way of a so-called “shock therapy” under Yeltsin (1991-1999). Similar to Brazil, post-reform Russia suffered a major financial crisis in 1998. Economic stabilization and growth take-off were finally achieved during the Putin presidency (1999-2008) – helped, admittedly, by continuously rising oil prices.
In the late seventies, China emerged from the political and economic turmoil of the Cultural Revolution (1966-76) with a pragmatically-minded leadership under Deng. The state-controlled economy was in tatters and the time was ripe for a new approach. Not only did it not matter if the cat was black or white as long as it caught mice. Becoming rich became glorious, too. Various types of liberalising reforms, perhaps most notably the reform of township and village enterprises (TVEs) in the late seventies and the establishment of special economic zones (SEZs) in the eighties, brought about fundamental economic change and set free a stunning economic dynamism lasting to this day.
In India, “liberalization by stealth” (Panagariya) started in the late 1970s and early 1980s and reforms continued under the Rajiv Gandhi government (1984-89), notably the liberalisation of the “Licence Raj”. Economic reforms received further impetus under PM Rao (1991-96) and FM Singh following the 1991 balance-of-payments crisis. The liberalising reforms, conspicuously, helped accelerate per capita growth.
By the late 1970s and early 1980s, the various economic models had either failed after a relative period of success (Brazil, Russia), or the realisation had emerged that the models had never worked in the first place (China, India). Economic and/or political crises acted as a crucial catalyst for reform by allowing political leaders to push through important reforms. One does not have to be of a neo-liberal persuasion to acknowledge that it was a combination of economic reforms aimed at “more market” and “less state” that helped lift growth.
By contrast, the global crisis has politically strengthened the “statists” and has ideologically increased the lure of the, what critics have labeled, the “Beijing consensus” (Halper). The “Beijing” as opposed to the “Washington consensus” rejects the presumption I favour of (unfettered) “market liberalism” and assigns the state a central role in economic development, mainly through state ownership in sectors that are deemed strategically important, through significant government control over credit, through state support for “national champions” and through state-owned investment funds (aka sovereign wealth funds).
After all, ad-hoc government intervention and, especially, “state-led” credit policies proved instrumental in limiting the economic and financial fall-out of the 2008 global crisis. In Brazil, the next government will pursue a more active industrial and financial policy and the Brazilian state will no doubt play a more prominent role in selected sectors. In Russia, where parts of the economy are dominated by the state, the government is talking about privatisation, but – like in China – this will at most involve selling minority stakes in “national champions” to foreigners. Neither China nor India will significantly reduce state involvement in the economy in the coming years.
This does not mean that we won’t see any economic reform in the BRICs, but a significant reduction in the role played by the state looks unlikely. All four countries have fared relatively well in terms of growth over the past decade. It is therefore not surprising that the dominant political forces seem to be taking an “if it ain’t broke, don’t fix it” approach. Admittedly, state involvement is not per se a bad thing. In the case of market failure or in areas where the social returns exceed appropriable private returns, for instance, state investment may even be desirable. There are also successful examples of state-led economic development, even if failures have historically been far more common. Amongst other challenges, states face time inconsistency problems and need to avoid capture by factional interests. The more extensive and long-lasting the state involvement, the greater the risk of “capture” by rent-seeking interests, and the greater the negative impact on economic growth.
The role of the state in economic development is too complex to be adequately captured by a label. Nonetheless, there is no denying that the “Beijing consensus” and its cousins in Brasilia, Moscow and New Delhi have thrown down the gauntlet to the, often misunderstood, “Washington consensus”. This political reality notwithstanding, BRIC history suggests the urge to extend the role of the state without carefully evaluating the potential costs and benefits should be resisted. Intellectually, if not politically, the “burden of proof” should remain squarely on the shoulders of the “statists”.