Politics remains mired in ideological preconceptions of what is optimal, often landing us with bad policy. Too often we see a simplistic and false dichotomy between partisan claims that markets are the best policy tool because they are efficient, or that government should lead because this ensures equity. This is a major drag on our progress and prosperity because today’s policy challenges typically require hybrid policy solutions: sophisticated combinations of government and market tools that promote equity and efficiency at the same time.
The 20th century can be seen as a process of trial and error through which we came to understand where governments or markets were more appropriate. Libertarian, free-market capitalism collapsed in the Great Depression. The welfare state, in which government sensibly intervened to overcome market failures in sectors like health care, saved capitalism from itself.
But, far from being a perfect system, the social democratic welfare states of the post-war years terminated in the horrors of stagflation: rising unemployment and inflation amid torpid economic growth. To overcome this, structural adjustment was needed to bring markets back into areas of policy where they had a comparative advantage.
Welfare states rolled back tariffs, price controls, subsidies and other distortions. They deregulated many markets to encourage open competition and the productivity improvements it brings.
This resulted in prolonged economic growth around the world from the mid-1980s until the Global Financial Crisis. It also accelerated growth in poor countries throughout Asia, dramatically reducing poverty and improving living standards.
Taking account of winners and losers
A key factor in the long-term success of structural adjustment was whether the governments prosecuting it considered the compensation of losers from reform.
France and Japan had a strong focus on potential losers from change. Consequently, structural adjustment never took place. The state continued to dominate the policy space, and the French and Japanese economies stagnated.
In America and Britain, structural adjustment took place under neoliberal regimes (Reagan and Thatcher). These were ideologically committed to markets even where government had a clear role to play. Growth took off, but the gains overwhelmingly went to the privileged. Marginalised citizens saw their prosperity continue to flat-line.
As growth was not invested in mobility in the form of schools, hospitals and infrastructure, the losers from change were never reactivated. Today large portions of American society struggle with limited health and education. They have low productivity and low wages: a waste of human resources. And, as we’ve seen in recent elections, they are very angry about it.
In Australia, Denmark and Canada, among others, structural adjustment was undertaken in a way that reaped the benefits of liberalisation while compensating losers from change. These countries put themselves on a long-term path that ensured both competition and opportunity by exploiting complementarities between markets and government.
The hybrid policy paradigm
Competition and opportunity are mutually beneficial. Competition in the absence of opportunity results in incumbents reaping the benefits of open markets. This is not because they are the most meritorious, but because they are in the right position. The resources of the underclass go underutilised, which is both unfair and inefficient.
Similarly, egalitarian policy settings without open competition lead to the dominance of insiders like belligerent unions at the expense of outsiders. This is evident in staggering levels of youth unemployment in France and workforce casualisation in Japan.
- ^ saved capitalism from itself (www.project-syndicate.org)
- ^ Not-for-profits must adapt as one arm of government's 'three-sector solutions' (theconversation.com)
- ^ French (www.ft.com)
- ^ Japanese (www.bbc.com)
- ^ limited health and education (www.brookings.edu)
- ^ How gross inequality and crushed hopes have fed the rise of Donald Trump (theconversation.com)
- ^ youth unemployment in France (ec.europa.eu)
- ^ workforce casualisation in Japan (japantoday.com)
- ^ Routledge (2018) (www.routledge.com)
- ^ our Gini coefficient (theconversation.com)
- ^ book on hybrid policy design principles (www.routledge.com)
- ^ low-taxing (theconversation.com)
- ^ highly targeted welfare system (insidestory.org.au)
- ^ Time for a blunt lesson on HECS and price signals (theconversation.com)
- ^ Randomised controlled trials (theconversation.com)
- ^ Mounting housing stress underscores need for expert council to guide wayward policymaking (theconversation.com)
Authors: Mark Fabian, Postgraduate student, Australian National University