The return of State planning

brasilia-2448030_1280Conventional economics is notorious for having created a highly persuasive analytical toolbox. The challenge of this stream of the profession until the 1960s was to prove the logical possibility that the market could not only coordinate the entire economy, but also keep it stable at that single point of optimum equilibrium. In order to boast the wonders of decentralized market exchange, the theory paradoxically invoked the metaphor of a “benevolent social planner”.

A growing list of circumstances in which markets fail to generate the optimal societal outcome (externalities, coordination failures, and so on) raised the academic premium for sound justifications for avoiding State interventions in the economy. Government failures – it was, and still is, claimed – could be even worse than those of the market.

The theoretical vilification of the State’s performance matched the emerging political philosophy in the early 1980s. Despite the enormous State apparatus created after the Second World War, from 1980s onwards, government functions were gradually reduced to the subordinate role of supporting the private sector. To paraphrase Keynes: neoliberalism won over the West as the Holy Inquisition conquered Spain. Western society surrendered to market dominance, shrinking State capacity despite the achievements of the three decades of postwar Keynesian policies, which generated the highest world growth rates in modern history. 

One of the blindsides of the drastic downsizing of the State observed after 1980s is severely limiting its capacity to respond whenever needed. The COVID-19 epidemic made this very clear. Countries that fell for the neoliberal spell faced a flagrant difficulty in organizing an efficient response to a looming healthcare crisis, thus rekindling a debate about the way in which the State operates in society. 

COVID-19 called into question the forty-year dominance of liberal ideas over the West’s economic governance. By placing public health issues at center stage in all countries, the virus triggered a breakdown of the market system and led to a major shift in ingrained standards of sociability. For the first time in decades, the economy has been forced to work for society, not the other way around. People had time to stop to reflect about the way society is currently functioning, and the effect it has on their lives. 

The notion of resource constraint has always emboldened economic discourse with moral overtones, but the CODIV-19 crisis gave way to unexpected reactions by the most celebrated exponents of mainstream economics: “this is a war; it is no time to think about debt or austerity”. Even Kenneth Rogoff, known for his unsubstantiated preaching of a growth-curbing debt threshold claimed, stated in an interview to PBS: “And you know what? If we have inflation at the end of this, so what, if that is what we needed to do to win this war. We’re trying to protect the American people, protect our interests, protect the future.”

The lockdown mode has led to a forceful paralysis of non-essential sectors to sustain social distancing. As part of the economy’s main engine was turned off, the productive system has been stressed to its limits in order to provide the population access to basic goods whilst maintaining the basic institutions that regulate society. It would be as if the economic body went into an induced coma, functioning with just enough intensity as to sustain life. Social distancing requires the heart to keep pumping blood to the most remote confines of the social body, even in very adverse conditions.

The healthcare crisis thus imposes itself as the mother of market failures in this context. The State needs to provide the necessary resources so that citizens are kept isolated, precisely to prevent the overload of a specific sector, the health sector. Home confinement implies the need for a drastic factor reallocation towards the health system. This means that the production of inputs required for the functioning of this system, and other essential activities, must be favored to the detriment of countless activities that are interrupted and/or affected by the sharp drop in demand for less essential goods and services. Since the reallocation is only temporary, the high costs of this process hardly justify any monetary gain. Furthermore, strong moral rejection of price gouging in times of collective hardship throws sand in the much-lauded price mechanism. 

This is where the state comes in with its ability to respond to unpredictable systemic shocks that threaten societal organization. Like the body’s immune system, the state needs to be adequately equipped to deal with the pathogen at critical times, as Mariana Mazzucato has clearly stressed in a recent article for The Guardian. It seems that, so far, countries with better state planning structures have responded more effectively to externalities and coordination failures created by the healthcare crisis. In Germany and other Northern-European countries, for example, the response has been faster and better coordinated, and the effects of the epidemic have been thus far more contained than elsewhere. 

These examples stress the importance of building State planning capacity in order to coordinate public policies. The idea is beginning to gain some ground even among orthodox economists. Frydman and Phelps proposition of a short-term “systemic insurance” goes beyond simple government expenditure programs to sustain aggregate demand and alleviate companies’ financial conditions. It is about a qualitative change associated with “large-scale government-led interventions in how our economies produce and distribute goods and services”, similarly to the industrial conversion mechanisms of USA’s Defense Production Act (DPA). 

Brazil, however, is going in the opposite direction. Liberal ideas have for centuries proved quite appealing to the country’s economic and political elites. Nonetheless, after the end of the military regime in 1985, the 1988 constitution promoted a considerable increase in the country’s welfare state, creating a public heath system and promoting improvements in public education. Yet, during the 1990s, the country’s economic policy became dominated by the Washington Consensus agenda. During the 2000s, the situation changed, albeit slowly, with the election of Lula. After 10 years of a leftwing government (2003-2013) that has promoted considerable improvement in the country’s extremely high income inequality, the country witnessed the eruption of a social rebellion motivated by the increase in public transportation fees. Paradoxically, this “20 cents” revolt – as it was labeled – triggered a highly polarizing anti-state wave a few years later. 

After the June 2013 demonstrations, the controversial impeachment of a democratically elected president generated a severe crisis in 2015-16 and gave way to a new round of the “structural reforms” agenda, with the clear objective of abruptly reducing the State and subordinating it to the market. In 2016, this agenda gained an administration of its own and went full-throttle. An expenditure ceiling that frozen real government expenditure for 10 years was implemented that same year. In 2017, a drastic labour market liberalization was approved. The Ministry of Planning lost relevance over the last decades and ended up extinct by Bolsonaro’s government. The once mighty National Bank of Economic and Social Development (BNDES), praised internationally by many economists, has been another important planning institution that was drastically shrunk since the impeachment of president Dilma Rousseff. The bank’s disbursements went from 2,3% of GDP in 2015 to 0,8% in 2019, and its current focus is on help designing and financing privatization programs. Moreover, in September 2019, the Brazilian Congress approved the Economic Freedom Law, which further relaxed labor market regulations and revoked two important pieces of legislations. First, it ended the Brazilian Sovereign Fund, created in 2008 to stabilize commodity prices. Second, it revoked the Lei Delegada 4/62, which was the Brazilian version of USA’s DPA.

Without a law to coordinate industrial conversion and under a neoliberal economic advisory team, the Brazilian State renounced almost entirely its prerogative of coordinating economic policies crucial to cope with the current pandemic. The Lei Delegada 4/62 allowed the state to safeguard “the free distribution of goods and services that are essential to the consume and use of the people”, especially in times of supply shortages. The law 13.979, from February 2020, which regulates the measures to be taken during public health emergencies, however, does not cover this important issue, focusing only on mechanisms for administrative and sanitary control. Consequently, we observe in Brazil the  same hesitation of Trump’s government in using the available State instruments to deal with the COVID-19 health and humanitarian crisis, but in a underdeveloped country that had just come out of a severe crisis and was undergoing a drastic process of State reduction and deregulation. 

As Karl Polanyi stressed in his brilliant 1944 book, The Great Transformation, after each wave of liberalizing policies, an increase in State interventions follows, in order to protect society from the pressures and negative effects associated with subjecting human activity to markets. Some thought that this turn towards stronger state intervention would come after the 2008 financial crisis. Nonetheless, the changes that followed the crises were rather timid. It was only some years after the 2009 European crisis that Europe started to intervene a bit more in the economy, implementing smart specialization policies and changing the mode of operation of the European Central Bank. More recently, the environmental crisis is reinforcing the importance of mission oriented public policies to deal with climate change. In Brazil, however, the troubled political situation makes it hard to predict how long it will take for such changes to take place, but there is already some debates about resuming welfare state improvements and government-led development policies.

The COVID-19 crisis seems to be the turning point for the return of State planning. This capacity is crucial not only to coordinate the process of economic development of underdeveloped regions and countries, but also to respond to the systemic challenges that our society faces from time to time. Confronted with the immense impact of the current pandemic, there seems to be no other option but to promote the resurgence of State planning to better cope with similar situations in the future, in benefit of the whole society. We must not fool ourselves though. Such change will not come without strong resistance.

André Roncaglia is a Professor in Economics at the Federal University of São Paulo (UNIFESP) – Brazil. He tweets at @andreroncaglia.

João Romero is Associate Professor of Economics at the Federal University of Minas Gerais (UFMG) – Brazil. He tweets at @Joao_P_Romero.

Photo: The national congress of Brazil, Brasilia.

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