The Mixed Economy, Back for the First Time

A few years ago it felt like it was only "far- left radicals" that rallied against the domination of neoclassical economics over development policy. But now, thanks to the economic crisis, even some of its most devoted proponents are beginning to recognize the inherent contradictions within orthodox economic theory that have brought the entire field of study into question. (see "What Went Wrong With Economics" in the centrist Economist).

Rooted in neoclassical economic theory, developing countries had been reducing direct engagement in the economy, liberalizing their markets, and privatizing state owned enterprises.
Now, as more policy-makers begin to revolt against the basic premises of textbook macro-economics, the fall out could ultimately be a modest return to a mixed economy. In richer countries, the state has already begun taking a bigger role in economic management, especially through economic stimulus packages and bank nationalizations. The crisis has spawned a reasonable expectation that the roles of the state and the market will finally be rebalanced in the developing world as well.

A new United Nations Conference on Trade and Development (UNCTAD) 2009 report on least developed countries (LDCs), believes that the government in poor countries should play a bigger role in formulating development policies now that the previous market-led models failed. The economic crisis, the report claims, has exposed the failures of the current development paradigm to address poverty and stimulate growth. "The crisis has exposed more than ever the shortcomings of the current development paradigm...least developed countries should seize the crisis as an opportunity for a change," were among an arsenal of attacks against the western-backed anti-state model of development.

There is some evidence that the re-balancing act between state and market goes beyond impassioned rhetoric at Non-Aligned Movement conferences or in written UN reports. Andy Sumner, from the Institute of Development Studies, Sussex, UK, summarizes at least 4 things that have changed at the policy- level which indicate observable changes in the political economy of development. These trends include a shift toward new economic policies experimenting with alternative development models--- models that more accurately resemble formulas in Beijing, China than those of Washington D.C.

The spread of a "Beijing Consensus" will most certainly include a dramatically increased role for the state in coordinating economic development activity. The magnitude of the current crisis has also made government-led social protection systems for vulnerable populations, more tenable in countries previously worshiping at the alter of social- service privatization. Developing countries are right to change course. LDCs’ per capita income is lower than 905 dollars per year, and they continue to lag in areas like healthcare, literacy and nutrition. Countries like Ethiopia and Bangladesh are off track reaching the Millineum Development Goals agreed upon by the UN. Though more advanced economies are expected to slowly bounce back from the current crisis, the least developed are expecting years of decline if nothing changes.

To set things right in coming decades, poor countries will struggle together to find a new mix between state and market that breaks the neoliberal status-quo of the last 30 years, but also rejects the top-heavy centralized systems that neoclassical economists criticized in the mid- 20th century. Heterodox economist Mushtaq Khan has frequently discussed the role of the state in economic development, and the risks that greater government intervention pose. His work and similar projects are now more important than ever. The new development policy experiment will further challenge the orthdoxy in the field of economics, but none of us knows exactly what will emerge. All we know is that the mixed economy is back again, for the first time.