Opinion | Wednesday, 03 February 2010

The dawn of a new era

Clyde Caruana

Over the past decade statistics suggested that most European governments were retreating or slowing their economic activity share in relation to national output. In 2008 the trend was reversed; bar two Member States the rest of the EU27 economies experienced rising government activity. Historically conscious (the Great Depression and Japan’s lost decade) of the damage that hesitation to intervene could further dampen the turmoil, governments quickly pumped in cash to cushion the crash. The unfolding events necessitated government support unlikely to be wrapped anytime soon.
Contrary to what many expected from globalization, that with time the state will surrender more of its power to the market, now and in the future we are likely to witness the opposite. Ironically globalisation is the main driver behind the rise of the state. Graham Turner, in his book titled ‘The Credit Crunch’, argues that as manufacturing firms fled from the West in search of higher profits, workers were left to struggle with almost stagnant wages. At the same time he also acknowledges that as a result of strife competition, consumer inflation was relatively low.
Encouraged with low inflation rates and concerned about economic growth, central banks kept interest rates ‘reasonably’ low such that consumers could obtain credit to spend. Credit creation thus substituted wage-income as the main spur of economic growth. Asset inflation made it possible for people to continue this vicious circle of borrowing. Once assets were overvalued and prices became unrealistic, the markets fretted and households were left with piles of debt to settle. Households and firms are now in a deleveraging process, meaning that they are focused on paying the accumulated debts as soon as possible. This sobriety implies that in the absence of households and the private sector, the ‘growth engine’ must bear a new holder.
Recently The Economist featured a write-up on the growth of the state. ‘State corporatism’ was coined to define the expansion of government activity. Other than increasing domestic presence, governments are increasing their footprint in the global market with the hoarding of funds intended to lessen the impact of ageing. Whilst the article raises the concerns associated with higher expenditure, mainly future higher taxation and inefficiency, it stops short from considering a possible shift in public tastes. Just as in the 1980s there were people who preferred to shrink the government’s role in the economy, today’s mood is far from being supportive of the free market.
For many, refraining the state from growing further may be music to their ears, but there are no reasons to believe that a disciplined government cannot contribute to growth. It is true that the larger the size of government is, the more there is the tendency of inefficiency, but the same can also apply for the private sector. Citigroup, one of the largest private American banks, grew so much that losses started to flow from everywhere.
In the coming weeks I will continue to expand on this issue of government size by looking at the different European welfare states. Welfare states on average absorb nearly half the public expenditure across the Member States, however as a percentage of the GDP there are wide variations. The crux of the matter is that efficiency is not a function of size but depends on the efficient way in which entitlement and delivery of social expenditure occurs.

Clyde Caruana is a statistician at the National Statistics Office



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03 February 2010


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