Otaviano Canuto
In a world in economic turmoil, calls for greater fiscal austerity, leaner social entitlements, and smaller government expenditures are seemingly ubiquitous. From the United States to the Euro Zone, the size and role of government are being questioned. Yet, at the same time, the recent financial crisis has highlighted the importance of the state as a regulator of the financial system. Just think about who was needed to step in to protect “too big to fail” financial institutions, extend social protections to the most vulnerable, and preserve the stability of the financial system at a time when no one else could?
Beyond these fluctuations in public opinion about the role of government, there is more the state can do to help drive post-crisis growth. In addition to its role in regulating financial systems, the state can play a very vital role as an investor in the knowledge economy by supporting policies and making investments that catalyze both market and firm growth. For example, government intervention in higher education is a primary area for enhancing growth, as a laissez-faire economy will tend to generate too few of these investments. Another example is in climate-change policy, where government can have a role in redirecting technical change to support green growth.
Another key area in which the state can intervene in the post crisis world is to serve as a guarantor of the social contract at a time when coping with the social costs of the crisis and creating jobs must go in tandem with reducing indebtedness. In the context of weakening public finances, tightening credit, and surging global imbalances, this pact must allow the state to manage the public deficit, while ensuring social peace and avoiding strikes and protests. Doing so requires the state to invest in trust by striking an appropriate balance in regulation, to reduce deficits while promoting redistributive policies, and to fight corruption where it exists.
These and other emerging roles for the state are explored in “Rethinking Growth and the State,” a chapter by Philippe Aghion and Julia Cagé in the recently released volume, Ascent after Decline: Regrowing Global Economies after the Great Recession. In this chapter, as is echoed throughout the book, the recent crisis has to a large degree re-legitimized the state’s role in the growth process—an important element that countries must rely on to ascend after the decline.
To access Ascent after Decline: Regrowing Global Economies after the Great Recession, please visit: http://go.worldbank.org/MLY6ZC2E30