I am not a fan of big government. It is important, I think, to clear this up early on in my notes. I have come to this position having started out in my early postgraduate years as one who initially subscribed to the Keynesian side of the question of how best to meet one’s needs and wants using scarce resources. My university yearbook quotes me as having Karl Marx as a philosopher whose work I admired. However, life’s realities over a period of two decades have since decidedly shifted my thinking towards reliance upon the free(er) market and, most importantly, limited government.
Depending on who you speak to, “big government” has many definitions and meanings. To avoid a boring lecture, here is a simplification of how I essentially see it. Anything a government does beyond protecting property rights, law and order, primary education, primary healthcare[1], defence of its borders and territory, and critical infrastructure (the type that fits comfortably in the public utility space), is big government. A government should not, in my view and on evidence in outcomes, be operating refineries nor should it be deciding which markets or industries it will provide financial support to and which ones it will not.
There is plenty of literature out there on the size of government and its impact, positive or negative, on economic development. A recent one carried out an empirical study of governments in developed and developing countries (including a fairly decent literature review to save you the hassle of looking for others) and made the following conclusion. I am shamelessly copying and pasting it verbatim.
“Regression analysis leads to the conclusion that over the first decade of the twenty-first century, after controlling for confounding factors such as population, lagged per capita GDP, net debt to GDP, the institutional factors of governance and economic freedom, and regional variations, there is a hump-shaped Scully curve relationship between the government expenditure to GDP ratio and the growth rate of per capita GDP. All other things given, annual per capita GDP growth is maximized at 3.1 percent at a government expenditure to GDP ratio of 26 percent; beyond this ratio, economic growth rates decline. This demonstrates that there is an optimal size for the public sector when it comes solely to the effect on economic growth. Naturally, what size the public sector should be is also about broader societal outcomes but, even then, the evidence suggests that there are few additional benefits once the public sector reaches 30 to 35 percent of GDP”. It went on to add that “Government is very important, and its programs are vital to our quality of life. At the same time, the results of this study demonstrate that more and larger government is not always associated with improved outcomes.”
I think the development game, wittingly or unwittingly, contributes to big government. The very nature of the interventions – and incentives that operate around these interventions – makes it so. It isn’t something folk will readily admit, or perhaps even recognise, but it is there. I will briefly highlight two manifestations.
One manifestation is through regulatory and institutional frameworks. A significant chunk of development work culminates in the establishment, amendment, creation, or enactment of, a new law, regulation, or institution. These exercises almost inevitably require resources channelled towards more jobs in the administrative class, more bureaucratic processes, and more regulatory presence in a previously unregulated activity. The argument is typically that in order to get this particular part of social or economic activity going, let us put a framework in place to give it a strong fundamental footing. A quick online search with the words “the importance of institutions to economic development” will produce articles such as this. They will say things like you need institutions to guarantee the protection of property rights, but such institutions can risk becoming ones that expropriate property rights, so you will need even more institutions to check these other institutions.
This is a powerful justification of pretty much any intervention in the development game. The upside, particularly for developing countries, is you sometimes get some really good outcomes such as when Nigerian judges were sent to Namibia to help set up new judicial institutions after their independence, or when Rwanda established its Development Board or its Law Reform Commission. The downside is seldom considered. Some of these institutions would have, for example, been envisaged as temporary measures to address an urgent problem. They frequently become permanent fixtures with expanding administrators and expanding functions, and they develop a somewhat circular relationship with the international development ecosystem that facilitated their creation in the first place.
This leads to another manifestation: the factory. International development institution X is providing assistance to developing country Y. A problem has been identified that needs solving, and resources will be committed to helping with a solution. A programme will be created for this purpose. A budget will naturally go along with it. Resources will be deployed. It will need advisers like me. It will need back-office administration. It will require lots of logistics, depending on the size and duration of the intervention. I was, for example, involved in a project that required me to be in and out of a particular country for nearly two years. That is easily high five figures in some of the world’s strongest currencies in fees, logistics and overheads for one adviser. This programme had dozens.
Country Y ends up with recommendations for a new law or an amendment of an existing one, a new institution or a re-organisation of an existing one, a new regulation or policy instrument, and so on. Resources will be required to make this happen. New administrative jobs will be created. Government expenditure profiles, both capital and especially recurrent, will change. In the extreme, you have situations like Malawi where aid (using the World Bank data on net official development assistance) as a proportion of GDP is as high as 16%, and whose government expenditure as a share of GDP has averaged 28% since 2010 and is currently at 33% based on IMF data.
What are the outcomes of these expansions in regulatory and institutional reach, in institutional size and spending? The interventions have a wide range of entry points; be it healthcare, education, infrastructure, fiscal policy, project finance, debt, selected industrial activity, and so on. But the outcomes can be standardised. So, one can measure how many non-government jobs were created. One can check how much additional economic output can be credited to the interventions that resulted in such expansion. One can do same for health outcomes, infrastructure outcomes, and all the other development indices the World Bank keeps record of. More importantly (in my view at least), one can also check measures that consider the trajectory of economic freedom, as is done at the Heritage Foundation, with their index going as far back as 2006. The results do not paint a glowing picture of increasing freedoms. They instead reflect, in most cases, growing government reach. Are they correlated? Is the correlation causal? My experience is that the development game is not, in practice, suited to limiting the scope of government intervention at the expense of economic freedom. It almost always expands the role of government. This is not necessarily a good thing. I’ll end with a quote attributed to Ronald Reagan (it is likely he got it from somewhere else): “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help’”. Make of this what you will.
[1] A personal experience with the delivery of healthcare is currently questioning my inclusion of healthcare in the above list, and the practical day to day decisions of middle-class folk around the world make a compelling case against government involvement in primary education.
The Development Game likes Big Government
Every intervention, like Alphabet's moonshots, hopes for a Namibian outcome (as cited, with Nigerian judges) and that hope is what sustains the 'powerful justification' as you put it. The other side of it is that, without these interventions, these developing countries are hardly taking the bull by the horns. Where they have, as with the fintech space in Nigeria, there have been major upsurges in productivity and enough private sector involvement to keep government small and relatively honest. So we know it is possible. But mostly, there isn't the will. And the main actors in the development game are not lacking in that department.
Spot on. And till he died, Douglass North, the Nobel Prize winner in economics who seminally propounded institutional theory as the foundation for sound economic performance, continued to protest that when he said "institutions," he didn't mean regulatory agencies and the like but those constraints, checks and balances, often invisible, that prevented excess and waywardness ("anyhowness"). But development and government practitioners all over the world hijacked his theory and formulated it as justification for more regulatory agencies and more government bodies!