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State Intervention in the Free Market Economy and
the Developmental State: Reality versus Myth

By Tsehaye Debalkew
July 27 2011

Benefits and drawbacks of state intervention in free market economy and the developmental state have continued to be the subject of an intense scholarly debate that takes off from a virtual theoretical stand point and a practicable application on the ground.

The pendulum of such a heated discourse has been swinging back and forth reflecting the contending political views representing the two sides of the isle; i.e. ideologues as well as members of the academia both extensively defending their turfs to enrich the current dialogue.

To augment their contentions, it is perhaps in order to measure some of their fervent beliefs by way of contestation and comparison of their core ideas that they portend to support. Advocates of government intervention in the market and developmental state systems argue that the scenario is embedded with elements that imbue aspects that improve the market structure by bringing about a gigantic improvement both in quality and expanse in the market facilities, such as roads and other desired infrastructure.

Direct government intervention they contend, plays another important role in regulating the inherent corruption and periodic violence that erupts in the market system. It is also equally quintessential, that price control by introducing the appropriate economic instruments and injecting true legitimate mechanisms, avoids or arrests the excessive hike in prices by the market leaders.

Too often, if not always, unbridled market forces infest and push both systems astray to be eschewed under the mercy of the vicious and rapacious, greediness, speculation, corruption and galloping urge for an endless and uncapped insatiable desire for profiteering. This is more often than not, exhibited by the legitimate actors who at times delve into a hostile and uncharted territory of succumbing to play through illegitimate means by superseding and transgressing the rules of the game and undermining the laws of the land they operate in.

On the other hand, those who solemnly claim that there are not any benefits to reap from direct government intervention in the economy, see only drawbacks from such unwarranted move. In this regard, they argue that like every coin that has two faces, government intervention in the market too, has some drawbacks. These are by and large expressed in stopping and delaying the transmission and flow of information that is vital and a blood-line to the smooth operation of the market system.

Milton Freidman, a noted economist, enlists himself with such beliefs. He strongly contends that government intervention in the market system, i.e. Free Enterprise or Developmental State, results in the increase of inflation causing deflation, recessions and even economic depression. Thus, he holds the principle of "Hands off" the market by the state as his guiding motto.

It is not incomprehensible to state that the foregoing introductory comparison of the distinctly different stand points triggered off by the two camps of economic thoughts, I believe will supply us with some of the seeds to apprehend. And as a launching pad for my argumentation, I would like to start off with the strong anti-government intervention and the resultant debilitating impact it entails if entertained otherwise as advocated by the famous economist Milton Freidman.

Does this contention, in its entirety, hold water vis-ŕ-vis its scrutiny in contradistinction and juxtaposition to the uncontested leader of the Free Market Enterprise, i.e. the US? I would hasten to argue that the response to such a contention lies in testing the validity of the non-intervention claimants by looking at the so called Free Market Enterprise of America as we know it to-day.

It is an incontestable and an indisputable truth that America espouses itself as the leader of the Free World. By all accounts and historical prisms, this is an arguably corroborated state of fact. America as the widely held view has it, is indeed the leader of the Free World. But does this premise mean that there is not even an iota of state intervention in the economy? Let us examine the facts on the ground briefly.

Fannie Mae and Freddie Mac are two huge, Federal Government Corporations Chartered by Acts of Congress long ago, to provide liquidity and stability to the US Housing and Mortgage markets and channel the provision of loans for education. The impetus for creating these two giant Corporations was two-fold.

In the preamble of the Acts, it is stated that both were necessitated as there was a critical gap in the national commitment to housing and education and the ability or willingness of private leaders to ensure a reliable supply to mortgage and education credit throughout the country was visibly not forthcoming. For instance, the primary purpose of Fannie Mae was to purchase hold or sell or mortgage loans, which later on, was amended to include guaranteed home mortgages supported by some states like Virginia.

At present Fannie Mae and Freddie Mac, own or guarantee 60% of the single family mortgage or seven trillion dollars of the total 13 trillion in outstanding mortgage debt of the US in general. This is only intended to show the tip of the iceberg of the nature of state intervention. This scenario is permanently intended to put a break on the unpredictable and oscillating nature of the private sector.

Hence such an episode in the Free Market economy delivers the much needed stabilization and maintenance of sustainable economy, primarily ensuring the health that spurs the on-ward march of the people protected from the vagaries of market exigencies through the legitimate, de facto and de jure vivid presence of "Uncle Sam" in the economy.

Other areas of the economy are not only its intervention per se, but its permanent presence and visible picture of the state, in the US economy that begs for a simple observation of the day- to- day routine that we see and practice. Suffice it to present, that public transportation in the big cities like New York, the Washington Metro Area, Los Angeles and Chicago that circumvent the states and the cities are run as separate Corporations owned by the states and the nation's capital.

These Corporations and others in NY, LA, and Chicago cities benefit a total of 70 million commuters a year, demonstrating that mass transit has a defining influence on life in the US. Hence the paramount impact of the state intervention in such critical sectors abundantly points to the fact that the argument labeled against state intervention is a farce and nothing, but a pretence at jockeying is presumably to try and show oneself to be more Catholic than the Pope.

Other areas of the active role that the state plays, in the US economy which is the icon of the Free Market System, is in the realms of postal services, where the giant US Postal Service, known by its acronym USPS, employs millions of workers and commands a multi -billion budget from the Central Treasury, functions alongside FEDEX, UPS, DHL and TNT and other private postal services in their own right.

This is another living testimony that clearly stipulates and elucidates the multi- purpose role that the state plays and the Sine Qua None necessity of its intervention and permanent stay as an anchor and a driving force of the economy in the Free Market System.

In a similar context, it is pertinent to see another revealing truth as exemplified in the Corporation for Public Broadcasting, National Public radio and Television Services like C-SPAN, a public television network, and NPR, a syndicated National Public radio which serve as a standing adjudication to the fact that the state intervention in the US economy is not an incidental occurrence with a transient temporal manifestation but a systemic rationale intrinsically interwoven with the Free Market economy.

What is more, it clearly indicates that the state intervention spells the continued assurance of opulence and growth of the economy which unmistakably shows that it is inconceivable to witness without the measured intervention of the state in a Free Market System, as Laissez Faire, as the US economy or the Developmental State, as the nascent and burgeoning Ethiopian Free Market Economy.

The Federal Deposit Insurance Corporation, the Federal Crop Insurance Corporation and the Over Seas Private Investment Corporation of the US are only some additional examples of the state intervention through the long arm of "Big Brother" conspicuously and visibly omnipresent in the highly acclaimed American Free Market System.

Against this backdrop, it is plausible and is in perfect perspective to insinuate the telling fact that the legitimate and positive role the state is currently playing in contemporary Ethiopia is in sync with the accepted norms in of countries that pursue the path of the Free Enterprise as is succinctly corroborated by the daily practice of the state intervention that pervades the US socio-economic and cultural milieu.

Suffice it to surmise the impact the state injects in the huge air aviation industry, schools and universities through direct economic investment. It is equally noteworthy to elucidate that the state has a central position in the regulation, control and management of research institutes, regulatory and Standardization Schemes, accounting and taxation projects, social security and the provision of housing, public health and other sectors with an outlay of Trillions of dollars that ensure and command millions of employment opportunities.

It is appropriate to gauge the erroneous anathema of the knee-jerk topsy-turvy quarters of the so-called fringe elements of the extreme opposition and their ideologues. These elements are bent upon spreading malicious lies by leveling false accusations against the State in Ethiopia by pinpointing to its legitimate intervention as witnessed in some strategic sectors like the telecommunications, energy and other sectors.

To conclude, one finds the current schism between the US president and the Congress as a telling confirmation of the need for State Intervention to monitor, straighten, manage, harness and lead the US economy towards a path that is healthy for the country, the American society and indeed humanity at large by appropriately and properly addressing the unchecked national debt.