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Social Sciences
Vol. 29, No. 1/January 1998
The Role of the State in the Formation and Regulation of the Market Economy
By Leonid Abalkin *
From the Editors: The problem of determining the place and degree of the required influence of the state on the economic processes that are going on in Russia has long been the subject of acute polemics among Russia’s economists. The scientific-practical conference “The Role of the State in the Formation and Regulation of the Market Economy” was no exclusion. The Conference was conducted in Moscow in April 1997. We publish below the principal report which was read by L.Abalkin at this Conference as well as the report read by E.Yasin to oppose L.Abalkin.
Contemporary history does not know of any example of a highly developed, flexible, effective economy without a market. However, we mean the modern market, the market as an attribute of the socio-economic model that has already formed, rather than as its comprehensive characteristic. The market itself is regarded as socially orientated, effectively regulated and organically incorporated into respective socio-economic models which are quite diverse and which do not exclude each other. For instance, such models as Anglo-Saxon, Roman, Scandinavian, East-Asian and, possibly, Russian.
I think we could hinge on those things which have been proven by world experience and is supported by a number of scientific research developments. What may be regarded as proven?
First. There is no and cannot be any effective socially orientated market economy which hinges on modern scientific and technical attainments without an active regulating role of the state. There are no examples of that kind in the world. At the same time, withdrawal of the state from the sphere of regulation of market relationships are well known to everybody. I think that the example of Russia will be in all manuals and readers of the early 21st century as a vivid illustration of that which is the result of ousting the state from the sphere of economy.
In that case, I would like to emphasize that it is wrong to define the role of the state on the basis of some unambiguously expressed parameters. For instance, to connect it with the share of state property or the share of GDP that is distributed through the state budget or with the volume of purchases by contracts or in the form of the state order. These are important indicators but the mechanism of state regulation is more refined, more complex and diverse, and often the regulating part of the state may be more significant, given smaller indicators of, say, the share of state property or the value of GDP which is distributed through the budget.
Second. The very directions, forms, methods and mechanism of state regulation do not remain unchangeable. Of course, the state always retains the classical functions, such as: protection of property rights; provision of the freedom of enterprise, stimulation of business activity and the struggle against monopolism; maintenance of law and order in the economic sphere; regulation of currency circulation, provision of the stability of national currency; regulation of the relationships between labor and capital, between businessmen and hired labor; control over the foreign economic activity, including organization of the customs system; provision of economic security of the country and the like. None of these function disappears or loses its importance. Changes relate to the mechanisms, methods and ways of the state’s realization of these functions and their predestination in the economy.
Together with society’s development, with the changes in the structure of social production, the shifts in its technical base, actualization of certain spheres of public life, we observe the development, enrichment and clarification of state functions. This process goes on in the following directions: gradual transition from the direct to indirect methods of regulating the economy; drastic intensification of the state’s social functions, beginning from establishing minimum rates of labor (including the hour rate) which are obligatory for each businessmen; determining the living minimum, the duration of the working time and the time for rest, and the guaranteed leaves; solving complex social problems, such as the complex of relationships between labor and capital, social partnership, the decrease of the unjustified differentiation in the income of the population, and the provision of stability in society.
Of late, we observe qualitatively new functions of the state, too, that formerly were not structured unambiguously, which is related with the gradual formation of post-industrial society. They include the adoption by the state of commitments in the field of education, the formation and support of basic science, the creation of special zones for working out modern technologies, the conducting of a clearly formulated industrial policy, and the solution of ecological issues. An example of the positive role of the state may be the overcoming of the tragedy of the Great Lakes in the USA or the clearing of the Rhine which was called several decade ago the “draining ditch of Europe”. The market lead to an ecological catastrophe while the state had to make order. I think for that reason that the conception of ousting the state from the sphere of economy, decreasing the number of its functions and weakening the regulating role as a general trend of development of our country does not correspond to the global world tendencies and does not meet the realities of Russia.
Third. The role of the state differs qualitatively at the stages of formation of the market economy and in conditions in which the well-tuned and well regulated market economy that has already formed is functioning. Self-organization (and the market is a classical example of self-organization) is a property that belongs to fairly stable systems and it is hardly effective in the period of transition from one system to another. One shall keep in mind that, given the conditions of socio-economic transformation, the principle of self-organization promotes the intensification of the conservative, protective function, the reversal of the economy to its former state and the establishment of old traditions. This is very dangerous. Besides, the absence of any regulating principles in the period of transformation leads to an inevitable growth in chaotic processes. By the way, the tendency to conserving the structures that have formed and the growth in chaotic processes are clearly seen in Russia today.
What tasks of the state are meant at the stage of formation of the market economy? I can single out several tasks of that kind. Primarily, this is the formation of a new system of relations of property which is inherent in the mixed multi-structure economy. This process cannot take place spontaneously in the near future in historical terms.
Further. The formation of minor business, including farmer households, is impossible without support and the state regulation. The latter is needed by modern highly organized structures of the type of financial-industrial groups and similar structures which are the props of the modern market economy in the whole world. Their creation cannot be left on themselves, requiring clear initiation, regulation and support of the state. Finally, let us mention the formation of the principal elements of the market economy, including the financial and securities markets, the institutes of regulating the market of labor and employment, the infrastructure of the market economy as a whole which can hardly form without the state’s active regulation.
After the basis of the market economy is created, one cannot speak about the withdrawal of the state from this sphere. The state is facing new tasks at the stage of regulation of the formed well-set system of economic relations.
Fourth. The scales of state regulation, its particular forms and methods differ essentially in various countries. They reflect history, traditions, the type of national culture, the scales of the country and its geopolitical position, and many other factors. Therefore, it would be wrong to try to find ready-made schemes and live according to the established pattern the effect would not be great. Such a task is always creative, requiring a thorough search for the answers to the questions that arise.
It seems that in principle the search for such answers within the framework of the correlation “state-market” does not reflect the real situation in society and is counter-productive in science and practical activity. In general, these categories can hardly be regarded as dual.... One cannot agree with those who make absolute and exaggerate the role of the market, underestimating the role of the state. At the same time, who are wrong are those who overestimate the possibility of the modern state without recognizing the role of market self-regulation, stimulation, etc. The answer is ready and absolutely correct we should seek for their weighted, rational correlation. We should understand the logic of social changes, and study how the modern mechanisms and structures of regulating economic and social processes are really forming, how this dual opposition is “broken off”, being convenient both the methodological and educational plane but, it seems to me, remote from life.
First of all, we observe a consecutive process of the formation of institutes of civil society which acquire ever greater significance in regulating socio-economic processes. These are various agreements, conferences, associations-unions of producers and businessmen, associations of bankers or chambers of trade and industry which are not elements of the state but which are at the same time not purely market structures.... I shall also point out to such formations as trade unions, numerous institutes of social partnership, societies of consumers, ecological movements that appear to be real participants and subjects of regulation of economic and social processes. When we speak about the modification of functions of the state in real life we mean more likely the transfer of functions of state regulation to the institutes of civil society, rather than the market.
At the same time, we observe a rise in the significance and the regulating influence of interstate institutes and various financial and other structures, in particular, transnational corporations which mostly predetermine the regulation of economic and social relations. Besides, according to the estimates I have, about two thirds of world trade constitute the domestic turnover of transnational corporations. Such a phenomenon needs to be comprehended.
Usually, the role of the state in the economy is related with the imperfection or shortcomings of the market which should be compensated for by the state. The market is imperfect. But if it were perfect, the role of the state in the economy would be reduced to zero. And the more perfect it is (80%, 90% or 95%), the lesser the role of the state. Or, the other way around, the market is needed to compensate for the flaws and imperfection of the state regulation.
I think that such logic possesses only a part of truth, and fairly dangerous one in all that. Because there is always a temptation let us look for a more ideal model of market. And coming closer to it, we shall gradually decrease the scales of state interference which ultimately are equal to zero.
The real situation is much more complex. There are certain circumstances and factors which determine the role of the state not merely as a compensator for the market’s imperfection but as one that has functions which relate to its exclusive prerogative. This is motivated by the fact that society represents a fairly complex structure, rather than an atomistic conglomeration of individuals or economic entities. At present, we witness ever greater socialization of individuals and economic formations which incorporate themselves into certain communities, conglomerations, strata, classes and other groups, having interests of their own. It is quite difficult to ensure the balance of these interests.
Today, researchers realize more and more that there are certain supreme national and national-state interests. They turn to be not only as an object in relationships between the countries but also as a motive which determines the behavior, life and the political line of each country. If this is so, we then should comprehend anew the very nature, origins and goals of existence of the state which is called upon to be the guarantor and defender of common national interests.
I would not like to dwell on the world experience in detail. But any corporation, from the American to the Japanese one, without any condition meets the requirement to ensure the correspondence of its activity with the national interests. The myth to which we stick that what is good to the General Motors is good to the United States has become obsolete. The relationships between the state and business have changed. Thus, the tasks of the state are related not only with creating conditions for the market operation. They imply the recognition of its role in maintaining the balance of social interests, social stability and protection of national interests when conducting the domestic and foreign policies.
If we could accept such logic and raise to the recognition of the priority of supreme national-state interests of Russia, we would cease building barricades and divide society into groupings that fight with each other. And when working out the strategic line of the country’s development, we could hinge on things that unite us.
Yet another issue for discussion is the attitude towards state property, its possibility and the allegation of low efficiency it inherits. I think this also relates to the number of myths, although quite wide-spread. The reverse assertion about the absolute supremacy and the inexhaustible advantages of state property was also a myth and we, of course, mean not the totalitarian system but the state property within the framework of the modern mixed and multi-structure economy.
First of all, I regard as incorrect and inadequate the division of property into state and private. There is municipal property which is neither state nor private. Such is the nature of cooperative property, the property of public organizations, for instance, church property. It is separated from the state but can this type of property be called private?
We witness the formation of utterly new, non-traditional structures. The biggest property owners in the West are pension and insurance funds. But what I mean is the property of an insurance company which commands tens of billions of dollars or German marks. Naturally, such a company is non-governmental but with good reason it cannot be called private, either. Therefore, the face to face juxtaposition of state and private property seems to be quite doubtful.
Now about the state property. One should differentiate between two types of it. There is state property in the commercial sector which, say, has the form of joint-stock companies with the 100 percent participation of the state in their capital or with the control stock of shares, belonging to the state, which functions no worse than private or group property. According to the results of 1996 in Russia the share of losers among the state enterprises was lower than among the non-governmental ones.
Another matter is the non-commercial sector of state property: various systems of infrastructure, energy systems, transport systems, communications, airports, air companies; the state property in the sphere of education, national culture monuments, preserves, national museums, libraries, etc. From the point of profit, the efficiency in this sector is lower than in the private sector. Such objects do not generate profit, at least high profit, and the terms of their recoupment are quite durable. For that reason, private businessmen find it unprofitable to invest in them and thus give them back to the state. Such property is inefficient not because of the fact that it is governmental but, on the contrary, it is governmental because it is inefficient and thus is given back to the state to accomplish certain general important functions. As regards its efficiency in the commercial plane, it is disclosed indirectly through offering free services in the sphere of education, raising the qualification of the personnel, low tariffs for transportation and electricity, and raising the competitive ability of national companies. In order to understand the current situation, one is better to hinge on the theory of niches which accepts the diversity of forms of property and the possibility that each of them finds its rational place as well as on the idea of fragmentation of relationships of property and representation of them in the form of the whole cluster of relationships.
The very scales of state property and the spheres of its application essentially differ from country to country. Its share in France and Italy is essentially higher than, say, in Britain and Germany. As regards the USA, state property is only federal property, rather than the property of the states.
When determining the directions... of state regulation, we must take into account the fact that we are talking about the economy which is in the transition state and the protracted crisis that is mostly non-classical, non-traditional in character (contrary to the classical structural or cyclic slump). It is related with broken in-depth reproductive ties in the economy, with the transition of production slump into the destruction of economic structures, with the loss of outlets, which impedes the renewal of production. If tomorrow we begin to produce more, the question is for whom? The market is occupied. Like nature, it does not abide by emptiness.
We have not succeeded fully with the assessment of the scales of phenomena which are related with the debt character of the economy. Non-payments, barter, poor collection of taxes, delays with the payment of salaries and wages cannot be considered separately. They are motivated by more fundamental reasons and, in particular, the general disruption of the balance in the economic system. Today the government calls the reduction in the rate of inflation as a major attainment. But low inflation which transferred from the open into the suppressed form and the outer well-being that is observed in the consumer market are wholly paid out by delays in the salary and pension payments. By the beginning of 1997, the total debt in salaries and wages amounted to 48 trillion rubles and that of pensions to 16 trillion rubles. In case of the total payment of the debt, about 70% will go to the payment of goods and services. The aggregate reserves of the wholesale amounted by the same date to 38 trillion rubles. The one-time payments or reimbursement of the whole debt are able to not only cause inflation but literally “smash” the national market.
The general conclusion, made from the above-said, is clear: the economic policy should be amended but it is impossible to solve this problem with purely monetarist methods. What is necessary is to stimulate demand, raise the volume of offer, and accumulate the reserves of trade resources. The same refers to the functions of the state. We need to revive national production, replenish the reserves of trade with the output of the light industry and foodstuffs. It is known quite well what commodity groups constitute the demand of the pensioners and to what goods they will spend their pensions. How can we do in this case without state regulation?
Non-payment of salaries, wages and pensions, at least in what regards the budget commitments, is the government’s compulsory, interest-free loan from the population which should be arranged as the governmental debt with relevant service. We should look for the solution of this problem, rather than escape from it.
As regards the total governmental debt, the situation is rather troublesome. The size of the foreign debt is about 130 billion dollars. The size of the domestic debt by the beginning of 1997 according to the estimates of the Central Bank and the Ministry of Finances of the Russian Federation equaled 370 trillion rubles. By the end of the year it will reach 570 trillion rubles. Altogether, the value of the domestic and foreign debts will approach the critical point of 60% of GDP in yearly terms. This will be followed by the country’s bankruptcy. It is very important we shall not trespass this line. It is necessary we find some solutions, particularly, effect the restructuring of the debts, and what is most important, ensure economic growth because, given the higher volume of GDP, the share of debts drops.
The danger also resides in the fact that, having no insight of the in-depth origins of the problem, we employ themselves with the search for malefactors. We have already begun the season of “hunting” for the directors’ corps which is accused of that the directors do not pay their workers their salaries and wages while themselves lie in the sun on the Canary islands. Possibly, there are such directors, too, but we should not tint all directors in the same color.
In order we could speak seriously about the state regulation of the economy we should revive the Russian statehood. In principle, all agree with this provision. First of all, what is necessary is to ensure the ability of the authorities to work out and conduct an independent domestic and foreign economic policy which proceeds from the supreme national interests and which is based on the control over national resources. Otherwise, all talk about state regulation loses any sense. In that I mean independent of both foreign and domestic influence group and clan... forces which try to impose a certain policy that does not coincide with common interests.
Furthermore. It is required to restore the social contract between the authorities and the people. In any democratic society (including our country according to the Constitution) the people is the supreme sovereign of power and law. Not always but it concludes a legally formulated social contract with power, delegating its natural rights and powers to the authorities, given certain conditions, guarantees, promises and goals declared. That is what makes the basis of the strength of power the credit of confidence to it. And the latter, like any credit, cannot be eternal, implying the relevant accomplishment of commitments that ensue from that.
The next thing is the formation of new federate relationships. The process is hard, durable and painful. But only progressing along this way, we will acquire genuine Russian statehood and the opportunity to conduct an effective policy of economic regulation. Today we would get into a blind alley if we try to effect the economic regulation as it is done within the framework of a unitary state.
And, lastly, we need clear legislative and legal regulation of all socio-economic processes the formation of the whole system of mutually complementing, intrinsically not contradictory laws that make a sort of code of state economic regulation.
The central issue of state regulation is the problem of working out a strategy of socio-economic transformations in the country with a clear definition of end goals, priorities and stages. We will have to overcome the primitive and detrimental idea of social costs as a certain compulsory deduction from those means which could be directed to the development of production and the rise of its efficiency. This is the recurrence of the residual principle of financing the social sphere.
The modern approach to investment in the social sphere proceeds from the fact that the investment in man, in human capital is most effective, that the quality of the human potential is the most important factor of economic progress and a rise in the level of the country’s socio-economic development. If we group together all countries according to the level of economic development, they will dispose directly, depending on the quality of human potential. In that, the rates of scientific and technical progress, the level of organization, culture and labor productivity are derivatives of it.
For that reason, the investment in man in strategic terms yield the highest effect. But what regards the short-term perspective, they may become ineffective. Such false ideas come to life when tactics dominates over strategy and when the horizon of our thinking is limited.
It would be erroneous to reduce the state’s accomplishment of social functions to the distribution of means. If the US government makes a decision to raise the minimum per hour payment of labor, it does not give money from the budget. For years it prepares to make such a decision, understanding that the particular norm will have to be observed later. This is a heavy burden for a businessman, too. But such a rise in the salary does not mean distribution of means.
In this connection, I would like to dwell on the so-called social reforms, particularly, in the housing and communal sphere. The government operates mythical figures 100 trillion rubles which allegedly can be saved. But how? Do not pay it from the budget but take it from the population. Such estimates are construed on sand. Only non-professional who plays politics, like the beginner chessman, thinks for one move only. The regional transfers may be reduced by 100 trillion rubles, the regions will not have to pay subsidies to the housing and communal sphere, they will relocate this burden to the population. But the government will not collect such a sum. If someone thinks that he may get, say, twice as more by raising the tariffs on the rail road, he is mistaken. Few people will ride and part of the money will go to conductors.
Shortly speaking, it is inadmissible to carry out reforms in the housing and communal sphere without first coping with the initial problem the reform of income and payment of labor. This is not only fraught with social conflicts but also with the further aggravation of the financial situation in the country. I would formulate my position in the following way: the Institute of Economics warns of the dangerous social consequences of such reforms. First, we have to raise the level of payment of labor to the honorable figure, and then, hinging on this basis, reform the housing and communal sphere. The government cannot overburden the people with its inability to collect taxes from natural monopolies.
Scientists of the Academy’s institutes prepared concrete proposals within the framework of the elaboration of the mid-term program of the country’s socio-economic development for 1998–2005. The Program includes two stages and comprises a substantiation of the possibility of coming out of the obtaining situation as well as measures which are necessary for the purpose, among their number are revival of the aggregate demand, control over financial-monetary flows, a clear definition of national priorities when conducting an active industrial policy, price regulation, including those of the natural monopolies.
Translated by Valery Yasinsky
Endnotes
*: L. Abalkin, academician, director of the Institute of Economics, RAS. The article was published in Russian in the journal Voprosy ekonomiki, No. 6, 1997. Back.