Twists and turns in public policy

ECONOMIC THINKING THROUGHOUT the developed world is undergoing a major transformation in areas such as the role of government in business and social sectors. Previously unfashionable prescriptions and packages, such as running up a budgetary deficit to stimulate economic activity, have now become part of mainstream thinking and equally significantly are being put to practice. It might be premature to call it a return to Keynesian economics but the first impressions point unmistakably to a retreat from the free market economics that has dominated Western thought for more than a decade. In the U.S., the Federal Government has been ramping up government expenditure and simultaneously reducing individual taxes in a bid to stimulate demand. The terrorist attacks of September 11 have made possible their political acceptance. Fewer people now have a philosophical opposition to interventionist government policies. And governments say that they are determined to put public good ahead of private interests. The Canadian Government threatened the pharmaceutical major Bayer with a cancellation of its patent on its anthrax fighting drug Ciprofloxacin, forcing the multinational to supply the drug at cheaper prices. Leading multinationals showed no such concern, a few months earlier, when asked to supply patent-protected AIDS fighting drugs to impoverished Africa.

At another significant level the developed countries are testing the limits of their monetary policies, which rather than the fiscal policies were used to fine-tune economic activities. The U.S. Federal Reserve has been regularly lowering its benchmark interest rates, some of which like in Japan have been reduced to the bone. Yet there is no end to the rapid economic slowing down. Hence the renewed interest in the efficacy of fiscal policies.

In most of the developed world after a decade of supremacy of the private sector, the public sector is set to take on a bigger role. Their governments are surely going to have a bigger say in matters such as allocating capital. Defence and security-related initiatives will claim a greater share of resources and the private sector will be the loser. And money earmarked for research and development will go towards technologies that enhance safety and security rather than just profitability. In short, there is going to be a new and more vigorous role for the governments, not just in the traditional areas of law and order or defence but in large swathes of business from which they had exited in favour of the private sector.

Public bailouts of failed commercial enterprises have happened before even in America but they were relatively uncommon. The celebrated Federally-sponsored rescue of the ailing car-maker Chrysler in 1979 comes to mind. Twelve years later the Government cleaned up the Savings and Loan Associations at an astronomical cost of 124 billion dollars. Those sporadic acts are becoming more common. After September 11 the civil aviation industry which was already in financial distress threatened to go bankrupt. In the U.S., a swift government bailout has enabled the leading carriers to keep flying. Some European countries will have no option but to follow suit. Various other business groups such as the badly hit insurance sector, tourism and steel are asking for succour. There is a far greater chance of their succeeding now than was possible just a few months ago.

While India is confronting a different set of circumstances, the developments abroad do matter in many ways. External trade might be hampered by protectionist tendencies. Trade and commerce will become costlier as the risk premia mount. While there has been no great philosophical divide in economic matters, the recent importance given to the private sector will be re-evaluated. There is already a great clamour for public spending and sprucing up of public enterprises to overcome the current recession.

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