Hindustan Times
How the state became a market participant
Behold, a new era of state enterpreneurism. Labour pains have begun but even before the baby has been born, a new paper dissects an emerging phenomenon that’s been staring us in the face ever since September 15, when Lehman Brothers filed for bankruptcy and the world fell of an economic cliff. Exploring the typology of capitalism and institutional change, a recent working paper titled State Entrepreneurism, like a good midwife, creates a theoretical base for a budding field of study — the state as an investor.
All those in the business of dealing with and analysing what is increasingly becoming a trend as country after crisis-ridden country becomes an economic player in the market, often playing by the rules (think sovereign wealth funds) and sometimes not quite (watch how the mineral resources of Africa are being exploited) come up against a theoretical and ideological wall.
“This paper attempts to elicit a theory of state entrepreneurism that reconciles Keynesian interventionism with the neoclassical economic principles that provide for private incentive and entrepreneurial innovation,” writes Benjamin A. Templin, an associate professor at Thomas Jefferson School of Law and author of this brilliant paper that updates you on all the issues you wanted to know about a state becoming a market player.
In this rather large, well-articulated, well-argued paper, I found the definition of state entrepreneurism very useful. Mostly, it’s common sense, but articulating and organising ideas in this manner is a first I’ve read. There are five rules that the state ought to follow so as to preserve an entrepreneurial economy, Templin writes:
Principle 1: Market Driven. Investments by the state should be market-driven and have a discernable return on the investment.
Principle 2: Prudent Investor Standards. The government entity must invest according to the standards of a similarly situated non-governmental prudent investor by following principles such as diversification and purchasing assets at a fair value.
Principle 3: Wealth Maximisation. Investments made for the purpose of funding entitlement programs must be managed to maximise wealth.
Principle 4: Political Insulation. Investment and portfolio management decisions must be insulated from political influence by establishing a federal government corporation that exists separate from the normal federal bureaucracy.
Principle 5: Non-Coercive Regulatory Action. The government must separate its regulatory function from its investment function and must not use its regulatory and/or law-making powers to target companies or employees for reasons related to the investment.
But how do you differentiate a state’s investments, when it has many governing principles, objectives or outcomes? Templin splits investments into four types: political, social, economic and financial.
“Political investments are those made as a bargaining mechanism between political actors in order to reach a compromise or advance a political relationship,” says Templin. I would put India’s ongoing struggle against naxalite insurgency or investments made to Kashmir or the Northeast under this.
“Social investments include investments made to advance some social purpose such as public housing for the poor or the development of fuel-efficient cars,” he writes. I would put the social schemes in rural employment, education and healthcare designed by the UPA government under this.
“Economic investments might be made for a number of different reasons. Public venture capital funds that make investments to help improve the economy in a region or a sector of the economy are considered developmental and are economic in the sense that such investments could lead to a rise in GDP by creating jobs and adding products or services to the economy,” he says. I would put tax concessions given to various regions or sectors to promote investment in those areas under this.
“Financial investments refer to investments made to help fund social programs. In other words, the investment is savings mechanism to finance the future cost of another government program. For example, the Social Security Trust Fund is a financial investment in which government bonds are being held to finance retirement benefits for the Baby Boom generation,” writes Templin.
I like this paper and would recommend it to all analysts trying to decode the state-led change around them. While this paper is US-centric in its approach, it is going to be a much-cited paper as other scholars explore this theme and push the frontiers of knowledge further.
(2 votes, average: 5 out of 5)
Loading ...Posted by Gautam Chikermane on Sunday, October 11, 2009 at 7:47 pm
Filed under Research · Tagged market, participant, Political investments, state enterpreneurism, Thomas Jefferson School of Law
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