Right of Reply: Size doesn’t matter; effectiveness does

When it comes to sustained economic growth, the nature of government intervention is more important than its size. JPOST Op-Ed by Gidi Grinstein and Omri Zegen.

Gidi Grinstein and Omri Zegen, 2/1/11, JPOST:

In "Teaching an elephant to dance" published last Sunday, Daniel Doron presents a too-often repeated dialectic between laissez faire and central planning, guides the reader to the "correct" side - the so-called Washington Consensus of limited government, lower taxes and free trade; and criticizes TheMarker and the Reut Institute for endorsing the other side at their recent Israel 2021 conference.

It seems that there are two main points of agreement between the authors and Doron: First, Israel's national objective should be to become one of the world's 15 leading nations in terms of quality of life. Indeed, this is the formal goal of the Netanyahu government, and a vision that has guided Reut since its inception. Second, a free-market economy - in which market forces determine prices and talent and hard work are rewarded - is the foundation for sustained growth, according to both.

But on all of Doron's other arguments we find ourselves on opposite sides. Doron must answer to reality - most countries that followed the policies recommended by the Washington Consensus - and were praised for doing so by the International Monetary Fund - may have enjoyed stability and moderate growth, but failed to produce high, sustained and inclusive development. Meanwhile, those that experienced a socioeconomic leap deviated from the consensus policies, and often suffered harsh criticism.

For this reason, in 2006 a group of leading economists, businessmen and government officials, headed by Nobel laureate Prof. Michael Spence (also a guest of honor at the recent Israel 2021 conference), joined to form the Commission on Growth and Development. Their effort not only reframed the Washington Consensus, but also dealt a blow to Doron's dialectical world of capitalism versus socialism.

Instead, they offered a third way: pragmatism.

The Growth Report, and the academic work that followed, proved that while all nations that have leaped forward nurtured a market economy, they each had a unique development environment that allowed for such a leap. The entirety of this environment, more than any specific policy intervention, provided the foundation for high, sustained, inclusive growth. Therefore, while the Washington Consensus may offer the policies necessary for a country to leap, it is not sufficient and should not be viewed as a rigid manual.

In shaping the ideal environment, the report showed that the government played a crucial role through legislation, regulation, incentives, investment in infrastructure and international relations. Therefore market forces alone did not generate a socioeconomic leap. In the report's words: "Fast, sustained growth does not happen spontaneously; it requires a long-term commitment by a country's political leaders."

Hence, in contrast to Doron's thrust, the size of government matters less than the nature of its intervention.

THE COMMISSION also demonstrated that the ideal development environment depends not just on policy items, but on "softer" ingredients not covered in most economic textbooks: a vision that can mobilize a "serving elite"; values such as pragmatism, investment in the future or inclusiveness; capable and flexible institutions; a development environment that taps unique assets and global trends while unleashing diversity; a labor market that blends flexibility with security; or a fertile dialogue among the sectors of society that decide priorities. These ingredients, often difficult to formulate precisely, did not direct growth, but fostered it.

Against this backdrop, the Reut Institute partnered with TheMarker to launch the Israel 2021 conference three weeks ago.

The conference sought to gather some of these "softer" ingredients: first, by convening and mobilizing Israel's "serving elite" - those individuals and organizations committed to improving its socioeconomic future - and providing them with the platform, knowledge and inspiration to maximize their efforts; second, by focusing public discourse on long-term socioeconomic issues; and third, by allowing for unprecedented dialogue among the government, business and nonprofit sectors to advise on priorities.

Therefore, every single one of Daniel Doron's claims is misplaced. He fears that Reut calls for "bureaucratic... mega-government" and "attempts to build a system of public-sector bodies," but international experience and our work focus on the effectiveness of government, not on its size. Doron describes the conference as an attempt to "reengineer" or "direct" the economy through "central planning," but the conference attempted to promote the exact opposite: a high-bandwidth development that encourages widespread experimentation in a complex, organic and unpredictable fashion.

Doron expresses specific concern about Reut's call for a "central brain," fearing it reflects a return to socialist central planning. This fear has no root in our recommendations, which clearly state that a central brain does not coordinate the entire government, but uses its position to assess the macrosituation of the country based on a unique view of social and economic matters, as well as global trends. Similar institutions exist in countries such as Ireland, South Korea and Singapore.

In fact, Israel's National Economic Council has a mandate to become just that.

The polemic of neoliberalism and capitalism against "central planning" and socialism is not only trite, but distant from the most advanced thinking on the challenge of nurturing the right environment for sustained, high and inclusive growth.

In this regard, the conference marked an important step, and we hope to continue advancing the solutions mentioned above together with the government, businesses and NGOs. Doron fears "sacrificing the present" for the future. Better to plan and act strategically now to improve the present and secure a prosperous future.

Gidi Grinstein is founder and president of the Reut Institute. Omri Zegen leads the team that promotes the ISRAEL 15 Vision at the Reut Institute.

for the full Op-Ed in JPOST, click here.