How Statism Keeps Poor Countries Poor

 

Acton University Talk by Stephen L.S. Smith of Hope College.

STATISM is an economic system (also called State Capitalism) which allows a private sector but in which many key industries are owned/controlled by the government.

It lies somewhere between communism and European-style social democracy on the economic spectrum.

Smith says we need a “field guide” since most statism is invisible to the casual observer.
So he took us to THAILAND via a slide show.
  • Banks: Easy to use, modern banking all over the place.
  • You need to buy a SIM card for your phone from “AIS.”
  • Transportation (air and rail) is top notch.
  • You have to leave Thailand (flying to the US) at 4am (because of the time change/dateline), and you stay in a Novotel by the airport for a few hours of sleep first.
But in fact….
  • The bank I used (TMB), upon some research is the Thai Military Bank. The army runs it. At a loss. The Siam Commercial bank is owned by the ministry of finance.
  • AIS (SIM card) is subcontracted from the Thai government to the Singapore (!) government, which sells the chip to you.
  • Both the state owned railways and airlines (each) lose over $1 million a day. Many new airliners are mothballed (over capacity). Unused capital (see the new ghost cities of China) is typical in a statist system.
  • The Novotel is owned by the government and just operated by Novotel.
So what?
  • Statism is the default system in the Global South. There are exceptions, but this seems to be the rule.
  • It is almost invisible at the street level, but has major consequences.
  • The government not only issues currency, but controls the flow of it–limiting investment which would compete with state businesses.
  • Very little revenue is left over (because government firms lose so much money) to lend to medium and small businesses. This leads to a growing black market with lots of informal street vendors. They don’t pay taxes which compounds the cycle; with a downward drag on the society.
  • Common in statist societies is weak rule of law and questionable property rights.
  • Insiders and elites benefit, which opens up patronage politics.
  • The highly educated urbanites benefit from statism because of the need for them running these bureaucratic businesses, which put a premium on education and connections.
  • Neglect of core state functions (governments are limited in capacity and spend their time running industries) such as rule of law, civil justice, non-corrupt police, property rights, basic education, and rural infrastructure.
  • State banking skews prices and and natural interest levels. Interest rates are set at a below-market level, discouraging saving. Most people want to save short term and pay off loans long term (People want fast access to their savings). Setting interest rates at an artificially low level creates tension in this natural supply/demand situation.
  • Lending is directed to favored insiders with big projects.
  • Capital is wasted (ghost cities of China where no one lives) because natural market forces are not the primary driving force of construction. State-owned firms serve political ends first.

  • Developing countries have more frequent bank failures, even with the “security” of state ownership.
  • Some countries have it way worse than Thailand. Pakistan and Egypt may be the worst. The Petrobas scandal in Brazil brought down the government.