Kansallisen ennakointiverkoston kutsuvierasseminaari julkisen sektorin tulevaisuuden haasteista. Videomateriaali tilaisuudesta: http://www.youtube.com/watch?v=8O68vF-a2u8

1. The role of the government in a
changing world
Ha-Joon Chang
Faculty of Economics
University of Cambridge

2. Economic Theory and the Role of
the Government
• It is not true that ‘economic theory dictates that
the smaller the government is and the less it
does, it is better’.
• Different theories provide different
prescriptions on the ideal role of the
government.
• Even for the same theory, what is the ‘correct’
role depends on the country’s values and goals.

3. Economic History and the Role of
the Government
• Many countries have done well despite (or
because of) going against prevailing economic
theories.
– The USA
• Protectionism, regulation of foreign investment,
government funding of R&D
– Finland
• Nokia, regulation of foreign investment, high taxes
– Most other rich countries have also violated many
elements of free-market orthodoxy.

4. Changing Role of the Government
• The desirable role of the government not only
differs across countries but should change over
time.
– ‘Policy cycles’ (classic liberalism – Keynesianism
– neo-liberalism – a new dominant ideology?)
– Long-term structural changes (Global warming,
Increasing complexity, Globalization of
corporations, Rise of new countries, ‘greying’ of
the population)

5. Global Warming
• Coping with global warming will require the
government to more deeply intervene in all
aspects of our lives – how we produce things,
what we consume, where we live, how we travel
to work, and where we go for holidays.
• An even bigger challenge is that the problem is
truly global and we need to work out a way to
equitably distribute the burden of adjustments,
while allowing poor countries grow with
minimum possible impact on global warming.

6. Growing Complexity
• Growing complexity makes government
intervention more difficult (although not as
much as it is often made out to be), and thus
makes it necessary for it to withdraw from less
urgent areas.
• Growing complexity increases reliance on
outside expert opinions, which increases the
danger of manipulation by interest groups.
– This makes it necessary to increase transparency
so that competing expert opinions can be openly
debated.

7. Globalization of Finnish Business
• In the short-run, investments abroad by Finnish firms
may reduce Finnish jobs
– although in the long run they can (although not necessarily
‘will’) create more and better paid jobs in Finland, if it
allows Finnish firms to grow faster and enough money
comes back home.
• However, globalization of business means that a lot
of public support for Finnish firms will ‘leak out’,
making it difficult to justify it to the taxpayers.
• Globalized firms will feel less (although not entirely)
attached to the Finnish society and become less
willing to accept egalitarian policies (e.g., welfare
state, higher wages).

8. Changing world economic and
political maps
• Rise of Russia
– Politically worrisome for Finland, but the EU will
provide substantial protection.
• Rise of China and India
– Not a direct political challenge, but over time they
will be seriously economic challengers
• they will begin to compete in high-tech industries well
before their wage levels reach the Finnish level, so
Finland needs to accelerate investment in innovation.

9. The Greying of the Population
• Increasing proportion of older people means
that people have to retire later and/or accept
lower pensions.
– Requires re-designing of the welfare state and the
labour market
• The other alternative is increased immigration.
– Difficult for a country like Finland, which was a
labour-exporting country until recently and which
has always struggled to keep its identity.

10. Words of Warning
• The most exciting change is not necessarily the
most important change.
– Telegraph vs. internet
– Washing machine vs. internet
• Seemingly irreversible trends can be reversed.
– British population trends of the early 20th century
– Globalization
– The Rise of China and India

11. Concluding Remarks
• No single ‘correct’ set of roles of the government.
• The role of the government needs to change over
time – ‘policy cycles’ and changes in long-term
trends.
• However, we should not assume that the most
visible trends are the most important ones nor that
today’s trends will continue forever.
• All these mean that intelligent governments need
long-term vision, pragmatism, and a healthy dose
of scepticism.