State and the Markets: Why legislating Interest Rates Makes Development Sense
Kenya became independent in the 1960s; in the post-world war II era and the glory of Marshall Plan for Europe was mesmerizing thinkers. The modernization thinkers were advancing the thinking that transformation of traditional structures to modern structures; mechanistic alliances to organic alliances were the developmental path. Different thinkers strived to show how rational “the modern” was against the archaic traditional structures. Thus modernization thinkers like Rostow prescribed stages of growth and development.
In the 1960s still, frustration was beginning to be felt at the seeming impossibility of all countries to transform as prescribed by the Eurocentric models. The foreign aid justifying theories such as focus on colonialism and its impact were questioned. Consequently, thinkers started considering determinants of structural change. Focus on balance of trade made import substitution a most celebrated economic model. Thus countries were urged to focus on comparative advantage and protectionism for the sake of infant local industries.
The world oil crisis and the attendant world debt crisis led to shift in focus from structure of the economy to role of the state in the economy. Thinkers went back to classical economic theory that emphasized the free hand of the market. Neo-classical liberal theory sees the role of the state as unnecessary interference that creates inefficiency and distortions. On the other hand, markets are viewed as perfect and market forces are deemed to always create an equilibrium that serves rationally in the best interest of all people. This kind of thinking informed the structural adjustment programs that were advanced by the Bretton woods system. At the heart of structural adjustment programmes was believe that privatization and liberalizing of markets unbridles market potential and leads to professionalism that allows for growth.
Fast forward and we all know the SAPS did more harm than good. People started to question neo-classical economic development perspectives. The question of State action on one hand and free hand of the market remains an unresolved issue for may thinkers who think the only solution is “either or”. Consider the current debate in Kenya on whether the president should assent to the banking amendment bill 2015, which seeks to introduce interest rate caps.
Straight jacket thinking economists, articulate in neoliberal economic school of thought, are up in arms against capping interest rates. They can't imagine that markets can be rogue. They believe that things only work best when the state does not interfere in the markets.
An institutional theoretical lens shows that different institutions affect society based on how they interact. The Neo-Marxist perspective helps to show the exploitative linkages in the economic system despite market conditions being perfect considering that capitalists will always work to perpetuate their selfish interest.
From a postmodernist perspective, the different economic perspectives or jackets are mere narratives that should always be informed by context dynamics. When the different perspectives are considered, it is safe to argue that State and Markets ought to complement each other. The markets should be free but there is need for strong State acting to address market imperfections and distortions. The markets require a referee; the hand of the market requires a referee so that individuals with monopolistic power do not misuse their power.
There are many examples why strong state intervention is key for sustained economic growth. China and Asian tigers have shown that it is actually never about "the free hand of the market" but informed government choices. The days of professionalism being the preserve of private sector are yet to be realized in Kenya. The perception that the private sector acts rationally is proven to be merely a myth. Just as we have corruption in government, the private sector in Kenya, Banking sector included, are guilty of foul play. The developmental state, focused on a holistic social transformation agenda, should have its influence both direct and indirect on every sector of the economy.