Does Government Involvement in Business Help or Hinder?

Toronto's Mayor candidates will talk to entrepreneurs about how the City can help. I have been asking business owners about their thoughts. These owners tend to run companies that are making a decent cash and the majority say,  "Simplify paperwork, taxes, hiring and firing rules and stay out of the way." They do not reach out for government programs like SREDS and find these annoying. Lawyers, who make a good living from explaining the difficult rules, may not like these ideas. I have also noticed that the companies that look for help from the government are often the ones who should not be getting a subsidy, while the stronger ones do not reach out for programs.
So, does Government involvement help or hinder business development? Many governments are now looking at industrial policy. Justin Lin’s book is well worth reading on the topic. He tries to sort out good industrial policy from bad. 
When does state intervention lead to structural upgrading, a la East Asia, and when does it merely generate a bunch of uncompetitive companies being kept on artificial life support by state subsidies, as sometimes happened elsewhere? His conclusion is that the state should not depart too far from a country’s comparative advantage, but consciously push it towards upgrading by imitating neighbours that are similar, but have travelled further along the upgrading path – basically the East Asian ‘flying geese’ model. 
Think of it as the state pulling a country along by a piece of elastic – pull too little and nothing happens, pull too hard and the elastic snaps. 
For a review of his paper, and Justin’s response in a guest blogpost, visit Oxfam’s From Poverty to Power blog on

1 comment:

Anonymous said...

The reason govts. in developed countries are getting back into involvement with businesses and corporations is because the behavior of the business and financial elites have forced the govt.'s hands. If the leaderships of (just to pick major corporations in a nation at random, oh, say, the U.S., my own country) GM, Chrysler, Goldman Sachs, AIG, B of A, and others had demonstrated an ounce of responsibility, foresight, maturity, and sobriety in pursuing profits and serving the needs of consumers/customers in the last 10 years, there would have been no demand for increased govt. role in the operations of these fine business ventures. Instead we saw greed, hell-for-leather risk-taking, hubris, and roughshod and contemptuous treatment of the citizenry at large. They demonstrated by their own behavior that they were BEGGING for govt. intervention!!!