ECONOMIC ripples from the West will soon reach the shores of the emerging world including those of Pakistan. Recent events in Europe — in particular the loss of the presidency by the conservative incumbent to a left-leaning politician in France’s election and the political upheaval in Greece — have reignited an old debate.

Once again academics, policy analysts and politicians in the West are debating the issue of the appropriate role of the state.

The discussion is essentially about two matters: what is the right size of the state and what should the state do in economic affairs. The conservatives want a small government limited to performing a few functions, leaving much of the economy in the hands of the private sector. According to this way of thinking even the regulation of private enterprise will be left in private hands.

Those on the left of the political spectrum want to see a more assertive state providing what economists call ‘public goods’.

They also see the state playing an important role in caring for the poor and the disadvantaged by providing more or less the same sets of opportunities to all segments of society.

This difference in points of view shows up in two areas. In fiscal affairs, the conservatives would like to see a low tax-to-GDP ratio. They argue that a low rate of tax on incomes encourages investment, increases the rate of economic growth, employment and wages, and ultimately helps the poor. This would mean reducing corporate income taxes to no more than a quarter of the income earned.

This model was once called the trickle down approach to economic development. This was the approach that guided the planners during the periods of Generals Ayub Khan and Pervez Musharraf. The left, on the other hand, would like to raise taxes on the rich, and the state thus in possession of additional revenues would be in the position to spend more on the programmes that benefit the poor and the less well-to-do.

The second difference concerns the policies to be adopted by the governments during periods of economic stress. The right believes in using monetary instruments to bring back economic life; the left would like greater emphasis on stimulating the economy by increasing government expenditure even if there has to be resort to printing money to provide the state the additional resources it needs. The first approach was championed by the ‘monetarists’ led by Milton Friedman; the second was put forward by John Maynard Keynes. The issue remains unsettled and is back to being fiercely debated especially after the political U-turn in Europe.

This debate has relevance for the developing world as well. As we know from our experience in Pakistan, development thinking in the West has considerable influence on the making of public policy in the emerging world. There was the time when the now discredited ‘Washington Consensus’ was the rage in development circles. It advocated a very small presence on the state in economic affairs in developing countries. This approach was accepted and adopted by the countries that had to listen to the IMF. This included Pakistan and most of the countries in Latin America. General Pervez Musharraf’s Pakistan bought the IMF approach and gave free rein to the private sector.

There were many adverse consequences of this approach to economic management.. One of the more damaging one was the break-up of Wapda into a number of entities that dealt separately with generation, transmission and distribution. Even generation was split in two parts. While the old Wapda was left with hydroelectricity, thermal power generation was given to a new entity, the Pakistan Electric Power Corporation (Pepco). The idea was that this reorganisation would make it possible for the state to sell the assets of Wapda to the private sector. That of course did not happen and the country was left with a dysfunctional power sector that has produced the massive power load shedding taking such a heavy economic toll in the country. Given this and other experiences, we are back arguing about the appropriate role of the state, its size, and the location of public policymaking.

The other ripple from the West concerns the role of the banking system that remains dominated by institutions based in the United States and Europe. During normal times, these institutions have helped provide trade and development finance to the countries in the developing world. However, the hit taken by the Western banks during the Great Recession of 2008-09 has led to new regulations. Among them is the requirement that the banks beef up their capital. As a result some international banks have pulled back from the developing world.

Infrastructure finance is an area that will suffer at the time when the need for it for financing is increasing enormously. The Asian Development Bank has estimated that the capital required for the countries in the continent at $8 trillion over the next ten years or $800 billion a year. India, Indonesia, Pakistan and the Philippines have the most need for it. India alone will need as much as one trillion dollars over the next ten years to meet its almost insatiable appetite for physical infrastructure.

The debate about the role of the state and the drying up of development finance has increased the influence of China on its Asian neighbours and near-neighbours. The impressive performance of the Chinese state in maintaining a high rate of economic growth for three decades and in protecting the economy from the impact of the economic downturn in the West has set an example for other Asian states to follow. Like the Chinese they would like to see an activist state engaged in economic affairs. If the thinking in institutions such as the IMF, the World Bank and the Asian Development Bank is influenced once again by those in the West in favour a minimalist state ( as under Washington Consensus), it will further erode the importance of the public sector in the national economy.

Which way should Pakistan go? Should it give greater importance to the economic role of the state as it once did when Prime Minister Zulfikar Ali Bhutto vastly expanded the size of the government and its functions? For that to happen, the state will have to mobilise a significant amount of additional resources. That, in turn, will mean the ability to tax those who have managed to avoid taxation.

Or, should the private sector be given a greater role including investment in physical infrastructure and improving the development of the large human resource? This will undoubtedly result in further deteriorating income distribution.

It would be helpful if these questions are answered by the political parties as they prepare their manifestoes for the next series of elections.