Sale Of The Century

And everywhere are the matrioshki, wooden dolls within dolls, but of endless variation - the traditional peasant women and a host of other characters, from Soviet leaders and US presidents to the Harlem Globetrotters. The favoured mode of payment is the dollar - the same dollar whose possession only a few years earlier could mean a stiff prison term.

Izamailovo is a particularly vibrant and stark symbol of how much has changed around the world since the 1970s in thinking about the relationship between state and marketplace. Socialists are embracing capitalism, governments are selling off companies they had nationalised, and countries are seeking to entice multinational corporations expelled just two decades earlier.

 

But the market system itself is destined to go through a great testing period, for this shift is engendering new anxieties and insecurities. They fear that government will no longer be there to protect them as they become intertwined in a global economy.

And they express unease about the price that the market demands of its participants and the possible embrace of money culture. Shocks and turbulence in international capital markets, such as those that roiled Latin America in 1995 and south-east Asia in 1997, turn that unease into fundamental questions about the danger and even legitimacy of markets.

Yet Asias crisis is less about markets than about the failures of markets - lack of transparency, speculative excess, political transitions. And the prescribed cure for Asias contagion looks to be more market not more government.

Where the frontier between the state and market is to be drawn has never been a matter that could be settled, once and for all, at some grand peace conference. It has been the subject, over the course of this century, of massive intellectual and political battles, and constant skirmishes.

V I Lenin defined the issue: it was a matter, he explained, of who would control the commanding heights, the most important elements of the economy. All this was before collectivisation, Stalinism, and the total eradication of private markets in the Soviet Union.

The phrase found its way to Britain, via the Fabians and the Labour party; it was then adopted by Nehru and the Congress party in India. Whether or not the term itself was used, the objective was one and the same: to ensure government control of strategic parts of the national economy, its major enterprises and industries.

Yet by the 1990s, the government was retreating. Communism had not only failed, it had all but disappeared in what had been the Soviet Union and, as an economic system, had been put aside in China. In the west, governments were shedding control and responsibilities. Instead of market failure, the focus was now on government failure.

The decamping of the state from the commanding heights marks a great divide between the 20th and 21st centuries. It is opening the doors of many formerly closed countries to trade and investment, and vastly increasing the global market.

Information technology is creating a woven world by promoting communication, co-ordination, integration, and contact at a pace of change that far outruns the ability of any government to manage. The connections, make national borders increasingly porous and increasingly irrelevant. Amid all this, the decisive new force is computers. With the establishment of the US government data web site last year, a 10-year old could gain access to more and better data than a senior official could have done just five years earlier. Would-be terrorists surf for weapon designs. If the internet is the new commanding heights, it is also beyond the reach of the state.

Capital sweeps across countries at electron speed; manufacturing and services move flexibly among countries and are networked across borders. As the barriers fall, private capital seeks new markets in what was once the special preserve of state investment; energy, communications and infrastructure, from power utilities to road construction.

Increasingly, investors around the globe are using the same approach and criteria to make their decision, and looking at the same pool of companies. The distinctions among national markets have become lost. In not so many years, a few national stock exchanges could well become global exchanges, opening for business not long after the sun rises and not closing until well after dark.

Performance - whether a companys quarterly earnings or a countrys inflation data or the outcome of a national election - sets off an immediate chain reaction. While the public votes every few years, the markets votes every minute. The commanding heights have been privatised, listed on the stock market and vigorously traded.

But politics within each country will still be shaped by its history, its culture and its definition of national objectives. This is not the end of the nation state, and even less the end of government.

Political leadership matters. Even if change in the direction of more market and less state is a pervasive global phenomenon, it does not lead to a single, common result. Success, political and corporate, is conditional on understanding regional dynamics.

If, in the industrialised countries, privatisation, deregulation and the opening up of economies to competition are seen as job-destroying rather than job-creating, then free market policies will surely be subject to continuing attack and constant revision. In developing countries, too, employment - along with the rate of economic growth - will be critical.

The market system will also be evaluated by the way in which success is distributed. Is the system fair and just? Or does it disproportionately benefit the rich and the avaricious? Does it treat people decently?

But, of all the dangers, perhaps the greatest threat to the new consensus, and the confidence that underlies it, would arise from massive disruption of the international financial system. Capital markets are growing far faster than the capacity to regulate them - or, indeed, even to understand them. The very scope and reach of the integrated global markets create financial risks on an unprecedented scale.

In the past, financial panics took weeks or even months to unfold. Now contagion can sweep through the worlds markets in hours, endangering the entire edifice. The danger arises not from the possibility of a shock but rather from the convergence of several shocks at one time.

In essence, the markets morality is twofold. The first is in delivering results - based upon the premise that the pursuit of individual interest cumulatively means the betterment of society. The second lies in the conviction that a system based upon property, contracts and initiative provides protection against the arbitrary state power. If the market is seen to fail on either of results or restraint, then, surely, there will be a backlash - a return to greater state intervention and control.

The outcome aside, what will be the new role of government? After all, there is no market without a government to define the rules and context. The state accepts the discipline of the market; government moves away from being producer, controller and intervenor and becomes the referee, setting the rules of the game to ensure competition and opportunity.

This leaves governments with a daunting challenge: to figure out ways to reduce and refocus intervention, and carry out its responsibilities efficiently, while preserving public trust. It also means redesigning the welfare state so that it provides the social safety net and the skills required to cope with global competition.

All this is a challenge for public policy and politics. It is also a challenge of imagination.

(Adapted from The Commanding Heights by Daniel Yergin and Joseph Stanislaw)