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State Capacity, Economic Crisis and Economic Reform: Implications for Sustainability

Module by: Adriana Maestas. E-mail the author

Summary: Sustainability Seminar recorded on March 2, 2011, delivered by Georgetown University Professor George Shambaugh. Like the economic crises in Korea in 1997 and Argentina in 2001, U.S. and European responses to the 2008-2011 financial crises are less about what particular strategy is most likely to succeed or who specifically will be bailed out, than they are about the capacity of national governments to overhaul their economies and restore confidence in the global markets. Whether adopting neo-Keynesian, monetarist, or neo-liberal reforms or whether rescuing Wall Street or auto makers, state capacity is essential. Enhanced capacity increases a nation-state's ability to manage the market and has a significant positive effect on the economy by decreasing uncertainty; thus enhancing consumer and investor confidence. Low levels of state capacity compound market uncertainty with political uncertainty. This weakens bargaining strength and undermines confidence in both political leadership and the economy. Understanding how the power of, and distribution of power between, economic and political elites affects the capacity of national governments to manage markets effectively (whether this involves negotiating with labor unions, entrenched corporate and financial groups, domestic and international investors, foreign governments, or international financial institutions), enables us to predict recurring patterns of political exuberance, economic exuberance, economic policy inertia, and credible economic policy reform. These patterns of behavior help to explain the evolution of national economic policies that triggered economic crises in Asia and Latin America a decade ago and the United States and Europe today. They have also shaped national responses to these crises and, as a consequence, confidence in national and global economies.

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