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Withered states are here now and working just fine

Last week, this space looked at noted IMF economist Vito Tanzi, who is predicting the withering away of the state. How far would this withering go? Mr. Tanzi suggested that governments might shrink by half or by more than half. He suggested that governments could shrink to the same relative size that they held in the 19th century – when governments routinely spent only 10 per cent of their respective gross domestic product instead of the 40 per cent that they routinely spend now.

These predictions (advanced in Mr. Tanzi's new book Governments Versus Markets: The Changing Economic Role of the State) disturbed many readers who reasoned that such withering would return us – literally – to the days of yesteryear. For some reason, these worried folk assumed that 10 per cent of one country's 2011 GDP would buy only the same public goods and services as 10 per cent of its 1911 GDP did – thus ending civilization as we know it.

One reader expressed this expectation vividly.

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"We could have life expectancy halved for a start," he wrote. "[We could]enjoy enormous rates of infant mortality. Educate virtually no one beyond Grade 8, and significantly reduce the number of folks who reach that grade. Eliminate all public highways and airports. Restore dirt roads. Save money on public health measures and welcome back periodic waves of cholera and typhoid. Erase any concept of universal medical care. Give free rein to industrial practices unrestrained by any kind of environmental or worker protection. Enjoy the prospect of polluted and festering lakes and rivers."

This is what you get when you assume (for example) that 10 per cent of Canada's 2011 economy (per-capita GDP: $40,100) buys only the same goods and services as 10 per cent of Canada's 1900 economy (per-capita GDP: $2,758) – or, for that matter, 10 per cent of Canada's 1820 economy (per-capita GDP: $893). This assumption is wrong. (The 1900 and 1820 GDP numbers come from the calculations of Angus Maddison, the celebrated British economic historian.)

Let's explore Mr. Tanzi's predictions in a simpler way, using the percentage of GDP that selected governments now spend. For example, on one hand, Canadian governments spend 39 per cent of our GDP. Danish governments spend 51.8 per cent of GDP. Zimbabwe's central government spends 97.8 per cent of GDP – all by itself.

But there are countries, on the other hand, that spend only 20 per cent of their respective GDP – or half as much as the typical modern welfare state. At this level of public expenditure, these countries take you halfway to Mr. Tanzi's expectations of a withered state that spends 10 per cent of its GDP. Here are five of them:

Hong Kong: Population: 7.1 million. GDP: $302-billion (U.S.). Per-capita GDP: $42,748. Unemployment: 5.3 per cent. Inflation: 0.5 per cent. Five-year compound average growth rate: 3.1 per cent. Percentage of GDP spent by the state: 18.6 per cent.

Singapore: Population: 4.8 million. GDP: $240-billion. Per-capita GDP: $50,523. Unemployment: 3.0 per cent. Inflation: 0.2 per cent. Five-year compound annual growth rate: 4 per cent. Percentage of GDP spent by the state: 17.2 per cent. Singapore requires its citizens to buy their own health and employment insurance – a requirement that has produced an exceptionally high level of savings and one of the richest countries on Earth.

Chile: Population: 17 million. GDP: $243-billion. Per-capita GDP: $14,341. Unemployment: 10.8 per cent. Inflation: 1.7 per cent. Five-year compound annual growth rate: 2.8 per cent. Percentage of GDP spent by the state: 21.1 per cent.

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Costa Rica: Population: 4.6 million. GDP: $35-billion. Per-capita GDP: $11,579 (the highest in the country's Central American neighbourhood). Unemployment: 7.8 per cent. Inflation: 5.8 per cent. Five-year compound annual growth rate: 4.5 per cent. Percentage of GDP spent by the state: 20.9 per cent. (Costa Rica is running a deficit these days – keeping tax revenue as a percentage of GDP to 15 per cent.)

Taiwan: Population: 23.1 million. GDP: $736-billion. Per-capita GDP: $31,834. Unemployment: 5.9 per cent. Inflation: 0.9 per cent. Five-year compound annual growth rate: 2.5 per cent. Percentage of GDP spent by the state: 18.5 per cent.

These countries, developed and developing, show that you don't have to nationalize half of your economy to ensure a relatively decent society. In most cases, these partly withered states do efficiently (through regulation) what welfare state countries do inefficiently (through monopoly government programs). Call it, as Mr. Tanzi does, libertarian paternalism. It isn't really all that scary. Honestly.

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