Growth Policy and the State

Working Paper No. 3

Growth Policy and the State

Author: Philippe Aghion

The role the state should play in economic growth is widely debated and controversial. The debate on the role of the state has been revived by the financial crisis to the extent that it turned a financial crisis into a public debt crisis. One response is the neo-conservative approach of a minimal state. However, this approach is not working too well in the United Kingdom, where it has been implemented. Conversely, in Scandinavian countries, where governments remain big, innovation and productivity growth rates remain high. This paper argues for a strategic or “smart” state rather than a reduced state. The strategic state would target its investments to maximize growth in the face of hard budget constraints. This departs both from the Keynesian view of a state sustaining growth through demand-driven policies, and from the neo-liberal view of a minimal state confined to its regalian functions.