Excessive government intervention in the private sector

According to the interventionist outlook, the state is not to be excluded from the strategic sectors of the economy; and political and trade union problems are thought to be best avoided, whatever the consequences to profitability, by keeping companies on the brink of bankruptcy from going out of business. In many countries, the major result has been a massive and debt-ridden state share-holding sector, often easily susceptible to political manipulation.

OECD has elaborated a set of positive adjustment principles to guide structural adjustment policies in troubled industries. These include the requirement that such policies be temporary, transparent, linked to the phasing out of obsolete capacity and free of protectionist measures against imports. It is however difficult to recognize these principles in actual practice. Whereas the rhetoric refers to facilitating adjustment, actual policy deviates from these principles in its objectives, instruments, time horizon and assumptions about how markets function. Many such policies do not aim to complement market adjustment in order to maximize aggregate output. Rather policies comprise a response to the conflict between the market's allocation of resources and the values and objectives desired by the political system. No matter how fervent their attachment to free market principles, governments in the major developed economies inevitably succumb to political pressures to intervene, and do so by means which often violate the positive adjustment principles.

[Industrialized countries] Despite its liberal rhetoric, the Reagan administration in the USA participated in the Chrysler rescue plan, used quotas when tariffs would have accorded with market principles in offsetting foreign subsidies on steel; sanctioned tighter restrictions in the Multifibre Agreement for Textiles; reintroduced quotas on sugar; concluded a cartel arrangement for semi-conductors and obtained voluntary export quotas on Japanese automobiles. Similarly, the Japanese government, despite its strong reluctance to aid individual firms, bailed out the Sasebo shipbuilding company, and despite its abhorrence of formal trade barriers, protected its aluminium industry with tariffs. Germany, despite its commitment to the social market doctrine, allowed its overall subsidies to rise dramatically in the 1970s and was drawn into the rescue of the AEG corporation.

[Developing countries] In virtually all the developing countries, the acceleration of industrial growth has brought an equally accelerated increase in government intervention in economic activity. In sectors other than transportation, power and basic services (and in those fields of industrial activity whose very magnitude makes private participation difficult or impossible), such participation merely obstructs and increases the cost of development and generates ever greater exclusion of the private sector from productive activities in which private enterprise has proven to be more efficient.