Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others.
-Thomas Jefferson (1743-1826)
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CONTENTS:
0 Market Economy as a Poverty Reduction Mechanism
By Mohsin Khalid
0 Government, Private Sector and Market Economy: Changing Perceptions
By Aftab Ahmad Khan
0 FreePakistan News Briefs
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MARKET ECONOMY AS A POVERTY REDUCTION MECHANISM
By Mohsin Khalid
[A talk given at a National Seminar on Civil Society and Good Governance arranged by Liberal Forum Pakistan last year in Islamabad]
Any discussion of the market economy should ideally begin with a comprehensive definition of the free market economy. But since that would be a repetition of things we already know, in the interest of brevity I would just like to emphasize that at the very basic, markets are essentially only a mechanism for the most efficient allocation of limited resources. Efficient allocation of resources leads to better factor productivity. Labor is always paid higher when it is specialized in its particular skill category. Capital always pays higher dividends when it is employed in the most profitable ventures. Similarly the yield of land is highest when the incentive is highest.
On the face of it the relation between the market economy and poverty reduction should be obvious. No need to state the obvious in such a distinguished gathering. The free market, when functioning effectively leads to effective distribution of resources, leads to higher productivity, greater profits, more confidence; leads to more investment, more jobs and economic growth, which when trickles down to the masses leads to higher incomes and better living standards, which is what we understand from poverty reduction. Quite straightforward really . . . In Fantasia!
Of course, as we are all aware, things in real life are not that straightforward. First thing to recognize is that nowhere in the world, and I mean nowhere does the perfect market system exist, nowhere does it function ideally and nowhere is it guaranteed to deliver the results as in the above fantasy situation.
Why doesn’t the Market System always work efficiently and result in growth and poverty reduction?
Why Governments Intervene?
One very interesting and simplistic approach is that people remain poor primarily because they come from poor countries. Meaning essentially that developing economies with low GNP have limited resources to allocate. Therefore they never have enough to reach the critical take-off stage of development. But another more plausible explanation is that because markets are distorted by outside players, they never reach that critical take-off stage. Most often, the culprit is the government. With populist governments mostly operating in developing countries, governments often take steps that distort the free market mechanism from automatically allocating resources to the most efficient user. Governments in these countries are generally petrified of the effects of the free market left to itself. They view it as a loose cannon that can blow them away if not periodically brought into submission. That’s why they have this constant urge to intervene in the markets. Just how dangerous and sensitive the free market left to itself can be for such governments can be judged by the example of the Delhi state government loosing power in state elections because the price of onions in Delhi doubled just weeks before the elections. And the recent example of the fixation of meat and mutton prices in Karachi by the city government. Why do you think the city government felt the need to intervene and control prices?
Price-fixing in the Agricultural Market to protect certain lobbies always backfires. Quick-fix approach, ad-hoc policies never allow enough time for the market to stabilize and find an equilibrium that benefits all stakeholders.
Protectionist policies to protect few large players, what in economic terms are referred to as oligarchies. As the cement cartel and the car manufacturers. Simple analysis will reveal that when compared to other nations in the region with similar economic systems, you will find that the nation is being forced to pay twice as much for cement and at least half as much more for similar cars than neighboring countries.
Why don’t the benefits of the Growth reach the poor?
Now lets focus on the relationship of the market economy that is most pertinent to poverty reduction.
The Essential Pre-requisites:
One thing to understand is that growth without income equality and equal distribution of wealth would never lead to poverty reduction.
The benefits of growth do not automatically reach poor people, who face many barriers to participating in the market economy, and benefiting from the opportunities that it presents; because of lack of property rights, limited access to credit, limited access to information and technology, poor infrastructure and low skill levels. While policies at the national and international level play a pivotal role, it is essentially the way government institutions and the market function at the local level that make a dent in poverty.
Experience demonstrates conclusively that the right political institutions and the right legal framework must accompany economic reform. Only then can new enterprises create sufficient employment to offset the loss of jobs resulting from public restructuring.
The absence of an effective rule of law is a barrier to the proper functioning of a market economy, a deterrent to both domestic and foreign investment and breeding ground for corruption. As the absence of foreclosure laws in Pakistan prevents institutions, banks from getting into micro-credit. Limited land ownership prevents poor from presenting them as collateral.
Poor people in rural areas are often physically disconnected from market opportunities; through the absence of basic infrastructure such as roads, electricity, and telecommunications.
To sum it all, we must understand that no effort to achieve real growth can come without the constant drive towards a free market economy. A liberal market system should be a basic pre-requisite for development, in the same league as health, education and human resource development to get country out of poverty cycle. In our own capacities, all of us and the Liberal Forum Pakistan as a group should advocate at all possible levels, limited government, limited government involvement in the markets and outward looking free trade policies. The drive in the late 80s from import-substitution to export- led to growth. Outward looking strategies work better than import-substitution simply because they are a better allocation of resources . . .
GOVERNMENT, PRIVATE SECTOR AND MARKET ECONOMY: CHANGING PERCEPTIONS
By Aftab Ahmad Khan
[The following article is a good specimen of how the perception about free market economy is changing/improving in Pakistan.]
There is now general consensus that the government should not try to do too much with limited administrative and financial resources available to it, but should concentrate on effectively performing the core tasks for which it is the appropriate agency. It has to move from doing too many things inefficiently to doing its essential tasks competently and honestly
History of development economics and economic policy changes during the last six decades make a fascinating study with animated and interesting controversies.
At the end of World War-II and during the 1950s and early 1960s, intervention in the form of central planning and ownership of the key sectors of the economy was often viewed as a more effective and speedy way to achieve robust growth on a self-reliant basis for developing countries as compared to dependence on competitive markets and the private sector. The principal theories of economic development put forward by leading economists in this field such as Big Push, Balanced or Unbalanced Growth, Backward and Forward linkage models and Critical Minimum Effort stressed the need for state intervention to mobilise resources and invest in priority economic and social areas to promote growth and provide protection for domestic industries. The famous Latin American economist, Presbisch preached terms of trade theory, which emphasised the secular decline of primary commodities and thus justified the need for import substitution and self-sufficiency as strategic objectives.
Government planning was viewed as essential to insure that capital formation proceeded at the desired rate and that such capital was allocated in a manner commensurate with development objectives of the country. Government control and direction came to mean central planning of the economy in which the role of market prices was of secondary importance.
It was also believed that reliance on market mechanisms would lead to inequitable distribution of income and would not lead to the elimination of poverty and unemployment.
Governments, therefore, engaged in both direct measures such as price controls, land reforms and income transfers and in indirect measures such as taxation and subsidies.
In contrast to this call for widespread government intervention, neo-classical economists have long argued that the role of the government should be limited to correcting market distortions and providing public goods. In their judgment, free market guides economic decisions better than government. Under free markets profit provides incentive and competition improves efficiency. Any government intervention or control that works against competition results in inefficiency and encourages rent seeking behaviour.
Unfortunately in many developing countries in the name of market failure or public goods, government intervention often went too far into areas where the private sector was already present. Public sector firms began to intrude and crowd-out the private sector. One of the aims of privatisation in many developing countries is to reduce these cases.
Additionally, recent technological changes have reduced the validity of some of the arguments for market failure and public goods. For example, in the telecommunications industry, optimum plant sizes have been reduced, allowing multiple firms to compete and co-exist in the same industry.
Again, in many developing countries the government grew corrupt and became a rapacious rent seeker. On account of political interference most of the public enterprises became inefficient and a burden on the budget. Licensing and regulatory mechanisms instead of guiding and facilitating private sector led to distortions and became a hindrance to healthy development. Public sector failed to optimise both efficiency and welfare.
By the 1980s it became quite clear that developing countries relying on extensive state intervention and control were experiencing lacklustre growth and were suffering from unsustainable macro-economic imbalances reflected in huge fiscal and balance of payments deficits, often accompanied by disconcerting inflationary pressures. As against this, countries that were successful in limiting growth in government and maintaining a viable and competitive private sector experienced much higher rates of growth and prosperity.
These trends created an environment conducive to limiting the role of the government. As such since early 1980s there is renewal of emphasis on private sector as the most efficient means of achieving objectives of high economic growth and improved living standards. The ideologies that influenced development strategies in the past have been replaced by a more pragmatic approach to development. Governments have themselves accepted smaller roles for themselves in economic affairs because of the need to reduce budgetary deficits and government debt and also to eliminate bureaucratic regulations and red tape that unnecessarily raise the cost of doing business. The success of the East Asian economies has also served as a testimony to the relationship between private sector development and long-term growth. The trend is evident in Eastern Europe, the USSR, Latin America and South Asia where the public sector has controlled a significant segment of the economy.
Notwithstanding the current swoon over the charms of the market and disillusion with government in developing economies, it is an indisputable fact that free markets can yield positive results only in a milieu characterised by good governance.
Governance may be taken as connoting how people are ruled, and the affairs of the state are administered. It encompasses the state’s institutional and structural arrangements, decision making process and implementation capacity. It implies that public authorities play an indispensable and creative role in establishing an environment conducive to growth and in determining the equitable distribution of assets and benefits.
An area of special significance for good governance is that of regulatory administration particularly for the financial sector where fraud and unsound management could have profoundly destabilising consequences for the economy. Regulatory administration is the main instrument available to the government to enforce compliance with the nationally established standards in various economic and social spheres and with national development objectives. The regulatory systems have to be designed and constantly watched to ensure that these activities do not become conservative or begin to create bottlenecks in the development process.
Notwithstanding the dominant position of the private sector, the government’s role in promoting some public goods and in framing the basic rules of economic activity in terms of safety standards, pollution control, law and order, provision of basic social services and infrastructure, protecting the vulnerable segments of society and maintaining a non-distortionary policy environment including macroeconomic stability continues to be important.
According to the World Bank, the government can improve development outcomes in the following ways:
(a) By providing macro-economic and micro-economic environment that sets the right incentives for efficient economic activity.
(b) By providing the institutional infrastructure - property rights, peace and order and rules that encourage long term investment.
(c) By ensuring the provision of basic health, education and the physical infrastructure required for economic activity and protecting the natural environment.
The World Bank has emphasised that the largest source of state inflicted damage is uncertainty. If the state changes the rules often or does not clarify the rules by which the state itself will behave, businesses and individuals will adopt costly strategies to insure against the uncertain future - by entering the informal economy for example, or sending capital abroad - all of which impede development.
There is now general consensus that the government should not try to do too much with limited administrative and financial resources available to it, but should concentrate on effectively performing the core tasks for which it is the appropriate agency. It has to move from doing too many things inefficiently to doing its essential tasks competently and honestly. [Courtesy The News]
FreePakistan News-Briefs
PRIME MINISTER SAYS ECONOMIC SOVEREIGNTY ACHIEVED
The Prime Minister (and Finance Minister) has said that Pakistan had achieved economic sovereignty and was working on a comprehensive plan to transfer these benefits to the common man. He told the participants of the 5th Workshop on National Security at the National Defense College: Gone are the days when Pakistan was termed a failed state and from being on the lowest tier of IMF poverty reduction programs has gone into the international capital market.
BRITISH HELP FOR POVERTY REDUCTION
The British High Commission has announced the release of Rs.800 million (7.5 million pounds) as part of an ongoing four year 2003-07 commitment to poverty reduction in Pakistan.
PAKISTAN’S SOCIAL INDICATORS DISCOURAGING
According to a latest internal report of the Asian Development Bank submitted to the Government of Pakistan, Pakistan remains a poor country with extremely low social indicators and needs to invest $1.5to 2 billion additional resources to achieve a medium-term annual GDP growth rate of 8 %.
BULLET-PROOF MERCEDES TO BE IMPORTED
The government has decided to buy ten bullet-proof Mercedes cars for beefing up the security of important government and political personalities of the country.
WB: TRADE TO REDUCE INDO-PAK TENSIONS
A new report of the World Banks says that the expansion of trade ties between India and Pakistan may anchor the recent relations would create new constituencies favoring reduced tensions.
ITEMS ADDED TO THE IMPORT LIST FROM INDIA
Pakistan has expanded its positive list of importable items from India by adding 81 more categories of goods. Most of the new items now being included in the positive list are raw material required by the local industry.
WORLD BANK ASSESSING POLITICAL RISK IN PAKISTAN
World Bank has started a survey covering the political and geo-political issues presently being confronted by Pakistan.
DEVELOPING THE PRIVATE SECTOR
Pakistan and Netherlands will work together to support the private sector development by promoting and supporting economic cooperation between the business sector of the two countries on the basis of equal partnership and mutual benefit with a focus on private investment.
FEUDALS RESISTING AGRICULTURE INCOME TAX
Country’s feudal lords, especially from Sindh and southern Punjab, have successfully persuaded economic managers to maintain the status quo on agriculture income tax regime in the country. "It is no denying the fact that agriculture’s share in GDP is not less than 24 per cent, yet we cannot pressurise the farmers to pay tax like manufacturing sector," said Chairman Central Board of Revenue.
AJK TRADERS CHALENGE NON-REFUNDABLE TAXES
The government of Pakistan is facing a legal battle over jurisdiction of Azad Jammu and Kashmir as 13 petitions are coming up for hearing in the Supreme Court against non-refundable duties and taxes on November 23, 2004. Big businesses operating in AJK territory importing raw materials through Pakistani ports and paying customs duties, GST and other taxes to Islamabad have filed petitions against refusal of Pakistan to refund duties and taxes on export shipment. Under the Pakistani law, taxes and duties are refundable on imports of raw materials used in export products. GST on locally purchased raw materials is also refundable but the AJK businessmen are not benefiting from the facility.
THIRD INTERNATIONAL PHILOSOPHY DAY OBSERVED
On November 18, the United Nations Educational, Scientific and Cultural Organization (UNESCO) celebrated its third international Philosophy Day. Over one hundred and twenty philosophers hailing from thirty-five countries attended a philosophical convention UNESCO arranged at its Paris headquarters. In addition, over seventy countries also observed the third Philosophy Day in their own fashion, organising conventions for students, scholars, artists, and activists. The Lahore University of Management Sciences (a private sector university) hosted Pakistan's celebration of the Philosophy Day. During the event, a meta-philosophical quest on the contemporary relevance of philosophy was initiated by Justice (R) Javaid Iqbal, son of acclaimed Pakistani poet-philosopher, Allama Iqbal. He lamented the ignorance of the Pakistani society. The entire debate proved quite enlightening as regards contemporary opinions amongst Pakistan's students and scholars. The third Philosophy Day ended on a high note in Pakistan, amidst bold comments, and the hint of a contemporary attitude open to critical thought, and original innovation.
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Edited and prepared by
Khalil Ahmad
Email: khalilkf -at- yahoo.com
[No opinion expressed here should necessarily be taken as reflecting the view of FreePakistan Newsletter.]
