Free market theories are full of explanations and reasons for their pushing forward the statement that direct government involvement in the economy retards development. One of their biggest arguments is actually a reply that is given to economists who fear the emergence of monopolies in a free market. Free Market Theorists argue that governments are monopolies themselves and an economy controlled by the state is just a politically veiled monopoly. So ultimately, one has to choose between the chance emergence of a monopoly from the private sector or a certain presence of a monopoly in the form of the government. Obviously, the better choice is the private sector where a monopoly need not occur.
A counter-argument by socialists in reply to this statement was that since the private sector is uncontrolled, a monopoly firm can rise unchecked and will be perhaps unstoppable. On the other hand, if consumers are not satisfied with a State monopoly, they can always vote the ruling government out of power and install somebody else at the head instead (this was an argument that I heard at a debate last year). But of course, history shows us different results. When the public sector started to fail in India, no new government could save it. Instead, it was the private sector that came to India's rescue with liberalisation in the 1990's.
More importantly, the private sector is not really uncontrolled. In a free market, consumers have the power to show who's boss. If they don't like the products of one particular company, they'll simply switch over to another, causing losses to the offending company and forcing it to either improve its products or face closure. Therefore, the argument that public sector companies are actually safer does not hold much water and the risks of a strong private sector don't seem to be any greater than the risks of a strong public sector.
But does this make the government redundant? Should economies do away with governments completely? Perhaps, the government should be thrown out of any economic enterprise altogether and let the more reliable private sector handle everything. But I'd like to disagree. No economy can do away with the government completely. The fact that most government enterprises are usually inefficient does not make any difference. The government cannot be wished away simply because the government does not want to be wished away.
A basic rule that most economists follow is "eliminate what is inefficient". The Public Sector with its sick industries and bloated labour just reeks of inefficiency and therefore must be eliminated according to this rule. But something that a lot of economists overlook is who the Public Sector is providing for. Public Sector Units (PSUs) are theoretically set up to provide services and products to those people who are, for some reason, unable to access such products and services from the private sector.
Admittedly, this wasn't really the norm in India. Most Indian PSUs were set up to fulfill grand agendas of nationalistic governments whose eyes were so set on the future that they ignored the demands of the present. But this is not always the rule. A lot of African economies depend heavily upon their Public Enterprises because the governments are the only bodies that are organised well enough to provide such services.
Joseph Stiglitz, in his book Globalisation and its Discontents gives one such example. A certain African country approached the IMF for funds. As is normal with IMF policy, the country received a number of conditions that it must fulfill before it could receive any aid. That particular African government was in the practice of assisting the country's poultry farmers by providing transportation services through which eggs and chickens could be sent to markets across the country, thereby reducing costs for the farmer. The IMF demanded that the government stop these services and let the private sector take over. Desperate for funds, the government complied and everyone waited for the private sector to magnificently sweep in and reorganize the entire transportation industry. It never happened. Why? Because there was no private sector at all. No one but the government had the resources and organization to conduct such services. And no private party had the initiative to start such a business because of lack of funding. The IMF funds didn't count since the government had never planned to use them for the transportation industry in the first place. They had borrowed those funds for an entirely different area of development. The result? The poultry industry started to collapse. Poor farmers were forced to pay steep prices to get their produce somehow to the markets. Those who could not do so, were forced to go out of business.
The government service provided to those farmers was nothing great. The trucks were old, the drivers corrupt and the roads extremely bad. But there was no alternative. It was government or nothing. Free Market Theorists would probably say that the Private Sector was weak because the government did not encourage investment. But tell me, which investor would want to pour his money into a poor Sub-Saharan African country with no prospects of development in the first place? Which domestic investor would have the means to do so? The way the government so willingly stopped operations proves that it wasn't really interested in providing these services anyway. It wasn't as if they were clutching the transportation industry with a tight fist and refusing to let any one else near them.
Such conditions exist even in India, in spite of a booming private sector. A lot of villages still depend upon the local Community Health Centre for its health care services because these areas don't attract private medical institutions. Most village children who do get an education do so because of a nearby government school. Most private schools do not find such areas economically viable to operate in (not that it is any fault of theirs).
What I believe is that the Private Sector should supply goods and services wherever there is an economic demand (i.e. demand backed with adequate purchasing power) for such goods and the Public Sector should provide the same to those who wish for such but are unable to afford the price. This is not easy of course. There are always rich consumers who try and get the product for a lesser price. But as I have noted before, PSU products are usually (usually!) of lesser quality than those provided by the Private Sector and if the quality gap is sufficiently large, it's highly unlikely that those who can pay for better quality will not do so. Such a quality gap will also motivate poorer sections of society to rise above their current income levels so that they can afford the same quality.
Of course, another point to note is that the government doesn't like being out of the spotlight! I have often noticed Free Market Theorists give an impression (probably unintentional) that one should ignore the government completely - a dangerous thing to do. If a vibrant economy ignores the government altogether, then an impoverished government with a bloated bureaucracy will sometime in the future, try and interfere in the working of this economy. Politicians and bureaucrats are usually attracted to money like moths to a candle flame. We have already seen politicians targeting IT firms in Bangalore, bureaucrats clamping down projects in Gurgaon and netas interfering in private projects in Mumbai and many of these people are obviously looking for some monetary gain. This means that the economy can never ignore the government altogether. Its presence in the economy is assured and if an economy hopes to thrive, it must ensure that a reasonably responsible government is in charge of the administration of the country, regardless of how strong the private sector is.
A counter-argument by socialists in reply to this statement was that since the private sector is uncontrolled, a monopoly firm can rise unchecked and will be perhaps unstoppable. On the other hand, if consumers are not satisfied with a State monopoly, they can always vote the ruling government out of power and install somebody else at the head instead (this was an argument that I heard at a debate last year). But of course, history shows us different results. When the public sector started to fail in India, no new government could save it. Instead, it was the private sector that came to India's rescue with liberalisation in the 1990's.
More importantly, the private sector is not really uncontrolled. In a free market, consumers have the power to show who's boss. If they don't like the products of one particular company, they'll simply switch over to another, causing losses to the offending company and forcing it to either improve its products or face closure. Therefore, the argument that public sector companies are actually safer does not hold much water and the risks of a strong private sector don't seem to be any greater than the risks of a strong public sector.
But does this make the government redundant? Should economies do away with governments completely? Perhaps, the government should be thrown out of any economic enterprise altogether and let the more reliable private sector handle everything. But I'd like to disagree. No economy can do away with the government completely. The fact that most government enterprises are usually inefficient does not make any difference. The government cannot be wished away simply because the government does not want to be wished away.
A basic rule that most economists follow is "eliminate what is inefficient". The Public Sector with its sick industries and bloated labour just reeks of inefficiency and therefore must be eliminated according to this rule. But something that a lot of economists overlook is who the Public Sector is providing for. Public Sector Units (PSUs) are theoretically set up to provide services and products to those people who are, for some reason, unable to access such products and services from the private sector.
Admittedly, this wasn't really the norm in India. Most Indian PSUs were set up to fulfill grand agendas of nationalistic governments whose eyes were so set on the future that they ignored the demands of the present. But this is not always the rule. A lot of African economies depend heavily upon their Public Enterprises because the governments are the only bodies that are organised well enough to provide such services.
Joseph Stiglitz, in his book Globalisation and its Discontents gives one such example. A certain African country approached the IMF for funds. As is normal with IMF policy, the country received a number of conditions that it must fulfill before it could receive any aid. That particular African government was in the practice of assisting the country's poultry farmers by providing transportation services through which eggs and chickens could be sent to markets across the country, thereby reducing costs for the farmer. The IMF demanded that the government stop these services and let the private sector take over. Desperate for funds, the government complied and everyone waited for the private sector to magnificently sweep in and reorganize the entire transportation industry. It never happened. Why? Because there was no private sector at all. No one but the government had the resources and organization to conduct such services. And no private party had the initiative to start such a business because of lack of funding. The IMF funds didn't count since the government had never planned to use them for the transportation industry in the first place. They had borrowed those funds for an entirely different area of development. The result? The poultry industry started to collapse. Poor farmers were forced to pay steep prices to get their produce somehow to the markets. Those who could not do so, were forced to go out of business.
The government service provided to those farmers was nothing great. The trucks were old, the drivers corrupt and the roads extremely bad. But there was no alternative. It was government or nothing. Free Market Theorists would probably say that the Private Sector was weak because the government did not encourage investment. But tell me, which investor would want to pour his money into a poor Sub-Saharan African country with no prospects of development in the first place? Which domestic investor would have the means to do so? The way the government so willingly stopped operations proves that it wasn't really interested in providing these services anyway. It wasn't as if they were clutching the transportation industry with a tight fist and refusing to let any one else near them.
Such conditions exist even in India, in spite of a booming private sector. A lot of villages still depend upon the local Community Health Centre for its health care services because these areas don't attract private medical institutions. Most village children who do get an education do so because of a nearby government school. Most private schools do not find such areas economically viable to operate in (not that it is any fault of theirs).
What I believe is that the Private Sector should supply goods and services wherever there is an economic demand (i.e. demand backed with adequate purchasing power) for such goods and the Public Sector should provide the same to those who wish for such but are unable to afford the price. This is not easy of course. There are always rich consumers who try and get the product for a lesser price. But as I have noted before, PSU products are usually (usually!) of lesser quality than those provided by the Private Sector and if the quality gap is sufficiently large, it's highly unlikely that those who can pay for better quality will not do so. Such a quality gap will also motivate poorer sections of society to rise above their current income levels so that they can afford the same quality.
Of course, another point to note is that the government doesn't like being out of the spotlight! I have often noticed Free Market Theorists give an impression (probably unintentional) that one should ignore the government completely - a dangerous thing to do. If a vibrant economy ignores the government altogether, then an impoverished government with a bloated bureaucracy will sometime in the future, try and interfere in the working of this economy. Politicians and bureaucrats are usually attracted to money like moths to a candle flame. We have already seen politicians targeting IT firms in Bangalore, bureaucrats clamping down projects in Gurgaon and netas interfering in private projects in Mumbai and many of these people are obviously looking for some monetary gain. This means that the economy can never ignore the government altogether. Its presence in the economy is assured and if an economy hopes to thrive, it must ensure that a reasonably responsible government is in charge of the administration of the country, regardless of how strong the private sector is.
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