The state and the market: coalition or collision?
Monday, 23 July 2007
Hasan Mahmud
WITH the whirlpool of globalisation, neo-liberalism has become the orthodoxy which conceives that greater welfare for human beings can be achieved by the free operations of the market. Specifically, this premise demands the state's withdrawal from the economic arena to make room for unfettered execution of the private capital. The logic behind this orthodoxy rests on the professed economic achievements and sustenance of the advanced countries following liberal policies. This is why, the government of Bangladesh, since 1993 when free market economy is espoused as the state policy, has been gradually retreating from the market and welfare provisions.
A decline in government subsidies in agriculture, education, healthcare and many other public sectors has become a regular phenomenon every year thereafter. Though a steady growth of GDP around 5.0 per cent and an overall improvement in other human development indicators are observed throughout the 1990s and early 2000s, nevertheless this can be regarded as beneficial if the increasing amount of foreign debt and cost of natural devastations are counted. The per capita foreign debt has become over TK 14,000 in 2006 compared to TK 5,000 in 1990. The green revolution, widely applauded for increasing food production, has caused ecological devastation. The massive application of HYV seeds along with chemical fertilisers and pesticides has completely destroyed the natural resource base of fishery, poultry and animal husbandry, raw materials for cottage industries and herbal medicines. As a consequence of these loses, nowadays people have to go to the market for most of these products that they used to collect from their neighbouring environments without cost for hundreds of years.
It is theoretically true that the expansion of market has created the possibility of getting almost everything people need in every nook and cranny in contemporary Bangladesh. But the fact that people have to spend makes it elusive for at least half of the population to get those products. This is because income for mass people has not increased proportionately with the market price. Consequently, most people have to remain unsatisfied with most of their needs that they used to satisfy, by far, in the previous times. This is at the root of a newly-emanated generalised notion in the country that 'good days are gone forever'. Such a frustration further heightens when the finance ministry declares to continue withdrawing from the market despite the skyrocketing prices of the essential commodities and the central bank expresses its inability to control inflation. Such a wired government stance is only conceivable through neo-liberal lenses that claim unquestioned compliance with the basic tenants of free market and free trade for the greater benefits for people in the long run where the state interventions are considered as setbacks.
However, a prudent analysis of the course of economic development in different advanced countries reveals that the state and the market function in tandem in all types of economies. This counter argument is explicit in the analysis of the economic adjustment policies of the advanced countries during the 1980s and the deliberate policies of the welfare states in promoting an existing middle-class or creating new ones.
Government and the market: The fact that the market position determines the overall position of the state in the international hierarchy makes the market a heavily politicised place for dominance. Claiming such a viewpoint, it is argued that the rules of the free market, where the individual firms coordinate and compete, are essentially established politically. To explain this proposition, we need to look at the pressures that the state has to face and at the corresponding financial strategies to overcome pressures.
The worldwide economic recession during the 1960s and 1970s had created a demand on the advanced countries to generate and sustain growth by reshaping the existing industrial structure. However, such a shift was intrinsically different from that in which economies in the developed countries shifted from agriculture to industry. This was because this involved a shift in the ownership, a risk of organised mobilisation by the workers, and limited gap between two industrial sectors than between agriculture and industry which caused huge job-loss. Given these challenges, the state appeared as a strong mediator in the process of restructuring industries, and hence growth and development in the later decades. This is evident when we look into the trade problem that involves in creating comparative advantage, negotiating market share and even directly participating state as a trader or salesman of the domestic products.
The dominant neo-classical economic model conceives that free trade is beneficial for everybody, for it allows everybody participating with particular comparative advantages and mutually sharing the benefits. For example, the automobile workers in Germany will produce certain parts and those in the US will produce the rest and free trade will combine them all to produce finished goods, and then proportionately distribute the profits among all. It assumes the comparative advantage as naturally given and static and, therefore, free trade produces real winners. However, this is only one-half of the story, for comparative advantage is subject to manipulation by the state. Hence, free trade also produces real losers, which necessitates the state's involvement to protect national interest. The developing countries and newly-industrialised countries (NICs), with their comparative advantage in cheap labour, were seen focusing on manufacturing sectors (viz India and the Asian NICs) during the new economic order in the 1980s, while the advanced countries tried to protect the market share of their firms directly by providing subsidies (viz France, Britain), or indirectly by market closure and financial promotion (viz Japan). This clearly shows that trade competitions do not simply maximise common welfare but rather establishes the relative position of countries in the ever-changing system of international comparative advantage and division of labour.
In fact, comparative advantage is the product of national policies over time. This becomes apparent when we consider the impact of government policies on the gradual accumulation of physical and human capital. The Japanese steel industry is a stark example of national policy induced competitive advantage which over time has become transformed into comparative advantage. Thus, comparative advantage involves patterns of dynamic conditions which can be altered over time by government policies. However, government not only promotes adjustment by creating comparative advantage but also protects national industries simply by subsidising uncompetitive production. For example, most of the developed countries protect their agriculture by heavily subsidising domestic production.
The state plays a crucial role in the adjustment process in the international context, too. New competitive productions in the international market engender the possibility of overproduction unless the loser exits. This calls for attention to the problem of access capacity that is settled basically through the politics instead of competition in the market. For example, the low cost products from the new entrants (viz garments products from Bangladesh) make those industries in the advanced countries (European countries) vulnerable. Hence the advanced countries join together to resist the newcomers collectively, and the EU has emerged. As a result, we observe a constant negotiation between the governments of Bangladesh with the EU authority over access for RMG products in the EU market. Moreover, states have been seen as directly involving in trade, that is, the East European states, OPEC and several developing countries.
To understand how the state influences both domestic and international adjustment, we need to look into how it influences the financial processes by which savings are transformed into investments. The required techniques include control of money supply or interest rates. Since financial markets are often imperfect, the government has a wide room to operate by various ways including money creation, financial regulations and preferential rules for specific firms, directly engaging as borrower or lender, and risk management on behalf of the banks. The government intervenes in the economic operation by means of its discretion in the provision of industrial finance and influences the industrial strategies of the individual firms. Through an analysis of the financial systems in advanced countries, three different models of financial system are observed where the government plays diverse roles. The state-led model is observed in Japan and France where the government attempts to orient the adjustment of the economy by explicitly promoting the position of particular sectors and imposing solutions on the weakest groups. The US fits into the company-led model where the individual firms are free to choose their strategies and the financial system allocates resources among the competing firms without the state's direct intervention. Sweden represents the tripartite-bargaining model which involves continued negotiation by the major social partners with the government.
The writer is a a Monbusho Scholar in the Global Studies Programme, Sophia University, Japan. He may be reached at 'mahmud735@gmail.com' More next
WITH the whirlpool of globalisation, neo-liberalism has become the orthodoxy which conceives that greater welfare for human beings can be achieved by the free operations of the market. Specifically, this premise demands the state's withdrawal from the economic arena to make room for unfettered execution of the private capital. The logic behind this orthodoxy rests on the professed economic achievements and sustenance of the advanced countries following liberal policies. This is why, the government of Bangladesh, since 1993 when free market economy is espoused as the state policy, has been gradually retreating from the market and welfare provisions.
A decline in government subsidies in agriculture, education, healthcare and many other public sectors has become a regular phenomenon every year thereafter. Though a steady growth of GDP around 5.0 per cent and an overall improvement in other human development indicators are observed throughout the 1990s and early 2000s, nevertheless this can be regarded as beneficial if the increasing amount of foreign debt and cost of natural devastations are counted. The per capita foreign debt has become over TK 14,000 in 2006 compared to TK 5,000 in 1990. The green revolution, widely applauded for increasing food production, has caused ecological devastation. The massive application of HYV seeds along with chemical fertilisers and pesticides has completely destroyed the natural resource base of fishery, poultry and animal husbandry, raw materials for cottage industries and herbal medicines. As a consequence of these loses, nowadays people have to go to the market for most of these products that they used to collect from their neighbouring environments without cost for hundreds of years.
It is theoretically true that the expansion of market has created the possibility of getting almost everything people need in every nook and cranny in contemporary Bangladesh. But the fact that people have to spend makes it elusive for at least half of the population to get those products. This is because income for mass people has not increased proportionately with the market price. Consequently, most people have to remain unsatisfied with most of their needs that they used to satisfy, by far, in the previous times. This is at the root of a newly-emanated generalised notion in the country that 'good days are gone forever'. Such a frustration further heightens when the finance ministry declares to continue withdrawing from the market despite the skyrocketing prices of the essential commodities and the central bank expresses its inability to control inflation. Such a wired government stance is only conceivable through neo-liberal lenses that claim unquestioned compliance with the basic tenants of free market and free trade for the greater benefits for people in the long run where the state interventions are considered as setbacks.
However, a prudent analysis of the course of economic development in different advanced countries reveals that the state and the market function in tandem in all types of economies. This counter argument is explicit in the analysis of the economic adjustment policies of the advanced countries during the 1980s and the deliberate policies of the welfare states in promoting an existing middle-class or creating new ones.
Government and the market: The fact that the market position determines the overall position of the state in the international hierarchy makes the market a heavily politicised place for dominance. Claiming such a viewpoint, it is argued that the rules of the free market, where the individual firms coordinate and compete, are essentially established politically. To explain this proposition, we need to look at the pressures that the state has to face and at the corresponding financial strategies to overcome pressures.
The worldwide economic recession during the 1960s and 1970s had created a demand on the advanced countries to generate and sustain growth by reshaping the existing industrial structure. However, such a shift was intrinsically different from that in which economies in the developed countries shifted from agriculture to industry. This was because this involved a shift in the ownership, a risk of organised mobilisation by the workers, and limited gap between two industrial sectors than between agriculture and industry which caused huge job-loss. Given these challenges, the state appeared as a strong mediator in the process of restructuring industries, and hence growth and development in the later decades. This is evident when we look into the trade problem that involves in creating comparative advantage, negotiating market share and even directly participating state as a trader or salesman of the domestic products.
The dominant neo-classical economic model conceives that free trade is beneficial for everybody, for it allows everybody participating with particular comparative advantages and mutually sharing the benefits. For example, the automobile workers in Germany will produce certain parts and those in the US will produce the rest and free trade will combine them all to produce finished goods, and then proportionately distribute the profits among all. It assumes the comparative advantage as naturally given and static and, therefore, free trade produces real winners. However, this is only one-half of the story, for comparative advantage is subject to manipulation by the state. Hence, free trade also produces real losers, which necessitates the state's involvement to protect national interest. The developing countries and newly-industrialised countries (NICs), with their comparative advantage in cheap labour, were seen focusing on manufacturing sectors (viz India and the Asian NICs) during the new economic order in the 1980s, while the advanced countries tried to protect the market share of their firms directly by providing subsidies (viz France, Britain), or indirectly by market closure and financial promotion (viz Japan). This clearly shows that trade competitions do not simply maximise common welfare but rather establishes the relative position of countries in the ever-changing system of international comparative advantage and division of labour.
In fact, comparative advantage is the product of national policies over time. This becomes apparent when we consider the impact of government policies on the gradual accumulation of physical and human capital. The Japanese steel industry is a stark example of national policy induced competitive advantage which over time has become transformed into comparative advantage. Thus, comparative advantage involves patterns of dynamic conditions which can be altered over time by government policies. However, government not only promotes adjustment by creating comparative advantage but also protects national industries simply by subsidising uncompetitive production. For example, most of the developed countries protect their agriculture by heavily subsidising domestic production.
The state plays a crucial role in the adjustment process in the international context, too. New competitive productions in the international market engender the possibility of overproduction unless the loser exits. This calls for attention to the problem of access capacity that is settled basically through the politics instead of competition in the market. For example, the low cost products from the new entrants (viz garments products from Bangladesh) make those industries in the advanced countries (European countries) vulnerable. Hence the advanced countries join together to resist the newcomers collectively, and the EU has emerged. As a result, we observe a constant negotiation between the governments of Bangladesh with the EU authority over access for RMG products in the EU market. Moreover, states have been seen as directly involving in trade, that is, the East European states, OPEC and several developing countries.
To understand how the state influences both domestic and international adjustment, we need to look into how it influences the financial processes by which savings are transformed into investments. The required techniques include control of money supply or interest rates. Since financial markets are often imperfect, the government has a wide room to operate by various ways including money creation, financial regulations and preferential rules for specific firms, directly engaging as borrower or lender, and risk management on behalf of the banks. The government intervenes in the economic operation by means of its discretion in the provision of industrial finance and influences the industrial strategies of the individual firms. Through an analysis of the financial systems in advanced countries, three different models of financial system are observed where the government plays diverse roles. The state-led model is observed in Japan and France where the government attempts to orient the adjustment of the economy by explicitly promoting the position of particular sectors and imposing solutions on the weakest groups. The US fits into the company-led model where the individual firms are free to choose their strategies and the financial system allocates resources among the competing firms without the state's direct intervention. Sweden represents the tripartite-bargaining model which involves continued negotiation by the major social partners with the government.
The writer is a a Monbusho Scholar in the Global Studies Programme, Sophia University, Japan. He may be reached at 'mahmud735@gmail.com' More next