We are certainly living through very exciting times. The development pendulum is beginning to swing once again, from an over commitment to public sector to an over enthusiasm for the private sector. There is ‘garage sale’ of public enterprises going all over the world- from New Delhi to Rio, and from Warsaw to Moscow- enough to warm of any ideologue of capitalism. Certainly the long overdue return to the market has started in many developing countries. But the fact that is being feared by the experts is that the pendulum may once again swing so far and we may all live to regret it.
Before going deep into the changes that occur in the present day world market we need to take a quick review into the over commitment made to the public sector in many developing countries. Our societies faced the challenge of tremendous poverty in the formative years. We realized that great disparity existed between various income groups and that we needed to pursue a range of social objectives, not only higher economic growth, to liberate our societies from poverty. In this search for social objectives, many developing countries lost their way. There was an innocent flirtation with socialism but unfortunately there was a mix up between ends and means. The means that were chosen were a large role for the public sector and, instead of a pursuit of the real social objectives, often it became bureaucratic capitalism. The economy was handed on a silver platter to the civil servants, often ill-trained and ill-paid. Many times they used controls and regulations, not to enrich the economy but to enrich them.
A very strange world emerged in the past 30 years. We had public enterprises in agriculture, industry, trade--all productive sectors--many of them inefficient and losing money. Most developing countries were short of financial resources. Yet they wasted their scarce financial resources, and even more scarce management skills, on inefficient public enterprises that could have been privatized with great benefit to all sides. As such, there was a strange "Alice in Wonderland" situation in many parts of the developing world. They committed their scarce resources and energies to things that the private sector could have done more efficiently and they did not then have enough resources left in their budgets to do the things that only the government could have done, particularly provision of social services and investment in education and health. Then they all complained about poverty of resources. Restructuring the priorities of many of these countries’ budgets would have really given them the resources they needed for urgent human development.
In many of these countries, markets are neither free, nor efficient, nor equitable. Unless there is a good regulatory role of the state, and unless free markets are combined with social compassion, we may have a good deal of upheavals coming in many of these countries.
Markets are not very friendly to the poor, to the weak, to the vulnerable, either nationally or internationally. Often we act as if markets are free. They are not. The markets are often the handmaiden of powerful interest groups, and they are greatly affected by the prevailing distribution of income. In fact, Brazil spends 12 percent of its GNP on social services. But the main beneficiaries are higher income groups. About 88 percent of its public sector health budget is spent on expensive urban hospitals for a few rather than on primary health care for all. Brazil gives eighteen times more subsidy to university students than to primary education while only 1 percent of the enrollment in its universities comes from the bottom 20 percent of the income group. That is why Brazil has four times the child mortality of Jamaica, despite having twice the per capita income of Jamaica and despite spending more on social services. This dramatically illustrates how even the distribution of public services is skewed in favor of the rich, not just the allocation of resources in the market, if the initial distribution of income and assets is extremely unequal in a society. Markets cannot become neutral or competitive in such a situation unless the playing ground is made more even and playable to begin with.
Is everybody in a position to compete in the market or are some people going to fall outside the marketplace because they do not have enough education, health, and nutrition to compete on any footing, let alone equal footing? That is why there is a much better distribution of income and assets, of credit, of power structures, and certainly a better distribution of knowledge and skills is vital to make markets work more efficiently. Now you may not often be able to distribute income and assets more equitably. There are many practical problems, there are several political limits. But you can distribute knowledge and skills quite equally in many countries and that is a tremendous leveling force to enable people to compete in the market. Unless there is a tremendous investment in human capital formation in many of these countries, the markets will continue to work inefficiently and inequitably, and may be hijacked by the rich.
The basic point is that markets do not automatically favor the poor, the weak, the vulnerable. Unless some policy steps are taken to enable the poor to compete on an equal footing, they may stand to lose a great deal from the workings of the unregulated market system. So our first step must be to accept the logic of the marketplace but then to turn around and make these markets work more efficiently in the interests of all the people. What we need are people-friendly markets. After all, markets are only a means: people are the end. Inorder to establish people-friendly markets, which are accessible to all the people, which encourage full participation in the mainstream of economic life, which extend their potential benefits to everyone rather than to a privileged few, then some preconditions must be met. There should be a more equitable distribution of income, productive assets (particularly land), and credit. There must be sufficient human investment to enable people to compete on an equal footing. There must be no barriers to market entry--religious, ethnic, gender, or any other barriers. There must be competitive market conditions and regulations for monopolistic practices so as to prevent the powerful few from bending the markets to serve their own narrow interests. There must be a regulatory role of the state to ensure that external diseconomies are not created for the entire society in the pursuit of private greed and that those who create such external "bads" (such as environmental pollution) are made to pay for the privilege. In other words, people-friendly markets require a very activist role of the government, not to over regulate economic enterprises but to create conditions of more equitable access to competitive markets.
Even when markets are fully competitive, it is inevitable that some people will fall outside the market place and require a social safety net. Because the preconditions for people-friendly markets are often missing in many economic and political systems, particularly in the developing countries, the need for such a social safety net often increases. Every society develops a certain social consensus over time as to how to balance market efficiency and social compassion. In the United States, the New Deal was an historic watershed when the American Society articulated a new social consensus between markets and government action -- a social contract that is still there despite some recent weakening. In many developing countries, less than 5 percent of their national income is often spent on such social safety nets, while the need for social programs is much greater in these societies than in industrial countries because their income and asset distribution is generally worse, their markets are generally less competitive, their barriers to market entry are generally more formidable, and their systems of democratic accountability are generally less institutionalized. And yet many international consultants and financial institutions have the courage to advise these developing countries to dismantle even their existing meager social safety nets in the pursuit of market growth. Obviously, they feel that there are no political limits to change in these poor lands while they would cringe at suggesting a fraction of similar structural adjustment in their own richer societies.
The basic point, which many professional shock therapists forget, is that the opening of market mechanisms need not inflict unacceptable social and human costs on the people. Their challenge is to design strategies that can combine rapid change with the minimum possible human costs. It is no use shrugging away the social pain with the banal observation that pain is inevitable in a major transition to the markets. Maybe so, but the most critical question is the distribution of pain: is it borne only by the masses or also by the privileged economic groups in societies? My own perception is that much of the pain for the poor people can be avoided if the burden of adjustment is placed on the favored strata of society--military establishments, industrial tax evaders, corrupt civil servants, and higher income groups. The international institutions should calculate the distribution of the pain of adjustment in a society and try to protect the poor within the society, rather than nonchalantly walk away from the issue.
How lightly the issue of more equitable distribution of pain was treated by outside consultants and institutions can be illustrated by just one example: their criminal silence on military spending levels in the developing countries in the last three decades. During the last three decades, military expenditures in developing countries increased by 7.5 percent a year, three times as fast as in the industrial countries. There are eight times more soldiers than physicians in these countries today. Many poor countries are spending two to three times more on their military establishments than on the education and health of their children. We have a situation today where military generals go around in air-conditioned jeeps while small children sit in windowless school rooms and suffocate. And yet never in these three decades did the level of military spending become a question of aid conditionality. There was more tolerance for military subsidies than food subsidies. International institutions carried out no serious economic analysis of military spending levels in the developing countries. No attempt was made to collect data on military debts--a frightening omission. No international screams went up against powerful military establishments in the developing countries. Sometimes those who pride themselves on designing "rational" aid conditionality for the poor nations should pause and think whether their machoism extends only to beating up on the poor or also to standing up to powerful vested interests.
The basic point is that it is possible to combine the painful transition to the market with social safety nets for the poor if some of the irrational spending priorities are changed in the system. The advocates of shock therapy should first look for some decent solutions, which can combine gradual reform with acceptable social pain, fairly equitably distributed. Opening up of the markets is the best thing that has happened to the developing countries and to the former socialist bloc. But this transition to the markets must be accompanied by a regulatory role of the state to make the markets accessible to all people and a compassionate role of the community to extend social safety nets to the victims of the market place. This is a time to strike a balance, not to go to any excesses.
Some analysts have contended that the recent years have seen the demise of socialism and the triumph of capitalism. If this is the demise of socialism, let us hope it is not the demise of all social objectives. And if this is the triumph of capitalism, let us hope that it is not the triumph of only private greed. We have come to a new crossroads in history when individual initiative must be combined with social objectives. It is not one or the other: it is both. And the future course of our societies may well depend on how skillfully we combine market efficiency with social compassion.
