Overview
Any new approach must correct the incentives for productivity and
create disincentives for corruption. It
has long been said that Democracy is the worst form of government except all
the others. The greatest advantage of a market economy is that it is based on
the most realistic assumption that every individual will act in his/her best
interest. Economic theory also tells us
that under certain conditions market competition produces results that are the
most efficient. As the obverse of
monopoly it is a useful goal even when the ideal is not attainable. It has
therefore come to be widely accepted over the last two decades that market
incentives are the most sustainable incentives for business, workers and
farmers and that market competition is the best handmaiden of the social
purpose. The best antidote to exploitation by corrupt businessmen &
bureaucrats, lazy organised sector workers and shoddy products and services is
competition.
Competition is also the best means of dispersing economic power.[1] In an ideal system (Schumpeterian)
competition would ensure that wealth could only be garnered through innovation,
acquisition of special skills, hard work and thrift. Such wealth generation is therefore in the
interests of the entire society.
Monopoly (or oligopoly) is the anti-thesis of such competition as it
allows generation of profits without any such meritorious activity. Government created monopolies, whether
deliberately created or the indirect result of distorting policies, are the
worst culprits in this regard. ‘Natural’
monopolies have to be regulated to ensure that ‘monopoly profits’ are
minimised.
Ideal competition is just that and market incentives are not
perfect. There will be market failure
and non-existence of markets. Market
economics itself help identify, analyse and suggest the best way of dealing
with such problems; Appropriate policies, developmental actions and regulatory
institutions.
The second underlying problem can only be addressed by the dispersal
of the government’s enormous power. This
requires right sizing of government, shedding of activities that can be
performed by others, decentralisation of governmental functions to lower levels
based on the principle of subsidiarity, the creation of countervailing power,
transfer of regulatory functions to independent professional regulators,
empowerment of citizens and civic groups, giving voice to the under-employed
and creation of checks and balances.
Incentives Efficiency & Productivity
Law & Incentives
Laws, particularly economic laws (including contract law),
do not merely define what a citizen/resident can or cannot do. They create a system of incentives and
dis-incentives for economic agents and those charged with implementing the law. Most economic laws have had consequences that
the originators had no inkling off. The
common result of the myriad such laws are to create incentives for rent
seeking, rent creation, bribery and corruption.
The rules & procedures for public institutions, such as
universities, research institutions, and hospitals, are equally oppressive.
Recent studies have demonstrated the (static) costs imposed on
producers by the bureaucratic red tape and harassment that results from
oppressive rules and procedures. The
dynamic costs, in terms of discouragement of creative, innovative &
knowledgeable people from entering business, though much harder to measure may
be more devastating in the long run. It is necessary to systematically audit
all economic laws from the incentive perspective and modernise them keeping in mind
the results that they have produced.
Laws, rules and procedures must be modified to minimise the time &
money cost of compliance to relatively honest economic agents.
Labour laws, though made with the best intentions have in many
instances had the opposite of the intended affect. Labour laws that focus on health and safety
of the workers are essential and should be extended to unorganised
workers. Similarly the right of assembly,
formation of labour and right to strike are democratic rights of workers. Harmful laws are those that try to overturn
market demand, supply and pricing principles, such as elements of the contract
labour act Industrial development and regulation act and the Industrial
disputes act. These elements of laws by
protecting existing organised sector workers provide an incentive for them not
to work sincerely & efficiently and also provide a dis-incentive to hire
new workers. They need to be made more
flexible so that organised labour-intensive manufacturing & services are
encouraged to generate higher productivity jobs.
Competition & Efficiency
The same basic principles of competition apply to infrastructure
services and factor markets as to the goods market. De-control and de-licensing must be completed
in the remaining items such as drugs, fertilisers, coal, petroleum, sugar and
small industry. SSI reservation is perhaps one of two main reasons why India, unlike China, has not become the
‘manufacturing base’ for the world supply of labour intensive goods. Lacs of new jobs have been lost in exportable
industries in a futile attempt to preserve the profits of existing small-scale
industrialists.
Similarly the key issue for a sick consumer is whether the drug is
genuine and will cure the sickness that it claims do, or whether it is one of
the myriads of spurious drugs that are flooding the market. The price is a secondary consideration, and
the governments health programs are the appropriate channels for insuring that
poor patients have access to basic drugs at an affordable price.
De-control and de-licensing must also be extended to services,
including infrastructure services (e.g. telecom) and factor markets (labour
& management). Contrary to some
assertions, the same principles apply to infrastructure service, with the
addition of measures to unbundled and regulate natural monopoly segments.
State Monopolies
State monopolies, whether they are departmental public enterprises
or Public sector units, have proved to be as inefficient and antithetical to
consumers/public interest as private monopolies. Such monopolies not only invite extraction of
monopoly rents and X-inefficiency but also confer additional power on
government departments & their ministers that is easy to misuse. Introduction of competition and dispersal of
this power requires, free private entry, un-bundling of all natural monopoly
elements and their regulation by independent regulators, and privatisation of
all contestable elements (core & non-core) so as to introduce genuine
competition into the latter. Public sector & nationalised banks also
constitute a near-monopoly as around 80% of the entire banking system is owned
by the government. This is the highest
percentage in the world. As we already
have one of the better regulatory systems (RBI) and banking has no natural
monopoly elements, the banking system will only become competitive if these are
privatised.
Extract from, "A New Development Paradigm:
Employment, Entitlement and Empowerment," Economic and Political Weekly, Vol.XXXVII No. 22, June 1-7, 2002 [ NewParadigm4nf ]
[1] A credible “Threat of competition,” for instance through potential
imports, is an even more powerful incentive for change than actual
competition/imports.
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