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Markets and Good Government by Robert Archer
Table of Content COMMENTARY
Most simply, the job of the market economy is to produce and distribute wealth. Wealth is produced by selling goods and services that people want to buy. It is distributed by employing people. The new orthodoxy says that market economies, based on competition between privately-owned producers, are comfortably the most efficient way of increasing wealth in a society. This is because inefficient producers fail and are quickly replaced; and because the discipline of competition forces producers (a) to produce what consumers want and (b) to do so quickly and cheaply. State-supported or private producers, by contrast, are consistently inefficient if they are protected from competition (for example, as monopolies). Over time, they tend to produce lower-quality goods at a higher price less flexibly. The creation of a competitive environment requires several conditions. It is self-evident, for example, that adequate numbers of viable companies with access to finance, labour and other resources, must exist. It is equally obvious that this condition is not always met--in poor countries, for example, or in poor communities within national economies. Another requirement is that companies should not benefit from forms of State protection (reduced taxes, privileged access to capital, guaranteed markets etc) that might reduce their efficiency or reduce the ability to compete of other companies. It is for this reason that the reform process in debt-burdened or very impoverished developing countries and in the ex-communist countries of eastern Europe has been dominated byprivatisation--the transfer of publicly-owned assets and production facilities to private ownership and management. In some cases (such as Poland) this transfer has been affected swiftly--the "big bang" approach. In other cases, transfer has been more gradual. How fast privatisation should occur, and how much effort should be made to stabilise the economy beforehand, are the subject of detailed and complex debates between economists; but the objective is scarcely questioned. Markets also need labour--in sufficient quantities and with skills appropriate to the sophistication of the economy concerned. Upgrading skills across a whole economy, as developing countries are required to do, is a huge and complex task. It also preoccupies the industrial economies, including the United States and Britain, which have failed to invest in their peoples at a rate that corresponds to the pace of technological change. A reliable judicial system is another important requirement. Regulatory institutions are needed to adjudicate fairly between companies, and between companies and the State, when there are disputes relating to free competition in the market. This is the first sense in which the "rule of law" is important to businesses and the creation of a market economy. It provides a way to settle conflicts that is based upon rules and is independent of the State and of the companies and individuals involved.4 In addition to an orderly political and legal environment and an appropriately-skilled workforce, markets need finance. The need for capital, like the need for skills, multiplies with technical sophistication. This is a huge question, which cannot be explored here. It is enough to say that finance is distributed in the world economy even more unevenly than skills.5 This striking degree of inequality - which is increasing all the time - challenges the most fundamental assumption of the new orthodoxy: namely that private markets offer the best and only path to long-term development. How are societies that do not already possess skills, institutions and financial resources to create the market economy that will generate these forms of wealth, when they must compete with markets that are better endowed? We return to this question later on. What are markets good at? Making and selling things and services. What are markets not good at? The short answer is: all the things that Governments should be doing.
GOVERNMENT
The market economy generates the wealth that provides the tax base on which Governments depend for their revenue. Governments spend their revenue on a range of administrative, economic and social activities that are vital to the economy: here occurs the first virtuous circle. These activities include: i Macro-economic policy: the application of fiscal and other policies that enable the economy to function and remain competitive. ii The provision of education and training, and also health services, to ensure that the economy has access to an able and skilled workforce. iii Infrastructure: making provision for and maintaining communications and other forms of capital infrastructure without which the economy cannot produce or trade efficiently. iv Efficient administration: maintaining a high-quality civil service. v Rule of law: ensuring that disputes are settled efficiently, and that the law (the instrument that maintains a competitive environment) is administered without bias towards the State or towards powerful private interests. vi Welfare provision; and vii Environmental protection.
Managing markets This list makes clear how much the policy assumes that markets require to be managed. Government intervention in the economy is held to be necessary in five essential areas (i, ii, iii, vi, vii):
In practise the good government approach acknowledges that markets are not efficient when it comes to long-term investment and when there is a low (or doubtful) return on capital (ii, iii, vi, vii). From another angle, this point demonstrates the powerful relationship that is assumed to exist between revenue, strong government and economic performance. Most of these items imply very large and continuous expenditures (this is the main reason why they are not undertaken by private entrepreneurs). Education, health, infrastructure and environmental protection are the most expensive costs that a modern or modernising society must undertake. This is a measure of the scale of economic responsibility that government is expected to bear. The State not only manages the economy, its interventions are central to long term economic development. It follows that a society which already has a strong economy and therefore a strong revenue base is likely to perform even better in the long term because it can afford to support highly trained and efficient civil servants (i, iv, v); and can also educate its population to a high standard, and thereby reap long term economic benefits. By contrast, a state with a small revenue base is likely to have weaker policies, weaker institutions, a civil service tending towards inefficiency and even corruption, a poor education and welfare system, and probably inadequate infrastructure. These characteristics, moreover, are reinforcing. It is difficult to tackle them one by one. Here again, the lessons for weak economies are bleak.
The Rule of Law The connection between business and rights is not often discussed. Human rights are usually considered, certainly by NGOs, in their dimension as universal moral imperatives. That discussion, of the absolute right of individuals and communities to protection from abuse by the State, deals with pathological political processes. The "normal" regulatory role of rights, as implemented under the rule of law, is less frequently considered, even though its role is far larger.6 Rights, "democratic practices" and laws provide moral rules and orderly codes that regulate every level of society. From this angle, the rule of law (including protection of various rights) is vital to modern business. Contracts underpin commercial activity; companies use the law to settle property, land and commercial disputes, and to deal with personnel problems etc. Some of the factors listed above specifically favour the protection of civil and political rights (ii, v). Other factors do so indirectly by reducing forms of abuse, including administrative and political corruption (iv, v) and corrupt business practises (eg insider trading, cartels, etc) (i, iv, v). The good government approach thus suggests that the market's requirements--the conditions that are necessary to maintain fair competition--promote and reinforce equitable and accountable government. Or, putting this another way, it suggests that business activity functions less effectively where the law is not observed and human rights are not respected. To make investment decisions, companies want predictable transparent policies from governments. They want a good legal system. They want swift efficient service from officials. They want good communications, a fast transport network and good services (including education and health). Above all, they require access to information, freedom of movement, and guarantees of personal liberty. All of these demands tend to support a political environment that respects political rights. This statement clearly needs qualifying. If, taken together, the attributes of the State listed above tend to promote political rights, the same is not necessarily true if they are taken separately. Some of the needs of the market system may be met by authoritarian states (i, iii, iv) or may be achieved without respecting human rights (iii, iv). Some of the most successful developing economies remained authoritarian during crucial periods of growth. Even today, East Asia's Tigers (South Korea, Taiwan, Singapore, Hong Kong), do not possess all the attributes of a modern democracy.7 The good government thesis nevertheless highlights the fact that there is an overlap between business interests and human rights. Here too, the economic connection cannot be left out. The same triangular interaction between citizen, market and state is to be found in discussions of civil society.
CIVIL SOCIETY
The idea that conduct of government and conduct of the economy should be publicly accountability underpins the good government approach. Formally, the economy is accountable to the government and to the law--though indirectly business fortunes are subject to the judgement of the consumer. Governments are immediately accountable to the public--periodically but directly at elections, and more regularly but indirectly through other forms of public accountability (such as parliamentary institutions, the press, voluntary bodies etc). Politicians and officials are also subject to the law. Without public accountability, the official orthodoxy suggests that political and economic institutions will become corrupted--thereby reducing their efficiency and also failing to separate the functions of government and the functions of the market. The condition of a country's economy and its political life are held to depend in the end on the vigour and scrupulousness of the public ("civil society") organised and represented in many forms of association. Two forms of public control are given particular importance in discussion of good government: democracy, and human rights. To these must be added the idea of the rule of law, represented by the judicial institutions, because these permit principles of democracy and human rights to be entrenched and applied. Properly speaking, the principles of democracy count as principles of human rights. Issues of democratic government could therefore be treated as a subset of human rights issues.8 In practice, however, official statements refer to democracy when they deal specifically with political structures and with institutional constraints on the power of the State. "Human rights" is more usually used to refer to forms of protection against abuse of the individual (or individual institutions) by the State.
The principle of universality. Both democratic and human rights principles are held to be universal. They presume equality: the vote or opinion of each and every (eligible) individual has equal weight, just as human rights law presumes that each and every individual has the same basic rights within society. In fact it is more accurate to say that democratic and human rights principles presume equality before the law, because it is obvious from experience that some are far more able than others to influence political decisions or defend their rights. There are at least three principal and obvious poles of inequality: between the literate and the illiterate; between the rich and the poor; and between those with, and those without personal connections.9 Even where corruption is not a major factor, knowledge and the skills to use it give power of influence that the ignorant and unskilled cannot possess. The law is the instrument for limiting corruption and excess, both in politics and human rights. It is a powerful tool: in many countries the judiciary has an explicit responsibility to rule against the State if the law requires. Nevertheless, we should again be clear. The rule of law requires only that two sides shall be heard with equal attention and that the most persuasive case shall prevail. Here too, in practise, literate, rich and connected people can maximise the strength of their case. The law does not positively discriminate against those who are poor or ill-informed; but it does not take steps to positively assist them. It promises a level playing field but offers no guarantee that the teams shall be equal in experience or skill or number. It claims in short, not to level privilege, but contain its abuse. It should be noted, therefore, that the democratic process and the rule of law operate in a way like the market. In both cases, equal opportunity and perfect competition privilege the experienced, the well-informed, the clever, the rich and the well-connected. Those that do not possess these attributes tend to perish. This is a profound contradiction within the ideals that democracy and human rights represent - because it is very hard to see how these inequalities can ever be perfectly removed from the real world.
Attibutes of democracy Democracy is controversial to define.10 This said, there are two different approaches to analysing democracy which have different consequences. The first looks at government systems and relations between institutions - executive, legislature, judiciary, military and so forth. By its nature this approach tends to be prescriptive (the choice of one form of presidency tending to determine the powers of the legislature etc). Donor governments have been explicit that they do not seek to make broad judgements about the forms that the political institutions of other (recipient) countries should take.11 The second approach tends to look at the attributes and qualities of a democratic process. This approach is not prescriptive about the form that institutions take but it is likely to make judgements about the quality of the political process, the legitimacy of decisions that are reached, and the integrity of its institutions. Donor governments do seek to promote certain attributes in the political institutions of recipient states. This issue is at the heart of the controversy about aid conditionality. A key attribute is pluralism--the view that a society is diminished to the degree that information, political authority or ideas are monopolised by one source, and enriched to the extent that many differing points of view contribute to a society's political, economic and social culture. Pluralism corresponds in the political sphere to competition in the economic market. It is empirically consistent with a high level of intellectual and cultural activity; but, in societies where political and other institutions are not strong (or legitimacy weak), a vigorously pluralist environment can paralyse political life.12 Pluralism is central to the good government approach. A second is accountability, the idea that the actions and performance of those who hold power should be subject to scrutiny by the public and by specialist institutions mandated directly or indirectly by the public. The concept of accountability is closely associated with the idea of "transparency" and is considered to be vital to the maintenance of efficiency. Transparency is important to economic as well as political ficiency.13 Changes of government by lawful process is another: this also ccords with the concept of political competition. Ensuring there is more than one contender for power offers choice to the people and encourages the regime in power to govern efficiently A point may be made here about the cost of democracy. Periodic elections are relatively inexpensive; what really costs in a democracy is maintainance of the democratic process--the layers of institutions that audit official activity, the committees of inquiry, the inspectorates, the judicial system etc. These are expensive in terms of money, and even more expensive in the demands they make on the time of skilled people.14
Human rights The ideological neutrality of human rights is its great strength. As the record of Amnesty International shows, it is territory claimed by advocates of all political persuasions. As already noted, however, the claim that human rights are universal does not imply that people are able to claim equal protection under human rights law. That depends on such things as access to information and resources, and on personal connections (who you know in your own country, and who abroad knows you). If you are subject to political arrest, it is clearly better to be a city journalist with access to a fax rather than a poor farmer in a rural village without communications. In addition, different human rights interest sections of society differently. Powerful employers will oppose social legislation governing unemployment and labour rights while, perhaps, supporting political rights. Farm workers may press for better wages, but may not admit that the property claims of their wives are equally legitimate. The true cost of maintaining human rights, once again, is incurred, not at the point when legislation is passed, but in supporting the complex institutional arrangements upon which effective protection of human rights depend: the networks of lawyers, the distribution of information, a free press etc. In discussion of good government, donor governments have emphasised the importance of freedom of information, because, without it, few other freedoms can be exercised effectively.
The relationship between growth and freedom Historically, democracy has developed and flourished in the most technically advanced economies in Europe and North America. These countries have exported democratic models to some other countries and in some cases (notably Japan) democracy has been imposed. More recently, some of the Newly Industrialised Countries (NICs)--Korea, Taiwan, Hong Kong, even Singapore--have been under growing domestic pressure to democratise. That pressure has been led by the professional middle class--the social product of industrialisation--for whom the liberal values of a free press, freedom of travel, political pluralism and the right to dissent are professionally as well as personally desirable. It requires exceptional skill to run an industrialising modern economy on command principles--as Russians, South Africans and Koreans have each found out. Beyond a certain stage of technology, the ability to diversify and innovate flexibly become crucial and at that point, a trained and also independent-minded workforce becomes necessary--the creation of which is incompatible with political censorship, suppression of debate, controls over freedom of movement and other restraints on expression. Entrepreneurs and owners may reach accommodation with authoritarian rulers (as Hong Kong's plutocrats are now doing in China). But to remain competitive they nevertheless need to attract the services of very large numbers of middle class professionals. It is these people who, in order to conduct their professional affairs, require a liberal political environment. In this sense the interests of business and (certain kinds of) liberty, including a measure of democracy, go together. In sum, the more an economy is technically developed, the more it requires a large professional middle class to run its communications systems, draft contracts, design products, circulate information and manage etc. If that work is not provided by expatriate labour (as it is, for example, in Saudi Arabia), the growth of this professional class is likely to be accompanied by a growth in the demand for political rights. The demand for political rights will not always be resisted by business; it may be one of the principal reasons why political reform occurs. Conditions must be attached to such generalisation. The first is that only certain political and economic freedoms coincide with the interests of business; and only certain business interests (those engaged in industrial rather than extractive production?) are served by political liberalisation. This defines an important political frontier. It helps to explain how political reform developed in Korea after 1987, and also the longevity of Singapore's authoritarian democracy. In Latin America, the inability of certain countries to sustain a politically liberal state is due, at least in part, to the entrenched strength of a backward landed élite (Argentina, Brazil, Central America etc). Today, countries such as Indonesia and Thailand, which continue to have authoritarian characteristics, are trying to follow the same path as Korea, Singapore, Hong Kong and Taiwan. It has to be confirmed whether they will do so. In relation to the argument of this paper, however, the key point to make is that, if this hypothesis is broadly true, it implies a counter-pattern. It suggests that where countries have a relatively narrow and simple economic base, there will be a small middle class and civil society will be relatively weak or undifferentiated; and that, as as a result, it will be difficult to entrench democratic and human rights values. This will be so not only because skills and finance are needed to maintain and entrench human rights and democratic practises. The low ratio of educated and professional people will itself be a constraint, because they possess the knowledge of rights, the professional motivation and the skills of organisation which others need if they are to act effectively. It may be argued that middle class professionals in poor countries do not have a good record of public service; it still remains true that, on their own and without help, communities of farmers are not in a position to defend their interests effectively. Moreover, it is the middle class that is professionally motivated to defend the basic civil (rather than social and economic) rights. If we look at the good government approach in the light of this discussion, it affirms that countries with strong economies can maintain comparative advantage because they can bear the high cost of educating and retraining their workforces--upon which the maintenance of an efficient administration, innovative policy-formation, a good justice system and the development of a technical economy eventually depend. Empirically, some of the world's fastest-growing economies are those which have invested most, through the public sector, in health and education: for example, Singapore, Hong Kong and Korea. These countries reap the benefits of efficiency.15 In some of them at least, political reform has accompanied (under pressure from below) the leap from processing to higher technology industrialisation. But the demand for democracy and for political rights, and above all for economic development, is not, of course, confined to the industrialised and the industrialising world. It has emerged strikingly in Sub-Saharan Africa, currently the world's most depressed economic region. This raises critical questions for the new orthodoxy, which agrees that democracy and human rights are vital elements in human progress. How are democratic processes and the judicial systems that entrench human rights to be sustained in countries with a low standard of living? How are very poor societies to generate a rich and diverse civil society? It claims equally that progress requires well-managed professional government. Where are the poorest countries to find the resources to train and pay highly professional civil servants? It claims that good quality education, and good health care are essential to effective democracy as well as long-term development. How are the poorest countries to find the very large sums needed to support such services? To each of these questions, the new orthodoxy replies that only the economic market will deliver real wealth to support long term development. It is therefore the market that will provide the final test by which the good government (and Washington consensus) should be judged. What does the new orthodoxy offer to the poor and to the very poor of the world? Is it plausible to assume that the poorest countries or even all the middle income countries can develop out of poverty by expanding their internal and international trade? Even more to the point, is it credible to believe that a competitive market-led ("gladatorial") approach will produce all-round economic prosperity rather than uneven growth?
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