Wednesday, November 22, 2006

Opinion

Krishna Bahadur Kunwar, Deputy GM, Agriculture Development Bank, Nepal

The words: liberalization, privatization, deregulation, globalization, open economy, free markets, market economy, are frequently used in recent years. Sustainable development, viability, profitability, autonomy financial reforms are other words which are used frequently. With a view to accommodate and updating, governments are adapting the New Economic Policy for the development. For making better understanding of these words, it would be noteworthy to discuss on liberalization and privatization. The World Development Report, 1996 defines in the following way:

Liberalization refers, except where stated otherwise, to economic liberalization: the loosening or elimination of government restrictions on domestic transactions, prices, and markets; on external transactions and the free exchange of domestic currency for foreign and vice versa (convertibility); or on free entry of firms into domestic markets (WDR 1996).

Privatization is used in its strict sense, that of divestiture by the state of enterprises, land, or other assets, and not in the broader sense of any action that moves an enterprise or an economy in the direction of private ownership or that tends to make the behavior of state enterprises more like that of private entities (WDR 1996).

Market economy is a free private enterprise economy governed by a price system and market mechanism.

Market mechanism is a system whereby prices of commodities or services freely rise or fall when the buyers’ demand for them rises or falls or the sellers’ supply of them decreases or increases.

Open economy that engages in foreign trade and has financial and non-financial contacts with the rest of the world – e.g. in areas such as education, culture, technology etc.

Price system is a mechanism by which scarce resources, goods and services are allocated by the free upward or downward movements of prices in accordance with the dictates of supply and demand in a market economy.

In market economies liberalization usually means eliminating price controls and relaxing trade protection in a few heavily regulated or protected sectors. Liberalization also means freeing entry into production, services, and trade, including the freedom to open a new business, to expand or break up an existing business, and to change product mix, suppliers, customers, or geographical base.

Many commentators fear, however, that in the shorter run, one of the steps towards openness - trade liberalization - harms poorer actors in the economy and that even in the longer run successful open regimes may leave some people behind in poverty. While for each component trade liberalization can facilitate poverty alleviation, in none of them can an unambiguous generalization be made either in theory or empirically (L. Alan Winters, Neil McCulloch and Andrew McKay, Trade Liberalization and Poverty: The Empirical Evidence. Centre for Research in Economic Development and International Trade, University of Nottingham, 2002).

Human Development Report 1996 with the theme “Toward better and slimmer government” explains six elements of the government organization (WDR 1996):

Facilitating policy formulations

Harmonizing the actions of economic agencies and coordinating Providing incentives for collective action and self –regulation

Enforcing regulations and policing

Resolving conflicts and providing arbitration

Providing technical assistance

The Report focused on the following the roles of government:

The role of government in producing and distributing goods and services must shrink dramatically. Public provision must become the exception rather than the rule. State intervention is justified only where markets fail – in such areas as defense, primary educations, rural roads and some social insurance – and then only to the extent that it improves upon the market.

Government must stop restricting and direct controlling private commercial activity and extricate itself from intimate involvement in the financial sector, focusing instead on promoting macroeconomic stability and providing a legal and institutional environment that supports private sector development and condition.

Providing social protection is a key function of government in all economies, but in a market economy it should- in principle, at least – be mainly targeted at those vulnerable groups who need it most.”

Four groups of goods and services have features that tend to make private markets fail, or function inefficiently, creating a potential rationale for government intervention;

Pure public goods such as defense, law and order, and environ­mental protection cannot be provided by private markets alone.

Goods with positive externalities, or spill-over benefits, are worth more to society than to any one consumer (public health, education etc.).

Natural monopolies such as gas pipelines, local transport networks, ant other infrastructure services are most efficiently provided by a singular firm.

Imperfect information, on the part of either consumers or providers, may make markets fail. Governments can regulate private pensions and insurance and complement them with basic public pensions and insurance to improve efficiency and fill gaps in coverage.

Rural Development Context

There are three principal reasons to justify the intervention of the government in the market (M. Zeller, 2000).

The public sector, i.e. the government and its parastatal institutions have a major role to play in the provision of public goods. Some vitally important goods and services are public goods in the sense that the private sector has inefficient incentives to provide them, but the economy can work more productively if these public goods are provided. Only the public sector is prepared to provide them as the market fails to do so. Public goods tend to be those with free rider problems. Street lighting, defense, police, legal framework and law enforcement, road infrastructure, basic research, or adapted research in areas in which research results can be hardly marketed are classical examples of public goods. The market fails to provide such goods and services as it is difficult to make people pay for such goods even if they use them. In essence, public goods provide benefits to society as a whole and increase the efficiency of an economy but would be supplied in less than socially desirable amounts by the private sector alone.

A second major role of government intervention is in the area of equity –enhancing policies, mainly in the social sector such as the provision of education and health services, or social security, or income transfers to the poor. However, under service conditions of inequality and poverty, land reforms are called for, that is the redistribution of land from the wealthy to the poor or landless.

Third major reason for government is to reduce negative externalities created by the market economy and enhance positive ones. Negative externalities create social costs that are not taken into consideration by private entrepreneurs and consumers. The agricultural sector is characterized by many externalities. For example:

The decision to take water out upstream may make people worse off downstream;

Building a dam may displace people;

Privately profitable use of pesticides may increase yields and income of farmers using pesticides, but may have harmful health effects for consumers;

Cultivation of land on steep slopes may cause soil erosion, and soil is washed down river and destroys coral reefs or reduces the fishers’ catch.

Rural development is a complex issue and it means in broad spectrum of rural development activities encompassing the simultaneous fostering of small-farmer agricultural progress, improvement of levels of living (incomes, employment, education, health and nutrition, housing and other social services) for the rural people; reducing inequality in the distribution of rural incomes and urban-rural imbalances in incomes and economic opportunities, and the capacity of the rural sector to sustain and accelerate the pace of these improvements over time. Excerpts from the author's freshly published book entitled Rural Development in Developing Countries which is available in all prominent book stores-ed.