Are the market economy and government regulations compatible? Most businesses in Pakistan – or for that matter in most other developing countries – are likely to answer this question in the negative. Their reasoning would be as follows: to obtain an optimal result, market forces must play fully.
Government intervention or regulation will increase the cost of doing business and lead to inefficiencies in the functioning of the micro-economy. However, if the same companies were asked whether the government should protect them from foreign competition through, for example, import taxes and subsidies, they would answer in the affirmative. Why do companies generally resist government intervention in the domestic economy, but look to it when faced with foreign competition?
The above contradiction in business approach to the role of government is largely due to a widespread misunderstanding of the relationship between a market economy and government regulations. The purpose of regulations is not to give government control over companies or to slow down their operations, but to ensure that the allocation of resources and results through private companies maximizing profits are optimal both for the business sector and for society as a whole.
Not only that, left completely to its own devices, the market mechanism will collapse in at least nine out of ten cases due to its inherent contradictions. A market or liberal economy can be, and should be, a regulated economy. There is little need for regulation in a centrally planned economy. This is why the privatization process is accompanied by the establishment of regulatory institutions. The United States, which is one of the most liberal economies in the world, is also a highly regulated economy.
It was the laxity of the Federal Reserve, the US central bank, in supervising the banking sector that led to the global financial crisis of 2008. Regulations are necessary for several reasons, such as (a) control of anti-competitive practices enterprises ; (b) protect consumers against unfair commercial practices and promote consumer welfare; (c) reduce negative externalities; and (d) protect the rights of employees.
Unlike the state-controlled economy, the market economy is said to be highly competitive due to a fairly large number of suppliers in an industry. Competition among suppliers leads to production efficiency and lower prices for consumers. However, suppliers can sometimes collude to fix production, create shortages and increase prices, thereby accumulating higher profits at the expense of consumers.
Such rent-seeking behavior is sometimes observed in the Pakistan sugar industry, where despite sufficient sugar cane production, either the crushing of the cane is delayed or the sugar suddenly disappears from the market. The sweetener’s scarcity drives up its price, often exorbitantly, leaving buyers dry. Once the price has climbed, the shortage of sugar suddenly goes away. Cartelization also tends to make firms less efficient, as the competitive incentive to cut costs is removed.
This is one of the reasons why the price of Pakistani sugar is much higher than the international price of the product, making it difficult to compete with local suppliers in overseas markets. Significant subsidies are needed to allow Pakistan to export its surplus sugar. The antidote to such anti-competitive behavior is regulation, which encourages competition – the Competition Act 2010 – and an independent institution to effectively enforce them – the Pakistan Competition Commission (CCP).
The effectiveness of the CCP in combating anti-competitive behavior is open to debate, but there is no question that government intervention is essential to protect not only consumers but also small businesses from the predatory practices of large corporations.
Consumers must also be protected from deceptive marketing practices. Such practices consist of giving false, misleading or incomplete information to consumers regarding any matter which influences their purchasing decisions. These include product quality, ingredients, uses, performance, origin, warranty, price and qualifications (in the case of service providers, such as doctors).
For example, consumers may be kept in the dark until the transaction is complete, the price of a service includes taxes, or a product, such as cosmetics or drugs, can have detrimental effects. involuntary. In Pakistan, the two main laws prohibiting deceptive marketing are the Competition Law of 2010 and the Provincial Consumer Protection Laws.
Deceptive marketing is not only harmful to consumers, it also harms the national image and the prospects for growth of the company. For example, companies that supply substandard products in the domestic market and often get away with it will often fail to gain a foothold in foreign markets, where product standards are rigorously enforced.
Due to the unscrupulous behavior of a few companies, a country may become known internationally as a producer of poor or substandard products and may lose potential markets for its products. When calculating the cost of producing or supplying a product, companies only take into account the cost that they have to bear.
However, the production process can also incur costs for third parties. These costs are called negative externalities. Classic examples are air pollution, the disposal of industrial wastes in rivers and lakes, and the overuse or waste of natural resources, such as water. Negative externalities often result in higher than socially desirable levels of production. Appropriate government intervention such as fines or lawsuits against polluters and progressive water pricing is needed to reduce negative externalities.
Finally, it is important to protect not only consumers and third parties against unfair commercial practices, but also workers. Such intervention can take the form of setting minimum wages, maximum working hours, job security, social security, decent working conditions and compulsory training for workers. In the short run, such stipulations would increase overhead costs, but in the long run, they will create a more productive workforce and help make a business competitive.
Regulations also have their drawbacks. If regulations are too numerous or too strict, they will stifle economic activity, be difficult to enforce and can create rents for the officials charged with enforcing them. Regulation must pass two essential tests: First, regulation must not be designed to give government power over business, but to achieve a specific policy objective. They should not burden businesses unnecessarily.
There should not be two laws if one law can serve the purpose. Second, regulations must be worded realistically, otherwise companies would not be able to prove compliance or find a way to violate them. For example, minimum wages should be set according to the state of the economy, otherwise companies will downsize or force workers to agree to work for less than the prescribed minimum wage.
THE WRITER IS AN ISLAMABAD-BASED TIMEKEEPER