Fragile free market system and developing economies

By M. Sharif

Developing economies are facing tremendous difficulties to prop up their economic status against outcomes of fragile free market system that initially made promises and prospects to boost their growth and development. After a period of more than two decades, it has mix results particularly for developing economies including Pakistan. The countries have experienced macroeconomic instability more for external reasons such as high cost of oil, food, slowing down of developed economies and global inflation than for domestic reasons of political uncertainty and not so apt management of fiscal and monetary policies.

Free market system

It is basically a strain of capitalist system in-vogue in the US. Its pivotal point is entrepreneurial and market driven capitalism. It seeks least interference by the state in small or big business not only within a state but globally also. Its protagonists, mostly in the US, consider the system far superior and result oriented than any other system in general.

Free market system has a few characteristics that make it quite different from any other economic system that has remained prevalent or prevails at present anywhere in the world. Its characteristics include unregulated and uninterrupted markets that are to be regulated by the market forces themselves despite the fact that it is extremely difficult to articulate the market forces.

Free market landed on global horizon with the patronage of the US and multilateral institutions in early 80s. It gave rise to a lot of expectations such as alleviation of poverty, increase in per capita income, sustainable high economic growth and development, greater share in global market, access to technology and pouring in of investor’s money and better standard of living for state citizens. Of course, these gains were not to be made in vacuum. The state, people and government aspiring to reap the benefits of free market were to put in hard work at different tiers of society, to face the challenges and tough competition generated by free market environment. The social sector had to be developed without any reservations with focus on human resource development. South-East Asian economies were the first to fall in line with the demands of free market economy. They were followed by the present day emerging economies with some reservations and reversals initially.

Free market thrust was followed by liberalising global trade with a clear message for emerging and developing economies that, it would provide the best solution to the problems of development and economic growth for any country that was ready to fall in line with the demands and norms of global trade. Reduction in import tariffs, liberalisation of imports particularly of industrial products from developed countries, free flow of currencies were a few from a number of demands that free market economic system put on members of WTO. It went well for the developed and emerging economies because these countries met more or less all the requisites of global trade such as good human resource, strong industrial base, sound currencies, huge forex reserves and comparatively well established and competitive systems to pursue fiscal and monetary policies in their national interests.

But, the irony is that the very protagonists of free market economy have not been willing to take care of interests of most of the developing countries whose economies are basically agrarian since commencement of talks on world trade, seven years earlier. The developed countries are not willing to give free access to the agro-products from developing countries. The measures work to the great disadvantage of developing countries and have kept them in Asia, Africa and Latin America on the edge of precipice. In fact, they have been the biggest losers because of protectionist policies of developed countries and liberal rules and regulations imposed by WTO in the name of free market. WTO has not been successful to strike a balance between the interests of developed countries on one hand and on the other interests of emerging and developed economies. The talks on global trade between the two sides held recently remained inconclusive.

Free market system carries with it the stigma that it is oblivious to the social needs of the citizens of a state. The entrepreneurs, investors and big businesses that reap the benefits have no social responsibility on their shoulders when markets collapse. According to an analyst, “despite the fact that the US healthcare system is the most privatised and market-driven of any in the industrialised world, it has become one of the least efficient and effective with extraordinarily high cost, mediocre results and a large and growing pool of working families with little or no insurance and inadequate care.” Likewise deregulated domestic or global energy markets have failed to keep prices of electricity, petroleum products and food items and commercial commodities within affordable limits particularly for the developing economies. They have pushed inflation to unbearable limits for poor masses of developing economies with the result that free market system based on the practices in-vogue in the US is being viewed with a lot of scepticism.

National economy and the system

National economy is an agrarian economy and has passed through many phases of development based on state-led economic growth and development model during the decade of 60s followed by centralised development pursued during 70s. They could not deliver the results that were expected out of them for multiple reasons. The governments during those times had fallen in line with economic growth and development models in-vogue either in western or socialist countries with the expectations that they would succeed to alleviate poverty and take the country to new heights of economic growth and development. They succeeded partially but at the end, they left the people and the economy in dire straits rather than in happy situation.

During last nine years principles of free market economy were pursued with complete commitment without preparing the economy to reap the benefits of free market system and face the challenges of its weaker points. Spirit of free market economy lies squarely on competition with domestic, regional and international players; judicious use of national resources in interest of consumers, creating job opportunities for labour, increasing productive capacity of human and physical resources and observing strict fiscal and monetary discipline in medium and long term perspective also to ensure high economic growth and development.

First four years after 1999 were fully utilised to take the country out of the morass in which it had fallen during the decade of 90s because of political infighting that scuttled economic growth and development. After setting economy on the basis of sound macroeconomic indicators, it was expected that the course set for national economy in accordance with principles of free market economy, would be self-sustaining. At least, this was the official hype all around although there were dissenting views that believed that the spirit of free market economy was being violated. They dissenters pointed out that Pakistan could ill afford deregulated markets and indiscrete imports on the back of lower import tariffs. Complete privatisation of national assets that was hardly transparent and pursuing loose fiscal policy on one hand and tight monetary policy on other hand.

A country first has to meet the requirements for the free market economy before the system could be effective. In the case of developing countries, at times, it becomes difficult because some protectionism becomes necessary. Pakistan has not done well in free market scenario – the industry has suffered as they could not produce goods either compatible with goods coming in the market or the price structure. The present situation of slowing down of exports is an example of how the free market system may harm the indigenous industries.