Who command and control the economy?

Proshare

Wednesday, May 11, 2016 3.30 PM / Temitope Oshikoya

“Our political economy is run by a compact elite that is able to fuse the power of our public government with the power of private corporate governments in ways that enable members of the elite not merely to offload their risk unto us but also to determine with almost complete freedom who wins, who loses, and who pays.” Barry C. Lynn, author of the book Cornered: The New Monopoly of Capitalism

This is what you need to know: important people have no special monopoly on wisdom; and in times like these, when the usual rules of economics don’t apply, they’re often deeply foolish, because the power of conventional wisdom prevents them from talking sense about a deeply unconventional situation.” In The Power of Conventional Wisdom by Paul Krugman, Economics Nobel Prize Winner and New York Times Columnist:

The boundaries between states and markets arising from the contest among the delusional markets purists on the right and the government activists on the left are arguably the most contested in the history of political economy of any modern society.

Of late, the luminaries of different degrees of illuminations have dogged further into their ideological holes as market purists and government activists. Their ideological polar positions on issues including devaluation, subsidy and “command and control economy” are a complete distraction to the real issues of market failures and government failures that need to be addressed.

Indeed, the present administration appears to be caught between these market failures and government failures as it is weary of the markets and power of the private corporates, but it is hobbled by internal partisan politics, regulatory capture, and public sector institutional ineptitude. This may partly explain the perception of the administration’s economic image as LIARS: LETHARGIC, INSULAR, ACKWARD, REACTIVE, and SQUANDERING OF A GOLDEN OPPORTUNITY.

Market Failures

To the uninitiated, economics is all about the virtues of markets, perfect competition and efficiency. Far from it! Economics recognizes that in addition to efficiency, issues of equity and fairness are embedded in the problem of scarcity. History of economics thought also emphasizes that market allocations are continuously being influenced by social and political forces.

Much of rational economics is about addressing market failures and government failures. Economics uses assumptions to abstract from the real world, but economists understand that the world is imperfect. As Jean Tirole, 2014 Economics Nobel Prize winner notes Economists have long extolled the virtues of markets. Unfettered competition protects consumers from the political influence of lobbies and forces producers to deliver products and services at cost. Alas, competition is rarely perfect, markets fail, and market power must be kept in check.”

Other forms of market failures abound. Externalities occur when market participants fail to account for the effects of their actions on third parties. The needs for public goods, such as national defense arise with missing markets, where markets may fail to form. There are incomplete markets where markets may fail to produce enough merit goods, such as immunization for all children, education and healthcare. Markets have systematic weaknesses, and financial and foreign exchange markets in particular may become unstable, unfair, and vulnerable to microstructure manipulation as a result of information asymmetry.

In macroeconomics, Keynes clearly demonstrated that all markets are not simultaneously cleared by prices; and due to structural rigidities and institutional constraints, market economies do not automatically gravitate toward full employment. This lack of optimally self-adjusting economy often implies the need for fiscal intervention.

Government Failures

Government activists have often justified states’ interventions on the need to correct market failures. It is argued that the most important roles of governments are defined as to regulate private market activities to correct monopoly power or externalities; make provision of public goods and services; establish institutions to regulate the markets; and redistribute assets, wealth and incomes with fiscal policies such as taxation and subsidy. As Dani Rodrik once remarked, markets are not self-creating, self-regulating, self-stabilizing, nor self-legitimizing. Markets need policies, institutions & infrastructure that reduce transaction costs for all participants.

Governments, like markets, however, are imperfect. As Gordon Tullock, et. al notes in Government Failure: A Primer in Public Choice: “Government can fail too especially with government, not of, by, and for all the people but of, by, and for some kinds of people. This is even more pronounced when you have “government of the Busy (political activists), by the Bossy (government bureaucrats), for the Bully (lobbyists) activists.”


Government can do little or too much for too long. Government omissions including neglect of infrastructure, education, and health; and commission including restrictive trade regimes also abound. Governments fail too, sometimes spectacularly, for several reasons. Amongst these reasons are: political self-interest with formal and informal rules of the game that exclude the uninitiated., weak policymaking capacity, public sector management, and rent-seeking and regulatory capture such as influencing the appointment of regulators.


The Economist’s Crony Capitalism Index

These themes have been illustrated by the crony capitalism index, which measures the extent of rent-seeking in specific industries and countries. As The Economist observes, over two decades, crony fortunes had leapt relative to global GDP and as a share of total billionaire wealth in industries that often involve cozy relations with the government. The Economist notes that the developed countries have lots of billionaires but fewer cronies, with only 14% of billionaire wealth from rent-heavy industries.

Developing economies account for 43% of global GDP, but 65% of crony wealth. Cartels, monopolies and lobbying are common ways to extract rents in industries requiring licensing or interactions with the governments. Several incentives have often been provided within the context of a captured state, where a few oligarchs have emerged with accumulated, concentrated and consumable wealth in commanding heights of the economy—oil, energy, banking, telecom, real estate, and other services.

In a captured state, economic oligarchs become self-perpetuating. The concentration of economic power reinforced special interests, with undue influence in politics, and which, in turn, ensure the adoption of policies, including licenses, waivers, and concessions, to favor their class. According to Business Day editorial’s Stemming the Tide of Inequality, “Thirty percent of Nigeria’s wealth is concentrated in the hands of 15,705 people: 5 billionaires with 11% plus a silver of 15,700 millionaires who control 19%. This leaves millions of mostly young Nigerians at the bottom of a pyramid. Now, you know those who command and control the economy!

The combination of private sector market failures and government regulatory failures is best illustrated by our financial system. As Proshare recently observes, “That the banks are complicit in the looting of public funds is not a subject of debate by any remotely informed about the workings of Nigerian banks. But proving the case will require much more than sensationalism and opportunism. More damning however is the self-indictment the central bank of Nigeria (CBN) has to accept, endure and assimilate from its role in the USD cash disbursements to the ONSA, the use of its foreign exchange market as a channel and vehicle for money sharing, looting and laundering; and its supervision/examination lapses that facilitated the conditions for such wholesome breakdown in financial systems administration and control.” 

Thus, when the luminaries of different degrees of illuminations and ideologues of both market purists and government activists come swinging, please remind them of the words of Paul Krugman cited above; as well as the remarks of Will Hurton and Philippe Schneider in The Failure of Market Failure, which note that: “Just as markets and governments can both succeed, so they can both fail. There is no reason to suppose that failure is the unique preserve of government or success is the preserve of markets.”

The challenge is in realizing that economic pragmatism is in making both market and government work together for equitable and inclusive prosperity for the Nigerian people. What we need are pragmatic goldilocks that extol the virtues of both the private sector and the public sector, while addressing market failures and government failures that prevent inclusive and shared prosperity. These require a balancing act that avoid the extreme ideological polar positions of the market purists and government activists.

(These issues are detailed in this writer’s new book on: Pathways to Shared Prosperity in Nigeria: Making Market and Government Work in a Global Context .

Dr. Temitope Oshikoya, an economist and chartered banker, is CEO of Nextnomics advisory. 

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