Published at FreeMarketFoundation.com, March 16, 2010
What developing countries need most
Dr Richard J. Grant
A characteristic shared by all countries, whether “developing” or “developed,” is that their economies grow faster the freer they are from government regulation. A “developing” country is generally characterized by a greater level of poverty. This makes the need for economic growth seem much more urgent. Given that, it would follow that a developing country more urgently needs to be freed up from government control – and from government regulations, spending, and taxes.
The developed countries are more advanced in many ways: higher incomes, lower crime, healthier people, better-educated people, fewer restrictions on their ways of life, and more choices of goods, services, and associations. These societies did not get that way because of government actions; they got that way because of government inaction. Had their governments grown and interfered in the economy sooner, then it is unlikely that we would be calling them “developed countries” now.
When looking at the United States, many people make the mistake of blaming its problems on free markets. But the United States, at present, is not the best example of a free-market economy. It was in the past, although it has never been totally free of excessive government interference.
At present, the United States has many problems that are clearly the result of excessive government interference in its economy and the lives of its residents. The recent recession, the difficulties of which are still being felt, was not caused by market freedom. It was caused by a multitude of government policies and actions that created an artificial boom in the economy that directed resources into unsustainable activities.
The US Federal Reserve (the central bank, a government agency) used its power to create money and pushed interest rates down to artificially low levels. This caused many people and businesses to believe that their investments would be more profitable than they could possibly have been. That is one of the reasons why many of these investments later failed. Had the Federal Reserve not manipulated interest rates, but had let them be determined by market interactions, then people would not have made so many investment errors.
There has also, for many years, been an attempt by politicians to please certain voters by making housing appear more affordable. Toward this end, the government gave tax breaks to promote home ownership. The US government also created several agencies that subsidised and guaranteed mortgage bonds for millions of homeowners. The guarantees encouraged the banks and other mortgage bond lenders to give loans to people that might have difficulty repaying the loans. In other words, government policy encouraged the financial institutions to take greater risks than they would have in a free-market where there would be no government guarantees.
The government also was party to more heavy-handed regulations that intimidated the banks into making loans that they never would have made in a free market. That was the cause of what we call the "subprime crisis."
What failed in the United States was not free markets, or a private property system, or what might be called “capitalism.” What failed was government intervention. It is not correct to contrast this with socialism and to say that “both extremes” have failed. Socialism has clearly failed and always will. Countries like the United States, and also South Africa, get into trouble whenever they move toward socialism.
A Public-Private Partnership should not be the first choice for any country. Such ventures in the United States have resulted in a terrible waste of resources. Wherever they are tried, they always result in the politicization of business and in greater corruption.
When PPP ventures are imposed on the mining industry, it is usually in places where property rights are poorly defined and poorly protected. The failure to define and protect property rights is one of the most serious causes of low or stagnant economic growth. It is, perhaps, a defining characteristic of the Third World. Such countries might be “developing,” but they will never achieve their full potential.
PPP ventures might be better than an economy subjected to full socialism. But any kind of government intervention, even in a relatively free economy, will create significant problems that might not be recognized as the result of the previous intervention. If the problems attract political attention, the government might impose more regulations or taxes and subsidies in an attempt to correct them. This, in turn, will lead to further problems that could attract more government intervention – and so on in the direction of socialism.
Although it might appear to be a simple matter for the government to provide services, there are very few services that the government can provide with less difficulty than the private sector. The government has no special advantage in the provision of electricity and transportation services, even though it has the power to expropriate land. The private sector, had it been allowed to compete freely, would now be providing electricity and transportation far more cheaply and in more appropriate forms than has ever been achieved by Eskom or Transnet.
The special protections granted to both companies have created the illusion of low cost. But these companies have been judged only by the visible prices, not by the real cost in resources and lost opportunities. This is why Eskom has been asking for large increases in electricity rates. Regulation has burdened South Africans with high, hidden costs. Had private companies been allowed to develop and to provide these services, South Africa would now be a much wealthier country, and the electricity and transportation systems would be far better developed. The solution is to allow that freedom now.
Development takes time, so the sooner a country frees up its economy and gives definition and protection to private property rights, the sooner will the people enjoy the benefits that only freedom can bring.
Author: Dr Richard J. Grant is Professor of Finance & Economics at Lipscomb University in Nashville, Tennessee, and is Publications Editor at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 16 March 2010
Note: The foregoing article is a response to a comment by one of our readers on the article Nationalisation: The Public Always Loses. He wrote: “While I agree with Dr Grant on this issue of Nationalisation, however, I still believe that for a developing economy like that of ours in South Africa, there is a need for the government's intervention in some cases. For instance, in the mining sector, I still believe that we (South Africans) may have to adopt the model practised in Botswana where a government is a shareholder but the actual mine is run by a private company. This would help in leaving the government with its job – to govern and service delivery to its citizens while also ensuring that ordinary citizens also benefit from revenues derived from their country's mineral wealth. In a nutshell, such model is Public Private Partnership (PPP) and it has proven, both in countries like Botwana and in South Africa, to be the viable business model as it strikes a balance between leaving everything in the hands of private companies and pure socialism. Both of these extremes have failed in the US and USSR. I believe that such model would also work for entities like Eskom and Transnet with their current infrastructure developmental requirements that our government /general public cannot afford!”
Friday, March 19, 2010
Nationalisation: the Public Always Loses
Published at FreeMarketFoundation.com, February 9, 2010
Nationalisation: the Public Always Loses
Dr Richard J. Grant
Generally speaking, nationalisation refers to any act by government to take control of any economic activity. Thus, it could include not only direct “ownership of the means of production”, but also taxation and regulation. But the more popular definition of nationalisation is the transfer of property from private to public (government) ownership. Depending on the intentions and attitudes of the government, this may be done by:
a. Purchase on the open market using tax money.
b. Expropriation without compensation.
c. Expropriation with compensation less than market value.
d. Expropriation with compensation of approximately market value.
e. Expropriation with compensation greater than market value.
Nationalisation can be used to harm the owners of the expropriated property, or it can be a disguised method of transferring wealth to them through overcompensation. Thus, it is not a foregone conclusion that all businessmen will be opposed to the nationalisation of their businesses, though they must always appear to be so in public. Certain individuals may personally gain from nationalisation, but the public as a whole cannot. Overall, the public loses.
The reason we lose is the same as for full socialism: economic information is cut off. Full socialism is just “full nationalisation”, and the effects of information loss are directly proportional to the level of government involvement in the economy. When a company is owned or controlled by the government, it becomes a source of “noise” that disrupts communications between producers and consumers. The more companies the government nationalises, the worse this disruptive effect becomes.
Even when it honestly tries, no government can ever run a business on a “commercial basis”. And if a government does try to “commercialise” one of its companies, it makes no sense for the government to own it. True commercialisation requires 100% privatisation; anything less is an open admission that the government still intends to exert its influence on the company’s operations. Politicians try to justify nationalisation in the first place by claiming it will change things. Any declaration that a company will be nationalised and then run on a commercial basis is a clear contradiction.
There are both political and economic reasons for this. Firstly, politicians are rarely able to resist the temptation to interfere in public businesses to achieve other ends. (The only politicians with the willpower to resist would also have the sense to privatise 100%.) Then, as government interference increases, the adverse economic effects become more apparent, though the cause might not be obvious to the public. This, in turn, usually leads to public demands for the government to “do something”: to put Band-aids on Band-aids.
Secondly, on the economic side, the situation of ‘shareholders” in nationalised industries is obviously very different from that of shareholders in the private sector. The legal implication of government ownership is that every citizen owns an equal share of the nationalised property. But this myth is quickly dispelled when a citizen tries to sell his share. He can’t; he doesn’t have the right of disposal. Any influences that the citizen exerts must go through the same electoral process as other political issues. Thus, upon nationalisation, the control of the nationalised company can never be the same as a private company in which the shareholders have a direct interest in its profitability and can more easily replace bad managers. Private shareholders also benefit from the presence of “corporate raiders” who buy the shares of companies they think are poorly run, take control and put in better managers. But nationalised companies face no threat of takeover if they are inefficient, and thus have less incentive to be efficient.
Who decides what kinds of industry a society shall have? Should it be decided privately or by the government? In the case of private companies, control is held by private owners who bear the costs and responsibility of their own decisions. But in the case of public companies, control is in the political arena. It’s everybody’s business, and therefore nobody’s business. No one with decision-making powers bears the cost of failure. How can this possibly be in the public interest?
Not only is a nationalised company less efficient than a similar private company, the mere existence of nationalised companies reduces the efficiency of all other companies in the economy. This is because the reduced opportunity to obtain services that have been nationalised increases costs and misallocates resources.
As government influence in the economy grows, it becomes impossible to avoid bureaucratisation of all companies, public or private.
Author: Dr Richard J. Grant is Professor of Finance & Economics at Lipscomb University in Nashville, Tennessee, and is Publications Editor at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 09 February 2010
Nationalisation: the Public Always Loses
Dr Richard J. Grant
Generally speaking, nationalisation refers to any act by government to take control of any economic activity. Thus, it could include not only direct “ownership of the means of production”, but also taxation and regulation. But the more popular definition of nationalisation is the transfer of property from private to public (government) ownership. Depending on the intentions and attitudes of the government, this may be done by:
a. Purchase on the open market using tax money.
b. Expropriation without compensation.
c. Expropriation with compensation less than market value.
d. Expropriation with compensation of approximately market value.
e. Expropriation with compensation greater than market value.
Nationalisation can be used to harm the owners of the expropriated property, or it can be a disguised method of transferring wealth to them through overcompensation. Thus, it is not a foregone conclusion that all businessmen will be opposed to the nationalisation of their businesses, though they must always appear to be so in public. Certain individuals may personally gain from nationalisation, but the public as a whole cannot. Overall, the public loses.
The reason we lose is the same as for full socialism: economic information is cut off. Full socialism is just “full nationalisation”, and the effects of information loss are directly proportional to the level of government involvement in the economy. When a company is owned or controlled by the government, it becomes a source of “noise” that disrupts communications between producers and consumers. The more companies the government nationalises, the worse this disruptive effect becomes.
Even when it honestly tries, no government can ever run a business on a “commercial basis”. And if a government does try to “commercialise” one of its companies, it makes no sense for the government to own it. True commercialisation requires 100% privatisation; anything less is an open admission that the government still intends to exert its influence on the company’s operations. Politicians try to justify nationalisation in the first place by claiming it will change things. Any declaration that a company will be nationalised and then run on a commercial basis is a clear contradiction.
There are both political and economic reasons for this. Firstly, politicians are rarely able to resist the temptation to interfere in public businesses to achieve other ends. (The only politicians with the willpower to resist would also have the sense to privatise 100%.) Then, as government interference increases, the adverse economic effects become more apparent, though the cause might not be obvious to the public. This, in turn, usually leads to public demands for the government to “do something”: to put Band-aids on Band-aids.
Secondly, on the economic side, the situation of ‘shareholders” in nationalised industries is obviously very different from that of shareholders in the private sector. The legal implication of government ownership is that every citizen owns an equal share of the nationalised property. But this myth is quickly dispelled when a citizen tries to sell his share. He can’t; he doesn’t have the right of disposal. Any influences that the citizen exerts must go through the same electoral process as other political issues. Thus, upon nationalisation, the control of the nationalised company can never be the same as a private company in which the shareholders have a direct interest in its profitability and can more easily replace bad managers. Private shareholders also benefit from the presence of “corporate raiders” who buy the shares of companies they think are poorly run, take control and put in better managers. But nationalised companies face no threat of takeover if they are inefficient, and thus have less incentive to be efficient.
Who decides what kinds of industry a society shall have? Should it be decided privately or by the government? In the case of private companies, control is held by private owners who bear the costs and responsibility of their own decisions. But in the case of public companies, control is in the political arena. It’s everybody’s business, and therefore nobody’s business. No one with decision-making powers bears the cost of failure. How can this possibly be in the public interest?
Not only is a nationalised company less efficient than a similar private company, the mere existence of nationalised companies reduces the efficiency of all other companies in the economy. This is because the reduced opportunity to obtain services that have been nationalised increases costs and misallocates resources.
As government influence in the economy grows, it becomes impossible to avoid bureaucratisation of all companies, public or private.
Author: Dr Richard J. Grant is Professor of Finance & Economics at Lipscomb University in Nashville, Tennessee, and is Publications Editor at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 09 February 2010
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