Victims of Our Own Narrative, an article by Zafar Masud, Published in Dawn, January 6th, 2024
“Market knows everything best” is considered the most cogent of arguments by free market supporters. This may be true in some instances but in most cases it’s unfounded, given the inherent imperfection of markets. While Chicago School orthodoxy says markets produce the best outcomes for society, behavioural economists insist that it’s humans who make markets. This means that humans can strive to improve their functioning.
Shiller, a Yale-based behavioural economist, argues that markets are shaped by ‘animal spirits’; individual actors have irrational tendencies, which can be amplified by the collective mood of the market. This sometimes results in irrational and suboptimal outcomes, such as speculative asset bubbles.
Dr. Bogan, a Cornell economist, aptly encapsulates it: “Markets are not perfectly efficient because it’s a collection of people, and they have flaws, biases, imperfections. And so markets aren’t perfectly efficient either”.
Even in a ‘relatively’ perfect environment, markets tend to be imperfect. The 1997 Asian currency crises, the 2008 banking crisis in the US, and most recently in Europe, are typical cases in point where governments had to intervene to save falling ‘free-market players’ in the ‘larger public interest’.
The fact is that it’s the interest of people which is at the heart of any policymaking. While markets should be free to operate with minimal regulations, regulators must have enough in their arsenals to ensure that there’s no exploitation of consumers, and there should be perfect competition and a level playing field.
In Pakistan’s case, markets and economic freedom are challenged and at the same time regulators’ independence and capacity are hampered. In the Heritage Foundation’s Economic Freedom Index, Pakistan ranks 152nd out of 180 countries. This indicates a heavily regulated economy.
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The worst situation is where there’s no regulator or government agency — significantly lacking expertise (like E&P, agriculture, etc) and at times having a conflict of interest of sorts (like CAA, FBR, etc) — to act as regulators. A serious effort is warranted to alleviate these conflicts; establishing regulators where they’re missing, and building requisite capacities and expertise where they exist, making them independent and centres of excellence.
Markets must be allowed to make money but without customer exploitation.
Zafar Masud
Our business and social maturity lifecycle is also in its infancy and warrants a dynamic regulatory environment while keeping markets functioning with adequate economic freedom. This makes the role of regulators even more central and inevitable. It’s not only the re-constitution of the economy, it’s the reprioritisation of the entire society and its actions to create an efficient market.
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As society becomes more responsible, the need for regulation will certainly subside. However, leaving things entirely to the markets prematurely, without a robust regulatory environment could result in irreparable loss to a country that has over 40 per cent of the population below the poverty line and is confronted with abject illiteracy.
We must take stock of our realities on the ground, and then devise the required role of regulators, who would ensure avoiding distortions through interventions necessary to keep order in the market.
Ha-Joon Chang in Edible Economics states: “We fundamentally go wrong when we start stating economics as a science. The critical thing to keep in mind here is that economics is not a science; there are no perfect provable answers.
There is no single economic solution or model that works in all situations — choosing the right economic answer depends on the circumstances of the economy and the conditions it faces. Economics is a study of human activity with all the emotion, ethical stands and imagination that everything human involves“.
Our policymaking pendulum, in Pakistan, swings from one extreme to the other, with policies implemented in patches, lacking cohesion, which end up doing more harm than helping the functioning of markets.
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For example, the ambition of following the free market monetary system whilst pursuing pro-elite, rent-seeking policies on the fiscal side, results in market failures, leaving the tools available to control inflation and unemployment less effective or even redundant at times. Therefore, ‘holistic and balanced’ are the functional words for all our policy actions — from macroeconomic policy to regulating markets.
Modesty is the key and balance is a necessity. Human nature is a reality; people, nations, and markets are unique, and their maturity life cycles are distinct. The right mix of free markets and regulation is needed based on the specific environment. The line must be drawn by the government to ensure that regulations and timely actions shall only come into force to protect the interest of consumers; otherwise, let the markets operate freely.
As Stefan Dercon alludes in his fascinating book Gambling on Development: “Success does not depend simply on whether the development process is state-led or market-led. Relevant factors are the quality of public administration systems, and how well policies and investment projects are implemented. Countries need to find a balance which is appropriate to their context”.
Markets must be allowed to make money but without customer exploitation and creating undue advantage of market failures and that’s where the role of regulators comes in handy to protect the ‘interest of the larger population’. It’s all about creating a prosperous, equitable, and stable society. Regulators shall be ‘inclusive economic institutions’ and not ‘extractive’, in the words of Acemoglu and Robinson.
While law by its very nature is definitive, regulations give regulators a wide landscape now known as “regulatory discretion”, and there’s always a risk that the regulators are quick to frame new regulations and resultantly over-regulate. It is also vital that the regulators assess, contextualise and address regulatory gaps in the light of next-generation laws and regulations.
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In Pakistan, while we surely need strong regulators to tackle market failures and protect consumer interest, a balanced policy environment is imperative, which appreciates ground realities, instead of discretionary and impulsive policy responses that swing from one extreme to the other. This equilibrium certainly ensures attracting higher private-sector investment and supports stronger, sustainable growth and job creation.
The writer Zafar Masud, is a development and social-impact focused banker and a public-sector specialist.