Excessive government intervention in the private sector

Government interference in the national economy
Proliferation of government regulations
Excessive government participation in national economies

Nature

According to the interventionist outlook, the state is not to be excluded from the strategic sectors of the economy; and political and trade union problems are thought to be best avoided, whatever the consequences to profitability, by keeping companies on the brink of bankruptcy from going out of business. In many countries, the major result has been a massive and debt-ridden state share-holding sector, often easily susceptible to political manipulation.

Background

OECD has elaborated a set of positive adjustment principles to guide structural adjustment policies in troubled industries. These include the requirement that such policies be temporary, transparent, linked to the phasing out of obsolete capacity and free of protectionist measures against imports. It is however difficult to recognize these principles in actual practice. Whereas the rhetoric refers to facilitating adjustment, actual policy deviates from these principles in its objectives, instruments, time horizon and assumptions about how markets function. Many such policies do not aim to complement market adjustment in order to maximize aggregate output. Rather policies comprise a response to the conflict between the market's allocation of resources and the values and objectives desired by the political system. No matter how fervent their attachment to free market principles, governments in the major developed economies inevitably succumb to political pressures to intervene, and do so by means which often violate the positive adjustment principles.

Incidence

[Industrialized countries]

Despite its liberal rhetoric, the Reagan administration in the USA participated in the Chrysler rescue plan, used quotas when tariffs would have accorded with market principles in offsetting foreign subsidies on steel; sanctioned tighter restrictions in the Multifibre Agreement for Textiles; reintroduced quotas on sugar; concluded a cartel arrangement for semi-conductors and obtained voluntary export quotas on Japanese automobiles. Similarly, the Japanese government, despite its strong reluctance to aid individual firms, bailed out the Sasebo shipbuilding company, and despite its abhorrence of formal trade barriers, protected its aluminium industry with tariffs. Germany, despite its commitment to the social market doctrine, allowed its overall subsidies to rise dramatically in the 1970s and was drawn into the rescue of the AEG corporation.

[Developing countries]

In virtually all the developing countries, the acceleration of industrial growth has brought an equally accelerated increase in government intervention in economic activity. In sectors other than transportation, power and basic services (and in those fields of industrial activity whose very magnitude makes private participation difficult or impossible), such participation merely obstructs and increases the cost of development and generates ever greater exclusion of the private sector from productive activities in which private enterprise has proven to be more efficient.

Claim

The market price system never works perfectly, least of all in developing countries; the question is whether to rely on imperfect markets or imperfect governments. On the whole, the countries that have grown fastest kept inflation under control by pursuing prudent, unambitious monetary and fiscal policies; they promoted exports mainly by refraining from discriminating against exporters; they left their economies open to foreign competition, which spurred internal efficiency; they left their domestic price systems largely intact, instead of supplanting them with marketing boards and other state monopolies; they allowed their financial system to provide adequate returns to savers; and they gave the private sector a big role in deciding where those savings should be used. Intervention breeds intervention; a quota here creates a shortage there; shortages push prices up, so price ceilings are necessary; price ceilings put firms in difficulty, so some are given subsidized credit; others are not, and want to contract, so sackings are forbidden; and so on.

Those who aspire to replace private enterprise by government control forget that the spirit of enterprise, imagination, courage and creative genius are characteristic of the men who forged the machinery of progress in the continuous struggle that is private enterprise.

Counter-claim

Government intervention has contributed to growth by reducing rigidities and correcting for market failures often resulting from the absence in developing countries of the array of conditions favourable to development. The case against intervention, in particular protection, in developing countries should be tempered by the fact that the motivations for protection in developing countries are quite different from those in industrialized countries. Broadly speaking, the adoption by developing countries of measures with the potential to restrict trade would appear to be designed to serve one or more of the following purposes: revenue collection, balance-of-payments protection, and infant-industry protection. Certainly, South Korea and Japan, let alone, the USA and most European countries can claim to be non-interventionists.

It is now quite clear what needs to be done to move national economies towards environmental sustainability, and it is clear that it is government that must take the initiative in at least six areas: strategic planning to take the long-term view on resource use; environmental taxation to begin to get into prices some of the large costs of environmental degradation; regulation where definite environmental standards have to be met; public investment in environmentally beneficial projects or infrastructure which do not yield a competitive financial return; stimulation of environmentally progressive markets such as energy efficiency; far greater provision of information and encouragement to potential green consumers; construction of an ecological-environmental indicator system.