The Rationale of Free Markets

Posted by: on Feb 27, 2013 | No Comments

To have any meaningful understanding of a socio-economic system, one needs to first gain an insight into two things – one, what purpose it is meant to serve, and two, for whom it is supposed to serve that purpose.

Why India and Nepal Rank Low in Economic Freedom Index

Why India and Nepal Rank Low in Economic Freedom Index

Posted by: on Dec 10, 2012 | 6 Comments

On the face of it, economic freedom is a simple concept. However, it encompasses every aspect of an individual’s life. Economic freedom defines the standard of living and has a significant influence on the quality of life.

Equal Income Distribution – Characteristic of Free Economies?

Posted by: on Jul 13, 2012 | No Comments

The wealthiest countries are those that have free economies. There is a popular belief that the more capitalist economies in Europe, North America and even Asia (like Japan) have greater financial inequalities. But the true picture reflects a different scenario altogether. Such countries are better off than the socialist economies when it comes to distribution of wealth.

Free the People, Control the Government: A Lesson from Hong Kong

Posted by: on Jun 29, 2012 | No Comments

It is often believed that countries that are small are easy to govern. It is also believed that high population impedes economic development. There is one nation that shattered these popular beliefs… Hong Kong!

When Government Inaction Cripples Economic Activity

Posted by: on Jun 9, 2012 | No Comments

It is a known fact that demand and supply decide the direction of a free market economy. However, it is the government that creates an atmosphere where market forces can operate without any fear for their investment.

Zero Tolerance for Corruption

Posted by: on Dec 16, 2011 | 4 Comments

The number 1 topic of discussion these days is corruption. Will putting people in jail solve the problem? Is it even the right thing to do? NO.

There is no person in India who has been untouched by corruption be it either paying a bribe or receiving a bribe. So, the result is that we can apply the law only selectively- If you are unlucky, you get caught, most do not.

If the law was to catch everyone then all of us would be in jail. Is this fair then that an unlucky few be in jail while the rest of us face no penalty? Did not Christ say that the first person to hit a sinner with a stone be the one who has not sinned- No one did.

Let us not look at developing countries like ours; Nepal, Bangladesh, Sri Lanka, Bhutan or African or Latin American countries- No one has found an answer as to ending corruption.

Let us instead go to a developed nation which has been consistently rated- The topmost corruption free place in the world. How did it achieve this status?

Firstly, it gave its people economic freedom- by this it is meant that it made it easy to do business. There were no unnecessary regulations, no restrictions on trade, no licensing requirements and no taxes on imports and exports. Foreign investments are welcomed and government puts no hindrances if you want to bring in money or take out money.

If you do this then you reduce the interaction between businessmen and government and chances of corruption are accordingly reduced.

This country then took another step. Government may not interfere with business people but still same interaction is inevitable.

Government still has to provide law and order, issue passports, take care of roads and issue some limited approvals.

Here the government decided that it will shed its hypocrisy and pay its ministers, bureaucrats and others a salary which is commensurate with the private sector. Its PM is the highest paid government employee in the world making over a million dollars per annum- higher than the U.S. President or any European PM.

After doing this, this country followed a policy of zero tolerance for corruption and has achieved it.

The country I talk of is Singapore. Could our country and our neighbours- Nepal, Sri Lanka, Bhutan and Bangladesh do the same and make this a corruption free region?

Is a Free Economy a Fair Economy?

Posted by: on Oct 19, 2011 | No Comments

The United States of America has emerged an economic superpower during the last couple of decades primarily because of its liberal trade policies. The world’s biggest ‘free trade’ zone was created with the removal of restrictions on interstate commerce by the US Constitution. At present, the US economy is the richest in the world, with a GDP of $14.12 trillion US dollars (Source: World Bank, World Development Indicators)

In today’s open market, free trade policies have undoubtedly improved the competition among domestic and international players. This has engendered continual innovation, thus leading to better products. The theory of comparative advantage states that, when each nation specializes in goods having lower opportunity costs, the economic welfare of all the nations improve collectively. In other words, each country produces what it can optimally and trades the surplus with other countries for what it needs. In this ideal situation, the market is solely driven by the forces of demand and supply and all countries are benefitted by trade.

Another reason why a free economy is a fair economy is because it boosts healthy competition and prevents the creation of monopolies. As there are more competitors in the market, customers benefit from lower costs and higher quality.

A final case in favor of a free economy is that it helps lower the cost of living. When the government adds import/export taxes and tariffs, the product is sold to the end consumer at a much higher price. This, in turn, significantly increases the cost of living. In a free economy, on the other hand, the government intervention is minimal. This helps ensure that the goods and services are produced efficiently and the general standard of living is improved.

The Downside of a Free Economy: Is There One?

Despite the overwhelming empirical evidence in its favor, the concept of free economy has been shunned by many for different reasons. And, one such reason is that it encourages “Dumping”, which implies exports at ridiculously low prices. Protectionists argue that the products are subsidized to such an extent that it often becomes difficult for domestic industries to survive. However, it would be unreasonable to state that the importing country is at a loss completely. After all, its citizens benefit from not just lower prices, but also greater choices. The loss of the domestic businessmen is surely more than covered up by the combined gains of the customers.

The government often intervenes in the pretext of “fair economy” to protect its own interests. It functions with the notion that producers are more important to the economy than consumers. In reality, it is the general population that drives a nation forward. And, a free economy gives the “power to the people”, thus making it the ideal path to progress.

Shutting Down Sweat Shops isn’t Going to Help!!

Posted by: on Oct 7, 2011 | No Comments

One of the oldest and perhaps the most misguided myths about capitalism is the notion that businesses and factories exploit the poor. Among the various anti-capitalist propagandas being touted by the Marxists, one of the most striking is the sad image of a sweat shop chock full of children slogging away at minimum wages for big companies and corporations such as Nike. Their argument against these big corporations and their sweat shops is simple and straightforward; sweat shops exploit these children to rake up huge profits, so they need to be shut down.

Arguments such as these are a staple of the pro-welfare argument. The oppressed, the downtrodden and the poor need protection and welfare to help them rise up and stand at the same level as us. The question that irks me here is whether the welfare programs set up by the government will really work or will the tax payer’s money just end up again in the hands of middlemen and government officials.

What we need to understand here is that government welfare handouts are not going to help these people. What they really need is opportunities. This is what will actually help them grow. Coming to sweat shops, how do you think shutting them down is going to help those children? They need those wages and closing down these sweat shops will take away the only opportunity they have. They might just as well starve to death, or worse – be forced into more exploitative professions, like girls being pushed into prostitution.

The answer to this conundrum lies in facilitating rapid growth in India’s per capita income, rather than condemning and penalizing sweat shops for providing opportunities. An increase in the per capita income will help parents send their children to school instead of sweat shops to earn daily wages. This is what happened to the sweat shops in the western world and this is exactly how sweat shops are going to end in India!

In the Name of Capitalism: All’s Not Well!!

Posted by: on Sep 28, 2011 | 2 Comments

Sarah Palin’s speech earlier this month in Indianola, Iowa tore apart Washington’s political fraternity. While it may have left her presidential aspirations in a dicey situation, her speech attacked government officials and politicos who are getting wealthy by helping out their corporate cronies and friends on Wall Street in exchange of votes for the favors rendered. She called it ‘crony capitalism’ – where the government, big businesses and corporations along with big finance come together in collusion. As a result of this, it’s the little guys who are losing out. Palin further said that this crony capitalism is, “not the capitalism of free men and free markets.” It is the same “crony capitalism that destroyed Europe’s economies.” While what she said was generally right, I got stuck with something else she was talking about – ‘crony capitalism’.

Crony capitalism is just jargon coined to mislead people into believing capitalism is unfair and exploitative. In fact, crony capitalism is nothing more than looting what is rightfully yours and mine. It has nothing to do with capitalism, or for that matter free markets and exploitation. So what exactly is crony capitalism all about, if it’s not capitalism? An example of crony capitalism would be Suharto’s regime in Indonesia. During Suharto’s 30 year reign (1968-98) as the President of Indonesia, businessmen made a killing. As long as Suharto’s family got a share of the spoils, businessmen could get any license they wanted. This ensured market monopoly and hence huge profits for Suharto’s cronies.

In normal conditions, where the government does not interfere or meddle with the market competition, only those companies or businesses will prosper that satisfy their consumers – not those who use unscrupulous means to gain market monopoly and deliver substandard products or services.

Let us look at a hypothetical situation to better understand how this affects businesses and consumers i.e. you and me. Suppose, you and I prefer using Samsung’s Galaxy Tab to maybe say Apple’s iPad or any other similar product. In such a scenario, Samsung would be the one making profits. As a result, its share values will go up and provide it with the capital to launch even more such products in the future – a win-win scenario for both the company and the consumer.

However, suppose Apple gets some of its cronies in the government to ban Samsung’s Galaxy Tab, in a bid to gain market monopoly. In this scenario, the profit Apple makes will be at our expense. This is crony capitalism. It cheats us, it cheats businesses (Samsung) and it kills productivity.

David and Goliath

Posted by: on Aug 20, 2006 | One Comment

What is common to Estonia and China? Estonia is in Europe, China is in Asia. Estonia is just a dot on the map, in China you could fit 212 Estonias. Estonia’s population of 1.5 million is 6.5% of Nepal’s. China has 1.3 billion people, 56 times that of Nepal. Estonia is a democracy, China is ruled by one party. You know China, but are unlikely to have heard of Estonia.

However, something ties these disparate countries together. Both have witnessed incredible improvement in the quality of life of its people during the last decade. Both have gone on the path of economic freedom and their citizens have reaped a huge dividend.

These two countries have forever exploded the myth that you need to be either small to develop as many say, or you have to be big as a few maintain. They prove conclusively that size does not matter. Economic freedom is what matters.

Whenever I talked of Singapore’s or Hongkong’s development, people say, “they are tiny, don’t compare them with us”. Now, when I talk of China, they have no answer.

China shed its ideology three decades ago. While it remained politically closed, with the communist party maintaining a tight control, people were given freedom to buy and sell, foreign investors were welcomed and private property allowed.

The results are apparent to anyone who has visited Shanghai, Beijing or many of the other towns and cities. It is joked that the national bird of China is a ‘crane’; you see so many of them around. 40% of world’s cranes, at one time, were in China; such was the construction activity.

While India stagnated under the weight of its socialist government’s regulations, China torpedoed ahead. For a country of China’s size to grow by 8-10% a year was considered impossible, and yet China achieved this feat not for one or two years but for the most part of the last 30 years. China’s per capita income which, at one time, matched that of India is now twice as much.

This happened with only partial economic freedom. China continues to be hampered by huge and inefficient government undertakings whose accounts remain a mystery. What would happen were these to be privatized and China’s economy was to become as free as that of Hongkong is anyone’s guess? Would it grow by 15% annually or 20%?

India now chases China, with a me too philosophy, and has with liberalization more than doubled its growth rates to 6-7% from its earlier 2-3%. If only India had adopted sensible policies immediately after independence the story would have been different.

You might have seen an Indian company dominating the world’s car markets instead of Toyota. It may well have been a Mumbai based MNC providing the world with a news channel instead of CNN.

In 1991 the Soviet Union, called the Evil Empire by the US President Ronald Reagan, ceased to exist and Estonia achieved independence after 50 years of Soviet occupation. Unlike the other newly created nations, carved out of the erstwhile Soviet Russia, Estonia went in for a big-bang liberalization. It rejected advice from those who advocated a gradual approach.

Mart Laar, Estonia’s former PM, told me that it followed the example of West Germany after World War II. Price controls were abolished, currency allowed to float freely, taxes cut, public enterprises (PE’s) sold and foreign investment was welcomed.

The three largest banks in Estonia which control 90% of its banking assets are 100% foreign owned. Rules are there to facilitate foreign and domestic investors, not to hamper them.

The results of sale of PEs, abolition of the corporate tax on profits reinvested in the domestic economy, elimination of custom duties on most imports and a general pro-business environment were spectacular. The economy took off and its people look forward to the day when they will enjoy Western Europe’s standard of living.

Nepal too can achieve similar success. Its people are as intelligent and not any less industrious. Being too small or having too many people is not a reason to be poor. Take off the economic shackles and the people of this country can do what the Chinese and Estonians are doing.

The Himalyan Times