Philosophers have been debating whether to let the economy engage in self-correction procedures, via so-called invisible hands, or craft and implement policies that aim at eradicating periodic malfunctions that plague economic cycles.
Since the Great Depression and its aftermath, that debate had been settled toward the adaptation of economic policies in the case of market failures, and it became a modus operandi for boosting efficiency and reducing waste. Scholars, in their published books and research papers, illustrated which policy to be used and to what extent. The classic textbook example is interest rate effects on employment and inflation, policymakers manipulate the return rate to influence aggregate demands, and consequently to acquire targeted employment and price levels.
The real question, however, is: Why do some countries adopt suboptimal, and in most cases failed, policies? Such policies exacerbate the situation and make the problem even harder to cure in the future. For instance, unemployment percentage will be small at the outset so unless corrective measures are taken the number of jobless will skyrocket and the problem will spin beyond control. The worst case scenario, however, is when no policy at all is being implemented which allows the problem to gain momentum and wreak havoc the economy. When late panacea arrives, either it is going to be too late or the “bitter medicine is a lot worse than the problem itself.” That may explain the persistence of simple economic challenges in less developed countries (LDCs) because untreated problems tend to gain immunity and resist any future policy prescription. One of the reasons for failed or no policies is the fact that policymakers lack the knowledge of the true economic indicators. In most cases, they relay on foreign “experts” who possess inchoate understanding of quite intricate circumstances of the national economy. At the same time, highly-educated indigenous people are alienated because they, in spite of their deep knowledge, do not meet the “expectations” of the policymakers. This turns the national economy into an experimental field for foreigners with mediocre education, and in some cases no qualification at all.
Second, policymakers may have vested interest in the outcome of the implemented procedure because they succumb to immense pressures from affluent and prominent members of the society, who are very protective of their interest at the expense of the rest. In rare cases, however, general public begs the government to abandon policies in spite of its success because people tend to be myopic and trade quite a substantial long-term gain for a short-run smaller one. That may explain the slow reform process in most developing countries in spite of its importance because risk-averse policymakers don’t want to take any chance that may endanger their posts.
Third, LDCs usually have nascent political and economic structures which result in fledgling, or absence of autonomous, institutions. Fully-functioning and independent institutions is sine qua non for success because they ensure implementation of the right economic policies. The absence of a specialized commission will be quite costly because other unspecialized government administrations will fill in the role and will compromise efficiency and effectiveness.
Let me give several examples to support my above arguments. In the United States, after the collapse of the financial market in the 1920s, the US Congress held several hearing sessions in order to figure out what went wrong. As a result, Security and Exchange Act (SEA) has been promulgated and the Security and Exchange Commission (SEC) has been formed in 1934 with the sole purpose of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. The statute and its subsequent amendments along with the autonomous agency have been able to bring back confidence to the stock market. While in the case of Saudi Arabia, the stock market collapsed (that is, meltdown) and investors lost their life-long savings and we are yet to figure out what went awry. A typical case of policy failure.
Developed countries value both consumers and producers equally in terms of their importance and welfare. In order to grant equal opportunity and fairness, the US for instance established the Free Trade Commission (FTC) to fight price-fixing, collusion, as well as dumping practices by different retailers. The Saudi market is still rife with monopolistic practices by retailers who engage in predatory-pricing schemes to foreclose the market, and consumers are complaining of higher prices and the inferior quality of commodities available in the local market. Their complaint is yet to be heard. We still need an anti-trust institution that ensure an adequate level of competition and fair pricing. A case of missing policy.
(Dr. Mohammad Fahd Al-Qahtani, [email protected], is assistant professor of economics, Institute of Diplomatic Studies, Riyadh.)
