Sunday, February 21, 2010

The Role of Government & Global Economic Challenges

In his new book, Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz outlines six economic challenges the world has to address:

  1. mismatch between global demand and supply because productive capacity is underutilized and necessary economic and social needs are unmet;
  2. climate change because environment prices are distorted leading to unsustainable use of resources;
  3. global imbalances because of excess consumption in the developed countries and excess savings in the developing countries;
  4. manufacturing conundrum because increase there is increase in productivity but decrease in employment;
  5. inequality because it is affecting overall aggregate demand as there is more money with rich and less with poor people, whose marginal propensity to consume is higher;
  6. and growing financial instability leading to unmanageable risks.

Addressing these challenges is crucial for global economic stability. And, these challenges calls for a new economic model.

Stiglitz argues that this new model should include a bigger role for government as markets do fail sometimes. It is the government's responsibility to ensure that errant markets do not lead to catastrophic situations. In fact, the government should play a vital role in escorting the market in the right direction so that there is no unhealthy competition and excessive risk-taking that could endanger the whole economy. There are certain things markets cannot do by themselves. The government should play a critical role in maintaining full employment and a stable economy; promoting innovation; providing social protection and insurance; and preventing exploitation by "correcting" market distortion of income.

One of the key roles of the government is to write rules and provide referees. “The rules are the laws that govern the market economy. The referees include the regulators and the judges who help enforce and interpret the laws. The old rules, whether they worked well in the past, are not the right rules for the twenty-first century.”

This post comes from sticky notes I used while reading Stiglitz’s book. Here is previous post (Botswana versus USA) based on the same book.

Hold on with pulse export, Nepal!

Nepal’s Ministry of Industry, Commerce & Supplies (MoICS) denied the Department of Commerce’s request to export 16,000 metric tones of pulses. The government had banned export of pulses on July 20, 2009 as domestic prices spiraled over 60 percent.

DoC has forwarded the file as it believes it is feasible to export, said Anil Kumar Thakur, director general. According to him, mills have sought permission to export ‘whole red lentil without husk’ which is not consumed in Nepal.

However, a MoCS source rejected the argument saying, “As production is going to decrease this year, pulse export can wreak havoc in the domestic market.” All this happening due to pressure from exporters, he added. According to the Ministry of Agriculture and Cooperatives, pulse production will decrease in Nepal by 30 per cent compared to last due to bad weather in the planting season.

Good decision! I am not a protectionist advocate but making sure that domestic producers first satisfy domestic demand at a time when there is deficit food production in a country where more than 70 percent of the population depend on the agriculture sector for livelihood is a right decision. Chasing after higher prices abroad when there is huge unmet demand in the domestic market is not morally right. Okay, I understand the concept of competition and the essentiality of free markets. But, this situation is different. It requires opting out of that principle until the domestic demand is met, i.e. making sure that prices do not further spiral up and the number of hungry people do not increase.

This is what I wrote last week:

Food crisis is acute in the mid- and far-western regions. In fact, last July, the UN World Food Program (WFP) reported that starvation in these regions is as severe as in Congo and Ethiopia. In rural Nepal, over 600,000 people are facing starvation every day and around two million will potentially experience the same fate in the coming days. The WFP is running out of resources to feed the hungry people. Landless agricultural wage earners are particularly hit hard. Production of major agricultural crops such as paddy, wheat, and pulses has nosedived. The country might face food deficit of over 400,000 metric tons this fiscal year, according to the Ministry of Agriculture & Cooperatives. The most isolated regions are facing high intensity of starvation and food deficit. This problem has to be deal with swiftly and with a decisive food security policy to address not only the immediate causes but also to prevent occurrence of such cases in the long run.

It is encouraging to see the donors and development agencies taking promising steps to address the short-term challenges. However, the same cannot be said about the government’s plan of action. It allowed export of lentil and pulses at a time when the domestic demand is far greater than domestic supply, leading to severe food shortage in the rural areas. It is also importing 50,000 metric tons of wheat from India. The government should have purchased food from the domestic private sector at the prevailing international price and supplied it to the regions facing food shortage. Note that prices of both pulses and lentil are already skyrocketing in the domestic market. In fact, due to supply constraints, prices of most food items are already going up.