Mitigating Market and Government Failure

Mr. Malaluan, a lawyer with an academic background in economics, is the corporate secretary of Action for Economic Reforms, and a convener of the Access to Information Network. This article came out in the BusinessWorld on October 20, 2008, pages S1/4 to S1/5.

The market, left to itself, facilitates the achievement of great things. The peculiar ability of the market mechanism to bring about economic growth and progress has been a central observation of Adam Smith in his popular treatise An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776. Such ability, he posited, finds root in the human propensity to exchange with one another, not out of benevolence but out of their regard for their self-interest, and in the process gives rise to division of labor.

It is this division of labor, as it results in improved expertise, time efficiencies, and invention of new technology, that allows the ever-increasing quantity of work that can be done by the same number of people. For society as a whole, this means ever-greater choices and conveniences at the least cost. Thus, although intending only his own gain, man in the course of market-facilitated exchange is, in the words of Smith, “led by an invisible hand” to at the same time promote the interest of society.

The observation of the positive social consequence of the division of labor and of exchange may have been expressed elsewhere and in a much earlier time. Wen-tzu, an elaboration of teachings attributed to the ancient sage Lao-tzu, stated in part:

“In ancient times, when the sage-king Yao governed the land, he guided the people in such a way that those who lived by the water fished, those who lived in the forests gathered, those who lived in the valleys herded, and those who lived on high land tilled the soil. Their habitats where suited to their occupations, their occupations were suited to their tools, and their tools were suited to their resources….

“Thus the people were able to use what they had to exchange for what they lacked, using their skills in exchange for what they could not do themselves. Therefore those who rebelled were few, while those who followed were many.”

Such was ancient free-market policy.

But the market, left to itself, has its social drawbacks. From society’s perspective a free market does not always allocate resources efficiently. Instances of market failures include: the failure to provide key public goods that society needs (think lack of infrastructure); the over-production of goods or activities with negative externalities borne by society (think climate change); and the existence of market power in certain goods and activities (think Meralco). Also, market players do not always behave efficiently, sometimes with huge social costs (think Asian crisis and US financial crisis; think Maynilad). Markets are also often unable to correct distributional inequalities that society may want to narrow (think parts of Mindanao). Finally, there is no guarantee that the promise of sustained growth and development will be fulfilled (think Philippines).

These market failures give occasion for government to intervene in the market in the name of public interest, such as through the provision of public goods, the regulation of various markets and activities, the imposition of fees and taxes or the grant of subsidies, and the introduction of redistributive policies. But we Filipinos know only too well how government interventions to overcome market failure often fail. Think large-scale corruption, losing government-owned or government-controlled corporations, and white elephants whose costs are ultimately borne by society even for generations to come.

In the face of the reality of failures in both government and market, the social debate has been between freeing the markets versus introducing more government interventions. Depending on one’s perspective, he may view either the free market or the government as the solution to the failing of the other.

But to go beyond the government versus market discourse, it may be worthwhile to explore non-governmental, non-market institutions, mechanisms or initiatives that can mitigate both government and market failures, to the benefit of all.

One such mechanism is public access to information held by government. The mitigating effects of public access to government information on government failures are easy to appreciate. For one, a free flow of information results in better government policies. It enhances the capacity of the public to provide timely feedback to government, promotes informed debate among stakeholders, and builds consensus around policy objectives and design.

For another, a free flow of information is a vital safeguard against corruption and rent seeking. Secrecy in government gives public officials and rent seekers alike a wide room for maneuver and greater cover for evidence of corruption (think Romy Neri invoking executive privilege). In contrast, transparency exposes the vested interests involved and leads to the identification of corrupt officials.

Access to government information also helps mitigate market failures. The availability of information on rules and government policies, programs, and resource allocation enables the private sector to make sound long-term economic decisions.

Private sector participation in publicly critical activities should be covered by access to information rights as well. In critical enterprises such as electricity and water, public access to relevant information can help guard against undue exercise of market power.

Our access to information held by government is guaranteed by no less than the Constitution. Section 7, Article III (Bill of Rights), states that the right of the people to information on matters of public concern shall be recognized. Unfortunately, while our Supreme Court has confirmed that this provision is self-executing, it is far from complete. Its effective implementation has for the past two decades suffered from the lack of the necessary substantive and procedural details that only the legislature can provide.

The Action for Economic Reforms (AER), along with members of the Access to Information Network (ATIN), has long been working for the enactment of a Freedom of Information law. They have come closer to fulfilling this advocacy when allies in Congress led by Representative Erin Tañada were able to push the early approval of the bill in the Lower House. The House approved on third reading House Bill 3732, or the Freedom of Information Act of 2008, on12 May 2008.

What remains to be done is for the Senate to pass its counterpart measure. We hope that Senator Bong Revilla, chairman of the Senate Committee on Public Information and Mass Media, will start hearings on the measure at the soonest.

Another possible mechanism to address government or market failures is the harnessing by civil society of a range of human values beyond self-interest, such as the bayanihan spirit. An example is the Gawad Kalinga. A non-market, non-government initiative, it undertakes to systematically provide key goods that the government and the market have otherwise underprovided, in particular housing for the poorest. Gawad Kalinga is now branching out to provision of education and health within its communities.

To be sure, there is no substitute for directly addressing the foundations of bad Philippine government. But as the problem of bad government appears intractable at present, the institutions, mechanisms and initiatives I describe at least allow us to explore alternatives beyond surrendering our social fate completely to the workings of the market.

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