INTRODUCTION
For over many decades now, many developing nations and countries have passionately pursued different types of policies and programmes in their quest to attain development. Many panaceas to underdevelopment have been suggested and implemented. These panaceas have all inspired hope and enthusiasm to developing countries. However, many of these panaceas have apparently been rendered inadequate, irrelevant and inefficient to the needs of developing countries since many of them have been bulldozed by the developed world on Third World countries without adequately looking at the economic, political, and geographical realities of these Third World nations.
One of the development approaches that have wrongly been bulldozed by the developed countries on developing countries through agents like the World Bank and the International Monetary Fund (IMF) is the market thesis approach. According to Chilowa (1997:124) “market thesis approach rests on the belief that the unfettered operation of the market,” does the greatest good in spurring a country’s economic growth and development. The market thesis approach, sometimes known as the “free market economy” is mainly of the view that the state is not supposed to interfere or play a leading role in development but the market should because the market can achieve allocative efficiency.
The purpose of this paper is to explain, using clear case studies of Malawi and Zimbabwe, how the pursuance of market thesis approaches to development can be inappropriate, detrimental and a misplaced policy prescription to developing countries. In what follows, I argue that for a country striving for economic development and a better position in the international economy in the long run, the state-led approach or the mixed economy approach seems more advisable than the market thesis approach. Admittedly, the state-led approach does also present risks in many ways, but the prudent implementation of state-led policies presents a rapid, more stable, and effective way to qualitatively change the economic position of a country, marking the transition from a “developing” to a “middle-income” or to a “newly industrialized” state than the market thesis. The argument is built upon three observations. First, developing countries face many challenges which cannot be settled through voluntary transactions. Second, even in mature market economies, state interventions are indispensable for remedying market irrationalities and for organizing efficient markets. Third, market institutions cannot be properly installed without the support of the state. As for the justification of case studies selection, Malawi and Zimbabwe have been chosen because, for one thing, they are both significant developing countries and for another, they have both been involved in the implementation of the market based policy prescriptions in the form the Structural Adjustment Programmes (SAPs) that were highly advocated by IMF and the World Bank as a prerequisite of getting aid from these institutions.
THE MARKET THESIS APPROACH
At the outset, it is important to look at the elements of the free-market economy before analyzing how it is a misplaced policy prescription for developing countries. According to Harrigan (2001:28), “the market oriented strategy to development is characterized by greater reliance on markets…in providing signals for allocation…with industrial and manufacturing growth determined by undistorted market forces...” Market thesis proponents argue that by “permitting free markets to flourish, privatizing State Owned Enterprises (SOEs), promoting free trade and export expansion, welcoming investors from developed countries, and eliminating the plethora of government regulations and price distortions…,both economic efficiency and growth will be stimulated” (Todaro, 1994:85). Essentially, their argument is that the markets are supposed to be turned by the forces of demand and supply. These free market proponents further take a swipe at various government subsidies on goods and services in the sense that they bring market inefficiencies. Furthermore, according to them, the state is not supposed to be involved in development because of capital flights. They say the state can frustrate the operations of the market if it is heavily involved in it. In their own words, they say the state can create a “rent seeking” society. These rent seeking societies influence the state policies in order to benefit themselves at the expense of public goals. Market thesis advocates, therefore, claim that the free-market economy, “leads to higher export and GDP growth rates, a healthy balance of payments, more rapid expansion of labour-intensive industrial sector resulting from forward and backward linkages with the agricultural sector” (Harrigan, 2001:28)
ASSESSING APPLICABILITY
However, while the free market economy, in curricula development literature looks good on paper, in practice and more especially to developing countries like Malawi and Zimbabwe, the problems of economic conversion to private markets are serious and very often intractable. In fact, Todaro (1994:586) notes that “although some economists may blithely assume an easy transition to fully fledged market economies, the fact remains that a well functioning market system requires special social, institutional, legal and cultural preconditions often absent in Third World nations.” Developing countries are characterized by fraud, corruption and monopoly which do not disappear by the wave of a magic neoclassical wand (ibid). Furthermore, for an economy to be market based, and to grow successfully to that effect, it needs perfect market economic conditions such as law and order, free flow of information, security of persons and property, separation of powers, rule of law, accountability and transparency and numerous others. Many developing countries, to say the least, are devoid of these conditions and therefore, market-thesis approaches cannot be the best policy prescription. In Zimbabwe, for example, the legal and political environments are in shambles (BBC News, 2009). The country is suffering from a serious political instability coupled with the continuous suppression of democracy and human rights, corruption, the muzzling of the press and the media, and the gagging of the civil society—the providers of checks and balances to government. Economically, macroeconomic instability has reached a critical point, with the country having the highest inflation rate in the world. Zimbabwe has also high interest rates, serious foreign exchange shortages, increasing government debt, an overvalued and unstable national currency and higher levels of unemployment (Lee, 2003:64). There can surely never be economic development in a country where there is this political and economic instability even when this country can be forced to liberalize its economy.
Furthermore, it should be noted that “markets in developing countries are permeated by imperfections of structure and operation” (Todaro, 1994:568). Commodity and factor markets are often badly organized, and the existence of distorted prices often means that producers and consumers are responding to economic signals and incentives that are a poor reflection of the real cost to society of these goods, services and resources. Governments, therefore, have an important role to play integrating markets and modifying prices (ibid). Todaro (1994:568) also notes that “the failure of the market to price factors of production correctly sometimes leads to gross disparities between social and private valuations of alternative investment projects. Therefore, in the absence of governmental interference, the market is said to lead to a misallocation of present and future resources or to an allocation that may not be in the best long-run social interests. This is sometimes known as market failure. Market failures here refer to situations in which voluntary transactions do not result in allocative efficiency (Shaoguang, 1994: 3).
Perhaps the most common failure of the market that exists in developing countries is the information failure and uncertainty that most producers and consumers face. It should perhaps be noted here that market efficiency requires that information be made accessible to all who want it. However, private producers of information have interest in keeping the information for their own exclusive consumption. For this reason, the private market is unlikely to provide an adequate supply of information (Shaoguang, 1994: 3 quoting Stiglitz, 1986). This is especially true in most developing countries where a majority of people do not know how to read and write and there is lack of equal access to education, credit, land, positions of decision making and economic opportunities due to information failure. Thus in many developing countries, producers are often unsure about the size of local markets, the presence of other producers, the availability of inputs, both domestic and imported (Todaro, 1994:588). Under such circumstances, which obviously are prevalent in developing countries, profit and utility maximizing behavior may be based on wrong assumption and hence not lead to an efficient allocation of resources (ibid).
In Malawi, for example, in 2008 it was estimated that 58 per cent of females and 28 per cent of males are illiterate (CIDA, 2008:7). This low educational standard not only makes Malawians ill-suited for manufacturing employment but also put them at a disadvantage for agriculture. Surveys have found that the little educated poor are not well-equipped to grow crops needing intensive education like tobacco. These intensive education barriers prevent rural poorer farmers, largely women, from accessing economic opportunities which might be brought by liberalizations in the agriculture sector. The government intervention is therefore needed in remedying these information failures. Given the asymmetric distribution of information between the producers and consumers, for instance, the state may use regulations to protect farmers’ interests. In addition, the state may offset externalities in the area of information by collecting, processing and disseminating crucial information (e. g information about foreign markets) to those who need it in the national economies of developing countries (Shaoguang, 1994: 3).
A second imperfection in the market is the lack of effective competition. Todaro (1994:589) observes that “in most developing countries, the existence of imperfect competition is widespread, particularly in the industrial sector, where heavy concentrations of monopoly power are usually found.” He further notes that “this situation results from the economies of scale that often characterize modern industries coupled with the relatively small market for manufactured goods that limits the number of films that can compete” (ibid). The result is an inefficient allocation of resources, with output lower and prices higher than under perfect competition. The government must therefore often intervene to limit monopoly power by regulating the size of firms or controlling prices. In Malawi, for example, the industrial sector is only dominated by a few firms more evidently in the telecommunication sector where ZAIN MALAWI (now Bharti Airtel) and TNM Malawi have enjoyed monopolistic markets which has resulted into these companies changing and charging their tariffs at will. Such a structure, like this one, hides inefficiency and limits the ability to compete both locally and globally.
Another major imperfection in Third World markets is the presence of substantial externalities. Many goods may have a high social value that is not reflected in their market price (Todaro, 1994589). Because such goods, such as education and health services, may be provided at a price below their cost or even free, the private sector has no incentive to produce them. Thus the government must often be responsible for providing these goods in order to ensure a minimum of welfare. Government also has a role in developing countries to provide infrastructure for rapid economic maneuvers. An economy is unlikely to take off unless its infrastructure is sound. However, in most developing countries, the level of infrastructure leaves a lot to be desired. It is therefore detrimental for this responsibility of building infrastructure to be left in the hands of the private sector, for they may find the provision of infrastructure not profitable. The government must also assist in the creation of human capital through education and training of labour force so that labour productivity will increase.
The calling for the abolition of subsidies in developing countries—where many people die of hunger every year— is to say the least, ridiculous and at worst “suicidal” and it defeats the whole purpose of development. Development should not be defined in economic terms only, but should encompass all human needs and increase human choices. Generally speaking, a successful program of development has to aim at strengthening a country’s agriculture, alleviating poverty, improving income distribution and building capabilities that enable individuals and groups to live meaningful and happy lives. In Malawi, for example, high fertilizer prices are mainly due to high transportation costs and frequent exchange rate adjustments, hence the argument for government subsidy. Lessons can be drawn from the 1987 case where Malawi was forced to abolish its fertilizer subsidy program by IMF/WB and this resulted in the maize price ratio to skyrocket rapidly and made the country to suffer from food insecurity and eventually the government revamped the program two years later after noting the withdraw ramifications (Chilowa, 1997, quoting Lele, 1990).
STRUCURAL ADJUSTMENT PROGRAMMES: LESSONS LEARNT
As it was said in the introduction, Malawi and Zimbabwe are among a group of developing countries that implemented the IMF/World Bank Structural Adjustment Programmes (SAPs) in an attempt to revamp their ailing economies. SAPs, broadly speaking, were a group of market thesis prescriptions as they demanded developing countries to remove governmental subsidies, privatize public entities, opening up to foreign investment, devaluation of currencies, liberalization of trade, elimination of price controls and many other prescriptions. All these were done with an aim of resolving balance of payments problems of developing countries and eventually spurring economic growth and development.
However, lessons learnt from many developing countries, especially these countries in question is that, far from helping to resolve the balance of payments problems, SAPs have actually worsened the debt problems and have had little impact in accelerating economic growth and development. In Malawi, for example, a major failure of SAPs is that to date Malawi’s export base has not diversified as the country is still dependent on tobacco for its foreign exchange earnings (Chilowa, 1997:59). Notably, the real Gross Domestic Product (GDP) fell by 3.3 %, 7.9% and 12.4% in 1988, 1991 and 1994 respectively (Chilowa, 1997:43). Zimbabwe’s experience under SAP between the same periods as above conforms to the above pattern. As noted by Mlambo (1997:53), “during this period, Zimbabwe’s external debt increased from $2 billion in 1991 to $4 billion in 1992.” By beginning of 1995, the debt had risen to over $5 billion and amounted to 94% of the country’s GDP as compared to only 45% in 1989 (ibid). The above examples show quite clearly that SAPS do not help resolve borrowing countries balance of payments on debt problems but actually worsen them.
SAPS, in the name of privatization, also led many people to lose their jobs thereby raising the cost of living in these countries in question. In Malawi, for example, the privatization of Malawi Telecommunications Limited (MTL) led to the massive job losses of about 300 workers in 2002 (Bamusi, 2002:4). Mafumu Textiles and David Whitehead and Sons nullified over 10, 000 jobs between them in 2001 (ibid). However, it should be noted that employment plays a vital role in social and human development as it empowers people economically by giving them the purchasing power over goods and services, and socially by offering a productive role that enhances people’s dignity and self-esteem.
The problems that SAPS brought could be summarized as follows: They brought price instability, they led to macro-economic instability, decline in manufacturing sectors, food insecurity, unemployment, increased economic hardships and increased poverty and inequality (Chilowa, 1997; Mlambo, 1997; Harrigan, 2001, Kohli, 2007).
The poor performance of Malawi and Zimbabwe and other developing countries’ economies under SAPs casts serious doubts on the efficacy of market based reforms and reinforces 1989 findings of the United Nations Economic Commission for Africa (UNECA) which showed that, between 1980 and 1987, non-adjusting sub-Saharan Africa countries grew, while those of strong adjusters actually declined (Mlambo, 1997:4).
FINAL REMARKS
Finally, it should be noted that a market economy cannot take place in a vacuum. Market transactions take place within the framework of rules and require some authority to enforce them. This authority is to say without fear of contradiction, the government. Furthermore, this essay has shown, as demonstrated by the cited examples, that the market is not a panacea for all socio-economic problems that developing countries are facing neither is it an immediate turn on for economic development. Developing countries face numerous challenges which cannot be settled through voluntary market transactions. Moreover, the market is not an end in itself. Rather, it is just a means to promote social and individual welfare. For this reason, the potential role of non-market means, including state intervention, should neither be dismissed nor underestimated. Finally, the take home proposition that this essay puts forward is that the state and market mechanism should be in tandem in developing countries and should play complementary roles to development.
BIBLIOGRAPHY
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