How free is free market?

Furthermore, the arguments that market protects the interest of individuals is limited, for such individuals are not guaranteed access to the market as buyers since their needs formulated as demand is not backed by purchasing power to make it an effective demand. Markets, in fact, exclude a significant portion of the people, particularly the poor from the process of development. Thus people experience exclusion from the market if they have neither assets nor capabilities. It will be foolish to think that those who propagate the superiority of market forces do not understand inherent weakness of their argument. They do. Not only that. In point of fact they, particularly USA practices domestically something different from what they preach.

Example 1: Federal Deposit Insurance Corporation, a US government owned institution, provides insurance cover to individual depositors up to $100,000.00. This practice has been going on since the last Great Depression even though the banks are supposed to compete in free market by swimming and sinking.

Tap here to add The Daily Star as a trusted source

Example 2: Under Community Reimbursement Act and Equal Opportunity Act, passed by US Government, banks are legally required to extend credit to specific areas and specific group of people; when under free market doctrine, banks are supposed to act as free agents in investing their resources.

Example 3: Under another law, Small Business Administration helps and provides credit to small-scale undertakings. It also provides counseling to them on business management, market study, upgrading the quality of products and arranges that some slices of big government and defence contracts are awarded to such undertaking.

Example 4: Under Higher Education Act, United States Government provides loans to college students and their parents at low rates of interest to finance their studies.

Example 5: Under a Minority Deposit Programme, US Treasury Department officially designates certain financial institutions as minority controlled and encourages governments, corporations to deposit money with them. These institutions in turn make loans to members of the minority community who do not have ready access to mainstream banking system.

Example 6: Huge subsidies are given to American farmers to grow agricultural crops despite their continued inability to face the competitive forces in the market. Much to the detriment of interest of farmers in other poor countries struggling hard to survive, despite the fact that they are able to produce the same at internationally competitive price in the free market.

Example 7: When Pennsylvania Railroad collapsed US Government intervened to avert a crisis in railroad communication and by involving its funds brought Amtrak to existence which is still running with subsidy provided by the government year after year.

Example 8: Long Term Capital Management Limited owned by a small group of very rich people and functioning outside the ambit of any regulatory oversight manages a big hedge fund. At the beginning of 1998 with the capital of just $4.8 billion LTCM managed balance sheet positions totaling about $120 billion implying an average of 25 times its capital. At the sametime it was managing total gross national off-balance sheet derivative contracts amounting to about $1.3 trillion. In the wake of East Asian financial crisis, it was caught up in a very messy position of big mismatch between its receivables and payables. It was sure to go to liquidation. But it was bailed out and its shareholders were rescued by the intervention of US Treasury and Federal Reserve Bank of New York. Critics saw this rescue operation as unwise government intervention into a crisis that market should have resolved.

The above instances have been cited not to suggest that those interventions were inherently bad or not useful, but to demonstrate the vanilla fact that, unlike virgin olive oil, there is no virgin free market anywhere in the world, US included as advocated by Washington Consensus. It is well understood why US government has to take such measures to help those who are vulnerable to the evils of market forces.

But the question that is often asked is: Why then similar measures taken by poorer countries for the same reasons are often being disapproved by Washington Consensus? Taka for example Bangladesh. She has been asked by the IMF and the World Bank who administer Washington Consensus reform programme to undertake extensive financial structure reform, further expedite the market forces in the economy, open it borders for free trade and free flow of foreign funds, develop capital market improve governance of the country and eliminate corruption immediately. Each one of them is a laudable move by itself. But it is not possible to take all these measures together without regard to the interest of the poor, the vulnerable and those who do not have access to the market. Also, such measures taken without any consideration for pace and sequence may give rise to instability and resentment in the society and hurt the larger interest of the country and may eventually lead to "regime change" for much worse ones.

Is it not true that successful reforms involving establishment of three market system in any country must arise and evolve within the prevailing political culture promising the nation a renewal of established values and not their sudden repeal? Whey US and other developed countries do not understand that a society can not jump out of its history? Why they do not draw a lesson from their failed efforts to suddenly privatise the economies of Russia, East European countries after demise of command economy there? Is it not true that free market economy that we witness in America today is really something that has grown over a period of time and this has been possible largely because the country, in the beginning, has been endowed with enormous natural resources and supply of abundant slave labour? Is it not true that in political sphere too, USA, without being burdened with any baggage of history, could embrace political democracy and Thomeas Jefferson and his compatriots could start with a clean slate to write the Declaration of Independence containing "laws of nature" inalienable rights and notion of the "consent of the governed"? Where are those privileges to the poorer countries who, burdened with political, economic and cultural constraints are asked to implant free market, free democracy without loss of time?

We must admit that free market is neither a virtue nor a necessity. It should be embraced only to the extent it brings wellbeing to the people and as much as it is acceptable to the people at any point of time. This is a political decision, which should not be left solely to the technicians. It must be clearly understood that free market may be a good example of oxymoron but is a bad prescription for implementation indiscriminately.

Before concluding, here is an excerpt from the editorial in Washington Post of July 5, 2003, "Once against the administration (US) has broadcast the message that its own ideological agenda is more important than its global alliances and bullying is the best means to get its way."

AKN Ahmed is the former Governor of Bangladesh Bank

Next Friday: How democratic is democracy?