War to Wealth

Kabul 2012

How does a nation become wealthy? This question has been bothering Economists ever since Adam Smith wrote “Wealth of Nations”.  The debate continues and Public Policy analysts continue to struggle to arrive at a definite answer.

One simplistic yet potent answer though is: The Nation that allows each of its population to contribute and reap corresponding benefits out of its efforts, is for sure on the road to success towards wealth creation. It is easier said than done, as it requires an environment where every talent is nurtured and promoted and where every property right is protected.

According to World Bank report titled, “States and Markets, 2002”: “people rise from poverty when countries act on two pillars of development:  Building a good investment climate in which private entrepreneurs will invest, generate jobs, and produce efficiently, and Empowering poor people and investing in them so that they can participate in economic growth”.  The role of institutions and their efficiency thus is the critical factor.

Strength of institution is dependent upon enviable Political will, handled with immense political maturity. In this context, the Afghanistan Constitution makers have set the road map for economic development. Article 10 provides for market economy and Article 11 says that suitable policies and mechanism be developed towards facilitating creation of a sound economic environment.

What did the Fathers of Constitution mean when they wished a market economy?

Well for sure, a level field for markets to compete for profits. And economic theories say that in the process of competing freely, the resource allocation is efficient benefiting the consumers in having lower price, better quality and even better service. Ideally this would happen if the market place is dominated by hardworking, innovative people. But blame it on human nature, tendency is to take shortcuts. Instead of competing fairly, it can often pay to take the so called smart route, through anti competitive practices such as forming cartels to fix prices for earning those extra wealth in the shortest possible time. Take the case of early 2008. Afghanistan’s main food and energy imports were hit simultaneously by dramatic price increases in international markets. Domestic prices of these products rose substantially, resulting in significant hardships suffered by households. The Government of Afghanistan was found wanting at policy instruments and institutional mechanisms to tackle this unusually severe situation, a situation made worse by the subsequent global financial crisis. Popular perceptions attributed the multiple crises to chronic market deficiencies and in particular to the presence of cartel-like behaviour by a few groups controlling trade and distribution of food and energy products. These perceptions have not been verified, yet the case makes a good ground for the necessity of institutions regulating market behavior and fair competition, to avert such situations in future or lessening its impact wherever possible.

In Afghanistan, where poverty is affecting a large portion of the population, and where the smallest variations in prices have a strong effect on the purchasing power and negative implications on the livelihoods of many such pressing issues such as high (rising) prices of essential goods  need to be dealt with in an informed and preventive manner.

The government’s role of protecting the vulnerable against price shocks; alongside with increased capacity to prevent and /or react to supply constraints of essential goods thus comes into focus.  The public policy responses to such concerns regarding scarcity generally include

·            Building up strategic reserves of key commodities

·            Implementing price controls

·            Establishing consumer cooperatives

·            Anti-hoarding policies and legislation

·            Rationing.

These government centered measures and interaction with the private sector are criticized by those who support a minimal state interference in the economy and a market based approach to dealing with scarcity. The criticisms have been primarily on the grounds that the measures are difficult to implement, may not work well, and are likely to be expensive for the government, and not achieve efficiency of public funds spending. Furthermore, experience shows that strategies such as price controls have often resulted in long term disincentive effects for local production; they have also generally resulted in long term disadvantage to consumers.

Nonetheless, there is a need in Afghanistan to implement measures to shield consumers from the worst consequences of sudden vagaries in supply and efforts at deliberate market manipulation. There is also a need to build up the technical capacity to deal with scarcity and diminish the occurrence of fraud in markets.

On the Policy front, we must therefore ensure that markets behave democratically where none of the players have undue advantage in controlling the market behavior.  And here comes the argument of a self correcting competitive market structure that provides for a level playing field to its participants.

As a general proposition (rule), all citizens benefit from competitive markets, whatever the state of development of the country that they live in, except that the process of intensifying competition may lead to certain part of the population to be immediately benefited, while others are actually penalized, such as firms going out of business and workers losing their jobs. Other policies are needed to deal with the dislocation that is caused by the loss of inefficient firms, and to help redistribute available resources such as human capital, efficiently onto the market. On a micro-economic level, the competition brings about immediate ‘losers’ and ‘winners’ while overall (macro-economic level), the economy definitely benefits from an intensifying competition, availability of more consumer choices, growth and development. The key is thus a fair and regulated distribution of resources, allowing for the positive effects of competition to come into play.

If a country does wish to base its economic development on free-market principles and the process of competition, such as envisioned by the  Article 10 of the Afghanistan Constitution  a much better solution is the adoption of a competition law that prohibits anti-competitive practices .The existence of such a law  shall provides clear and unequivocal signal to all stakeholders: that competition is a benefit to society as a whole and is something that enhances consumer and producer welfare, in a fair and equitable manner.

With a demonstrable sense of certainty for fairness, markets would naturally grow, investments will pour in and the road that ends in war will have a silver lining that will soon glitter as gold. Because the biggest incentive will be profit. In the case of undue increase in prices of essential goods that Afghanistan has experienced, through an effective competition mechanism, it can be ensured that the markets are not being manipulated in any unfair way, such as through collusion and price gouging. 

 Those having doubts about the prescription, if it applies to the state in which Afghanistan in now may like to take note of what the 2001-Nobel Prize winner economist Joseph Stiglitz said “Strong competition policy is not just a luxury to be enjoyed by rich countries, but a real necessity for those striving to create democratic market economies”. 

Published: Afghanistan Times; 20 September 2012