Rethinking the role of govt in averting market failures

BY NYASHA MANDEYA

The world’s problems have magnified since the Covid-19 pandemic struck, forcing governments  to scurry for emergency interventions in the advent of imminent market failures. In such circumstances markets have been known not to always deliver outcomes that are just, acceptable or even efficient. This is particularly so in the delivery of social policy that has necessitated government intervention to attend to the glaring disparities between the poor and the rich within countries and between countries as they have been disproportionately affected by this health disaster.

The role of the state is pivotal in the case of a paradigm shift, as heralded by the Second Republic of Zimbabwe, or even more critical, in times of catastrophic events of unimaginable magnitude as the Covid-19 pandemic is wreaking havoc across the globe. This has forced governments to craft emergency measures and devise socio-economic rescue packages. Given the far-reaching consequences such events have on nations, huge financial packages would be required to bankroll effective innovation in social policy. The private sector is incapable of financing such humongous responsibilities that would range from building capacity in health services, developing virtual learning programmes, providing unemployment benefits and rescue packages to businesses affected by the forced closures. Therefore the nature of such public goods impedes private sector involvement, let alone the huge financial outlay which is beyond their reach. As such governments must assume responsibility, requiring huge financial resources, traditionally sourced from taxation.

The issue of public policy relying on taxes to raise revenue is contentious given the adverse economic impact of the emergency measures which have since resulted in many companies totally shutting down as millions become jobless while others have lost considerable income. On the one hand, many economists like Friedman argue that taxes kill initiative to work and stop growth though there is no conclusive data to support this notion. On the contrary, most democracies raise revenues through taxation and there is voluminous economic literature that shows that the rich do not stop working when the tax goes up. A good example is the transition in Switzerland from a system where people paid taxes on the previous two years to a more standard pay as you earn system, where labour supply did not change even in the years where no tax was paid. These mixed views are supported by evidence from around the world where, in 2017 taxes as a percentage of gross domestic product for Denmark was 46% while the US at 27% and most developing countries below 15%. These figures have been drastically reduced with the erosion of the taxable base stemming from the widespread business shutdowns across the globe.

Traditionally, governments have always depended on taxes to fund public policy. In the same vein, taxes are also used to reduce inequality in many countries. However, given the extent of the financial burden the ultra-rich would not be rich enough to finance the entire government. It is therefore inevitable that others like the middle class will also have to pay. The general public is often sceptical of government intervention and therefore reluctant to pay taxes. This scepticism is magnified by the disappearance of the middle class, largely due to unemployment and income losses emanating from the numerous shutdowns in response to the rapid spread of the Covid-19 pandemic. This radical criticism of the role of government may be the biggest single constraint in helping those who need it most.  Why are people so suspicious of governments? Is this approach objective?

This approach is somewhat subjective given that the problem is that there is no substitute for a lot of things that the government does. However, it is the order of the day as many governments impose themselves on things that they should not be doing as  in the transport sector where private players have been known to excel particularly airlines and road transport networks. For instance, in Zimbabwe, the railway transport, which is a key enabler of industry, has been neglected by the government in favour of road transport which requires huge investment. When a hurricane strikes, when a pandemic strikes or when industry shuts down abruptly, usually there is no immediate market solution. Governments exist in part to solve such problems which no other institutions can realistically tackle .

Tax reforms in  most developing countries face stiff resistance arising from the perceived lack of credibility and legitimacy of governments.  In the US, credibility was eroded by the more than 40-year-old unfulfilled promises of the Reagan era while in India, it was eroded by frequent policy boobs and dismal failures in solving problems faced by farmers. Furthermore, in many African countries, bureaucrats and politicians have been portrayed as either bumbling characters or outright corrupt, a view that erodes reputation. Meanwhile efforts to raise revenue through taxation by governments in developing countries have been constrained by poorly performing economies and a sizable informal sector where collection of taxes is next to impossible. Due to poor institutional frameworks, such countries are characterised by high prevalence of tax avoidance and tax evasion. As a result, the twin evils of corruption and wasteful practices have exacerbated their fate, leading experts and qualified professionals to shun working in the public sector.

Transparency has been a popular cure to the ills of corruption in many governments. This is the idea that the workings of government should be available for scrutiny by outsiders such as independent public auditors, media, and other public monitoring agents. However some of these outsiders have limited ability to understand the bigger picture or evaluate how well social objectives are being served.

In addition, putting too many constraints on government officials in the name of transparency can also discourage talent when it is most needed. For example, despite the fact that the US is the world leader in computing, none of the big technology companies chose to bid for contracts to set up the computer system for supporting Obamacare because the checklist was too long , thereby discouraging many big technology firms.

Even though successes in public policy have been recorded with programmes such as the Progressa/Oportunidades of Mexico, effective innovative social policy will depend largely on bridging the divide between disagreement and distrust that has eroded the legitimacy of governments through reforms in governance practices for better social policy design. A middle of the road approach through private sector and public sector partnerships could also mitigate the pitfalls of pure government intervention, leading to better social policy innovation. and implementation.

Mandeya is a Zimbabwean economist based in Canada. These weekly New Horizon articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society  and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. Email: kadenge.zes@gmail.com/ Cell: +263 772 382 852