Government and markets

The new government is inundated with long lists of the things which people want it to do. Some lists contain a degree of prioritisation. But others do not prioritise actions. Their authors seem to have an unrealistic view of what a government can do.

A good strategy is not just about the actions one is planning to take. A good strategy should also list the things one is not going to do. In this note, I write about one such thing. I argue that the government should not interfere too much in the working of markets.

Bangladesh's economy is a market economy. This market economy has evolved over time, acquiring many dimensions. It is a complex, multi-layered entity. It is also well integrated with global markets. Thus, the increasing complexity of global markets feeds into Bangladesh's markets, making these even more complex.

To deal with this market, the government needs to understand the complexities. It must have a good idea of the structure of different markets, the players operating in each, their inter-relationships and behavioral tendencies. It must also understand how expectations are formed in the market.

A lot of what happens in the market has to do with perceptions and expectations. For example, market players do not act based only on current or past prices. They also consider future prices. For example, traders may not release products from their stocks if they expect prices to go up. By contrast, if they believe that supply will expand soon, they may release the stocks before the expected new supplies arrive and dampen prices. Note that, in both cases, it is expectations of the future that affect behaviour, not just what is happening at present.   

Unfortunately, governments often do not have the patience to learn how a market works. They see a problem in a market and jump into action. Often the culprit is inflation. When prices go up, the government steps in. Magistrates are sent to raid stores and go-downs; arrests are made, often with a horde of TV cameras present. Lists are produced of the maximum price a trader can set; people are sent out to monitor whether the traders are complying.

These actions are ego-boosting. Government officers have a feeling that they have been tough. It is a good feeling. But being tough does not mean you are being effective. All these actions often lead to nothing. Every year, during Ramadhan, we are reminded of this.

And yet, the government goes on interfering with the market. After all, they need to show action. The temptation is stronger for new governments who are often desperate to show that they are in charge. 

But markets can't be interfered with easily. Markets have their own logic, the logic of demand and supply, and that of expectations. One can steer the market and regulate it. In fact, market regulation is needed to make markets function in the interests of society. But it must be done smartly, based on adequate information. Smart regulation and control are not the same thing.    

How do you steer the market? You do so by talking to as many market players as you can. You talk to them frequently and inclusively. In other words, you don't consult only a few powerful players because they may not have the incentive to give you the true picture.

One of the less-appreciated aspects of a market is that it is a very valuable source of information on what is going on in the economy. For example, the price of a good or service sold in the market is not entirely the result of the decisions of a single person, i.e., the trader, although at first glance it may appear to be so. It reflects, at least implicitly, what many others in the market are thinking, others with whom the trader is interacting in some way.

Thus, even what a single trader in the market tells you is based on the information held by many. Imagine, then, how much information you can get by talking intelligently to dozens of market players.

The market is like a huge statistical agency. But its data does not come out in nicely compiled reports or excel sheets. One must know how to uncover the secrets of the market.

That requires patient enquiry, not a high-handed show of muscle.

Syed Akhtar Mahmood is an economist who previously worked for an international development organisation.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.