Tough politics but loose economics

Nizam Ahmad offers a free market prescription for fixing what ails the nation

The more laws are promulgated, the more thieves and bandits there will be - Lao-Tzu

The last president of the Soviet Union (USSR), Mikhail Gorbachev, before it disintegrated and became Russia again after 70 years, adopted radical reforms for freedom and democracy, but his economic policies led to the final collapse of the USSR.

Murray Rothbard (1926-1995) of the Austrian school of economics, in his piece "How and How Not to De-socialize," wrote that Gorbachev adopted severe economic measures as crackdowns on the "villains of the black market." USSR was then plagued with underground markets, as laws were too restrictive.

According to Rothbard, "the black marketeers are not villains. The black market is simply the market, but declared illegal." By the end of the 1980s, severe shortages of basic food supplies in the USSR led to more government regulations, like the rationing of food. Gorbachev's harsh economic policies caused the economic crisis, prolonged it, and led to the fall of the USSR, and the communist empire.

Gorbachev's political liberalisation meant taking strong action against the opponents of reform and democracy, but the tough tactics could not revive the economy, and, instead, worsened people's economic condition. Gorbachev misunderstood natural economic activities and personal economic liberty to fulfil economic want as a form of defiance to his authority. He was wrong, as good economies do not function freely under coercion, but dishonestly.

The high consumer prices in Bangladesh may not be due to shortages or restrictions, but there are similarities in policies that have largely caused today's unstoppable upward trend in market prices. The initial terrorisation of the economy and the market, of seizure of luxury properties like cars, the demolition of established bazaars, the costly city

The market, unlike political organisations, is far more intricate -- it is a combination of labour, wants, choices, and exchanges that no government or authority can control. It is not like removing a dictator so that a process of democracy can begin, although not instantly. The removal of a politician does not affect the economy like the removal of an industrialist, a grocer, or a trader. Economic misdeeds will not vanish, but a country may, by arresting defaulters or seizing luxury cars; unless we identify what causes such wrongs, and begin to address them.

I am not defending untaxed wealth or ill-gotten wealth, but the method of tackling economic transgression has been hot-headed and hasty. The government's handling of political problems is almost a fairy tale, and one could never imagine that the fall of the rich and the mighty would ever happen -- but to make it real the government must rethink its economic methods or lose it all.

Transparency International (TI), World Bank, and many other organisations have been indexing and discussing corruption for many years, but none of them offered suggestions on how to reduce it (other than crackdowns) or why it happens. Like communists, we have relearned, by the persistent cataloguing of corruption, to abhor wealth and scorn those who possess it. We now assume that business and money are twin evils -- a profession of the unenlightened and the dishonest. The civil society, TI, and NGOs have spitefully drawn a picture of dishonest people and black money holders, but failed to identify the bad laws and bad policies that produce them.

Common business sense says that high taxes and a restrictive economy are the breeding grounds for tax evasion, corruption, forgery, and black markets. Indeed, the absence of Rule of Law could not stop wrongdoings, as it may now, but no Law is workable in the long-run if public policies are wrong.

It is a proven fact that a government's involvement in economic activities is most inefficient and the most corrupt method of economic development, yet the Bangladesh government, supported by academics and now by many think tanks, pursues this unworkable model of development because a few international institutions endorse it.

There are many reasons for a price rise, but the increase in the stock of money is the foremost. Cracking down on spurious consumer goods may have pushed prices up as well, as sellers and producers will no longer use spurious ingredients or preservatives. Fish without formalin and with formalin cannot be the same price -- the price for formalin-free fish will be higher.

Nonetheless, the biggest reason for today's upward movement in prices is the increase in the stock of money, largely brought about by the remittances of nearly $5 billion a year in the last couple of years. It is like after Columbus discovering Americas (1492) and Cortez invading Mexico (1519) that an influx of precious metals began to enter Spain, reversing the trend of lower prices in Spain, and in Europe, that had static metals production used as currencies. The sudden increase in stock of metals increased prices and Spain began to collapse as an empire.

Unless the people of Bangladesh, not the government (the rulers as in the past), enjoy the freedom and the security to employ or spend their dollars as they choose, the market prices and economic mayhem would continue to deteriorate further. The blame on hoarders, on evil syndicates, or on foreign factors, is nonsensical. Our academics seem ignorant about classical market processes, and as former socialists and now believers in the gigantic role of the government, that they would direct and advise, are out to damage the concept of economic liberalisation.

It is unfortunate that the government controlled Central Bank do not mention the increased supply of taka, its continued loss in value, but blame the international oil price hike, hoardings, cartels, syndicates, and such "blame the others" for high prices. Faisal Salauddin correctly addressed this issue of increased money stock for increased prices in his article "Where is Bangladesh Bank in the Inflation Debate" in The Daily Star of June 14.

Only radical financial liberalisation can bring back monetary stability hence stable market prices. First, the government must stop releasing or printing equivalent taka for every dollar remitted. People must have the privilege to retain what is theirs. A holder of a dollar would be far more cautious in spending a dollar than he would if holding few takas. With less takas in circulation or released by the Central Bank in exchange of a dollar, the stock of money would cease to increase or at least at today's rate. The exchange of dollars for takas also produces a multiplier effect in a "fractional-reserve" banking system where a certain percentage of reserves are required to create money by banks that increases the stock of money further hence prices.

Bangladesh need not wait for international authorities to approve the liberalisation of our taka or in stopping the circulation of dollars or of any competing foreign currency in our economy. The people must have the freedom to choose their currency of their choice. The country would not collapse by this measure but the economy would become stronger, robust, and prosperous. It will boost the confidence of traders, importer, or an investor, as policies in the country are pragmatic not Utopian, or from the ivory towers dressed in mathematical vernacular.

We are sovereign and can take examples of other governments as in Malaysia, US, UK, and other EU governments, all of whom have altered their monetary and financial systems as and when it had suited them although there is lot more they can do, and someday they may when their people will demand it.

There can be no fixed mantra of money for all nor must we wait for some authority's consent to go the way that suits us, or in legalising what is already in practice but in black markets.

The Republic of Panama has no central bank yet thrives as a successful economy. Malaysia overruled IMF and still has a vibrant economy. The pound survives in Britain despite EU going euro. The US broke off the dollar link to gold and became bankrupt under Nixon, which should have ended IMF yet it lingers on with devastating effects on poor countries.

To bring down corruption, a whole scale liberalisation of the economy is necessary. Follow the Chinese model that without World Bank and IMF policy guidelines unleashed tough politics but loose economics. They learnt from Hong Kong the simple rules of economics and are now a giant Hong Kong itself -- a world economic leader after liberalised economics not controls. It has bypassed Russia and has survived as one China mainly because of its loose economics nothing else.

Liberalisation would include simplification and lowering of VAT, tax, tariffs, and regulations not the increase of it. It would mean a small government but well paid employees to keep them off corruption. It will enable an environment for a voluntary exchange of goods, services, and money between free people of free nations, but it will remain ever vigilant to seize frauds, raid forgeries, but to guard properties.

Why did prices of sugar increase is not the government's business since intervention and planning, or supplying of sugar, or the storing of it will only distort and destabilise the market. Government's sugar policies of permitting local sugar and edible oil refineries, of imports by TCB, and others have produced many impure sugar and oil kings that a free market would have levelled.

Bangladesh's present handling of the economy reminiscences the Gorbachev era that brought immense hope with his Perestroika and Glasnost but all ruined by the might of KGB to hunt down unlawful traders of US made Levi's jeans in the black markets of Moscow. Bangladesh's independence in 1971 brought immense hope politically but wide scale-government domination of the economy pursued by academics crippled the economy, and ended up tragically ousting Bangabandhu himself.

To retain the political benefits that the country has again achieved, the government must stay off the economy, allow market forces to work, discard drives against hoarding, stem the Central Bank to create money, and dump the economic ideology of government doing all and knowing all.

Nizam Ahmad is Director, Liberal Bangla, UK.