THE WELFARE STATE: NEED FOR A KISS OF CHANGE (PART VI): Choice between Government Interventions and the Free Market

Market failures do not necessarily justify government interventions. The free market and governments can both be inefficient in a number of areas that have to do with the welfare of the people. In fact, government failures in certain areas could be more damaging in many respects. The case for government intervention versus the free market therefore must be made on the basis of which of the two has a comparative advantage in which area.
What are the characteristics that make the government special?
Governments are the only socio-political and economic organizations that have universal membership. They have the power of compulsion over the members and are thus inherently capable of forcing individuals and institutions to abide by laws and adhere to rules and regulations that are in the best interests of society. Governments have a multiplicity of concerns: economic growth, employment, equity and many other political considerations, including foreign policy.
The flip side is that governments are huge and powerful monopolies; they have the power of compulsion to restrict or eliminate competition in their areas of activities (like, for instance, full-fledged privately owned TV-Stations to compete with Government-owned TV-Station). This is an aspect of the Welfare States that is well documented. The power of compulsion of government, if not kept in check, leads to favouritism, arbitrary and discriminatory treatment of individuals on a wide scale. Moreover, Governments have little or no incentive to use resources efficiently; they don’t respond to consumer needs. Nor do they actively engage in innovation, except the ones that are politically motivated. (For instance, in the days when free enterprise in the field of education on a large scale co-existed with government-owned educational institutions, the New Eton College, Rose Hill, a private enterprise led by the respected, late G. Vencatasamy and his sons, was the first to introduce in Mauritius subjects like Additional Mathematics, Economics, Accounts, legal studies etc in the early 1960s – an initiative that had necessitated lots of muscle-flexing for obtaining approval from the Ministry of Education, the regulatory authority - whilst government-owned colleges were busy teaching Latin and Greek amongst other subjects, the useful ones. Which bank first introduced the ATM in Mauritius: a private sector bank or a public sector bank? You may have correctly guessed already. Which one between the government-owned radio station and the private radio stations is innovative, efficient and responsive to listeners’ preferences? Readers have the answer. The list is long.) The power of compulsion and universal membership give governments the latitude and flexibility to spend on welfare as they feel fit; it’s not uncommon to see pressure groups often rising up out of nowhere to demand wasteful welfare spending. Because the government is expected to have an equitable employment policy ‘hiring and firing constraints’ make it difficult to alter the composition of the civil service in response to changing economic circumstances and challenges or to fire incompetent employees. It’s a distinctive feature that encourages rent-seeking mentality in civil service.
In contrast, as Adam Smith said over 250 years ago, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” By “regard to their own interest” he meant their profit motives. The free market is guided by profit-making only; it’s not a school of social ethics or of political responsibility. But the free market, despite this remark, is tremendously helpful in many ways (as mentioned in the introductory part of this essay) to society.
In sum, the free market failures that call for government interventions also give it the incentive to knock out competition (for instance, from private television), supply services inefficiently, create bureaucratic red-tape, make employment and wages in government sector unresponsive to changing public needs and preferences, encourage wasteful rent-seeking activities, amongst others. Tax burden goes up as more welfare services are offered by the government and people are left with less disposable income. These features have to be contrasted with the sole objective of profit motive. But the free enterprise stands for greater efficiency in the supply of services, less waste of resources, greater responsiveness to changing public needs and preferences, lesser tax burden because of much reduced government involvement in welfare activities and therefore more disposable income, amongst others. This is the background against which any decision for correcting market failures by government interventions have to be judiciously weighed.
In the local context, the following key points need to be duly taken into considerations: Welfare State interventions are expected to redistribute income in the ways mentioned earlier. Have not the upward revisions of wages and salaries and other associated benefits awarded by the PRB every five years and other wage determination mechanisms set up by the Government had a stronger redistributive impact than the array of Welfare State interventions, per se? Have not welfare services benefited other classes of income groups more than the deserving poor for whom they were designed? The other objective of the Welfare State is to eradicate poverty. Have government interventions in the past 50 years or so succeeded in eradicating/alleviating poverty? In this connection, two questions could be set to those of us who actually suffered deprivation in the more than 25 years preceding 1985 and enjoyed the economic prosperity after 1985: (i) didn’t the high growth rates triggered by the sugar boom in the mid-1970s lift more people out of poverty and severe deprivation than welfare spending did? (ii) didn’t the high growth rates of the Mauritian economy in the second half of the 1980s, made possible by the sustained pursuit of the right kind of policy package lifted still more people out of deprivation and desperation than welfare spending did? Didn’t these two episodes of high growth rates opened new vistas and windows of opportunities for the very many in the country to rise and float with the economic tide from a state of idleness and deprivation? These are real life observable evidence that high growth rates of the economy weaken the case for exaggerated welfare spending. They do not need sophisticated econometric models for an illustration. What if an ever growing welfare spending budget crowds out Government spending for purposes of enhancing economic growth? While welfare interventions do help correct for market failures, doesn’t over-spending in welfare services limit Government capacity to facilitate growth-promoting spending that lifts people out of poverty? The fence-at-the-top-of-the-cliff rather than the ambulance-at-the-bottom approach obviates the need for high level of welfare spending. Aren’t high growth rates strong fences at the top of the cliff? Many probing questions could be set to explore the effectiveness of some of the Government’s welfare promoting interventions. The point I wish to drive home is that there are many criss-crossings of layers of wasteful and mis-guided Government interventions in the life of the people.