Understanding the role of Government in Market-based economies while debating the causes of Liberia’s recession
By John Solunta Smith, Jr.
The Perspective
Atlanta, Georgia
November 29, 2019
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Liberian Currency |
I have followed the debate over the years and especially in the most recent on the printing of a new Liberian Banknotes. I intend to contribute to getting the debate in a better perspective. By attempting to do that, I commit to bringing forth series of articles.
In this first piece, I have decided to remind contributors to Liberia’s development debate from social media to blogs about the role of Government in Market-based Economies such as the Liberia Economy. This piece will be followed by attempts to answer questions such as, what has gone wrong with our economy and why? Secondly, what is our understanding of the current proposal before the Legislature about the printing of New Currency? What are the expected short and long-runs impacts on the Liberian Economy? I will offer recommendations and suggest a way forward in every piece.
By this understanding, I like to use this first article to set the background of my conversation with my readers. Liberia operates a Market-based Economy. By definition, it is an economic system where prices and production decisions are decided under fair competition among businesses and market agents . As I explain to you the acceptable roles of the government in such an economy and the economic reasoning associated with each role will give you awareness and more insight to contribute to the national discourse. In order to begin with such roles, let be briefly outline Political Economy understanding of the function of the State.
It is a consensus by Political Economists that the function of the State is classified in three (3) levels as summarized below
- Minimal functions:
- Addressing Market failure (defense, the rule of law, anti-poverty programs, etc.)
- Macroeconomic management
- Public Health among others
- Intermediate functions
- Addressing externalities such as Basic education, environmental protection, etc
- Regulating monopoly
- Overcoming the problem of information asymmetry and information failures
- Providing social insurance
- Redistribution policies such as Pension and unemployment allowances
- Activist functions :
- Coordinating the private sector
- Fostering market and Clustering initiative
- Asset redistribution from illegally gotten assets to forcibly acquired assets. As a Philosopher, we do believe that even if the government state failed to return such assets to its original owners, the natural law of redistribution would ensure such assets return to its original owners at the appropriate time through the sons, daughters, and families associated with such acquisition.
I am sure we now have an appreciable understanding in summary of why there should be a State and its functions in a market-based economy. This will lead me to provide you with highlights about the functions of the Government in a Market-based economy such as ours. In any market-based economy, if the government is laissez-faire in taking on any of the above roles or the government does extend its roles by overly intervening in the market, that economy might experience negative consequences with varies degrees of severity.
In economic literature, there is an established consensus supported by economic principles and reasoning concerning the role of the government in a market-based economy. These roles instruct the government to perform six (6) functions as detailed below.
- The first of these roles is to uphold the rule of law. The Government should provide the economy with a legal structure to make and enforce laws. Fundamental to the hearts of this role is Property rights protection, Contract enforcement, and the government acting as a referee and impose penalties for any foul play in the market by any of the market agents impartially .
- The provision of Public Goods. What then is a Public Good? Public Goods by definition and concept are goods and services that individuals and private agencies cannot provide in the economy such as National Defense and Public Security Services, or a good example could also be Roads connectivity and specific infrastructures such as Samuel K. Doe Sport Stadium in Paynesville city or the famous Sport Commission on Broad Street in Monrovia.
- Maintaining competition and fighting against a monopoly in the market. The Government is responsible for promoting competition among its citizens and in the market transactions. Why is competition so essential in the market? This is because competition drives enterprises to and reduces costs, improve quality and internal efficiency. The competition also provides incentives for enterprises to adopt new technology and invest in Innovation by doing so. They will enjoy economies of scale. The overall, promoting competition by the government, even in its hiring of employees, reduces managerial inefficiency.
- Redistribution of income and reduces inequality through taxes: The government, as part of its role in a Market-based economy, is to persuade the rich and enterprises to provide compensation for the elderly, handicapped, and poor in the economy . The government must engage in welfare programs such as transfer of Social Security pension, Medicare programs, and health insurance as well as unemployment compensation for those who are qualified and looking for a job in the economy but cannot find one. In a market-based economy, the government is expected to engage in the anti-poverty programs for the benefit of her city and the growth of the economy.
- Promotes Economic Growth and Stability: Most importantly, the macroeconomic growth and stability of the country is the burden of the Government. The government should play these roles to enable the country to enjoy economic growth and development. Let it be noted here that economic fluctuations, as presented in the business cycle, is a regular economic phenomenon for all healthy economies. However, the government should ensure in hiring technocrats that will help manage the deepening of the recession noticed on the business cycle in a manageable perspective.
- Facilitator in economic development: When I sat in the class of Professor Justin Lin Yi Fu in 2016, my perspective about State and Market relationships changed. Professor Justin Lin Yi Fu, the only non-American and European to become Chief Economist and Senior Vice President of the World Bank and the most Senior Professor accredited as one of the brains behind China Economic growth believed that the Government should serve as a facilitator in the economy to help market succeeds. Professor Lin, in his famous book, New Structural Economics, outlined the government facilitating role over the decades to making market succeed in market economies such as U.S, UK, Japan, and even in China with its Socialism with Chinese characteristics. This means there exists a partnership between the market and the state in promoting economic growth and development even in Communist China.
About the Author: Dr. John Solunta Smith, Jr. is a development practitioner with experience in youth development, Development Policy Analysis, research, and Microeconomic and Macroeconomic Policy Analysis... He has training in Economics/ International Economics Development & Trade, Statistics, Development Economics, Macroeconomic and Microeconomic Policy Analysis, and Research Methodology, both Quantitative and Qualitative. He earned a Ph.D. in Economics from the National School of Development, Peking University in Beijing, China, and a Masters of Management Science degree with recognition in Public Policy from the School of Government, Peking University