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Economic system: The role of the private sector - Part 1
Vinod Anand | 06 Feb 2012

When the limits of the public sector are drawn, the government retains important functions in the private sector.

IN THE first place, as a link between its own activities and those of private persons, it has an interest in seeing that its own development expenditures do not give rise to “unearned increments”. It is a difficult and highly technical matter to frame legislation for this purpose, but many of the governments of the developed countries are already experimenting in this sphere, with greater or lesser success.

Next, private enterprise will not yield its best results unless legal and social institutions are such that the private initiator secures the fruit of his own effort. Of the many spheres where this is relevant, the most important sphere which is widely neglected in under-developed countries is the contract between the cultivator and his landlord. Tenancy legislation should protect the tenant against arbitrary disturbance, giving him secure tenure so long urn hr practices good husbandry. And it should protect his right of compensation, upon termination of the tenancy, for any unexhausted improvements which he has effected.

In many cases, even more radical reform is needed than rum protecting tenants. In many under-developed countries, the cultivators of the soil are exploited mercilessly by a landlord class which performs no useful social function. This class contrives to secure to itself the major part of any increase in agricultural yields, and is thus a millstone around the necks of the tenants, discouraging them from making improvements in agriculture and, in any case, leaving them too little income from which they might save to invest in the land. In such countries land reform, abolishing this landlord class is an urgent pre-requisite of agricultural progress. Land reform is not, of course, the only prerequisite; capital must be made available to the farmers; extension work must be organized; the size of the unit of cultivation must be reconsidered; and so on. But land reform in these countries would be the first step necessary for releasing the productive energies of the people.

The burden of private debt upon the small farmer comes within the same category. Where this is so large as to discourage initiative, governments have sometimes to create machinery for machinery out excessive debt. At the same time, it may be necessary to pass legislation which will protect the small farmer from becoming committed to an excessive debt burden. And, in addition, governments have the duty of creating credit institutions and insurance schemes which satisfy the farmers’ legitimate needs for credit.

Next, a number of cases covered by the principle that the government must sometimes compel all the firms in a particular industry to adopt some measure which the majority desire, but which cannot be brought into effect unless they all participate. Thus, compulsory standardization of products is sometimes required in manufacturing industry. So also is compulsory grading and marking of some agricultural products. In soil conservation some measures are useless unless all the farmers in the appropriate area are compelled to participate; and the same is true of measures controlling the spread of diseases of plants or livestock.

Or the government may be required to take the initiative’ in organizing co-operative measures which stop short of compulsion. This is obvious enough in the fields of agricultural co-operation where many of the governments of under-developed countries now operate actively. Another important sphere which is less widely recognized is the planning of an industrial centre. Some manufacturing industries flourish with difficulty in isolation, because of their interdependence: they use common services, such as power, and they buy each other’s products and by-products. Hence, if an industrial centre is to be created from scratch, it may be desirable to arrange for as many complementary industries as possible to be started at about the same time in the same place. The initiative in making and executing a plan which has the effect of bringing many private entrepreneurs together in this way must usually rest upon the government, and is an important function of an industrial development corporation.

Another problem which faces the government in the private sector is the degree of efficiency in the use of labour by private enterprise. In countries where labour is abundant and underemployment rife, this problem is of secondary importance when compared with the problem of creating new employment opportunities. But, as labour becomes scarce, economic progress depends upon more efficient use of human effort.

Two of the methods of achieving greater efficiency are very important. These are: the use of better techniques, and the use of more capital. There are three other aspects of the problem. First, efficiency is to some extent a function of the amount of pressure which is put upon entrepreneurs. This pressure may be supplied by competition; or it may arise from trade union pressure upon wages, which drives entrepreneurs to improve their technique or it may result from government actions. Secondly, efficiency is sometimes kept down by restrictive practices imposed by labour, in collective agreements or otherwise, for the purpose of protecting the employment opportunities f particular groups of workers. This is a problem for which we offer no solution. Thirdly, efficiency is to some extent a function of the scale -on which economic activities are carried out. This has wider and narrower contexts, which call for more extensive treatment.

In its widest context, it relates to the size of the market self. As Adam Smith pointed out, the division of labour is limited by the extent of the market. Some under-developed countries are so small that their internal market is not large enough to support large-scale industries. The best solution may be to co-operate with other countries in the same region. This does not necessarily involve political federation, though sometimes such federation is also desirable on other grounds. The creation of a customs union is a less radical possibility. Still less radical is the creation of a free trade area; and failing even this, it is possible make preferential tariff arrangements for promoting economic development. All these types of policy, which involve discrimination in international trade, have given rise to controversy. Their use was, however, sanctioned by the Havana Charter for an International Trade Organization, which laid down the conditions which they might be operated. There are many small countries whose prospects of economic development will remain small until they enter into close economic relations with their neighbours.

Given the scope of the market, the number of firms may be too large or too small for efficiency. In large markets of well developed countries, it is often possible to leave the solution of this problem to the ordinary operation of competitive forces. But in less efficiently working markets, it is necessary to take measures either to promote more competition, or to reduce competition, as the case may be, with the purpose either of increasing or reducing the number of operating units. Closely related to this is the problem of standardization of the production of industry and e rationalization of the production plans of individual units. It is often pointed out that action along these lines offers a way of increasing considerably the productivity of industry without much reorganization. Its possibility and its desirability depend upon the government being able to persuade industrialists to fall into line and co—ordinate their activities; and also to control their activities if they evince a tendency to exploit a quasi-monopolistic position at the cost of the public.

The treatment of monopoly presents a problem to the governments of under-developed countries. Monopoly is a necessary instrument of economic deve1opmeit in situations where risks have to be taken which would not be taken except on the basis of a franchise. Sometimes, monopoly is also an instrument of efficiency, either because the scale of operations needs to be large, or because the firms in an industry need to have their activities coordinated directly by agreement, rather then indirectly by competition. On the other hand, monopoly concentrates economic power and some communities may prefer greater decentralization of power, even at the cost of somewhat lower economic efficiency. Every country has to make this choice for itself.

Where the pattern that emerges includes many small units of operation, the government can help to increase their efficiency by providing services which the firms can use in common. Thus, in agriculture, the government can organize education, credit, processing and marketing facilities, and so on. In manufacturing industry, it can similarly organize training facilities, market research, power, or managerial advice. In the mineral industry, many governments help small units by organizing finance, assaying, and the crushing of ores, marketing or other facilities. This means of aiding efficiency provides the governments of under-developed countries with one of their most important duties.