Guest Column:
Will This Be the Century of the Private Sector or the State?
By Cesar E. A. Virata

UN Photo

The answer would seem obvious, considering the major changes in economic structures that have taken place in the last fifteen years. Countries have had to face challenges in managing the transition from varying degrees of state ownership to more market-oriented private-sector economies with varying degrees of government regulation. This transition process continues and is gaining strength. However, unemployment and the political effects of globalization on State or protected enterprises threaten to hinder this process. The first phase of trade liberalization, as negotiated during the Uruguay Round, has affected the industrial and service sectors more than the agricultural sector. Since developing countries rely more on agriculture, there has been greater resistance to breaking down trade barriers, both tariff and non-tariff, on manufactured goods and the resulting imbalance of economic benefits from the General Agreement on Tariff and Trade/World Trade Organization agreement in 1994.

On the other hand, the agriculture sectors of developed countries, although relatively small components of their economies, have strong lobbies and are protected by common policies, subsidies and sheer bargaining strength. Thus, debates and negotiations go on to improve the imperfect systems of State control and intervention versus free-market mechanisms under private control. I am quite certain that based on their respective situations, each country will try to find a system that balances government regulation with market-oriented private enterprise. At the same time, Governments will continue to play a basic role in maintaining peace and order, providing a judicial system; providing basic social services of education, health care and welfare; protecting labour; and caring for and protecting the environment.

Lessons can be learned from history and from more current experience. By ignoring these lessons, we are liable to repeat mistakes. Philosophers, economists and political scientists have over many years introduced ideas and concepts on welfare, state ownership or capitalism, private property, allocation of resources, efficiency, value added, rent, returns to the factors of production, bills of rights, sovereign will and constitutional provisions governing relationships. The world has benefitted from these principles, many of which have been adopted by the United Nations.

Until just before the turn of the twentieth century, economic and governance systems were determined by sovereigns, colonizing Powers, revolutions, consultations or voting by recognized and qualified voters. The end of that century saw countries competing with each other to devise systems that could produce goods and services for consumption and weapons for mutual destruction.

Businesses Can Flourish by Helping to Tackle Global Ills Businesses that wish to thrive in a global economy must respond to major social and environmental trends that are reshaping markets, argues a report co-sponsored by the United Nations Environment Programme. “Tomorrow’s Markets: Global Trends and Their Implications for Business”, released on 3 April by UNEP, the World Business Council for Sustainable Development and the World Resources Institute, says future markets will favour businesses that partner with government and civil society groups to serve basic needs, enhance human skills, increase economic capacity and help remedy inequities. Since the world economy depends on a base of natural resources that is being severely degraded, reducing consumption and waste creates new opportunities for businesses to grow through the innovation of a less wasteful process and with life-enhancing goods and services, according to Tomorrow’s Markets. The report stresses that wherever they operate, businesses must meet increasingly rigorous governmental regulations, as well as societal expectations of socially responsible behaviour. It highlights critical trends that businesses can harness in order to turn profits and foster progress. For example, the report notes, over 400 million people today use the Internet, which will have about a billion users by 2005; however, more than half the world’s peoples have never used a telephone. “This report emphasizes global trends that will help business leaders better understand the inter-relationships between environment and development issues and, in turn, respond more effectively to the enormous challenges before us”, said UNEP Executive Director Klaus Toepfer. A sound, healthy environment for development “makes business sense”.

At one time, it was estimated that there was enough weaponry to kill the entire population of the world fifteen times. Today, stockpiles have been reduced to kill the world population just eight times over. The dedication of resources to updating and maintaining defense-offense establishments puts a strain on government budgets. Over time, the relative efficiencies of the market and government-regulated private enterprise systems proved to be, overall, more effective in providing goods and services to the people. Thus, there has been a decided shift to free enterprise market-oriented economies with varying degrees of regulation and intervention, depending on assessments of economic and political stabilization needs of political leaders. When trade and production are liberalized, consumers benefit due to a wider choice of goods and better prices. Definitely, in this round of reforms, the paradigm has shifted from protection of production to consumer benefits.

However, as previously mentioned, market mechanisms are also imperfect and require intervention when societal needs are not met. Therefore, I believe adjustments will continue to allow the private sector to produce a broad range of products and services, while the State will be responsible and accountable for basic services, like justice, police, defense, foreign relations, basic education and health, protection of the environment, taxation and monetary policies. Countries will continue to search for a balance.

Is there a danger that predominantly private sector-led systems will fail to meet peoples’ basic needs, and the shift will move once again towards State-planned and controlled systems? I do not believe so, unless in the process of transition and adjustment the needs of large sectors of society are not met. If these sectors are neglected and unable to both join the mainstream of efficient and competitive activity and share in the benefits of free enterprise, then this will open opportunities for destabilizing forces to encourage the return to government programmes for welfare and protection and/or to subsidized State-owned enterprises. This could happen, notwithstanding the question of whether a country could stand isolated from a functioning world economy.

Suppose, for example, a relatively small country, heavily dependent on a few crops, lacking in entrepreneurs and still relying on government trading for their produce, would like to diversify its economy for stabilization by manufacturing wage goods. However, lacking economies of scale, producers are unable to compete with the low-priced imports made possible by free trade. What policies will it adopt? Will it be protective of its new industries and suffer the consequences of high prices while draining its foreign exchange reserves? Or will it seek trading investments and arrangements with neighbouring countries or subregions to expand its market base?

Furthermore, will this country have the business and managerial capability to stay in business, be competitive and have access to equity and loan capital at reasonable costs?

Opening multiple sectors to domestic, regional or international sources for investment, such as utilities, infrastructure, communications, natural resource exploitation, manufacturing and wage goods, would be a way to link itself to world commerce. Still, it must face setbacks caused by natural calamities, high-energy prices, a fall in commodity prices, and high international interest rates, which could devastate a fragile economy. External assistance, debt restructuring and additional investments from public or private sources could alleviate severe downturns. However, the question remains: how often can a country be helped before it is eventually written off the books and the map? Naturally, countries will turn to any system that will offer them survival.

Will there be enough of these countries unable to join the mainstream of globalization to worry the major Powers with strong economies? I would say it will remain a concern and a subject for summit resolutions in such areas as additional development assistance, poverty alleviation by the international financial institutions, and debt relief, if called for, or social treatment as an exception to the general rule. Combinations of these programmes were implemented during the period of decolonization, but there are still a significant number of countries that have failed to make the grade.

Still, considering the many factors that influence the choice of systems, I believe that the enlargement of the private sector will prevail in this century, with complementary support from Governments.

Cesar E. A. Virata is the President of the International Chamber of Commerce of the Philippines and the Chairman of the Asian Wise Persons’ Group. He was formerly Minister of Finance and Prime Minister of the Philippines.