Open Economy: Conflict of interest at the top

10 Aug, 2014 - 06:08 0 Views

The Sunday Mail

It is rare these days to come across someone who openly demands a free market economy. The phrase itself is hardly part of our everyday language: odd for a country of such elevated economic discourse.

I believe that to a noticeable extent, we should allow our economy to work as a free market.

This could be a widely shared conviction judging from the regular lobbying demands made by industrialists and the entrepreneurial spirit brewing within the youth. It is concerning that free market practices usually tend to be confined within our public institutions.

A few weeks ago, Mines and Mining Development Minister Dr Obert Mpofu reportedly scoffed off accusations of bribery by enunciating that he is financially prosperous beyond considering a mere US$10 million bribe. Is he guilty?

Of course, we do not know. This is not an indictment.

Actually my presentation is constructed on the hope that his wealth is indeed the result of his shrewd entrepreneurial intuition.

It is not wrong for a minister of such an imperative sector to acquire himself significant wealth. However, it is economically concerning.

For an economy that is highly leveraged on public institutions and State control, we should be wary of the inherent risk that comes from the economic opportunities that we leave exposed to entrepreneurial savvy State representatives.

I consistently stress that our inordinate political clench on the economy is a systemic risk.

Conflict of interest between regulating the market and competitive pressures of being an involved market participant is likely to arise. This exposes us to decision-making that may not be for the greater interest of the economy, and resource allocation that may be exploitative of political influence.

Now, understand that this topic goes beyond the aforementioned minister.

However, assume that State representatives can accumulate such rare levels of wealth in our present economy at the same time that they are in office. The assumptions get worrisome.

Competitive advantages for a free market participant include access to greater funding than competitors and access to information before the rest of the market.

Combine these advantages with the regulatory authority that we leave to the discretion of state representatives in office. What we have then is a case where we risk a few individuals having free reign on tools that can consolidate entire sectors and industries to themselves.

For a country trying to empower the majority and create an inclusive economic environment, this systemic weakness basically risks privatising entire industries to individuals who happen to find themselves in incumbent positions.

Such unattended market predominance is undesirable to our economic and social ambitions.

I will give four reasons.

First, a regulator is supposed to help governance direct the market towards achieving public objectives. The demands to achieve public objectives are usually disruptive and costly to businesses. So if State representatives are dominant market participants themselves, they would be in conflict to fulfill their public mandate.

Their duties would be against their own self-interest.

Second, shrewd entrepreneurs are typically driven to consolidate their own market share.

Using their authority, conflicted State representatives will create barriers of entry to push out other private market participants. How fair would issuing licences and permits be?

In an economy where State enterprises are in front of the line in getting finance, how much capital access would be made available to other private market participants?

Third, incumbents who are market participants will secure lucrative public contracts for themselves.

We have had issues in public project tenders caused by nepotism. Just the other day, Finance and Economic Development Minister Patrick Chinamasa described our country’s tendering system as “the capital city of corruption”.

If a Government project is put out to tender and a State representative has their own interested firm, what are the chances of fair competition in bidding for the rest of the market?

Fourth, as is the nature of business, networking is valuable. One can imagine the risks of such valuable networks developing within confined institutional hierarchy.

I am sure “salarygate” compensation went beyond job description responsibilities. In the same vein, regulation will become biased in favour of associates familiar with State representatives.

Effective market regulation depends on equal and fair treatment.

What is intriguing is that this topic is not unfamiliar to many of us. It is almost a cultural understanding that entering public institutions promises business potential. It is no coincidence that many businessmen aspire to find seats in public institutions. Not to serve, but to gain from these systemic weaknesses.

A somber reality.

Anyhow, it is very important to clarify what kind of economy we want to create, and highlight the characteristics of such an economy.

I hope that we want to create an economy with highly competitive markets that are fair and involve many citizens being participants in economic activity.

I want free market characteristics made available for all. An inclusive indigenous economy that gives the majority a fair chance of creating wealth. This cannot happen with unregulated regulators.

Who is watching them?

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