Fair Distribution of Economic Welfare: Science against Myth | Daily News

Fair Distribution of Economic Welfare: Science against Myth

A bustling street in Pettah, Colombo.
A bustling street in Pettah, Colombo.

 Part 3

* Targeted Policy Tools with Coordination

If the policy decision is taken to initiate policies on selected disparities, targeted policies should be implemented. For example, China has commenced poverty eradication policy targeted for identified groups. Such policy decisions and policy actions should be taken by a group of authorities who have statutory mandates on identified distributional aspects. Recommendations of external professional committees who have no ground knowledge and information would only be a waste of time as the relevant authorities invariably tend to disregard such reports as they are not bound to accept such recommendations. In this regard, the government needs to ensure that the existing authorities get involved in taking policy actions willingly so that post-allegations could be avoided in the event of subsequent issues or concerns over new policies. Therefore, it is necessary to identify a consortium of authorities along with specific policy actions for each distribution to avoid bureaucratic conflicts.

For example, at the testimony of the US Fed Chairman before the Congress at one time, a Congressman after elaborating income and employment disparities in the US questioned the failure of the Fed to take policies to arrest the situation. The former Fed Chairperson Janet Yellen (present US Treasury Secretary) immediately responded that it was the duty of the fiscal policy to address the disparities whereas the Fed’s mandate was the maximum employment and stable prices. However, the present Fed Chairman accepts the role of the monetary policy to address economic disparities through low interest rates and credit distribution tools under specific schemes, but inability to offer credit targeted to specific individuals or communities. Janet Yellen now moving to another powerful public shoe of the US Treasury Secretary states that low interest rates are likely to be long term and the smartest thing to act big on stimulus at historic low interest rates for the recovery of all segments.

World over, Central Banks generally tend to disagree with sectoral or targeted credit policies under their monetary hypotheses. However, the relevant legal provisions of the monetary policy and credit/bank

The COVID pandemic adversely affected Colombo Stock Exchange trading.

regulations have immense discretionary powers to implement credit policies/schemes towards targeted sectors or groups that will qualify for the schemes. Credit is the single most powerful tool to address economic disparities in the modern monetary capitalist economies that run on credit and financial capital. Setting up of specialized credit institutions such as EXIM banks, development banks, mortgage banks, finance leasing companies, community/co-operative banks and microfinance banks is intended to improve credit distribution channels. Directed lending and refinance lending are also two tools. In this perspective, ambitious proposals to set up new ministries or departments responsible for addressing distributional disparities will fail as it requires the integrated acts of several authorities.

Therefore, coordination of policy tools among the different authorities on the basis of distributional targets and performance levels is of prime importance to avoid tool conflicts. For example, households moving from foot bicycles to motorcycles, three wheelers and small cars over a period of time is an indication of improvement in distribution of household income and wealth and living standards of lower income brackets. However, if monetary authorities impose credit restrictions on financing of small motor vehicles due to concerns over rising volumes and their adverse impact on foreign exchange outflow and road traffic, the result will be the widened disparity as the rich will continue to import and enjoy luxury vehicles. Therefore, it is worthwhile to have a simple diagram to list the identified distributional disparities, present levels, authority responsible, targeted policies, targeted disparity levels and policy implementation period and make it transparent to solicit the support of all stakeholders.

*Failure of Conventional Fiscal Instruments

- Taxes and Subsidies

Taxing the wealthy, tax concessions to investors and offer of subsidies and facilities to lower income groups are not considered feasible in modern market economies. Taxes will always be passed on to the public and the wealth accumulation would continue. Killing the wealthy is not the solution as their wealth is in constant utilization for production activities that provide employment and income to people. In modern corporate world, wealthy investors confront immense risks on their capital and profit share as business mangers steal corporate income by way of various executive remunerations and accounting impairments with the help of accountants, auditors and regulators. The market value of their wealth is also at risks of insider dealings and market manipulation by securities traders.

Income and corporate tax cuts announced with the objective of promoting further investments out of tax savings and multiplier effects on production, employment and income work in contrast to the objective. For example, US corporate tax cut in 2018 to 21% from 35% which was intended to raise local investments and to bring back American investments from abroad resulted in many corporates buying-back of shares out of tax savings where the US growth and employment slowed down in 2019 causing dampening impact on economic disparities. Tax concessions and state protections to investors and entrepreneurs would cause wealth accumulation to those investors through inflated profit unless a fair volume of factors is employed with fair share of factor remuneration to ease the income disparity based on the initial business feasibility reports. Therefore, corporate bailouts by the US Government in response to corona pandemic were conditional upon employee protection. Further, subsidies work as disincentives to skills and innovations.

* Need to address corruption

Corruption broadly reflects unfair accumulation of wealth/income/economic benefits by stealing the value though unlawful/unethical means. Corruption generally is referred to stealing of funds and benefits belonging to the public/state by various insider means inclusive of leakage of policy/market sensitive information to connected parties. Similar corruption is evident in the private sector too. For example, creative accounting, marketing and remuneration methods help business managers to steal corporate income and profit attributable to shareholders which cause corporate bankruptcies and financial crises.

Corruption disproportionately accrues wealth/economic benefits to those parties creating large disparities through a lot of leakages to distribution. Corruption is so powerful that ambitious policies targeted to improve the distribution become still born with allegation of new round of corruption. Therefore, the need to improve systems of institutional governance and cultures with the lines of responsibilities for internal controls, reporting and disciplinary procedures to prevent identified corruption is of prime importance to improve distributional disparities by lowering corruption. However, corruption is a key part of the natural price determined due to the government intervention/controls in the market mechanism and it will continue to remain depending on the size of such control.

* Resorting to Market


Market mechanism cannot be neglected in any economic governance system as the bureaucracy is not the god to solve basic economic problems connected with mobilization of resources to satisfy human needs and wants. The public is prepared to accept economic outcomes of competitive demand and supply forces if they are transparent with fair market practices/standards. The competition is needed to facilitate productive skills in mobilization and utilization of resources. Fair market standards set the field for competition. The price is the central outcome of market forces that determines the mobilization of resources.

Therefore, any bureaucratic control of price is the fundamental breach of market mechanism as it causes a network of insider dealings that prevents market-based distribution. Few bureaucrats have no divine knowledge to determine the fair price and distribution. Market mechanism tends to distribute resources and wealth based on competitive skills. To the extent the bureaucracy controls the markets, corruption enters as the most essential skill for competition. Driving on the roads is a good example for market competition.

The various modes of management of state enterprises also are attempts to harness the market mechanism in nationally critical businesses for fair distribution objectives as decided by the bureaucracy. Globalization of markets led by geopolitics is a crucial facet influencing the choice of the degree of the market mechanism. There is no question that global market mechanism is preferred to domestic market mechanism as it opens the base of resources, skills and fields to compete whereas global disparities of distribution also are caused by markets driven by few geo-political networks. However, although markets are dirty with geo-political elements, markets have to further evolve every day to ensure fair distribution in this journey by providing a transparent and competitive platform to search the value. Therefore, all types of market regulations have to be based on the assessment of the level of the value and its distribution created as against the possible outcome of free markets. The past half century gives enough real-world lessons on outcomes of markets to living standards of human being as compared to state-controlled production processes.

Present Policy Challenge

There is no debate on global and local disruption of supply chains due to the present corona pandemic and resulting recession and disproportionate impact on people. Therefore, the recovery from the pandemic economy entails three dimensions, the control of the spread of the pandemic, economic recovery in terms of aggregate numbers such as GDP, employment and spending at pre-pandemic levels by repairing the supply chains and distribution of the economic recovery fairly to all stakeholders. The attempt to economic recovery in aggregate numbers compiled by statistics alone will not help recover from the pandemic. The recovery without distribution will soon cause civil uprise as the recovery is expected to be unequal. Therefore, all three dimensions should be simultaneously integrated. This is the brutal challenge confronted by the governments on policy front by trial and error as there is no rocket science to recommend the policy mix. The time taken has no target and depends on the global recovery that may take several years. Therefore, it is worthwhile to have a monitoring list of policy actions, targets and performance on pandemic recovery in all three dimensions.

Another worse pandemic risk is globally on the way. That is the climate change and environment pollution. The poverty created and distributional disparities caused are already felt across the world and future generations are the victims of our present actions. The science has no limits to inventions and utilization of the nature for the well-being of the human, irrespective of the byproducts such as waste/garbage, pollution and global warming considered as harmful. The science can use all such harmful byproducts as raw materials to produce new welfare for the human being. Resources and nature are boundless in front of the science. They only punish human being if they are not duly utilized to solve human problems. Unfair distribution is a major abuse of resources and nature which is being punished. The global warming and rising conflict between wild animal and human are two such punishments.

Therefore, it is necessary that the governments share hands with global initiatives already going on based on science to address such risks. Markets have already ventured into solutions based on private capital. What matters are the scientific knowledge, skills and supportive policies and not political slogans and allegations. The regular policy transparency along with coordinated press briefings (in place of bureaucratic confidentiality and diverse political briefings) and regular policy fine-tuning based on impact assessment are necessary to improve the public trust in policies. Instead, pumping numbers on corner economic activities to paint rosy outcomes and mislead the public will only cause disasters eventually, sooner or later.

(The writer is a former Deputy Governor of the Central Bank of Sri Lanka)