Market Oriented Economy

 

With the fall of the USSR (Union of Soviet Socialist Republics) in 1991, the great belief in the efficacy of the Communist system of government and production and distribution received a body blow. Although several other factors such as faulty planning and a corrupt polity were responsible for it, many countries began to adopt a market oriented strategy to bring about higher productivity and growth supposedly championed by the United States.

A market oriented economy can be defined as an economy where the market plays the “invisible hand” (Adam Smith-Wealth of Nations, 1776) in producing and distributing resources efficiently in a system. It brings about the highest levels of productive efficiency. The essential feature of the market economy is the decision of the market to determine what to produce, for whom to produce and there is a private ownership over the means of production. Production and consumption decisions are taken according to the forces of the market; namely demand and supply. As opposed to the planned or socialist economy of the Soviet Union where prices were administered by the government, prices are free to fluctuate in a free market economy where the forces of demand and supply determine the price level for a particular product. In a world of perfect competition, these prices would be unique and the price offered by the consumers would equal the price willing to be charged by producers calculated on the basis of their costs of production for the product. However, this situation is impossible to be found in a real world system and often conditions of monopoly or supernormal profits emerge. The global response to the free enterprise system has been tepid in many ways. While many countries such as India and China and many Western countries have adopted a mixed economic model where the public and private ownership go hand-in-hand, many countries such as the USA, Singapore and Hong Kong have a relatively more open market system.

According to the “Index of Economic Freedom” created by the Heritage Foundation and the Wall Street Journal , economic freedom can be categorized broadly into the factors such as business freedom, trade freedom, investment freedom, monetary freedom, freedom of Government, labor freedom and freedom from corruption and property rights. Countries having the highest degrees of economic freedom have shown high per capita incomes, high life expectancy, lower infant mortality and high rates of literacy. These countries have also shown relatively high shares of the Gross Domestic Product (GDP) being allocated to the poorest 10% of the population. The disconcerting factor of the free market or the laissez-faire economy has been its link with Capitalism. This has mainly been brought about by the private ownership of the means of production and thus the market economy has mainly been found to be successful in the developed countries with high levels of per capita GDP if judged by the index of economic freedom. USA and most of the West European countries fit in this example.

Aiming to bring about a dimension of social welfare and to accommodate the persons thrown off the system with comparatively low purchasing powers in market oriented economy, mixed economic models undertaken in China and India have been particularly successful. While the government or the public sector retains ownership over the strategic sectors of defense and artillery, maintenance of law and order, building of infrastructure and telecommunications, private equity participation has been encouraged in some of the sectors. There have been high flows of Foreign Direct Investment in various sectors and many infrastructure projects have been funded by foreign equity capital. For example, many Special Economic Zones (SEZ’s) in both these countries are being built with the help of FDI flows from abroad. As per the private equity participation, private equity in the telecom sector has been permitted up to 74% in case of India. Shift to a more market oriented economy since the 90’s from a more centrally planned economy before has led to both the countries recording record growth rates of about 8%-9% over the past few years. Another model where both public and private participation is encouraged thereby utilizing the benefits of high growth associated with free market economies is the social market economy model adopted by Germany in the name of “Soziale Marktwirtschaft.”

Market oriented economy model is the most efficient model of the economy where we can have high growth rates of the economy coupled with high per capita incomes. With increased FDI flows to the domestic economy, even countries part of the erstwhile Soviet Union and formerly Communist and Socialist economies such as Vietnam have experienced high standards of living in the recent years. Increased FDI flows generally leads to import of sophisticated technology and technical know how which can lead to higher productive levels in the recipient economies.

Adoption of a more market oriented economy across the world has been the fallout of the decline of the Soviet Union and the recent wave of globalization and liberalization. Unless structural challenges such as poverty and illiteracy are addressed in a comprehensive manner in the developing countries such as India and China, the fruits of a free market enterprise with high growth rates and per capita incomes shall only be restricted to a privileged few in a situation of rising income inequalities.

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