The shortage economy

BY SUKHDEV SHAH

The phrase 'shortage economy' was coined during the 1980s to describe the extreme shortages of consumer goods in socialist economies of the Former Soviet Union (FSU) and Eastern Europe. After an initial good start in the 1950s and 1960s, centralized planning in these countries started to develop bottlenecks that hindered production, fostered emergence of unused capacity, and created shortages of consumer items of all sorts. Shortages became extreme during the 1980s, as reflected in the long queues for basic consumer goods such as clothing and food items, health and education supplies, and of smuggled foreign goods. The depth of shortages in these countries -- most notably in FSU countries -- was captured in the popular joke about low productivity of government workers: a typical worker in FSU countries spent more time standing in queues than working in the office!
Such shortages occurred partly because of central planning that could not sensibly plan for the production of thousands of items to match consumer demand, and partly it reflected government intentions to create shortages of consumer goods to increase saving.

Achieving parity between demand and supply is almost automatic in a market economy -- or capitalist enterprise system -- which does the equilibrating job by making use of the price signal that helps eliminate the shortage.
However, the centrally planned system does not trust the market and, instead, it tries to replace it with officially fixed production, to be sold at officially fixed prices. Of course, planners have to work with insufficient information to get at correct market-clearing prices, which is seldom achieved. This led to the shortage of some goods at the same time that unsold inventories of other items piled up. Consumers also had to wait for years to get a phone connection, find a living space, and purchase a car!
Nepal's case is different!
Nepal's economy is facing shortages of many items but consumer items are not one of them. Except for the occasional shortage of petroleum products -- most of the time for reasons beyond government control --supplies of most goods and services available from private shops and businesses are plentiful. Also, foreign goods and currencies are available on demand in the private market, without having to wait in long queues or go through the black market. Most likely, the socialist economies of Eastern Europe and FSU would have survived and even prospered had they ensured adequate supplies of consumer items at prices private producers and businesses found profitable.
However, Nepal's economy is being undermined by a different kind of shortage, generally not faced in ex-socialist economies. This is the shortage of public goods, comprising such basic items for day-to-day living -- drinking water, electricity, roads, bridges, sewer system, trash management, transport, health, education, public security, and clean environment, to name a few. Because of the nature of such public goods -- need for large investments, economy of scale, common accessibility (non-exclusiveness), inability or difficulty of collecting user charges, and their impact on overall quality of life -- they cannot be provided by private enterprises which, in large part, are motivated by earning a profit.
Given that the provision of public goods, in most part, is in the public domain, adequacy of their supplies, as well as quality of their delivery, reflect, more than anything else, the government's commitment -- or lack of it -- to serving public interest. If the government is unwilling or unable to carry out such functions, it can be considered a failure -- it even looses the right to govern, at least in a moral sense.
We all are aware of the scarcity of public goods faced by the Nepali population and abysmally poor quality of the ones that are provided -- electricity, drinking water, public hygiene, road transport, health and education and, most significant of all in the post-monarchy Nepal, poor law and order situation. Looking at the scarcity of public goods faced by the Kathmandu population -- electricity, drinking water, extreme level of pollution of air and waterways -- one can scarcely believe that the government exists here in any meaningful sense.
Shortages of life-sustaining public amenities have not occurred overnight; rather, this has evolved over years and decades -- through revolutions and regime changes. However, there is no record of serious efforts made by any government to foresee the crisis and prevent unabated deterioration of living conditions for valley residents, whose number is believed to have zoomed from just one million 30 years ago to over four million at this time. Electricity, water, and waste-disposal infrastructures that were created just for one million people have changed very little over many decades. Speaking more generally, almost total neglect of investment in key public sector amenities has been the single reason for rapid deterioration in the qualify of life for Valley residents and in most of the urban areas of the county. Of course, much of the countryside has remained untouched.

Plan priorities!
Nepal has adhered to the techniques of development planning now over half a century, backed by sizeable investment of government money and foreign aid resources. However, the impression one gets is that the core structure of the economy is unaffected, and remains overwhelmingly rural and subsistence-based. In many ways, it looks as though that the economy has followed its own natural course -- making use of traditional technology to sustain life at the very basic level for a growing population -- very much like Robert Malthus envisioned two centuries ago. The reason for this failure is simple -- the wrong plan priorities.
There is a misconception in countries regarding the government's responsibility for meeting people's basic needs -- that of gaas, baas, kapaash (food, shelter, clothing); in the context of India, prior to the upsurge of double-digit growth in the last decade, people wanted the government to simply meet their food needs: Bhookh lagi hai roti do; nahin to gaddi chhor do [we are hungry, give us food; if not, vacate the thrown.]!
Such demands or expectations from governments may be alright -- even desirable -- in heavily economies, where the government owns the means of production and has centralized decision-making. In these economies, most of incomes earned by workers and households came from wage employment, overwhelmingly from government jobs, which they spent on government-provided goods and services. Public facilities -- education, health, transport, electricity, water, and sanitation services -- were provided free of charge or at highly subsidized rates.
However, in free -- or largely free -- market economies, the government is not expected to meet all -- or even most -- of the economic needs of people, except in emergency situations occasioned by natural calamities. The market system in these countries -- although not perfect -- does a pretty remarkable job allocating resources to their best uses and setting prices at levels that clear the market. Government interventions in the market are generally ineffective, tend to create artificial shortages, and breeds corruption among government officials. As noted above in the context of the situation in the Kathmandu valley, despite the scarcity of many consumer items, their uncertain supply source, and absence of any centralized distribution network, most goods are available in the market and cases of sustained scarcity of any item seem quite rare.
This is only one part of the story though -- evidence that the market and, indirectly, the private sector are doing alright, even under difficult circumstances. This is not at all so in the provision of public goods and services, which is the core function and responsibility of government. Looking at the available evidence -- scarcity of water and electricity supplies; conditions of roads and bridges; lack of public sanitation and pollution control, absence of law and order -- it would be difficult to dispute the fact that they represent the extreme form of government failure. One can say that such failure underlay the poor quality of life for most population and contributes to a lack of public trust in the government.
Government planners then must narrow down the approach to planning to areas strictly in the public domain, and drop such high-flying ideals as comprehensive planning and all-rounded development of the country -- themes that have been repeated in each plan implemented since 1956! The narrowing of plan objectives will require the government to focus its investments only on a few critical areas. At the present time, such areas can be limited to the establishment of law and order, infrastructure development, and environmental protection -- strictly Adam Smith's-type prescription for limited Government.
From the list of infrastructure items, we can eliminate “mixed” items such as health and education that can better be handled by the private sector, which does indeed happen in the Kathmandu valley and in most urban areas of the country. We can also leave out agriculture and industry sectors from the list of government priorities, since private producers can use available resources and technology in a more efficient manner than when mandated by government dictat.
The above reasoning leaves only a few infrastructure items -- in addition to law and order and environmental protection -- that need to concern government planners. Looking at the present needs of society and assessing the strength of linkages to the rest of the economy, critical areas for planned development can be whittled down to no more a few -- electricity, transport, water supply and sanitation. These core development areas are clearly in public domain and, more importantly, they have strong linkages with the rest of the economy.
We can envisage -- taking just one example -- of a five-year water development plan targeted to supply drinking water to the entire population and irrigation water to all farming areas in the country. What miracles can this do to lift the country's productive potential and improve public health? Another five-year development plan devoted to power sector and roads development can perform similar miracles. Such focused development of our infrastructure -- along with environmental protection and an improved law and order situation -- will work as an elixir for our long-dormant economy and give credibility to the government's effort to alleviate poverty and improve living conditions at the grassroots.

(The writer is an economist based in Washington DC)

Posted on: 2009-04-01 00:08:24