Bangalore, known as India’s Silicon Valley, went from being a quiet and serene city in the ’80s to a thriving tech hub in the 21st century. It all started with the government’s special attention and investment in the IT sector, initially attracting companies like IBM and Texas Instruments and then other giants like Microsoft, Apple, Google, Amazon, Siemens, and Nokia.

This tech hub is now worth over 100 billion USD, has over 10,000 startups, and produces nearly 40% of India’s IT exports. All the country’s original companies, such as Paytm, Phonepe, Ola, Inmobi, Swiggy, Zomato, Razorpay, Flipkart, Myntra, etc., started their journey in the city.

Karnataka’s progressive and stable government emphasized encouraging the sector and supporting startups with training and investments from American tech giants and their establishments and a liberalization policy of export-import for computer hardware and software. The state leadership made policies and implemented these interventions in the market to leverage the potential of their huge youth power and skillful demography.

In Bangladesh, initiatives like Startup Bangladesh Ltd, Bongo BD, the iDEA project, and A Fund of Funds have lately started providing crucial assistance, funding, support for necessary infrastructures, and mentorship to attract investors and young entrepreneurs to foster the startup ecosystem.

The free market regards itself as efficient, and the government here is supposed to have a restrictive role in providing basic rights and public goods, ensuring law and order, and property rights.

However, it’s not the same in underdeveloped or developing nations where production has undesirable effects, and the market has information asymmetry. In come the government interferences to mitigate the negative impact.

Government intervention: Where and why

Government interventions can create employment, incentives for small businesses and industries, and positive externalities to correct market failures. They can also play a crucial role in shaping high-performing human capital by investing in it through training schemes, internships, collegiate programs, scholarships, and specialized workshops.

As a buyer or seller, the government can enter the market to keep the prices stable and reduce the living expenses of low-income citizens whenever prices are exorbitant for the common people.

Trading Corporation Bangladesh (TCB) sells essential commodities that are out of reach for people in general and necessary food items at subsidized rates to families in need and marginalized communities. Thus, a government body plays an effective role in stabilizing the volatile prices and safeguarding the interests of the masses.

The most common forms of government intervention in trade are imposing various tariffs, subsidies, quotas, restrictions, export controls, and the most critical and significant one—exchange rate manipulation. These are mainly connected with international trading, whereas inside the country, the government can create monopolies to control industries and usurp possible profits or maintain an invisible dominance.

The Canadian telecommunications industry is highly concentrated, with a few companies like Bell, Rogers, and Telus. These companies benefit from government regulations that limit other participants’ scope and resist competition, thus forming a monopolistic structure that charges higher prices.  

Some state-owned enterprises (SEOs) operate as monopolies, such as the state-run Ceylon Petroleum Corporation in Sri Lanka, which faces criticism for inefficiencies and mismanagements where politically linked entities benefit from the organization’s operations.

Risks of rent-seeking and crony capitalism

Rent-seeking is a term that might be associated with state interferences, which implies the practice of individuals or groups attempting to secure economic benefits or privileges by exploiting public policies or regulatory means instead of economic productivity.  

It links political patronage, nepotism, corruption in public contracts and appointments, overcharging and underperformance in projects, fund embezzlements, and exploitation for private gain.  

For instance, power distribution companies in Dhaka are allegedly linked to rent-seeking behavior, corrupt practices regarding electricity billing and metering, procurement irregularities leading to over-invoicing, bribing or payment of unofficial fees for a new connection or higher loads, nepotism, and cronyism.

Crony capitalism is one of the major issues following the dominance of corrupt politicians and business elites. According to Professor Dr. Selim Raihan, a professor of the Dhaka University economics department and executive director at South Asian Network on Economic Modelling (SANEM), the influence of these elites in policy-making, referred to as state capture, was visible in various areas in Bangladesh, such as the telecommunications, RMG, banking, real estate, and energy sectors. This is how the interventions favor wealthy people and create an oligarchy.

“In India, the coal industry is subsidized, and it often makes a profit at the expense of renewable energy. Mining sectors in countries like Nepal and India are sometimes operated to usurp portions of profits or extract rent from people with political connections.”

“Free markets are depicted as having almost negligible government interference. However, it is necessary to some extent to enforce the rule of law, ensure property and consumer rights, stabilize markets, and reduce the impact of information asymmetry,” Dr. Selim Raihan remarked.

The involvements are made to leverage competitive advantage in industries, but they might create negative externalities, market distortions, adverse impacts on innovations, and demotivation for businesses and startups.

According to Dr. Sayma Haque Bidisha, professor at the Department of Economics, University of Dhaka, and Pro-Vice-Chancellor (Administration), a free market economy isn’t often regulated as freely as described in textbooks, so the conditional consequence of creating distortion isn’t what happens in the market.

“Social security systems, unemployment benefits, and real wage adjustments with inflation exist in Western capitalistic economies; they are not present in our country. Inclusive development isn’t consistent as not all people have proper access to education, healthcare, employment, access to credit, and work privilege. So, support mechanisms should be provided.”

She suggested that systems need digitalization to tackle corruption or malpractice. Even if automation isn’t fully activated, smart cards or documents might help people in actual need.

“If common people remain unfed in the economy, the criteria for an open market economy and a perfectly competitive market aren’t fulfilled. So, the subsidy will not create that much distortion but rather help stabilize the prices,” added Dr. Bidisha.

She suggested encouraging and introducing more subsidy programs, sales, and distribution of essential products at fair market prices, social security programs, etc., in our economy.

Around the globe

Inclusive development aims at social and financial development with a focus on– poverty alleviation, employment generation, health, education, gender development, and social welfare. According to Nobel laureate economist Amartya Sen, investment in the social sector will expand freedom for individuals and social groups.

Once again, India sets some good examples for us. Some Major government interventions in the social sector in recent years in India include Janani Suraksha Yojana (JSY), Ayurveda, Yoga & Naturopathy, Unani, Siddhi, Homoeopathy (AYUSH), Indira Aawas Yojana for housing—implemented by MoRD, TSC/NBA for Rural Sanitation (Total Sanitation Campaign)—implemented by MoRD, and RUSA (Rashtriya Uchchatar Shiksha Abhiyan).

Intervention in international trade might create disputes among the trading nations, disrupt global supply chains, and exhibit rent-seeking behavior at the national level. However, if correctly implemented, this interference can address market failure and make room for less developed trades, maintaining the balance of freedom and protection.

Some sectors need more state-based support than others to build an inclusive, participatory society that nurtures the young generation and transforms them into human capital.

In East Asian economies, specific sectors and industries are targeted for selective interventions to stimulate their economic growth, emerging as Asian tigers. A disciplined macroeconomic policy framework, substantial investment in human capital, diverse industrial policy, investments to draw in multinationals, providing infrastructure and a strong regulatory environment, public housing and education, and a robust civil service and administrative structure nurturing export entrepreneurship have helped these countries grow.

In these newly industrialized economies (NIEs), exporters were granted access to incentives like tariff exemption, free access to foreign exchange, free trade zones, effective institutional assistance, and considerable labor market flexibility.

For instance, Malaysia is the developing world’s leading exporter of semiconductors after several international investments in the nation in response to strong government incentives and encouragement. On the other hand, Singapore’s governmental policy was fashioned in considerable measure to entice multinationals, as foreign direct investment was the foundation of its development approach.

Mexico, Thailand, and Brazil have revolutionized healthcare access for their citizens. China’s experience is very intriguing. The prior universalism was overturned in 1979 when Mao Zedong implemented economic reforms in China. However, advancing life and overall health came at a high cost. Also, China does not rely on commercial health insurance to provide health care; the state plays a key role.

Growth in the technological sector might be accelerated with tangible subsidies and scholarly support to compete and accommodate the 21st-century competition. Various startups might be encouraged or lent money with negligible interest rates to support them. Technical support or research funding could also be great initial options for these initiatives. In countries like Canada or Sweden, the government stood by the projects aiming for research and technological development.

Bangladesh’s ICT sector should be an eye-opener for policymakers. Billions of taka spent on Hi-tech parks and other ICT-related infrastructure didn’t bring anything fruitful to the country, except immense corruption in the sector. 

Mumtaheen Shamsia Praptee continues her journey in Economics through research and writes about various macro-economic issues.