How not to manage the market
To effectively manage the economy, the government must have the patience to understand and respect the complexities of the market, rather than resorting to heavy-handed interference
The new government is inundated with extensive lists of demands from the public. Some of these lists are being prioritised, but others lack any sense of order, reflecting an unrealistic expectation of what the government can achieve.
A good strategy is not just about the actions you plan to take; it should also outline what you will not do. I would like to address one such aspect, arguing that the government should avoid excessive interference in the functioning of markets.
Bangladesh's economy operates as a market economy, one that has evolved over time to encompass many dimensions. It is a complex, multi-layered system, closely integrated with global markets. The increasing complexity of global markets feeds into Bangladesh's markets, adding further layers of intricacy.
To effectively navigate this landscape, the government needs to grasp these complexities. It must understand the structure of different markets, the key players, their interrelationships, and behavioural tendencies.
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Moreover, it is crucial to comprehend how expectations are formed within the market.
Much of what happens in the market is driven by perceptions and expectations. Market participants do not base their actions solely on current or past prices; they also consider future prices.
Raiding stores and warehouses may boost the egos of government officers, giving them a sense of toughness. However, being tough does not necessarily mean being effective. Often, such actions yield little to no results, as we are reminded each year during Ramadan.
For instance, traders might withhold products from the market if they anticipate prices will rise. Conversely, if they expect a surge in supply, they might release their stock before new supplies arrive, potentially driving prices down. In both cases, it is the expectation of the future, rather than current conditions, that shapes behaviour.
Unfortunately, governments often lack the patience to fully understand how markets function. They see a problem and rush to intervene, frequently reacting to inflation.
When prices rise, the government often responds by sending magistrates to raid stores and warehouses, making arrests, and setting maximum price limits, all under the scrutiny of TV cameras. Officials are then dispatched to monitor compliance.
These actions may boost the egos of government officers, giving them a sense of toughness. However, being tough does not necessarily mean being effective. Often, such actions yield little to no results, as we are reminded each year during Ramadan.
Yet, the government continues to interfere in the market, driven by the need to demonstrate action — especially new governments eager to show they are in control.
However, markets are not easily manipulated. They operate according to their own logic, governed by supply, demand, and expectations.
While it is possible to steer and regulate markets — and indeed, such regulation is necessary for markets to serve society — it must be done smartly, with adequate information. Smart regulation differs from mere control.
So, how do you steer the market? By engaging with as many market players as possible, frequently and inclusively. It is important not to consult only a few powerful players, as they may lack the incentive to provide an accurate picture.
One often overlooked aspect of a market is that it serves as a valuable source of information about the economy. The price of a good or service reflects not just the decisions of a single trader, but also, implicitly, the thoughts of many others with whom that trader interacts.
Therefore, even the insights of a single trader can provide valuable information. Imagine how much more you could learn by engaging intelligently with dozens of market participants.
The market functions like a vast statistical agency, but its data does not appear in neatly compiled reports or spreadsheets. Uncovering the market's secrets requires patient enquiry, not a heavy-handed show of force.
Syed Akhtar Mahmood is an economist who previously worked for an international development organisation.
