Regulating markets: Co-operative News

Posted on November 9, 2010 · Posted in Co-operative News

 

Former Cuban president Fidel Castro spoke to his country a few days ago to signal an historic shift away from the direction adopted since the establishment of a communist government in 1959.  As part of wide-ranging economic reforms, co-operatives are to play a key role as a means of moving from a state-led, planned system.

 

Fidel and his brother Raul, the current president, have accepted the market economy may not be fair or just, but there is no real alternative to it.  To paraphrase Winston Churchill, capitalism sucks, but the alternatives are even worse.

 

There are four reasons why state socialism has failed Cuba and other countries.  The first is that the planned economy is an inefficient means of allocating resources.  The second is that too often, bribes are paid to get round the bureaucracy that tends to accompany the planned economy.  The third is that to prevent ‘free enterprise’ operating, the state must impose a level of control and surveillance that is unacceptable and incompatible with human rights.  And the fourth is that capitalist countries may impose trade controls and sanctions to prevent a planned economy acquiring resources from outside and meeting the needs of its people.

 

Cuba has now accepted this reality.  But it is not prepared to roll-over to the major capitalist countries and accept the takeover of the island by major corporations.  Instead – like Venezuela and some other Latin American states – it is seeking to develop a mixed economy, in which co-operatives play a strong role.  This approach has an uncomfortable parallel: Gorbachev proposed the same with his perestroika initiative.  This came to nothing, as marketisation inexorably evolved into the domination of Russian society by a few major corporations.  This, in fact, is one of the main problems with a capitalist economy – the most efficient way for a corporation to operate is to eliminate competition, which is also the least efficient system for the consumer.

 

In the west, therefore, socialist and social democrat governments have tended to encourage ‘third sector’ operators such as mutuals, co-operatives and social enterprises as a counterweight to the giant corporations.  But this is not sufficient in itself to produce a consumer-friendly market society.  It is also essential to have strong regulation.  The role of the regulators is to prevent the domination of super-corporations; to prevent anti-competitive mergers; and to protect consumers from excessive charges.

 

This is why the Conservative-Liberal Democrat government’s approach in the UK is so very worrying.  It is, apparently, going to abolish Consumer Focus – the government’s consumer protection agency headed by Ed Mayo, before he became general secretary of Co-operatives UK.  Without Consumer Focus, consumers will be left vulnerable and giant corporations will be less constrained in their activities.  This is especially true because of the other regulatory bodies also being closed in the ‘cull of the quangos’ being unleashed by the Government, including, it seems, the Office of Fair Trading.

 

As the current Consumer Focus chief executive has made clear, for a grant of a few million pounds a year, it is recovering tens of millions of pounds annually for customers of banks and utilities.  Pleas for its abolition have been led by the Taxpayers’ Alliance.  It is worth noting that the Alliance is funded by large corporations and has close connections with people who run the Adam Smith Institute – which during the Thatcher government regularly complained that her administration did not go far enough in adopting radical policies.

 

What I find particularly galling is that at a time when regulation has been shown to have failed us, the policy response by the current government is to remove large amounts of the regulatory apparatus on the grounds that it is too expensive.  The reality is that it was not rigorous enough.

 

Our global financial crisis was brought about by weak regulation, which should have been strong enough to protect us.  Specifically, banks complained that countries that adopted tougher banking regulation would cease to be major financial centres.  That is why London retained its role as the most important financial centre in the world – the Government agreed not to implement regulatory structures that would ‘damage’ the banks.  If it had adopted the type of regulatory approach that would have protected us from colossal market failure, the banks would have relocated their investment operations to New York, Frankfurt or Hong Kong.

 

The reality is that the major banks and other large corporations are both bigger and more powerful than most governments.  (Incidentally, Ireland’s opposition finance spokesman Michael Noonan came up with a nice line on this, reflecting on the near collapse of the Irish state after it nationalised the collapsed Anglo Irish Bank.  We took it over, he said, because the bank was deemed to be too big to fail.  The reality was that it was too big to rescue.)

 

Future global financial crises can only be avoided if countries work together to agree a framework for international co-operation and regulation that is either operated jointly, or else applies consistent and uniform rules.  The chances of achieving this are small given the number of countries that try to entice corporations ‘offshore’ to attract jobs and tax revenues.  The folly of this approach is illustrated by Ireland’s dire financial mess.

 

 But any prospect for future movement towards consistent international regulation – even within the European Union – has surely become even more distant now, through the actions of the UK government.  Strong regulation is absolutely essentially if we are not all to be squished by the major corporations.  And that very much includes building societies, credit unions, co-operatives and other mutuals that will not merely be marginalised, but are at risk of being driven out of the market if competition authorities are not there to protect them.

 

It is perhaps not surprising if Conservative ministers are either unaware or unworried by this.  But it is indeed unfortunate if Liberal Democrats now share this myopia.