Private and public sectors – motivating and regulating markets

Even though the government and the private sector have different roles in society, I believe both must depend on a capitalist philosophy in order to be successful.

When capital is raised, be it from taxes or from the savings of individuals for investment, it must be put to productive use.

Simply put, the capital must result in higher productivity, that is, there should be more goods and services produced for less capital.

This translates to higher profitability. However, government organisations are often found to be less efficient in making that transformation because there are few incentives to do so. In comparison, the private sector is mostly driven by profit motives and incentives.

I believe having a motivating factor is fundamental for success and can garner remarkable results. In order to create motivation, government organisations could implement incentives for good performance. This could result in generating higher productivity among government workers, and in turn, they may be able to put capital, in the form of taxes, to better use.

We have already seen some governments around the world privatise firms, implementing profit incentives within those organisations, often with stellar results.

I think it is a mistake to speak of free-market capitalism or government-led industry in isolation. The two can and do co-exist, as in countries like China, Russia and India, where the government occupies the “commanding heights” of various industries while applying free-market style incentives to the management levels of these organisations.

Labeling a country as following only one of these economic models is often inaccurate at best and detrimental at worst.

Instead, I see the government’s role as an “umpire” in society, mediating between groups with different interests. In order for society to function effectively, opposing forces must be regulated to obey rules and act collectively for the common good.

The recent financial crisis was an example of the consequences when governments do not play their umpire role effectively. I believe that the regulatory authorities, the courts and the government departments tasked to regulate the financial industry, for instance, did not adequately enforce rules and work cohesively.

They allowed themselves to be influenced by a few key players. This problem was not exclusive to countries practicing free market capitalism. China too, had similar problems but China’s centralised single-party government was able to move swiftly to correct regulatory errors and thus able to achieve quick results.

The key is to have a government that acts as a true umpire, treating each player fairly and applying the rules equally for all and independent of corrupting external influences. A free market model with an ineffective umpire, inadequate regulation and an uneven playing field is likely no better than a government-led model with no real capitalist system of incentives to maximise productivity.

The writer is Executive Chairman, Templeton Asset Management Ltd

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