Market watch: it’s not all statist gloom and doom

This column will highlight a few – admittedly cherry-picked – examples of pro-market developments in different parts of the world....

Supporters of the free market economics have seen better days. Their ideas seem everywhere in retreat, while heavy-handed interventionism is back in fashion. And yet, when we talk about economies “moving away from free markets” (or towards them), we are looking at macro trends that hide a lot of variation between sectors and policy areas. Economies are almost never “free” or “unfree” across the board. They are free in some respects, and unfree in others. Economic commentators are enamoured with terms like “Anglo-Saxon capitalism” or “French corporatism”. And yet it is France that has, for example, a large, competitive private healthcare sector, an arrangement which would be unthinkable in the UK.

This column will highlight a few – admittedly cherry-picked – examples of pro-market developments in different parts of the world.

Starting in an unlikely place: I once heard somebody claim that North Korea and Cuba were the only places in the world where you could still escape advertising (unless, of course, you count party propaganda). For Cuba, this is no longer true. Flyers, bumper stickers, text messages and small billboards, which advertise small businesses like restaurants or repair shops, are becoming increasingly common. 

The economic evidence shows quite conclusively that in the long term, housing costs are mainly driven by land use planning restrictions.

Technically, advertising was never banned in Cuba. Why would it be? The country had no (legal) private sector to speak of for most of its post-revolution history, and even if there had been, where would they have gone, in the absence of private newspapers, magazines or TV channels? 

A few years ago, however, Raul Castro’s government expanded the scope for small-scale private entrepreneurship, which led to thousands of mini-start-ups springing up. These new entrepreneurs soon realised that customers would not automatically come looking for them just because they are there. Customers need to be wooed, or at least, they need to have a chance of finding out about the existence of a product. This makes advertising an integral part of a market economy, the logical correlate of free consumer choice. 

Albeit within tight confines, Cubans are learning the ropes of capitalism. The entrepreneurial genie is out of the bottle. Will it unleash a dynamic of its own, creating pressure for further rounds of liberalisation? 

Meanwhile, in Europe, Spain has finally begun to overhaul its sclerotic labour market, which remained stuck in Franco-era corporatism even as the rest of economy modernised. Spain has long been the epitome of an insider-outsider labour market. Insiders enjoyed exceptionally high levels of job security and wage stability, but the flipside was chronic mass unemployment. Even during the best of times, unemployment refused to go measurably below 10 per cent, and when the credit-fuelled boom ended, it shot up to over 25 per cent. 

In 2012, the Rajoy government began to allow selective opt-outs from collective bargaining agreements, partly shifting negotiation powers from the industry level to the company level. Dismissals were also made easier and less costly. 

These reforms were not particularly radical, but they seem to bear some fruit. Over the past three years, Spain’s unemployment rate has fallen by six percentage points. Hopefully, this will embolden the reformers to go further. Unemployment can become a self-perpetuating trap. The longer people have been out of a job, the more their skills deteriorate, decreasing their chances of labour market re-entry. Spain will need radicalism in this area.

While Spain experienced an unsustainable construction boom, some other parts of the developed world experienced the opposite, namely a failure to build enough houses (the UK being the most extreme example). One of the most clear-cut counter-examples is Houston, Texas. Between 2010 and 2015, about three-quarters of a million people have moved to the city and its exurbs, making it the fastest-growing metropolitan area in the USA. You would think that this influx would lead to pressure on the local housing market, but no, supply has kept up with demand. The average house price stands at three and a half times the average annual income, a ratio that would-be homebuyers in the UK can only dream of. 

Unemployment can become a self-perpetuating trap. The longer people have been out of a job, the more their skills deteriorate, decreasing their chances of labour market re-entry. Spain will need radicalism in this area.

The economic evidence shows quite conclusively that in the long term, housing costs are mainly driven by land use planning restrictions. Houston is one of the few places in the US which is not covered by the country’s system of zoning laws. Mind you, this does not mean that housing development is “unplanned”. Houston has plenty of private planning mechanisms: homeowner associations influence development around them via the use of restrictive covenants. If this seems like a radical idea, bear in mind that historically, plenty of places in the UK have developed in such a way, the city of Bath being a famous example. 

Brazil’s new government has announced a sweeping privatisation programme, mainly covering energy and infrastructure. It is not as if the country had suddenly fallen in love with Thatcherism: Margaret Thatcher saw privatisation as a means to increase the economy’s then abysmal productivity performance, with privatisation revenue being an added bonus. In Brazil, it is the other way around. But if the pitfalls of crony capitalism are avoided, the results could ultimately be the same.  

Chile’s famous privatised pension system has been under attack from the country’s political class for years. And yet quietly, the Bachelet government is seeking to improve it by liberalising investment opportunities. Chilean pension funds will soon be allowed to invest directly in real estate and infrastructure projects, without the obligation to use costly intermediaries. This should lead to higher returns and greater diversification. 

It’s not all statist doom and gloom, then. If you know how to look for them, pro-market reform stories can still be found.