THE QUEST FOR A MARKET ECONOMY

By Rusiripala Tennekone

Sri Lanka has chosen “Market Economy” as the system for the country’s economic
development. Theories governing the market economies emerged in the latter part of 19 th
century. Its advocates believed then that market forces, should operate freely with the
least government interventions. An important aspect of a market economy is that it allows
the laws of supply and demand to direct the production of goods and services and prices are
determined based on the interactions between the public and business. Therefore a market
economy should function with little or no central planning by the government.
State owned enterprises in our country are mainly responsible for the distribution and use
of resources and production decisions. Almost all public services come under the
government, with central planning involved to that extent. A switch over from such a
system to a complete free market economy is therefore a highly complex and complicated
task heavily laden with seriouspolitical and social consequences too important to be
disregarded. The transition itself has to be, therefore, carefully planned.
As it is widely known “A Market Economy” is the creation of a free market system in which
goods and services are bought and sold with the prices determined by the free market,
without government control. It is basically a capitalist system. The changeto such a system
from a society fully pledged itself to social welfare by the state is an uphill task, time
consuming, requiring meticulous planning by the government.
Many prerequisites including a range of legal reforms need to be in place along with
carefully phased out planning of social issues during this transitional process. There is a
continuing debate as to how a given market could be free from total government
intervention for it to become a “free market”. A strong impediment is the inevitable
government intervention that is inalienable in the area of resource allocation.
In pure economic terms, a free market is one which runs under open policies where
governments do not intervene, through subsidies, taxations, price controls and Labour rules.
Bit in such markets the prices could be controlled by monopoly powers. Under such
circumstances the interest of the market participants or the welfare of consumers may be
seriously hampered leading to adverse conditions affecting the efficiency of the free market
outcome.
One of the important factors for an operation to be a well- functioning free market is the
existence of perfect competition. For the market to be competitive there is a need for
plural buyers and sellers. Any market which does not conform to these will not create a
structure of perfect competition. If there is only one or a few sellers and suppliers to cater
to the requirements of multiple consumers or buyers such a market would be a monopoly.
In a monopoly market a specific entity would increase prices and maximize profits even by
resorting to reduce production. Therefore a need arises for some sort of intervention by
governments to regulate private business behavior that becomes monopolistic. The WTO
and the EU have rules for dealing with such markets with anti- trust laws. Hence there is no

ideal situation of a free market which operates independently free of any regulatory
influences. To maintain the market efficiency and to safe guard the consumer governments
have to introduce laws and regulations.
Some enterprises become monopolies through acquisitions, management controls, and
formation of cartels and integrations of different sorts. Such conglomerates may attempt to
control the production, distribution, sale or price of, or trade in goods or provision of
services. They can even resort to unfair trade practices, such as:-
 Those leading to abuse due to dominant position.
 Engage in technical or scientific development relating to goods or services to the
prejudice of consumers.
 Introduce predatory prices to eliminate competitors.
Large monopolies can even become threats to state operations. Hence there is a need for
the government to take necessary steps to prevent practices having adverse effects on
competition. Even in the US, claimed to be the biggest existing free market, there are
regulations designed to protect the safety and health of the general public and the
environment, while safeguarding the consumer and ensuring economic stability.
US has struck a balance between a complete free market operations and a regulated
economy. There are several laws introduced to serve as checks and controls such as;
 The Securities & Exchange Commission Law to fight against insider trading practices
and to ensure clean disclosures.
 Creation of an institution (FDIC) to ensure depositors funds in the event of bank
failures.
 Laws to guarantee environmental safety by regulating destruction of natural
resources and creating environmental hazards.
Therefore it has to be borne in mind that the free market economics is not a panacea by
itself to our economic ills or such systems can flourish freely without any regulations from
the governments. All possible steps have to be taken to protect people at large, consumers
and the environment ensuring the public interest.
Our neighbor India has adopted a law, as far as back as 2002, titled – THE COMPETITION ACT
2002 OF INDIA, correlated to their economic development efforts addressing the following:-
 To promote and sustain competition in market
 To protect the interest of consumers
 To prevent practices by the business community leading to adverse effects on fair
competition.
 To ensure freedom of trade participation in the market in an equitable manner.
Today, Sri Lanka is experiencing a rapid emergence of giant business ventures which
encompass huge mergers and acquisitions. All sectors including production, services,
distribution, trading of consumer products and the financial industry are seen to be affected

by this trend. The limited regulatory controls currently in operation appear to be totally
inadequate tosafeguard and protect the markets affected due to the growing monopolistic
pressure. The Financial industry is the worst affected. In such a climate government has to
ensure;
 The interest of consumers
 The freedom of trade of other market participants
 Elimination of any possible adverse effects on competition
 Promotion and sustenance of an open competitive environment.
It is a good thing to look at the Indian Act which even provides investment limits determined
on a carefully assessed basis, with the interest of the country’s economy as the foremost
consideration. India, recognized as the biggest surviving democracy by the modern world,
provides a classic example for promoting healthy business competition with proven success
worthy of emulation.
(The writer wishes to highlight relevant provisions in the Competition Act of India in another
article to follow)
Constitution of Sri Lanka has a provision covering this aspect.
Under the directive principles of state policy given in Section 27 of Chapter I Subsection (2)
(f) it is stated as follows:-
“the establishment of a just order in which the means of production,distribution and
exchange are not concentrated and centralizedin the State, State agencies or in the hands
of a privileged few, but are dispersed among, and owned by, all the People of Sri Lanka;”
Any undesirable development causing an adverse effect on the operation of a system of free
and fair competition could be arrested by the introduction of suitable regulatory measures
under the constitutional provisions. It is the responsibility of the Government to create an
equitable environment for the business operations in the country as a prelude to other
steps for establishing a free market economy.

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