In some cases, market failures such as the cost of externalities are dismissed as the necessary corollary of doing business: there is a belief that taking government action to respond to externalities would do more harm than good. For example, Southeast Asia has been regularly plagued by large-scale air pollution (haze) since 1972, which has caused adverse health and economic impacts across the region. Yet, after decades of constant objections and complaints against the industrial-scale burning of rainforests in Indonesia, the profits from oil palm and pulpwood production have outweighed any significant policies or reforms to curb such activities.
Society needs to reassert its control over the market and the private sector, to ensure that they are oriented towards the public good. The pandemic should remind us that there is a need to adhere to the social contract. If the social contract is broken or unmet, social cohesion will break down — as seen in the recent unrest in Thailand and Myanmar.
Businesses play an essential role in this and are granted a “licence to operate”: an understanding that society creates the conditions in which businesses are allowed to make private profit. When business violates that contract, whether by ignoring externalities, or not working towards what society critically needs in a crisis, or concentrating profits in the hands of a few, societies need to change the business environment to ensure the private sector acts responsibly. Take the recent attempt to degazette the Kuala Langat North Forest Reserve (KLNFR) for property developers in Malaysia. Had civil society groups not voiced their opinions, the 8,000-year-old forest would have been demolished and various indigenous communities dislodged.
In practice, businesses can be persuaded to implement this by moving away from the idea of “shareholder value” towards true “stakeholder value”. So long as shareholder value is in place with its diverse perverse outcomes, there is no mechanism for companies to decide to make something in the public interest at a reasonable price. A more balanced approach, balancing the interests of workers, local communities, consumers and broader society would allow for a private sector that is more responsive to the public interest.
As Asean continues to develop and the region is increasingly being viewed as a high-end manufacturing centre, efforts should be taken to re-focus on “strategic manufacturing”: building self-sufficiency in important products to ensure that societies can function during global shocks. Most discussions on promoting local manufacturing tend to fall into one of two categories: either classic industry (steel, cars, textiles) or support for some geopolitical agenda (5G, airplanes). What the pandemic reveals is that countries need to make self-sufficiency an economic priority to include critical goods and services such as access to water and sanitation, food staples, vaccines and ventilators.
Changes in these areas will lead to a more robust economy, building societies that are less exposed to shocks and are more resilient. This can be delivered by the market, but only if it is guided — and not by the free hand of vested interests — by strong policies from the institutions of the state, for which there is no substitute.
