There are many reasons to build a market, marketplace that functions by itself, freely. There are, however, many more not to establish one. And the preferred choice in developing countries looks like pretending to have established one, taking advantage of both. Most countries, with the globalization context where they thought they would benefit from freely moving capital, goods and services idea (not skilful people out of the country hopefully), thought over and decided to open free markets for commodities like gas, power, agricultural products etc. But free meant free to the extent it served the politics more than the market or the society in general. So, many interrupted the markets, did not apply, or acted against the laws, rules, and regulations they established. And every intervention put a big wound in the market and an effective and efficient market stayed as a dream in the research papers of idealists.
We see many examples of these in the energy markets in emerging countries, where the ruling power interrupted prices, flow of commodities, promoting some parties or consciously not letting some interested parties enter the market, sometimes openly and sometimes just by ghosting. The main reason why they establish a market (or better to say an oligopoly resembling a market) is usually to get another leverage for their power by
- Keeping prices under control, mainly with concerns about their political future
- Bringing foreign investors, but keeping them under control while benefiting from the outlook
- Creating their own oligarchs who earn money in good times, and pay back when necessary
- Establishing and keeping good relations with a global network, that supports their presence, existence, and future in the ruling position
- Creating opportunities and jobs for their families, side business owners in their close circle, supporters (if anything is left).
The reason for the controlled market is existential in many cases. If the prices are high, the ones in power lose votes and power. If the volatility is high the clever and experienced outsiders make money and the not so competent partisans lose. If the prices are too low foreign investment escapes. In the end a totally free market is a star shaped knife on a boomerang.
On the other hand, when economies fail there is nothing else to do but try to control all markets for developing countries’ governments. The energy markets that run on supply-demand are affected especially when prices rise, usually due to exchange rate failure, merit order based marketplaces create a huge producer surplus and/or scarcity rent for some players/products/contracts. For example, if natural gas prices go higher due to increasing exchange rate the hydro power plants earn more in a merit order based marketplace.
- Declaring price caps,
- Blocking price increases by using legitimate power of other authorities like a competition authority or a regulatory authority, “motivation techniques” like letters, phone calls, TV, or social media messages,
- Decreasing the market price by increasing the amount of energy supplied by state owned/controlled utilities with prices under costs (sometimes under marginal costs), importing additional amounts using state’s unique rights,
are some of the methods used to stop or slow down increasing prices.
When energy prices increase on the other hand, most industries are affected in terms of cost. While the mostly effected industries due to the share of energy in their costs like steel, ceramics, cement industries have to raise their prices, others that are not so much effected due to energy costs or consequentially, tend to increase their prices seeing a room for price increase too. While the first group’s act is inevitable, the second group’s act starts a chain reaction and triggers price increases in all industries, which leads to inflation rate increase. This behavioral finance challenge must be faced by the one leading the economy and when the chain reaction signals a big problem, they feel the need to interrupt.
Abrupt price increases and inflation consequently, in some emerging countries, is one of the biggest threats to economic stability. Under severe conditions it might be considered normal to see some sort of regulation in some areas even in most liberal markets. In most cases however, these regulations turn into interruptions, which in the long run turn into subsidies, which ruin all the market rules written/unwritten, and the system, market, and the country loses trust. Effected market players usually suffer but stand to the extent they can by using contingency reserves, start expecting and demanding exclusivities, concessions, and incentives and this results in an unjust discrimination against others. The vicious circle ends with trying to find new funds, new investors, new entrepreneurs who will believe that there will be a free market soon, again!
The cost of all these are reflected in the scarcity of energy sometimes, quality of products and services supplied by effected industries, and of course decreasing quality of life of public. Every interruption opens a hole in a system/market. Non-isolated systems can lose entropy. Their environment’s entropy increases in such cases. While some countries lose wealth, momentum, or credibility when markets are interrupted, others gain. Although the belief of reaching a perfectly efficient market is maybe a dream, interruption to markets is definitely a nightmare.