We shouldn't use the government to do things. For the clear and obvious reason that the government is bad at doing things. So, you know, don't use an organizational method known to be bad at doing things to do things.
Sadly, we do have things that can only be done by the government. There's even that smaller class of things which both must be done and can only be done by the government. So, we're going to get governed -- badly -- and the government will do things -- badly. But in the interests of keeping our lives as blissfully free of things being done badly, we should restrict government to the smallest size possible. That small set of what must be done and can only be done that way.
That's a pretty bleak and flat out statement of the minarchist position. Which has its value as just that. But it's possible that we might want some actual proof of the government doing things badly.
So, as just such an example, the non-performing loans situation in the nation's banks. When the IMF looks at Bangladesh, it notes that some 10% or so of all bank loans are “non-performing.” Not paying interest, not making repayments perhaps. Some portion of them never will do either as well. Money lost by lending it to someone who wasted it. We know it's wasted because if it hadn't been, then they'd be making enough return to be able to pay the loan back.
Well, OK, but everyone knows that there will be some loans that go sour. But we need to look at one more part here: “Central bank data shows that till June this year, the volume of total NPLs in the banking sector stood at Tk156,000 crore, which is 10.11% of total loans.
The NPLs in the state-run commercial banks reached 25.01% and in private commercial banks 6.46%.”
6.4% is a pretty high NPL ratio too it should be said. But 25% is an absurd one. We can also note that, fairly obviously, 25% is a higher rate than 6.4% and therefore a worse one -- we are using a measure where more does mean worse. And now run with the other piece of information there -- it's the state banks with the worse result. Government does things badly.
As to why, it's not difficult to work out either. Commercial banks are going to lend money where they think they will make a profit. OK, obviously enough they'll sometimes get that wrong -- but that is what they're at least going to try.
State run banks aren't going to lend purely upon profit expectations. That's actually the justification for there being state banks in the first place, that they are organizations that can take a broader view of lending other than just straight profit. But that also then means that the lending is going to be done at least partially upon political and not business grounds.
Again, that's often used as a justification for state banks. But look where this actually gets us in reality. A quarter of the people money gets lent to should not have had money lent to them. And, just to rub this in, that result is more than four times worse than the private sector banks.
This is also worse than just a few loans going sour. Those losses eventually have to be carried by taxpayers -- bad lending by the state is a tax which we'll eventually have to pay. It then gets worse again. Bangladesh isn't exactly awash with capital. So, money that gets wasted on things that don’t work deprives us of the ability to finance things that do -- or at least might.
It is true that we're going to need to have at least some government. Simply for those things that have to be done but cannot any other way. But we really should limit the government to only those things. Because the government simply isn't very good at doing things -- therefore only use it where we have to.
There will be those who insist the other way. Government should take economic decisions, should invest and lend money. That allows politics to determine investment and funding. To which the answer is, yes, that's the complaint.
For when politics determines investing and funding then all too much of the money will be wasted -- that 25% NPL rate being our proof.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
