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View all search resultsMarkets work only if the state works
Markets can only function fairly and effectively if strong institutions, impartial regulation and a capable state underpin them
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A man uses his phone on March 6 while waiting for customers at a clothing shop in Tanah Abang Market in Central Jakarta. (AFP/Bay Ismoyo)
M
arkets are often portrayed as self-correcting forces, naturally producing efficiency if left alone. The message is familiar, from textbooks to political debates: the less the government intervenes, the better the economy performs. But history, theory and everyday experience tell a different story. Markets can only function fairly and effectively if strong institutions, impartial regulation and a capable state underpin them. Without these, markets tilt toward domination by the powerful, entrench inequality and breed instability.
The Netflix documentary “Rotten: Avocado War” offers a vivid illustration of how markets collapse when the state fails.
In Mexico, avocado exports boomed after the 1994 North American Free Trade Agreement (NAFTA) agreement. Production surged, farmers’ incomes rose and demand for land skyrocketed. In theory, this was a win-win for trade and development. But the absence of effective law enforcement left space for armed gangs to step in. These groups extorted farmers, taxed exports and controlled distribution routes. They behaved like “roving bandits”, maximizing short-term rents without investing in long-term sustainability. Instead of a competitive market, Mexico ended up with criminal monopolies.
Chile faced a different but equally telling problem. Guided by free-market economists, the government privatized water rights in 1981, making them tradable commodities. The hope was to achieve efficiency through clearly defined property rights. In practice, water rights became concentrated in the hands of agribusiness and mining companies, leaving local communities dry. Rivers shrank, conflicts escalated and public outrage grew. By 2022, Chile was forced to revise its water law, limiting private rights and restoring ecological safeguards.
Both cases highlight the same truth: when the state is absent or captured, markets become arenas of exploitation rather than prosperity.
These lessons resonate strongly in Indonesia. Consider three areas. First is preman (thugs) and informal “taxes”. For many street vendors, the biggest burden is not official taxation but the daily levy paid to local gangs or “informal enforcers.” Studies suggest they can lose 30-40 percent of their margins this way, far more than any corporate tax rate. For small traders, this is not just an economic cost but also a barrier to mobility and security.
Second is resource governance. Despite reforms, Indonesia still struggles with water governance. The 2019 Water Resources Law aims to balance public and private rights, but overlapping authorities and weak enforcement have allowed industrial polluters to damage rivers and groundwater. From the Cisadane in West Java to extractive industries in Sulawesi, poor oversight has created negative externalities for communities.
