Markets paralysed…!
View(s):We all agree that our rice farmers should receive a “just price” for their harvest, as we often hear. Understandably, it should be a “higher price” ensuring that farmers can have a sufficient income to prosper with rice cultivation. There are about 1 million rice farmers in Sri Lanka.
More goods and less buyers result in prices coming down.
Consumers should also receive a “just price” for their staple food, rice. Apparently, it should be a “lower price” ensuring that everyone can afford to buy their basic food. The total population of the country consists of about 22 million people which constitute the country’s consumers.
Policy dilemma
The price of rice cannot be increased for the benefit of the rice farmers, because then it would hurt the consumers who are already paying higher price. Neither can the price be reduced for the benefit of the consumers, because then it would hurt the farmers who are already receiving lower price. So how do we solve this puzzle?
The path that our successive governments have chosen to meddle with this national policy dilemma is a peculiar one too. Farmers are bound to their less-productive and less-rewarding agriculture with regulations, tax exemptions, subsidies, import controls and administered prices. Accordingly, farmers can survive from season to season, although they are not able to thrive with rice production.
As a result, both the consumers and the taxpayers are also bound by the above policy mix. Consumers have lost their freedom for consumer choice, while they must pay a “high price for inferior quality”. Taxpayers too must pay for maintaining the government apparatus and the bureaucracy that are designed to handle the government support for agriculture.
We can be happy at least if it works in the long run for the improvement of farmer incomes, consumer benefits and food security of the country. Of course, we all survived but never thrived with this economic activity or the set of policies protect it. And it is difficult to suggest that this policy mix can sustain our food security either which is defined as the availability, affordability and quality of our food.
Competitive markets
Since we have already discussed this issue and concluded last week, it is not necessary to repeat our discussion here. Instead, I want to choose one important issue that many have chosen to highlight in their criticisms: government intervention.
Markets are not working so well as in economic textbooks. Therefore, the government must come in. Let me emphasise the fact that “I have no disagreement with this argument”. In fact, markets are not perfect, as everyone knows.
Even the neo-classicals and neo-liberals are fully aware of the fact that markets are not perfect. That’s exactly why all their theories are always based on “assumptions”. They have set a number of critical assumptions to establish the conclusion that “competitive markets lead to efficient resource allocation” resulting in benefits for individuals and for the nation.
If the “markets are competitive”, then they work efficiently. If they are not, then they don’t. In a competitive market, there are many informed participants – customers and suppliers, whose entry to and exit from the markets are not constrained with barriers.
Many buyers and sellers
If we delve into this statement, we will identify some important features of a market. The first is that there are “many” buyers and sellers. Only when there are “many buyers” in the market, there will be high demand so that there will also be “many suppliers” to cater to that demand.
Many people choose to travel to cities like Bangkok, Shanghai, Singapore, Hong Kong, Delhi and Dubai for shopping and businesses – why? There are many buyers and many sellers in these cities. When many people visit for shopping and businesses, these markets get multiplied further with many more buyers and sellers.
The outcome of having many buyers and sellers in a market is the high degree of competition for lower price and better quality. As a result, there is greater opportunity and encouragement for innovation as well. The suppliers know that they cannot improve their profit by charging a high price for inferior products, but with innovation they can.
In contrast, in some other countries, we may find “poor markets” with few buyers and few sellers. Because there are only a small number of buyers, many suppliers do not gather. Then, we don’t find everything we need. Even among the existing suppliers, competition on price and quality is limited so that customers must often pay a high price for inferior quality. The country does not grow and prosper, because there is no incentive for innovation.
Information asymmetry
The buyers and sellers are also “informed” market participants, according to another strict assumption of a competitive market. Customers usually do not know “everything” about what they buy. We often listen to what the supplier tells us, or we believe what is written on the product.
One of the best examples is the “purchase of medicines”. If you have not studied medical science, you do not know at all what you buy and how much you should pay. Obviously, we end up paying exorbitant prices for unknown medicines.
In countries with better medical practices, the doctor and the pharmacist both explain to the patient about the medicines. Medicines also come in packages with instructions that the patient can read and understand. If we can’t read the doctor’s handwritings or the language of instructions, we don’t know the medicines. Apart from that, we still do not know the ingredients of a drug.
While the asymmetric information problem in medicine is a very specific issue, this is a common problem in most of the market transactions. In a market where there are not many sellers, there is no competition and thus buyers must believe what the fewer number of sellers say. In that sense, information flows are also limited in poor markets with fewer market participants.
Government intervention
There is no dispute among economists about “government intervention” per se. But nevertheless, there is a dispute about the way that the government should intervene in the market: Should the government control the market or facilitate the market?
Those who believe that the “government must control” the market believe that the government knows how to do business better than the market. Accordingly, they think that the government must run at least some of the businesses.
If some businesses are run by the private sector, the government thinks that the market can be controlled in order to bring a better outcome. Accordingly, they bring import controls, regulatory barriers, bureaucratic procedures and other measures, all designed to control the market.
If we impose these measures, we automatically limit market competition, information flows and incentives for innovation. How do the governments represented by politicians and bureaucrats know better than the competitive markets?
Market facilitation
The role of the government is essential for the functioning of a market economy, not by replacing it or controlling it but by facilitating it to improve efficiency. If the competition is restricted by regulations and institutions, it is the government that should ensure competition by reforming them.
If the inputs – material inputs, energy, transport, technology, infrastructure, and logistics are not available for businesses, the government should ensure their availability at competitive prices and competitive quality. If skilled-labour is not available, the government must facilitate human resource development through education and training, while opening the country to the global labour markets. If capital is not available, it is the government which should facilitate foreign direct investment flows by eliminating barriers against them.
The main point that we need to get across is that the government has a major role to play in strengthening the “market economy” by removing its barriers and establishing a conducive business environment. It is the role of the government to facilitate the market mechanism and not to paralyse or control the market overriding its function. All what we have discussed here applies to our agriculture too.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
Hitad.lk has you covered with quality used or brand new cars for sale that are budget friendly yet reliable! Now is the time to sell your old ride for something more attractive to today's modern automotive market demands. Browse through our selection of affordable options now on Hitad.lk before deciding on what will work best for you!