Liberalised vs controlled markets

January 13, 2009

, NAIROBI, Kenya, Jan 13 – Lately there has been hue and cry over the arbitrary increase in the prices of essential commodities such as maize flour and fuel.

The latest increase in the fuel prices for example resulted from an artificial shortage that has been blamed on oil marketers who wanted to make a quick buck by citing a supply constraint.

On the other hand, the price of a two kilogram packet of unga, which is the staple food for many Kenyans went up from Sh76 to Sh120 in less than a week due to the emergence of a cartel that was buying cheap maize from the National Cereals and Produce Board and selling it back to the board at exorbitant prices.

This deliberate attempt to manipulate prices instead of leaving them to the market forces has caused many Kenyans to appeal to the government to introduce and in some cases re-introduce price controls for vital commodities.  

They have argued that by regulating prices for food and fuel, the government would be playing a critical role of protecting its citizenry from exploitation by rogue businessmen.

The government has expressed its willingness to do so particularly in the energy sector where it has developed a formula for working out the prices of petrol and related products. The new mechanism is expected to be implemented as soon as it gets a nod from the Energy Minister Kiraitu Murungi.

Granted and in light of what has happened in the market in the last few days, maybe they have a point. But is price controls really the solution the country is looking for? Shouldn’t we leave the market economy to the demand and supply forces?

To effectively determine what mechanism the government should use, we need to look at the pros and cons of both price controls and those of a free market economy.

In a liberalised market, consumers are free to buy whatever service or product they want and in whatever quantity they can afford. If the market is not influenced by monopolistic tendencies, then producers are compelled by the demand and supply forces to make quality goods and services. This enhances competition and efficiency in the market which means cheaper and high quality goods.  In such a scenario, the ultimate beneficiary is the consumer.

However this element of choice lacks in a regulated economy. It often leads to the distortion of the market which can either experience an oversupply or worse, a shortage that outstrips demand. This is part of the reason why black markets in a society emerge and thrive. It is feared that such an environment also chases away investors. A developing economy such as Kenya requires all the investors it can get and it would therefore be a bad idea for the State to intervene in the market. 

Unlike in the liberalised economy where increased competition ensures and assures job creation, the regulated markets experience low unemployment levels and high rates of poverty. This is because production is left in the hands of one or a few big companies that can sell whatever they want at a price that they feel like.

The other advantage of a liberalised market is the production of more and diverse goods and services. This directly and positively affect the GDP of a country and also leads to innovation of many sophisticated and advanced products and services. If the population is consuming and demanding more owing to the purchasing power of each individual, then it means that tax collection also goes up. The government is then able to generate more revenue that goes into meeting its financial obligations and development projects for its citizens across all social classes.

Proponents of a controlled economy argue that a liberalised market where prices surge and many commodities get out of reach of people particularly those living below the poverty line, increases the chances of widening the gap between the rich and the poor. They say that the benefits of such an economy do not permeate to the grass root level. This could be true but it is also the point where the role of the State is required to ensure that none of its citizens is locked out from enjoying the benefit of the existing structure.

The events of recent days have shown that many marketers cannot be left to their own devises. Therefore the government should take serious punitive measures against unscrupulous business people who are out to fleece the public and set an example to others that the State is on the lookout for Kenyans.

With this in mind, it is important to say that it is the role of the government to protect its people, both the consumers and those in business and this can only be done by striking a balance where everybody wins – the consumers get the products and services that they want and which are fairly-priced, companies make their profits and the State gets its cut from collecting taxes from these two classes of the population.

Therefore the onus is on the government to develop policies that promote a win-win situation that would eventually contribute to a country’s social, economic and political development.

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