Free Markets Give Options to the Poor

Published on 27th February 2007

If Africa has to fight poverty, it must promote free markets. Free markets will enhance investor competition, quality delivery of services, and discovery of new resources to meet human wants and needs. - Thompson Ayodele

The market is constantly despised and castigated for aggravating the lot of the poor and for increasing their poverty levels. What makes a country poor or rich does not have any relation with its population or resources. It depends on a system that encourages risk taking, innovation to be rewarded and allocation of resources to be done through a spontaneous process rather than a predetermined outcome.

Poverty haunts Africa. Majority of the population live in poverty. There is no moral justification for African governments to bring relief to the continent’s poorest. Beyond an acceptance of the primacy of economic growth as the starting point for poverty reduction, there is little consensus as to how this might best be achieved. 

The prevailing view, one frequently espoused in government, emphasizes the state’s role as against markets in promoting development and in alleviating poverty.

A widely erroneous held view is that poverty is as a result of a market economy that thrives on, and in turn generates inequality and injustice. In this view, markets are seen as inimical to the interests of the poor who need in some way to be protected or insulated from them. Nevertheless, several evidences from China and India, which have reduced the number of poor people within the last decade, suggest that the only long term and durable solution to poverty lies in the well functioning of the market.

Africa is not alien to the institution of free market. A study of African traditional system reveals that there were free markets, free trade and of course free enterprise before the advent of colonial institutions. However, shortly after independence many postcolonial African leaders imported a development pattern that favored central planning.

And with central planning, Africa’s economy was controlled. The state demanded for itself ownership of economy and participation in the economy. It led to the institution and imposition of the flurry of state controls and regulations on the economy, the operation of a whole lot of state – owned enterprises. State intervention later created shortages and poor services. 

These shortages in turn led to operation of black market. When black market is created, there is an opportunity for officials operating the control to illegally enrich themselves. Ironically, this imported economic model did not face up to the traditional African society where chiefs do not fix prices but prices were arrived at through bargaining between buyers and sellers. Now in contrast to this price controls (or at best dictated by the government) were imposed on some commodities and products in Africa, something that did not exist in traditional Africa. 

Private entrepreneurship is necessary for economic development. This is because it is the discovery of new resources, wants, knowledge and means of production to meet human wants. Central government entrepreneurship has rarely been very successful in development and has left many countries in Africa with a legacy of white elephant project and huge foreign debt. 

Politicians and civil servants lack knowledge and incentives to discover the right knowledge. Instead of meeting people’s demands and informing them of what is possible, they tend to employ their energies to finding opportunities to line their pockets. Profit chasing individuals, on the other hand, tend to do what market demands and adjust to evolving circumstances in the course of economic change.

There is a discovery procedure and it fulfils these functions in tackling economic problems: 

  • Facilitates entrepreneurial exploration and discovery
  • Spreads useful knowledge around
  • Brings about the spontaneous correction of errors, and
  • Controls the concentration of economic power 

Intense competition in the market has three important social functions: 

  1. It gives incentive to be on the alert and to incur the costs of searching for valuable knowledge
  2. It signals success to others
  3. It signals failure through red ink and induces the spontaneous, automatic abandonment of those property uses which are not sufficiently highly valued 

Profit has important dual functions: to signal knowledge and to serve as an incentive to improve value of human knowledge. 

In a competitive economic system, people have a profit incentive to search for and test useful knowledge that their fellows welcome. Market competition creates conditions in which people are most likely to learn how to improve their lots. 

Market is enhanced by competition. The uncomfortable business is driven by rivalries with others on the same side of market place. To position themselves properly for deals with buyers, producers incur high costs of research and development to improve products, advertise and to offer better or cheap models. This rivalry drives ceaseless product innovation.

Where market is not allowed to flourish and industries are protected from incurring knowledge exploration costs by government, this automatically reduces the intensity of an industry’s rivalry and hence unwilling to incur transaction costs. As a result of government intervention, entrepreneurs only generate and utilize few useful new ideas.

That is why protected manufactures who enjoy government made certainties are poor innovators. The flipside of such welfare policies for big business is always industrial malaise, poor economic growth and limited competitiveness.


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