One of the popular notions in Africa is that the “Government knows best”. So, with any problem, the suggested solution is often preceded by the “Government should”. Hence, too many governments in Africa interfere with the smooth operations of commodity markets in order to placate certain special interest groups such as consumers. But quite often, state interventionism hurts the very people the government set out to protect, as I will illustrate.
Let’s assume consumers in African country A, complains and demands their government act against the increasing prices of maize on the market which currently sells at 2000 naira a bag. And the government agrees and imposes a maximum price or a price ceiling of 700 nairas on a bag of maize. Selling maize above that price will be illegal, to placate the consumers. As the government forces producers to accept the price of 700 nairas on a bag of maize, three things happen.
First, because human beings everywhere operate by incentives, producers of maize will start smuggling their produce to country B, especially if the price of a bag of maize in country B is substantially greater than 700 naira a bag. The smuggling of maize from country A to country B with a relatively unchanged demand for maize in country A leads to a chronic maize shortage in country A.
Second, because producers of maize produce or sell maize to make profit, they will under-produce or cut back on the production of maize. Instead they will grow or produce something else, after they realise that the government-imposed price on maize is less than what they can get on a market where prices are determined by supply and demand forces. The immediate effect of this will be a shortage.
Third, because the imposed price on maize is generally lower, it artificially cheapens maize and thereby induces greater consumer demand. Also, since producers don’t want to lose money on maize, they will withdraw existing bags in the market from sale. Subsequently, consumers who go to buy maize will find that there is none. But if one is willing to pay significantly above 700 nairas for a bag of maize (the government-imposed price), there would be plenty of maize to be purchased. This inevitably leads to another appalling phenomenon called the “Black Market” where maize will be sold above the official government-sanctioned price. What’s more, this problem leads to the illegal hoarding of maize to be later sold on the “Black Market” which eventually translates to the chronic shortage of maize on the original market.
So irrefutably, prices are determined by the market forces and no government can successfully impose price controls and battle market forces. And unfortunately for African countries, government policies to make basic commodities available at reasonable prices flout not only the laws of economies but also common sense. At the same time, it hurts the African people.
By Nana Kwaku M Asamoah
Email address: [email protected]