Thursday, October 30, 2008

Merits and de - merits of market economy and what would the government do to mitigate the demerits in Tanzania

Introduction:
Since independence, Tanzania, like many other African countries has experienced a remarkable political and economic transition. Formerly a one party state with a planned or command economy now is a multiparty democracy with a mixed market-oriented economy. Tanzania has, undergone a series of economic reforms, including currency devaluation, tariff reduction, domestic tax reforms, and increased investments in infrastructure. The country’s economic performance under these structural adjustment efforts has improved substantially in many respects and in some areas has not improved agriculture sector being the one. It is the intention of this paper to discuss market economic system by exploring its merits, demerits and suggests some alternatives to mitigate the demerits in Tanzania. In the course of the discussion the paper will first attempt to define the terms economics and economics systems types. Finally the conclusion will be given.
What is economics?
There's no one universally accepted answer to the question "What is economics?" Various definitions have been given out by scholars. The few to mention are as follows: The Economist's Dictionary of Economics defines economics as "The study of the production, distribution and consumption of wealth in human society."
(Wikipedia, the free encyclopedia) define economics as a social science that studies the production, distribution, and consumption of good and services.
Lionel Robbins (1932) defines economics as the science which studies human behavior as a relationship between ends and scarce means which have alternatives uses. Scarcity means that available resources are insufficient to satisfy all wants and needs.
The Tanzania Institute of Bankers (2006) defines economics as the social science concerned with the problem of using or administering scarce resources to attain the greatest or maximum fulfillment of society’s unlimited wants.
Therefore for the purpose of this paper discussion will define Economics as the social science which examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.
Economic system can be categorized into three categories as follows: Firstly, the Capitalistic economic system. This type of economy is characterized, dominated and guided by market and private ownership of economic resources. Relies on market forces to decide on what to produce, how to produce and how to distribute what is produced. The second type of economy is that of command/ planned sometimes called socialistic economic system. This is dominated by the state / central planning and public ownership of the economic resources. The decision on what to produce, how to produce and how to distribute is done by the government. The third type of economic system is that of the mixed economy which, apply both the two i.e. capitalist and planned/ socialistic economies. Individual people create demand and so determine some of the goods and services that are produced by the way that they spend their money. The government determines other goods and services that are produced ie education, health, public goods like street lights.
For the purpose of the discussion on the merits and demerits of the Market economic system or capitalistic economy, the paper further explore what is and the characteristics of Market economy as follows:
Market oriented economic system according to Wikipedia is defined as an economic system in which the production and distribution of goods and services take place through the mechanism of free market guided by free price system. In market economy, business and consumers decide of their own choice what they will purchase and produce and in which decisions about the allocation of those resources are without the government control. The producer has a power to make decision on what to produce, how much to produce what to charge the customer for the goods he produced what to pay the employees. The decision made depend on or influenced by the forces brought by competition, supply and demand.
This type of economy is opposite to the socialistic or planned economy whereby the government makes decision on what will be produced and in what quantities. In addition to that market economy is opposite to mixed economy in which the market system is not entirely free but under some government control which can not be like in the planned economy. Market economies work on the assumption that market forces such as, demand and supply, are best determinants of what is right for a nation’s well being. The economies are rarely engage in government intervention such as price fixing, license, quotas, and import duties and subsidies provision. Therefore, market economy relies chiefly on market forces to allocate goods and resources to determine prices; and hence this is called free economies, free market or free enterprises system.
Merits of market oriented economic system in Tanzania
Firstly, one of the market oriented economic system characteristics is that the economy is on the individual or private ownership where labor resources, natural resources, capital resources (e.g., equipment and buildings), and the goods and services produced in the economy are largely owned by private individuals and private institutions rather than by government. This private ownership is combined with the freedom to negotiate legally binding contracts permits people, within very broad limits, to obtain and use resources as they choose. This type of economy has some merits and promoted the economy of Tanzanian’s individuals and private companies as they now own the resources, run businesses and increased their investments. For example people like the Bakheresa are running flour business that used to be owned by a state through the National Milling Corporation. Companies like IPP media owned by Reginald Mengi and the like. In the market economy individuals are now able to own equipments and buildings of any value which was not a case during the socialist economy. The system allows increasing their entrepreneurship and investment among Tanzanians individuals hence poverty eradication at individual level.
Secondly, another characteristic in the market economic system is that of competitive motive which controls the market. The tendency of competition in Tanzania has benefited Tanzanians as it creates competition among the goods producer and service suppliers. Competition is evidenced in various products and supply of service. For example companies dealing with soft drinks soda Coca cola and PEPSI are competing for customers. Companies dealing with beer ie Serengeti and Tanzania Breweries are competing to produce different varieties of beer which gives better choice to consumers. Cell phone companies ie Vodacom, Tigo, Celtel and Zantel are competing to such that they are reducing service charges to customer. Through competition Tanzanian’s have benefited as they have good choice of quality at reduced price, variety of commodities and services and there is no shortage of commodities and services compared to the period of the socialistic/ planned economy where Tanzania used to have one company producing beer and one company for telecommunication service provider that of Tanzania Telephone Company Limited and transportation dominated by National transport Company ie KAMATA and UDA hence there was no choice or alternatives among consumers of the products and service.
Thirdly, in a market oriented system where there is an opportunity for the buyers and sellers freely to enter or leave any market. Buyers and sellers act independently in the marketplace. This system has benefited Tanzanians as people have freedom of choosing of being customer to a product or service of their choice. For example on communication service people can decide any time to be a customer of any communication service provider of their choice. The companies includes tigo, Celtel, Vodacom while during the socialistic/ planned economic system the country used to have only one company that of Tanzania Telephone Company Limited (TTCL) owned by the Government. People had no option regardless of poor services that were supplied by the TTCL. People can make a choice on buses to board for their journey.
On the other hand in the market economic system producers also have a choice on what they want to produce. A case of Tanzania agriculture sector farmers now have a choice on what to produce. Take a case of Shinyanga community which used to be forced to plant cotton and sale it to state owned authorities i.e. Tanzania Cotton Authority the only authority that used to buy cotton which in most cases the price was low and sometime it delayed payments for the farmers. Through the market economy farmers from Shinyanga and Mwanza now have a freedom of and changed from growing cotton to rice which have the ready market and good price. Another case is that of coffee farmers of Kilimanjaro also some opted to uproot coffee plants instead they grow maize and tomato that have good price and ready market. Farmers are now benefiting their product due to freedom of entering and leaving the market for both
Fourthly, in a market economy there is a motive of self interest whereby the "Invisible Hand" that is the driving force in a market economy is each individual promotes his or her self-interest. The entrepreneur’s motive is profit over the business. They try to achieve the highest profits for their firms while on the other hand workers want the highest possible wages and salaries and the owners of property resources such as building attempt to get the highest possible prices from the rent and sale of their properties. The system does not need official and government to deicide on price and profit margin. This is another merit for the market economy in Tanzania as individuals try to work hard to make profit from their business as they are not in control of the state or any authority as it is in the planned economy system where there are regulatory and price setting authorities which will not allow for maximum profit. Individuals and companies are able to set prices that will enable them to make profit. On the other hand consumers and the workers are getting the greatest satisfaction from their budgets as they can choose the type of employment that gives them highest possible salaries. People now can move from government to private organization or company and vice versa looking for well paid salaries depending on his or her qualification that enables them to have high purchasing power.
Fifthly, in the market economy, markets (goods or services) are the basic coordinating mechanisms no central planning is done by the government or authorities. A market brings buyers and sellers of a particular good or service into contact with one another. During the error of planned/ socialistic economy Tanzania used to have crop authorities that used to control and making coordination between buyers and sellers, Crop authorities included Cotton authority, Coffee authority, Tea authority and the like. These authorities used to have a lot of bureaucracy and inefficiency, giving low price to farmers such that farmers did not benefit on what they were producing. Through the market economy where there is no government or authorities control and coordination hence less bureaucracy and red tape, buyers and sellers are getting into contact with another directly and easily depending on the products, goods and service they sale or buy. For example growers and buyers of cereals e.g maize from Dodoma, Iringa and Sumbawanga do have a direct contact with Mohamed enterprise or Bakheresa who are the major milling and seller of maize flour in Tanzania. Farmers are getting good price through that direct contact instead of going through other coordinating authorities eg National Milling Cooperation (NMC) as it used to be in socialistic economy. At that period of planned/ socialistic economy if Bakheresa wanted to get maize have to buy from National Milling corporation where farmers would have sold their maize which resulted to high operational and administrative costs hence the price to the farmers was low while on other hand Bakhresa would sell the maize flour at high price to consumers as he bought it at high price from NMC
Sixthly, Market economy that promotes private investment it creates more opportunity for the increase of revenue collection by the government through taxation to private and individual business. Tanzania Revenue Authority now is collecting a lot of revenue from private owned companies these include: Tanzania Breweries. Tanzania Cigarette companies, Mining industries, Hotels etc. compared to the period of the planned economic system.
Demerits of market economy a case of Tanzania.
Market economic system apart from the above merits also has demerits in Tanzania as follows:
Firstly, in market economic system where there is a tendency of dependence on supply and demand theory have its disadvantages to small scale producers and consumers in Tanzania. This is more experienced in the agriculture products where during the bumper harvest the producers experience loss as they do lack storage and processing facilities for perishable products which they can store or process their products to wait for the period of high demand that will benefit from the increases of the price. For example during the harvest of farm crops eg fruits (pineapples, oranges mangoes) maize, rice etc the price goes down which make famers to get loss as they can not store and process to wait for the better price period.. While on the other hand when the products are scarce in the market consumers tend to suffer due to high price as the demand increases. This has been the recently experienced in a case of cement the price have gone up due to high demand of cement.
Secondly, in the market economy where is characterized by competition for the market, it give difficulties to small entrepreneurs due to poor technology and low capital. Small firms may be taken over by big companies. The majority of Tanzanian depends on agriculture which is not mechanized and well advanced. Farmers are using hand hoe such that they can not produce much to compete with big investors from other countries that have big capital and mechanized agriculture. This is experienced by the sugar cane farmers in Kilombero where small farmers are competing with big investors for the same market. Investors command the price as they have big harvest and good quality sugar. The same it applies to small entrepreneurs’ who are competing with big investors who have big capital such that they dictate price by selling at low price their commodities Small entrepreneurs’ are not able to compete as they do not have enough capital for competition. A case of Bakheresa who is in the business of ice cream, bread, chapatti as result small entrepreneurs such as food vendors (mama ntilie) can not compete with him as he sales at low price and big supply as a result the common people suffer. Chinese investors now are competing with local people such that the local industries are stagnant and are not making any progress. Interchick company has monopolized the market for chicken such that small scale poultry keepers are making loss as they do not have the market.
Thirdly, in the market economy the system does not require coordinating organ between producers and consumer. It is the type of market (product and service) that connects and coordinates consumer and buyers. In such economy where there is no coordination mechanism, for rural communities the majority in Tanzania suffer and do not benefit from the system as they do not have a coordinating mechanism with the consumers, the coordination forums would look for good price and control the price in favor of the farmers. E.g. Farmers cooperatives used to coordinate and negotiate price on behalf of farmers for better price of their crops. But in the market economy instead of having the coordination mechanism farmers from the rural area are conned by middle men by giving them low price as they are unaware about the price in the market. For example at Kariakoo there are people who work as middle men ( dalali). These people make sure that there is no contact and communication between the farmers who bring their products and the buyers at Kariakoo. The middle men always make double profit by putting low price to the farmer and they hike the price to the consumer
Fourthly, under the market economic system where there is no control mechanism there is a tendency of investors or suppliers to supply poor quality products. A case now in Tanzania there is a lot of poor quality and fake products in shops i.e. TV sets, radio electrical products etc as a result people are buying commodities that are not equivalent to the price they give. Many cases of building burnt due to poor electrical installed material.
Fifthly, in market economy with no government control on the economy producers of good and services would seek to maximize profits, and may pay little attention to they cause pollution to air, water etc from their industries and whether the employees work in a safe and healthy condition and paid good salaries and whether the goods and service produced is of good quality. In Tanzania there many cases of industries that do not consider that for example many complains have been given by community around KTM textile industries in Mbagala Dar-es-Salaam on the polluting the stream around that area. Industries and mining in Lake Zone are polluting Lake Victoria.
What Government can do to mitigate the demerits of market economy in Tanzania?
Firstly, Tanzania government needs to adopt an economic system that will enable the government to have policies that will allow a mixed economic system. The government still needs to have some authority in different sectors of the economy such as social services provision; education, health, transport, telecommunication, power supply water etc. This would be by establishing and strengthening boards and authorities that will work as regulatory authorities for quality and price control for the pro poor community. Authorities like Tanzania Bureau of Standards (TBS) that make sure all commodities produced and imported meet the standards; Other authorities like EWURA responsible for petrol quality control and price; SUMATRA regulatory board for transport, Tanzania Food and Drug Authority ( TFDA) etc.
Secondly is for the government to formulate policies and practices that will give fair competition in the market among local and small scale entrepreneurs; Small scale farmers and entrepreneur versus the high and foreign investors support them with capital support, create markets and technology for them to meet the competition For example the small scale miners to be supported by the government with capital so that they can compete with big foreign investors.
Thirdly is the government to formulate policy and measures that will support and improve the small scale farmers and investors by investing in transport, communication, processing, storage and marketing infrastructure. Such policies will help small scale farmers to bring their production to domestic and international markets more cheaply and effectively. They also tend to help the poorest households, which are generally engaged in small scale farming of non traded food crops, by gaining them more effective access to and participation in market. They can also improve the cost-efficiency of international trade.
Fourthly, government needs to promote credit facilities to small scale farmers and entrepreneurs so that they can have enough capital to compete with big investors that have high potentials of getting loans from banks. The credit system to small scale farmers and entrepreneurs’ will enable them to improve and expand their farming and businesses.
Fifthly, government needs to introduce policies that will be for pro poor by controlling and protecting the local industries and entrepreneurs’. Foreign investors should not be allowed to invest in sectors that the indigenous have capacity to invest in. For example in Kariakoo you find a Chinese who is a foreigners investor is selling the same commodities that are being sold by Tanzanians. In employment sector government should not give working permits to jobs that can be performed by Tanzanians to avoid unemployment to indigenous. For example now most of the foreign hotels especially those owned by Asians they are mostly employing workers from India which the jobs can be performed by local Tanzanians eg chauffeurs
Fifthly, government to put strategies that will promote the spirit of people to consume the local produced commodities compared to foreign. For example to strategies that will motivate super markets to sale Tanzania’s products like fruits, vegetables chicken etc. instead of selling the same products imported from South Africa.
Sixthly, government needs to waive or reduce the export and import taxes for the small scale farmers and micro business people. For example in order to promote agriculture sector for the indigenous people will need to have an exemption on import taxes for the agriculture in puts and an exemption for export taxes so that they can compete with other countries at the international market.
Seventhly, government needs to support local cooperatives and associations that will coordinate small scale farmers and entrepreneurs to advocate and coordinate for fair competition and protection of the local people industries and entrepreneurs. Associations such as the of Tanzania Export Association (TANEXA) that will advocate for local exporters interest
Eighthly, government needs to promote and support indigenous people to invest and get in partnership with big and foreign investors. This can be achieved by regulating the investment regulations to favors and support the indigenous. Some people could monopolize and become very rich and powerful because of their success in business while other peoples, especially the farmers, unemployed would remain very poor as a result an unequal distribution of wealth.
Conclusion:
Market economy system that work on the assumption that market forces such as, demand and supply, are best determinants of what is right for a nation’s well being. The economies that are rarely engage in government intervention such as price fixing, license, quotas, and import duties and subsidies provision has got both merits and de merits. For a country like Tanzania which of its majority citizen are poor. Small scale farmers and entrepreneurs still require the economic system that will be for the pro-poor community. Government need to have policies that will support and favors the poor to participate in the market oriented system otherwise will create classes in the society of “the have and have not” and a unequal distribution of wealth.

Reference:
1. Hardwick,P; Khan,B & Langmead, J (1994) An introduction to modern economic 4th Edition.
2. Niclas Berggen: The Benefits of Economic Freedom ( A survey) Volume viii No 2 2003
3. Principles of Economics Bankers work book series The Institute of Bankers
4. National Council on Economic Education, New York, NY
5. Robert,P & Quillfeldt, J; ( 1987) GCSE Economics
6. http://www.ingrimayne.com cited on 7th March 2008
7. http://economics.about.com/cs/studentresources/f/whatiseconomics.htm cited on 7th March 2008
8. http://academics.smcvt.edu/economics/Whatis.html cited on 7th March 2008

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