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5.7 The role of government interventions in markets


5.7.1 Improve market infrastructure
5.7.2 Improve information
5.7.3 Improve institutional infrastructure

Despite recent free market trends in the world and in Africa, markets in general remain a subordinate instrument of national political systems and their policies. Government interventions must work to facilitate market competition and to help the market achieve national policy objectives.

Government policies and interventions must address more than the objective of "rationalising" trade, which often results in efforts to make marketing practices conform mechanically to a modern model. Marketing interventions should take into account the proven capability of the marketing network. Policies should be aimed at working with the existing system, not at replacing it. Government attempts to replace free market systems have often raised the costs of marketing, thereby hurting consumers, distorting resource allocations and damaging the economy. It is important that policy makers view trading as a necessary and socially desirable activity carried out in an environment of risk.

The questions to be asked in considering any intervention are: is it really necessary or is it simply for the sake of government control? What would happen if the intervention wag removed? Studies of cattle marketing systems in Africa have, in fact, shown that markets often perform well when left to private entrepreneurs.

It is generally recommended that governments play a facilitating rather than a direct role in markets. Regulatory interventions should be limited. Appropriate interventions are thus indirect in nature and have three general aims:

· to improve market infrastructure
· to improve information
· to improve institutional infrastructure.

5.7.1 Improve market infrastructure

Interventions to improve market infrastructure would target roads, rail, market facilities, water points and health-control infrastructures (i.e. quarantine facilities). Projects for market-sale points, such as auction yards, need to be better designed and located. In Abidjan, for example, a new concrete livestock market remained unused next to the traditional open-air market (Ariza-Nino et al, 1980). In this case, the informal market was already serving an existing need. If market facilities are provided, they need to be built on existing traditional sites and should not be so heavily regulated that agents avoid them.

Investment in water points along trekking systems may prove wasteful. Water points can cause crop damage to neighbouring fields. Often, traders are taxed at these points, which makes them use traditional routes. Market trails could be created if well located in terms of supply and demand areas and grazing areas, along the route and water points. Providing grazing reserves near major livestock markets helps to stabilise the flow of cattle, but fees for such use must be reasonable if traders are to use them. Such reserves could reduce price fluctuations, reduce risk and animal weight loss.

5.7.2 Improve information

Information is important for facilitating effective marketing. While traditional information systems seem relatively effective for livestock markets, one unfortunate consequence of regulated prices is a lack of information on real market prices.

5.7.3 Improve institutional infrastructure

Improving the institutional infrastructure may be the most important government role in marketing. Government interventions should promote an open and stable institutional framework. This may take the form of improving security (i.e. protecting property rights and contracts) and controlling corruption and violence.

A major difference between "traditional" and "modern" markets lies in the degree of personal involvement of marketing agents. In a "modern" market system, personal involvement is minimum; traders operate through institutions which guarantee legality and value. While in traditional livestock markets transactions are guaranteed by a broker who is known to the traders, transactions in modern markets are guaranteed through regulations and supporting legislations. Unfortunately, attempts to provide these regulations have often been badly handled. As a result, traders have shifted back to operating within the informal sector.

Box 5.6: Government intervention in livestock.

In Africa, government interventions in the market have primarily been in terms of providing abattoirs, meat packing facilities and milk processing plants. These interventions set prices, grades and standards for livestock products. Such interventions are usually implemented in order to control consumer and producer prices through a monopoly framework. Control would be over grades and quality for standardisation, health or export. The view held is that private trading is exploitative and inefficient. Thus, government monopolies would produce economies of scale.

These interventions may, in fact, result in inappropriately-located processing facilities, such as abattoirs in pastoral, low-density areas which cannot supply to plant capacity. In practice, it is difficult to exploit the potential economies of scale because of chronically under-utilised capacity.

Capacity under-utilisation is also caused by price policies which pay low prices to producers, uniform across regions and seasons. The result is an unwillingness by producers to supply at the controlled price level. Instead, goods are diverted to the informal economy, because private agents may be able to offer higher farm-gate prices. The result is less use of existing processing capacity, higher average processing costs and a general decline in the economic viability of the system.

Institutional attempts to "organise" trade through restrictive licensing or limiting the number of intermediaries have forced traders to move into the informal sector. In some Sahelian countries, authorities have tried to limit or reduce the number of traders and organise them along artificial functional lines. The result has been less competition, less new entry into the market and the creation of informal markets. Attempts at regulation should promote rather than discourage competitive marketing to reduce costs. Finally, any new interventions should be made gradually, since new policies often cause severe market disruptions.

Most governments have not been able to resist the temptation to intervene directly in markets, particularly by setting prices to create low prices for urban consumers. In general, price-control efforts reduce the efficiency marketing systems.

Direct government intervention in the form of marketing boards is now also recognised as generally undesirable. The result has often been to incur additional costs and wastage which might not occur in a competitive marketing situation. Problems of marketing boards tend to be:

· Government management styles and procedures can be too cumbersome for efficient marketing.

· Few incentives exist for efficiency.

· Low salaries can produce corruption.

· Marketing boards are too often a convenient means for taxing producers and traders.

· Since, for marketing boards to operate efficiently, marketing channels need to be few and concentrated, livestock markets are generally not suited to them.

Box 5.7: The case of Alphabeta: Price intervention.

In Alphabeta, the government adopted a system of uniform producer prices for milk delivered to the National Dairy Co-operative (NDC). The government gave no consideration to seasonal and regional variations in milk supply and production. Because informal milk market prices could not be effectively controlled by the government, they varied seasonally. During the dry season, when milk was in short supply, producers sold their milk to the informal market which offered higher prices. The effect of the uniform price policy was, thus, to divert milk to the informal market during the dry season. During the flush season when informal milk prices were low, milk was delivered to the NDC. The result was under-supply to the NDC during the dry season and over-supply in the flush season. The consequent need for additional manufacturing capacity to cope with the flush supply led to capacity under-utilisation during the dry season and higher overall processing costs. Further, uniform producer prices in all locations, no matter how remote, led to higher transportation costs. The higher processing and transportation costs were passed on to consumers in the form of higher dairy product prices.


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