ARTICLES
How Markets Benefit the Poor
By Thompson Ayodele*
The market is constantly despised and castigated for aggravating the lot of the poor and for increasing their poverty levels. This has been the rhetoric of the self-appointed friends of the poor. Their solution is for government to allocate resources and regulate the economy. They perceive government as all-knowing, all-merciful, and all-wise, and assume that it is charitable to take charge of people's needs the way government officials think is appropriate while disregarding the ability and talents of individuals.
Except for the maintenance of law and order, the services that government is offering today in the developing countries were, historically, in private hands. In the name of maintaining the "corporate unity" of Nigeria after independence and bridging the gap between the haves and the have nots, successive Nigerian governments took it upon themselves to provide lots of services, even when it was apparent that such services could better be provided by private firms. The result: inefficiency and corruption crept in. Despite massive and apparent failure in government-provided services, including the maintenance of law and order, many still look to government for solutions to the nation's myriad problems.
The issue is not whether government should participate in providing services but what form its participation should take. It is wrong to imply that private provision means there is no role for government. The government's role is to put in place the ground rules for establishing a framework in which private enterprises can operate efficiently and respond to society's needs. Every society will continue to depend on a mix of publicly- and privately-provided services. However, it is up to the people to decide where to draw the line. Nigerians have begun to draw that line, and they prefer the private provision of services. Following are some examples:
- many parents, including those without formal education, now enroll their children in private schools.
- with the partial deregulation of the telecom sector, thousands of people are opting for private providers while abandoning government owned telecom services. The cost of installations also continues to decline rapidly. Inefficient service providers risk losing their subscribers in droves.
- in power generation, private individuals now own power generators to serve their households.
- in water provision, government taps are dry. Meanwhile, on a small scale, private individuals now sell water. The vendors ensure regular availability and proper maintenance of their boreholes; if they do not take these steps, they go out of business.
The religious sector provides a good example of this. In effect, where government regulations forbid choices and create inefficiency, the people are creating choices and efficiency themselves.
You cannot walk 500 yards in any city, town, or village without seeing a billboard informing you about an upcoming religious gathering. Religious advertisements jostle for attention whenever you turn. Churches compete for venues and are ready to pay the stipulated fees. Undeniably, in the last couple of years there has been a tremendous growth in the number of Pentecostal churches. This is an area where there is no government regulation or legislation, and there is no limit to the number of churches that can spring up in any given location. Irrespective of your place of abode, nothing stops you from starting your own church, nurturing it, and seeking ways to make it expand. There is no limit to the number of "miracles" that can be performed. The churches get no government subsidies, but instead rely entirely on donations and contributions from individuals and, to some extent, corporate gifts. Their resources are well managed and well used. Unlike Nigeria Airways (Nigeria's comatose and corruption-ridden airlines), which has depleted its assets and is incurably in debt, many Pentecostal churches are increasing their assets and smiling on their way to their banks.
Since they fend for themselves, the churches are innovative, entrepreneurial risk takers. Entrepreneurship here implies two qualities: being alert to new opportunities, and being willing to incur the necessary transaction costs by pioneering new activities and products. When the churches make correct decisions, followers increase, as do contributions and donations. In every respect there is incentive and motivation for the leaders. If any of them cannot meet worshipers' expectations, their congregants vote with their feet. When a "product" does not produce expected results, membership and financial losses are incurred.
Lack of bureaucratic obstacles enables churches to be innovative. Imagine if there were regulations with respect to the number of "miracles" that every church had to perform, or if they have to seek permission to establish churches.
The example of the freedom to own and build churches shows clearly that Nigerians need the same measure of freedom to go into any legitimate business without excessive regulation and bureaucratic control. The maximization of economic development and economic freedom are like Siamese twins. What makes a country rich or poor depends on the level of economic freedom its citizens enjoy. If the level of economic freedom is low, citizens will remain poor, notwithstanding the availability of natural resources or the entrepreneurial spirit of the entire population.
If Nigeria embraces economic freedom, the long-term benefits will be reflected in an increase in its people's living standards-particularly those of the poor-and the ability of the whole country to weather economic storms. If the country resorts to government intervention and protection of local industries to the detriment of market forces, the economy will lack the built-in insulator to withstand economic shocks and turmoil. Experience elsewhere points to one basic fact: Economic freedom leads to prosperity.
The growth rate in free economies across the world is a lesson for a country like Nigeria. When the government keeps intervening in the economy, the market is constantly blamed for any crisis that may later ensue. In actual fact, the reason for market failure should be attributed to government intervention and consequent economic distortions. Government subsidies are one such distortion. Government subsidies are a disincentive to public enterprises. Subsidies have made them less efficient and innovative, and have made them an avenue for enriching government cronies and lackeys. They have destroyed competition, which, in turn, is largely responsible for the inability of local industries to compete in the quickly globalizing world.
The starting point for economic freedom is to embrace market reforms and their supporting institutions such as property rights, the rule of law, and effective institutions. The latter, which should not be confused with organization, simply mean predictable ways in which people will behave. For instance, when you give your check to a bank cashier, you must be sure that he will not collude with fraudsters to drain your account. Many officials, who embark on "white elephant" projects and frivolous overseas trips at government expense, do not welcome the market allocation of resources. However, profit-minded entrepreneurs, ready to expand their market share and business influence, welcome such an allocation.
The opportunities that the market offers are of most critical importance to the poor. In market economies, the rich owe their prosperity to activities that have widened choices for the poor. Those who want to reap where they do not sow will resist effective market reforms. But the market does not punish those who work more and earn more. It allocates resources to both poor and the rich alike. The results of your economic activity will be based on how innovative you are, your entrepreneurial zeal, and your ability to take risks, not on those whom you know, or how well connected you are.
* Thompson Ayodele ( thompson@ippanigeria.org) is the coordinator of the Institute of Public Policy Analysis in Lagos, Nigeria.