Nigeria, torn between market system and command economy

Nigeria, in principle, runs a market-based, free enterprise economy. That connotes that the forces of demand and supply, within a defined regulatory framework, determine what is produced and for whom it is produced. Yet we are increasingly witnessing tendencies towards the other extreme where forces other than mere regulation dictate the prices at which products […]

Nigeria, in principle, runs a market-based, free enterprise economy. That connotes that the forces of demand and supply, within a defined regulatory framework, determine what is produced and for whom it is produced. Yet we are increasingly witnessing tendencies towards the other extreme where forces other than mere regulation dictate the prices at which products are sold.

The resort to a command economy is quite attractive in times of economic disruptions such as we are currently experiencing in Nigeria. This is quite evident in the present dispensation in the country. It has become part of the official reaction to the inflationary pressure that has come upon the nation.

The most brazen example of this development has been the desire to clamp down on entities perceived to be charging high prices for their products. The government says it will set prices for various products, including and perhaps especially, agricultural produce. This is quite understandable since the government wants its citizens to have access to food.

However, planning must be complete and not in bits. Indeed, what the market system needs is a regulatory environment that sets the boundaries for all economic agents. Regulation should ensure that neither producers nor suppliers of raw materials undercut each other. Regulation ensures, for instance, that producers do not take undue advantage of a market structure such as an oligopoly to charge high prices, thereby fleecing the consumers. That development can lead to such powerful firms being unbundled into smaller entities. That is regulation. This should also work on the part of suppliers of raw materials, who should not be allowed to band together to undermine the buyers of their materials.

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But that is different from a command economy structure. You cannot, for instance, control the price of finished goods while leaving uncontrolled the price of raw materials that go into the production process. We have seen situations where regulatory agencies, which hitherto have been virtually non-existent, suddenly came alive with cudgels to clamp down on perceived price offenders. This cannot work. It can only lead to disincentives and could add to the list of firms shutting down or relocating.

The managers of our economy must resist the temptation to return us to the system of economies run by control and command centres. Command economies led by the socialists could not survive despite their attempts at mathematical exactness in economic planning. The planners gave production targets to factories as well as the quantities of raw materials allocated to each factory. At the same time, the producers had prices set for them at which their products were to be sold.

Indeed, command economies carried the idea of planning to an absurd extent. They could not survive because the system was marked by inefficiency, low product quality, disenchantment, scarcities of basic consumer goods, and general consumer dissatisfaction. The system was characterised by big shops with scanty goods on the shelves. Over time the few goods available began to disappear, leaving empty shops.

The economy wasn’t designed to meet the needs of the people. There was no organic relationship between the producers and their customers because the producers were acting on behalf of the state, which saw the people as objects to be controlled.

So, price controls of the type practiced in the planned, socialist economies of Eastern Europe could not ensure consumer satisfaction because they were based on faulty doctrines. They were not being enforced because the state wanted to give the best to the people. Rather, the entire system of production, distribution, and consumption of goods and services was simply an extension of the government apparatus.

In those economies, there were no markets to determine prices and allocate resources. The absence of markets defined most of the economies of the economies outside of the developed world then. Where there are no markets, the economy is run by the dictates of the state and its officials. So, in the command economies, governments did the resource allocation through their officials. They determined what was produced, in what quantity, and at what price and for whom.

If price controls could engender economic success and prosperity, the economies of Eastern Europe could not have been poor for such a long time. They would have zoomed into the group of first-world countries; they would not have experienced the social discontents that bred revolutions leading eventually to the drift towards market economy. 

The best approach to achieve a stable price system is to minimise violent policy disruptions. The government’s desire to control the prices of finished goods but not the price of the raw materials that went into their production is a disservice to the producers. When the economy experiences systemic disruptions that cause price increases, people take advantage of that to charge their prices.

In an economy where the informal sector is not captured in the official statistics that we quote, the prices that govern that segment of the economy are reflected in our cost estimates. The current shortage of petrol in Nigeria has led to price distortions in the informal sector that will impact the prices of virtually all goods. Yet such developments are not reflected in official pronouncements.