The recent failure of the financial markets and supply/demand problems in agriculture can become an excuse for excessive government intervention, which could have dire consequences for farmers.
Economic policy moved towards more free markets with less government intervention in the last decade. The World Trade Organisation focused on eliminating trade-distorting measures while the International Monetary Fund promoted a more free international currency movement. P eriodically we experience a situation where the free-market system fails to deliver the goods. Producers produce more than the market needs or demand exceeds supply to such an extent that shortages and even famine occur.
This is known as market failure. The last couple of months we saw an extreme case of this when the developed world’s financial markets collapsed. A gricultural markets frequently fail to balance supply and demand. Governments then intervene to re-establish the equilibrium. Most agricultural policy experts agree that government should limit intervention as far as possible. S ometimes these interventions are too effective for their own good – the European Common Agricultural Plan moved Europe from famine after the Second World War to a situation of severe oversupply that lasted until 2006. It also protected inefficient farmers to such an extent that they can no longer produce without huge government support.
Where should government intervene?
Government must intervene if buyers and sellers don’t have to pay for the economic impact of their choices or don’t receive the benefit thereof. I nsufficient information about goods and services can result in market participants making the wrong decisions. Before the melamine scare, consumers were prepared to buy Chinese food products if they were sold at a lower price. The knowledge that these products could contain harmful ingredients then stopped consumers buying them. Government must therefore provide and ensure compliance with labelling and production standards that ensure food safety and quality.
Manufacturers of branded products are very conscious of the importance of quality and safety and go to extreme lengths to ensure the food they sell is safe for the consumer. There’s less incentive for the producer of generic products to maintain product integrity through the production chain. roducers who adhere to product standards need government protection from unscrupulous producers, who put the good name of the product at risk. free market works well when both buyers and sellers share enough information to enable them to make the correct decisions. Traditionally market information was collected and provided by the different statutory boards. With their ill-advised demise in 1998, this function largely fell by the wayside. It’s government’s responsibility to see that sufficient information is provided to roleplayers.
The National Agricultural Marketing Council does an admirable job of providing market information under very difficult conditions. Their capacity should be expanded with more personnel and funding. common reason for market failure is when market power is unevenly distributed between buyers and sellers. If a few large sellers dictate to many buyers, they can dictate prices. Much of the produce grown by South Africa’s 40 000 farmers is sold through the four major retail chains. There are many stories about how the retail chains misuse this market power. R ecently we’ve seen a few cases where the Competition Commission and Tribunal imposed stiff penalties for uncompetitive behaviour. In the UK, they have a Fair Trade Commission that looks at unfair trade practices, not covered in the Competition Act. We probably need something similar.
Why we don’t want intervention gricultural production does not adjust smoothly to changes in demand but has periods of over- and under-supply. In many countries, the government intervenes in the market by taking surpluses away and providing products in shortage situations. For example, the Canadian dairy industry manages supply and demand and ensures that farmers get a “fair” price for their milk. High food prices have resulted in a lot of debate about various aspects of market intervention.
The problem with market intervention is that it is impossible to marry the politicians’ short-term goal of cheap food with a longer term goal of food security. The intervention road is a dangerous one to take and, once started, is difficult to stop. n a free-market system government must supply and enforce the rules of the game and provide the enabling environment within which the different market participants can operate efficiently.
Farmers will have to adapt to the free-market environment and manage their operations in accordance with it. While it frequently does not seem so, we are better off in the free-market system. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw • global farming The recent failure of the financial markets and supply/demand problems in agriculture can become an excuse for excessive government intervention, which could have dire consequences for farmers. Demise of the free-market by koos coetzee
