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| Columns |
| Economic & Business Forum |
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by
D.D. Phiri, 20 May 2005
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12:31:41
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Pricing of products under liberalisation.
As I started thinking about my next article for this page I heard from the radio that the US government has decided once more to impose quotas on certain imports from China because they are undercutting local manufacturers to the extent that they throw too many workers out of employment. European Union member countries have also been making the same complaint for some time.
For several years the US has been appealing to China to revalue its currency the yuan and make it stronger. What does this mean in the layman’s language? Once it costs more dollars to acquire a unit of the yuan, prices of Chinese imports to the US market will rise and become less capable of undercutting American manufactures.
The Chinese have steadily resisted the appeal and have kept on inflating their favourable balance of payments with the US. China has replaced Japan as the conqueror of American and European markets.
America, the leader of classical capitalism has always preached liberalisation of trade mutatis mutandis. At the height of its industrial revolution Britain preached free international trade. To catch up the US and Germany listened to the voice of the German economist Friedlich List about protecting their infant industries.
During the Japanese export boom, the Americans spoke of fair trade in preference to free trade. This is what they have been saying to the Chinese and because the latter have been ignoring the appeal, the Americans have decided to use the statute law to keep out excess Chinese imports. National interest has taken precedence over international interest.
About the same time I was hearing of the American quotas on Chinese imports. I heard that the Malawi government had imposed higher prices on cotton produced by smallholder farmers. The farmers have been complaining that the buyers are offering them below cost prices as a result of which the farmers have found cotton farming unworthy of the trouble. With the imposition of the higher price it is the buyers that are complaining. They remind government that such fiat prices are not only unfair but also contrary to its liberalisation policy.
What the US and the Malawi governments have done has one objective; not to pave the road to hell with good intentions. Liberalisation in the sale of cotton has given buyers the clout of a monopsony: the monopoly buyer who dictates prices of bargaining them. If the peasant farmer is not heeded, he will give up growing cotton as he has done in the past, and this would bot be in the overall interest of the country at a time like this one when the tobacco industry has no future.
We sometimes forget that cotton was one of the cash crops that the British Government encouraged in this country at the very beginning of the 20th century. It was keen to have a source of supply within the Empire instead of depending on imports from the southern states of the United States. In the course of time tobacco and tea surpassed cotton as foreign exchange earners. But we must at all costs revive cotton growing as an aspect of economic diversification.
As I have said in the previous commentaries, if you want to have an assured place in paradise when your days on this earth are over, do as the priest or pastor says, not as he does. As for salvation in economic relations on the earth do what the advocates of liberation do, not what they say.
The world of economics is ruled by theories of economists from Adam Smith to professor Milton Friedman of Chicago University. They analyse the market structure as to the amount of competition existing in it into pure competition, monopolistic or imperfect competition, oligopoly and monopoly. It is up to stakeholders to serve their self-interest according to the nature of the market. Sometimes self-interest requires that you adhere to the tenets of the theory regarding one of these market structures, sometimes you should ignore the theory.
Pure competition exists where five conditions are present:
A large number of buyers and sellers. Sellers compete with one another for customers and are willing to lower their prices. Buyers compete for the product and are willing to accept a higher price in order to have product. In case of the cotton commodity in Malawi there are many sellers, but few buyers. The buyers are in a stronger position. They can meet behind doors and agree not to accept a price higher than X.
Since the buyers are so few the seller has only two options, either to accommodate these buyers or take his commodity back home and let it rot there.
The second condition is that buyers and sellers deal in identical products. Most agricultural commodities fulfil this condition.
Thirdly each buyer and seller acts independently. Fourthly buyers and sellers must be well-informed about the items and the prices at which they are sold.
Lastly, buyers and sellers should be free to enter or leave the market. Producers have to keep prices competitive otherwise other firms come in to divert customers to themselves.
Pure competition exists only in theory. Economists use it as a frame of reference or benchmark from which the market should not divert too much.
Monopolistic or imperfect competition is more prevalent in the market than pure competition. This is brought about by product differentiation, using brands. Soap these days is never sold as soap, but is given a name, so are vehicles, pharmaceuticals. The difference between one brand and another may be insignificant, but the manufacturer using advertisements makes potential buyers perceive differences in a magnified form and willingly pay the higher price that the manufacturer charges.
Oligopoly is the situation where there are very few sellers facing numerous potential buyers. In most cases one of these few buyers is considerably bigger than others. This biggest firm is the price leader. The price that it charges is adopted by the other firm. If one of the firms requires its price the most powerful firm fixes its own price even lower so as to drive the impertinent competitor out of business.
Monopoly is a situation where there is only one supplier. Pure monopoly like pure competition is rare. There are natural monopolies which exist because the market is such that two suppliers cannot supply the market without both of them going out of business.
Each market requires constant vigilance to make sure that national policy is fulfilled. At present in Malawi I believe we want the cotton industry to thrive, grow to support our local textile industry. It is no honour clothing ourselves with kaunjika, the discarded clothes of other countries.
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