Government Intervention In National Markets

Government Intervention In National Markets

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Government intervention in national markets.

Angola is one of those countries that is full of such examples. It is also full of contradictions and inefficiencies that dictate that more than often these interventions are only temporary on not fully abided by.

Angola's socialist turned capitalist market is full of such regulated areas where government intervened directly much to the disarray of the market. I can remember a time when you couldn't import tires into the country because Mabor the country's tire producing factory had the monopoly of the tire market. If a private company wanted to import tires they had to require an authorization from Mabor, which would result more than often in it being denied, or a request for a commission on the import wasn't uncommon either.

This continued for a good while even after Mabor stopped producing until the law was eventually revoked and companies are now able to import tires at will, but this law must be less than 2 to 3 years old (!!) as I had a friend who had a run in with the law because of a container full of tires which didn't have the authorization from Mabor to enter the country.

The Major Objectives of Government Intervention

Generally speaking governments intervene in the market for two main reasons: "social efficiency and equity". [1] One does not expect to see a government intervene in the economy to favor a firm, or because the government would profit from such an intervention in the way a firm sees profit (except maybe voters positive perception of the intervention).

Social efficiency is related to the concept of the government intervening in a situation where the costs pertaining to a firm or a number of firms acting in a specific way is higher that its benefits. One might want to say for correctness purposes that one achieves social efficiency when "the marginal benefits to society - or marginal social benefits (MSB) – of producing any given good or service exceed the marginal costs to society or marginal social costs (MSC)." [2]

Equity on the other hand is related to the distribution of wealth. A quick definition could be that "Equity is where income is distributed in a way that is considered to be fair or just". [3] This could be easily seen in the struggle of women to receive equal pay as men when performing the same tasks. Legislation is in place in some countries to prevent that this discrimination doesn't happen and income distribution is equal and fair between men and women.

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Why Intervene – Customs of Angola as an Example

Traditionally if the government is called to intervene is because there is a market failure in one or both of the issues described above that requires government direct intervention.

Government can intervene in many ways but generally intervenes through one of the following ways: creation of legislation to address the problem or taxation (or subsidies). Both of these take on many forms and approaches and both have specific drawbacks and advantages over each other, but depending on the situation either one o the other is best, or sometimes a combination of both.

I always remember listening to law makers saying that the largest part in the law is law enforcement. The law means nothing unless you have a way to enforce it. The situation with the customs in Angola prior to 2001 was such an example. Government had a tariff scheme in place for the taxation of goods coming into the country but year after year the customs department showed a deficit when comparing expenses and returns.

In a country where nothing is produced it seemed like something was wrong in the system. I have often stated this, but corruption ensured that this was so. By bribing customs officials one could lower the total cost of the invoice and effectively pay less taxes. This is one of the great distortions of market that I have found as companies abiding by the rules and always up against companies incurring in such practices effectively making them less competitive.

The government under pressure of the IMF had to look at this customs procedure and in June 2000 created the legal framework necessary to the introduction of an independent customs management assisted by another independent company running pre-shipment inspections. [4] This document legislates about the operations of pre-shipment inspections (PSI) of goods being exported to Angola.

What happened in effect was that it created the legal framework for both Crown Agents to run customs and Bureau Veritas to run PSI's. Crown's first priority was to eliminate corruption and fraud within customs to ensure that duties and taxes were paid appropriately.

Bureau Veritas ensured that companies were importing what was said at the cost that was said, effectively stating in the inspection reports if the goods were in accordance to the proforma invoice registered and if the goods valued was according to market prices, undervalued or overvalued which would have penalties if found to be a fraudulent practice of some sort.

This intervention had a very positive effect in customs as "In Angola, where CA [Crown Agents] are assisting the Customs Service to implement holistic change, annual customs receipts have increased from $220 million in 2001 to $860 million in 2004, clearance times for properly documented cargoes are down from 30 days to 1, and firms such as Coca Cola are making significant new investments in the country due to the greater security of their market." [5]

This was all achieved without recourse to tax alterations, but just by creating an appropriate infrastructure with appropriate checks and balances to ensure compliance with legislation in vigor that previously was not being enforced. Crown Agents had virtually the power over customs and were allowed as part of their mandate to fire, suspend, transfer and take any action deemed necessary against customs agents and officials as part of their objective to get rid of corruption at customs.

Conclusion

Government intervention in the market is primarily aimed at reducing injustices and inequalities. In this case it created a very positive effect in the market reducing corruption in customs considerably in most sectors, allowing for fairer competition between companies and for larger revenue streams that will allow further investments in customs itself as well as other areas of government intervention that would otherwise have to be funded via other sources such as recourse to debt or donor funding, creating a better more transparent and fairer economy.

While intervention should be reduced to a minimum not to pervert the market, governments should always keep an eye out for situations that only government intervention will regulate in everyone's best interest against the interest of just a few.

REFERENCES

[1] Sloman J. and Sutcliffe M., Economics for Business 3rd Edition, page 401, paragraph 1
[2] Sloman J. and Sutcliffe M., Economics for Business 3rd Edition, page 401, paragraph 2
[3] Sloman J. and Sutcliffe M., Economics for Business 3rd Edition, page 402, paragraph 4
[4] Ministério das Finanças, Decreto Executivo nº 34-00 26-06-2000, [internet] Accessed on: 19th November 2005, http://www.minfin.gv.ao/leg/adu/adu.htm
[5] Crown Agents, Building Partnerships between Business and Government - Commission For Africa, [internet] Accessed on: 19th November 2005, http://www.crownagents.com/news/news.asp?step=4&NewsID=648
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