Business & Finance INDUSTRY

Ghana’s Free Market Conundrum

There are some people that in one breathe advocate policies that support the free market, but in another preach the opposite. This was how I felt reading an article in the 16 October 2017 edition of the Business and Financial Times. It was titled: SMEs Call for Tax Holidays. The point of the article was a call on the government to give local firms the same tax concessions it offers foreign multinationals. The CEO of a chocolate making company was interviewed in the article. She said, “And beyond the tax concessions, there should be support for the business. For example, there are companies that produce chocolate here, but we have allowed the influx of many chocolates from other countries. How do the local companies grow with such competition?”

It is only fair that Ghanaian firms be allowed tax holidays granted to foreign firms, and that is what should be done. However to call on the government to protect indigenous firms is a bad policy in several respects. Instead of asking how local companies grow with such competition, it is should be asked why a local company or any business for that matter will want to be in an industry it cannot compete in. If a Ghanaian company cannot compete with foreign firms it should not be protected; rather, it should be left to die.

The protection of one businessman is automatically the failure of another, without creative destruction. The businessman who succeeds on the basis of protection has nothing superior to offer. Most of the time, his product is inferior. Why would he be protected in the first place if he had a superior good? When local companies are protected, local firms who import goods that the local firms are protected from will be forced to go out of business. When this happens, it becomes a tax on consumers who will have to pay higher prices. Let’s illustrate this with an example.

Company L is a local firm which makes soap and sells one at GH¢5. Consumers complain that its soaps are crude and expensive. Another company, Company F, imports soaps from overseas based on a partnership with a reputed foreign soap manufacturing company. Company L prices its soaps at GH¢3 each. Consumers patronize Company F’s soaps because it is smooth on the skin and obviously cheaper. Company L complains that Company F should be stopped from operating because it – Company L – is a local firm and must be allowed to grow. The government decides to protect company L and increases the taxes on imports, making it impossible for Company F to operate at profit, therefore it stops trading. Consumers will then have to pay an extra GH¢2 artificial price for an inferior good. If this is not a tax on consumers then what is it?

Some claim having strong indigenous Ghanaian brands is a necessity. They advocate protection to achieve this. To them, I ask: have you seen a child really ‘grow’ when it is always protected by its parents? The idea held by some businessmen that they should be given special dispensation because they are Ghanaian is short-sighted. Do such businesses plan to exist only within the borders of this country? Do they plan to expand elsewhere? Do they expect to be received in foreign lands especially when they advocate protection here? It seems to be accepted as a given that strong indigenous firms are needed to ensure that a country is stable. It might be dangerous for a country to have a military of foreigners, but it is not dangerous for a country’s market to be led by foreigners. There is nothing sacred about the idea that Ghanaians should run the business economy. If a Ghanaian is interested in building a business empire, as some clearly intend to, he should go ahead. But to stifle competition in the name of growth is irrational. Besides, foreign firms with major assets in this country will have a great deal to lose if the country is unstable.

Competition is good for business. Anyone who has been in any business knows competition keeps you on your toes. It is the same with competition in life. Recently, Coca-Cola reduced the price of Coke because it saw its market share was shrinking to Pepsi Cola because Pepsi Cola had a lower price. This can only happen under competition. Competition also forces you to continuously improve products.

It is true that some international firms have succeeded as they were protected in their infancy. The logic of this argument is therefore that if local firms are to succeed they must be protected. But for every one of such companies we see today, there are a hundred others that did not see the light of day. This translates into crazy monetary burdens on taxpayers.

There is nothing wrong with a business trying to monopolize its market. What makes it a moral question is how it intends to accomplish that feat. The best way to have a monopoly is to have a product or service that is several times better than that of competitors. In that way, competitors are kicked out of business. This is called creative destruction. Asking for protection is the worst way for a business to grow because protection leaves us all naked.

WRITER: Kwaku Gyamfi

IMAGE: Google

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