“A free and competitive market allocates resources in the most efficient manner” ~American libertarian party
In a capitalist economy, government intervention tends to hinder the growth of small and micro businesses because government intervention interferes with the characteristics of capitalism e.g Capital accumulation, private ownership and free markets. This being said, what do I mean by government intervention? Government intervention occurs when the state is involved in a country’s free-market economy. For example, taxes, subsidies and regulations are all forms of government intervention.
Therefore minimum government intervention means that the government is less involved in the country’s economy thereby allowing the economy and the businesses in it to be controlled by the principles of supply and demand only. To analyze this theme, we will look at government intervention in three ways, the taking, the giving and the regulating and how each one tends to hinder the growth of small businesses in an economy.
The Taking
The concept of “the taking” refers to any type of government intervention that involves the government taking out money from the circular flow of income, For example, taxes (corporate taxes, value-added taxes, income taxes, sales taxes, property taxes) nationalization etc. When a small or micro business is starting out it is much easier for them to start out and to stabilize in an economy where the government takes less from these businesses, this is because most SMBs have limited capital. The amount of money they invest in starting a business is not a lot, so for them to pay all the taxes required reduces their capital and their power to invest and grow their businesses, hence they usually remain small or end up being bought by cooperating giants in that industry. In Kenya, the BBI report proposed a seven-year tax exemption(aka tax holiday) for startups. This will allow more capital to be invested into the economy as these SMBs now have more mon ey to invest and it will also create incentives for more SMBs to start up because the government has given them the space to do so.
Furthermore, nationalization occurs when the government converts businesses from the private sector to the public sector. This usually happens in socialist countries e.g. Russia, North Korea and China. By doing this the government is able to control a large section of the market because they have the power and the capital to do so, this leaves a limited space in the market for SMBs, therefore it becomes increasingly difficult for SMBs to compete with these large state-owned businesses, for example, in Kenya, the government-owned 14.6% of the uchumi supermarkets allowing them to sell commodities at cheaper prices then SMBs in times of low demand. As a result, the allocation of resources becomes inefficient due to the lack of competition, which could result in market failure.
The giving
The concept of “the giving” refers to any form of government intervention that leads to the government injecting money into the circular flow of income. For example subsidies,government loans or government grants.
At face value this type of government intervention seems helpful and beneficial to these businesses, this sort of government intervention has become popular rhetoric with “social democrats”. While not denying the benefits of allowing government monetary assistance, in the long run, this system may prove to be counterproductive.
Firstly, once the government injects the money into these businesses they will lower the cost of production making their goods cheaper than the competitors, this will lead to the demand rising, considering the fact that these are SMBs, they will not be able to meet that demand hence the prices of those goods would also rise. Eventually, consumers may choose to buy from larger businesses because of the stability they have compared to SMBs. Therefore, when the government intervenes in the demand and supply curve it does not allow the free market to set the prices in the economy and this could lead to market failure in the end.
Secondly, another problem that arises from “the giving” is higher taxes. In order for the government to have the finances, they will have to increase its revenue by pushing for higher taxes from other sectors of the economy. This will put those businesses at a disadvantage as their cost of production will be higher. As a result, this could lead to market failure in those industries that have to pay higher taxes as most of them will lose the incentives to continue producing.
The regulating.
This concept focuses on government policies that “regulate” businesses activities in an economy. For example maximum price legislation(Cap prices) and minimum price legislation, such policies allow the government to set the maximum price businesses can sell at, by doing so businesses will be making less profits, hence this becomes increasingly difficult for SMBs in those industries to grow. Another problem that is created is a shortage of those goods as suppliers are not incentivized. For example, in Kenya, the government enacted maximum price legislation on maize flour that led to supply shortages as many of the suppliers were SMBs and could not afford to sell it at the price the government set.
Meanwhile, the governments usually use minimum price legislation to “support” small businesses usually in the agricultural sector, this leads to there being a surplus in the market for that good as the suppliers have the incentive but the demand is not that high, therefore the government usually ends up buying the surplus goods so that the prices do not fall again.
Conclusion
Overall, I believe that a free and competitive market is more efficient and beneficial to SMBs. While most of us can be lured into the new wave of “democratic socialism “seen in many Nordic countries and advocated for by the political left in America we have to understand that free and competitive markets have always flourished and boomed. Considering the Kenyan market and a general mistrust in our government, small and micro-businesses would have an easier time in the market if the government was involved less.
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Name: Naeem Yusuf
Division: Entrepreneurship Unit
Strathmore Law Clinic
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