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Wednesday, September 7, 2011

Economics 101 for Cape Verde

I've been immersed in on-the-ground research and activities in Cape Verde which have provided me with a very close-up view of the consumer, business and government practices in Cape Verde that have major implications for Cape Verde's current and future economy.

I've summarized my findings into three key lessons in Economics that Cape Verde would do well to learn:
  1. The private sector and middle class grow economies, not governments;
  2. Customer service and ease of doing business matter a lot;
  3. Lowest price does not mean you will have the lowest costs in the long run;
Below, I've expanded on each of these areas.

1. Private Sector/Middle Class vs. Government
There is a pervasive attitude in Cape Verde that suggests the government drives the growth in the economy and delivers solutions. It begins with the widespread expectation among the local population that the government is to be relied upon for solutions to all problems. Moreover, the government itself appears to believe that they are indeed the fountain of knowledge and creativity for the country and the solution to all problems. This is an insidious belief system.

In just about every highly developed economy, it is recognized that creativity and growth begins with the private sector, particularly businesses and entrepreneurs. The role of the government is to facilitate the ability of the private sector and investors to drive growth by:
  • making investments in areas that represent needs to be met and opportunities to be capitalized upon,
  • fostering competition and survival of the fittest on a level playing field,
  • providing opportunities for those who might otherwise be left behind,
  • investing in capabilities that are squarely in the public interest,
  • while ensuring that the appropriate controls are in place without excessively hampering growth.
Furthermore, it is the private sector in a free market that creates jobs which provide workers with the means to prosper while they also become consumers of the goods and services they produce. The increase in consumers with financial capacity then creates even more growth via local consumption.

In Cape Verde, there may be a lingering belief that is the opposite of free market philosophies. This may be a holder-over from an earlier time when Cape Verde was very underdeveloped and a lot of emphasis was placed on the role of government as the "savior" of the citizens. It is now time for the country to step up more firmly to its new reality of Middle Income Country status where a lot more is expected from the participants in this economic play.

In a free market economy, failed businesses are ruthlessly weeded out allowing only the fittest and most productive to survive. But in Cape Verde, the government creates a distortion in the market by protecting failed government-owned businesses like Electra, the national utility, and TACV, the national airline. The government also practices price controls which are known by every economist to create major distortions between supply and demand. It is essential for Cape Verde's future economic success and ascension into the ranks of the Middle Income Countries that the non-competitive aspects of the national economic philosophy and price controls be terminated as quickly as possible.

2. Customer Service and the Ease of Doing Business
This is an area that requires a global perspective on the part of Cape Verde's people, businesses and government. Cape Verde is now playing on a global stage in front of a global audience.

It is quite clear that many business owners, private and public workers in the service industries are unaware of what customer service excellence means. It is highly unusual to enter a business place and be welcomed or acknowledged as a potential customer. Many workers act as if they are being inconvenienced by the presence of paying customers. They seem to believe that they work for the "don" or "dona" of the business. Little do they realize than the "don" would fail to have a business that provides them with a job except for the paying customers. In some cases, it's not clear that the business owners themselves realize this.

If the local workers could be exposed to what they are up against compared to workers of equal means in Mexico, the Caribbean, Asia and other parts of the world, they would quickly realize that without major changes in attitudes and skills, Cape Verde may be hard pressed to sustain the investment and economic growth that is underway.

Thankfully, a new customer service teaching institution has been established to impart training to prospective workers in the service industries. This occurred as a result of the foreign investors who built new hotels only to realize that the local workers were not versed in customer service or had attitudes that were adverse to customer service excellence.

The same principles of customer service apply in the public sector as well. The customers of the public sector are the citizens, businesses and investors (local and foreign) who seek to do business in the country. Excellence in customer service translates into the ease of doing business in and with the country. See my earlier post about where Cape Verde stands in terms of ease of doing business. 

It would be helpful for Cape Verdeans to study the outside world and especially its global competitors - countries who have been where Cape Verde now happens to be in terms of its economic development.

3. The Problem with Low Prices
While low prices are a great option to have when purchasing goods, it better not be the only option or the basis on which you build the infrastructure that supports an economy.

The problem in Cape Verde is that since the low per capita income and the relatively low economic output is the starting base from which economy is being grown, there is a tendency to think of the cheapest product as the solution for everything. However, there is a huge trade off that typically accompanies the lowest priced goods and services - quality, or the lack thereof.

When quality is lacking in the goods and services you buy, you are being lead into a fool's paradise because you are likely to find yourself in the position where you are forced to spend additional sums of money to replace the low quality product. The effect is that your costs over time may be considerably higher than if you spent a bit more on higher quality and maintenance in the first place.

It is great for consumers to be able to afford goods and services at cut-rate prices that may not otherwise have been affordable. However, there are innumerable stories of products which last a few days or a few weeks before they are toast ... due to the inferior quality. Giving consumers a range of prices and quality choices is the way to go. Yet many importers are force to import only low quality, low priced products because of high customs fees, thus giving consumers no choice. This creates an environment where consumers become "blind" to the long term value of quality products and accept that broken products and unreliable services are just a fact of life that must be tolerated - that is until life becomes unbearable.

Cape Verdean consumers often fail to see the connection between low prices (especially those that are imposed by price controls) and the source of some of the misery in their daily lives. For example, the government may try to keep the cost of water and electricity down so that the utilities are affordable by awarding contracts to the lowest bidders who use the cheapest equipment and/or fail to include the cost of adequate maintenance of the equipment. The result? Constant breakdowns leading to costly repair or replacement of the equipment. Thus consumers end up with either expensive electricity and water, or no electricity or water, or in some cases the worst of both worlds - insufficient water and electricity and high bills for the little that they get.

What's the point? It's the exact opposite of what consumers would get if the government chose a more sensible strategy of higher quality at slightly higher prices - this would result in more abundant water and energy at lower long term prices! Yet the government keep going down the same path of insisting on buying or contracting the cheapest products but somehow expecting a different long term result than they have always realized in the past.

The long term value of having the choice of quality products is a lesson that Cape Verdean citizens and the government needs to learn. Quality matters in a free market. There is a place for cheap, low-quality products, but there is also a place for higher quality products. To fix the problem of an infrastructure that is build on the lowest priced products or with inadequate maintenance may result in a short term rise in prices, before the impact of quality takes a hold to lower prices in the long run.

Wouldn't you rather pay a little more for water and electricity if you knew that you would have it 24 hours a day, 7 days a week? The Cape Verde government should let the free market work. I've discussed the impact of price controls and how they lead to economic distortions exactly like the ones Cape Verde is experiencing now. The reality is that a free market would actually lead to greater supply of scarce products and resources at lower prices and higher quality in the long term.

There are some key economics lessons to be learned that could dramatically improve the quality of life and the economic abundance that Cape Verde is capable of achieving. The government needs to take greater steps to increase free market forces and actively get out of the way of the market. There are significant opportunities in which investors (local and foreign) can capitalize for their benefit while delivering social good. But Cape Verde's citizens must first heed the lessons and demand the additional changes from their leaders.

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