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Ignore economics, impose a price and punish anyone that disagrees: The reality of Zimbabwe`s price controls

08/11/2017 00:00:00
by Perry Munzwembiri
 
 
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A nation in dire straits, failed by bad politics

IN the midst of the high drama ensuing in Zimbabwe following the expulsion of former Vice President Emmerson Mnangagwa, news that the cabinet had endorsed the decision to set up a special taskforce on price stabilisation and supply of essential commodities – basically meaning price controls – largely went unnoticed.

It comes as no surprise however, given the way politics seem to take precedence over key economic issues in Zimbabwe. Interestingly, Zimbabwe has been here before, and the results are almost guaranteed to result in wide-scale shortages and a flourishing black market.

Renowned Economist Milton Friedman once said, “We economists don`t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can`t sell tomatoes for more than two cents per pound. Instantly, you`ll have a tomato shortage.”

The suits in government however do not seem too bothered to be flouting even the most elementary law of economics, even when faced with solid evidence of how such a course of action has failed in the past. You know what they say about doing the same thing over and over again and expecting different results – the quintessence of insanity.

Zimbabwe`s Industry and Commerce minister, Mike Bimha was quoted in one of the country`s dailies saying, “When companies operate, they operate on the basis of licensing and permits, which Government has a leeway to withdraw if a company is not behaving as required.”

This was in reference to what government perceives to be unjustified price hikes on essential commodities such as cooking oil, flour, rice and fuel etc. of late. Minister Bimha`s tone is hardly surprising to the discerning observer, as Zimbabwe`s government has often favoured to use the stick as opposed to the carrot, and unashamedly so.

Revoking business licenses, throwing people in jail and other similar actions by the government are not the solution to the deep-seated problems the economy is facing. The trader selling vehicle spare parts along Kaguvi Street in Harare needs to source foreign currency to import his wares and re-stock, on the parallel markets where rates are on the up daily for reasons known to us all.

Hard currency is now difficult to access, and the privilege to transact with the greenback offshore, will cost one an arm and two legs. And without factoring this movement in the RTGS/Bond to USD exchange rate, margins would be wiped clean, and most traders would simply shut shop. Be that as it may, government sees price increases on the local market as being driven by greed and indiscipline.



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This phenomenon is not peculiar to Zimbabwe alone, however. In Venezuela, President Nicolas Maduro has signed decrees to control the prices of new and second-hand cars, also accusing criminal gangs and “western-imperialist economic saboteurs” of creating artificially high prices – sounds familiar right? Mr Maduro even went further, declaring that anyone caught breaking the law would face jail sentences of 6-12 years. The results in Venezuela have been long queues and empty supermarket shelves, and one does not need to be a prophet to see what lies ahead locally.

Contrary to what the suits in Zimbabwe`s government may think, price controls are never a perfect response to market inefficiencies, but in fact, are a mistaken response to a market that is being too efficient in its response to structural economic challenges. This then, is where Mr Bimha and his team should be focusing their efforts. Attempting to control prices will just be akin to chasing the wind, but it appears Zimbabwe`s government reckons it has a realistic shot of achieving this feat.

Even after imposing the most primitive of punishments, for flouting price control regulations, this intervention never yields the intended benefits ever. History is replete with such examples. Consider, the case of Roman Emperor Diocletian who in 301 AD blamed the rapid rise in prices to the “avarice” of merchants.  He then imposed the death penalty on anyone who sold commodities at prices higher than those he had gazetted. The penalty was also imposed on anyone who attempted to hoard goods or buy them at a higher price.

The result however was that so many people died under that law to the point that it was eventually repealed, showing that in some circumstances, people would rather die than comply. It is commonly said of price controls that, “in almost every place they have been enforced, you`ll find a story of overreach followed by a lesson in humility.”

Zimbabwe`s government would do well to take heed, and address the root structural problems facing the economy, and not the symptoms.


 
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