Price controls don’t work
By Eric Bloch
AS Zimbabwean inflation surges upwards, creating new record highs each month, the hardships upon the
overwhelming majority of the population, the calls upon government to
impose price controls where they do not exist, and to enforce those that do, become increasingly strident.
The letter pages of the national press are flooded with letters scathingly attacking commerce and industry for alleged ” profiteering” and exploitation of the poor. The Consumer Council of Zimbabwe vigorously urges governmental price control actions. MPs and Senators (having arrived at the legislature in their luxurious, state-funded motor vehicles, and wearing top-of-the-range outfits), weep crocodile tears of sympathy for the beleaguered consumers, and demand that the Minister of Industry and International Trade should curb the perceived avarice of private sector marketeers.
That these reactions are so prevalent, and intensifying, is not surprising. Ever greater numbers are reduced to the lowest levels of poverty. They cannot adequately feed themselves and their families. When ill, they cannot afford to seek medical attention or purchase medications. Many cannot pay their children’s school fees. Those fortunate to have employment can still not make ends meet, to such extent that tens of thousands cannot afford public transport to and from their places of employment.
Instead, they leave their homes before the break of dawn, walking many kilometres to work, and then walk like great distances homeward at the end of day, at best having one meal in the entire day, and knowing that upon arrival home they will be confronted by crying, unhappy, under-nourished children, and embittered, poverty-traumatised spouses.
Those same distressed masses see owners of businesses still driving executive style motor vehicles, usually coming to their places of business from upmarket residences, and therefore assume that they are earning vast profits, and are the cause of the misery of the majority. They are oblivious to the magnitude of debt accumulated by most businesses in their struggles to survive within the collapsing Zimbabwean economy; debt attracting interest rates of up to 700%.
They are blind to the progressive erosion of the capital of the enterprises, caused by ever-rising costs, concurrently with declining sales revenues. They disregard the fact that manufacturers, importers, wholesalers, retailers and all other suppliers are as subject to inflation as are the populace at large and that, therefore, the survival of their businesses is dependent upon increasing prices. The reality is that very few Zimbabwean businesses engaged in meeting consumer needs are achieving increases in profits, in real terms.
With official inflation having reached almost 1 200% in the year to May, profits will have had to increase 12-fold just to have retained constancy of value. Not many enterprises have attained such profits. In fact, a great many have incurred losses, forcing numerous to cease operations.
Moreover, to make a profit is not a crime. Why should any place their capital at risk, devote their time, energy and expertise to business operations, and be confronted by the array of economic hazards that exist in any economy, but especially in a distressed one, if not in order to make a profit, and that profit should be commensurate to the risks that are faced, and to the capital and other resources employed. If there is not a prospect of such a profit, whether due to economic environmental circumstances or to governmental actions and constraints, then the businesses will not be established or, if existent, will not continue.
In that event, price becomes irrelevant, for the goods and services are simply not available to the consumer, irrespective of affordability or otherwise.
But, most of all, those who demand enforcement of price controls fail to recognise that price controls do not work. All that results from controls are scarcities in official markets and, in consequence, growth in black market activity, invariably at prices markedly greater than would have pertained in normal markets, had there been no controls. Thus, price controls are actually inflationary, and worsen the lot of the consumers.
A marked example of this was when the Zimbabwe Republic Police recently tried to enforce the prescribed fare of $50 000 for commuter omnibus services in urban areas, as against the fares being imposed by operators of $80 000 (which they required in consequence of massive escalations in costs of motor spares, tyres, petrol and diesel).
The police set-up road blocks to catch the “errant” operators. To counter this, the operators would end their journey before reaching the road blocks, charging $80 000 for the trip to that point, whereafter the passengers would walk to the other side of the road blocks, and board other commuter omnibuses, paying yet a further $80 000 to complete their journey. Thus, in seeking to limit costs to $50 000, instead of $80 000, the commuter was actually faced with a cost of $160 000!
In like manner, the authorities descended heavily upon bakeries and other purveyors of bread, arresting nearly 300 for selling standard loaves at prices ranging from $120 000 to $135 000, when the “controlled” price was $85 000. In consequence, standard loaves of bread are no longer available and, if the consumer is to have bread, he must buy non-standard loaves (such as super loaf), at prices ranging as high as $200 000. Once again, the consumer was not protected by the controls, but afflicted by them, with yet further intensification of hardships.
Petroleum prices have rocketed upwards in the last few weeks, partially driven by growing scarcity, which does motivate some to make excessive profits by exploiting the desperate need of the customers, but mainly driven by massive increases in procurement costs. Those increases are partially attributable to surging world crude oil prices, but more so to the vast movement in exchange rates within the parallel market. On radio, last Thursday, the Consumer Council of Zimbabwe vehemently demanded governmental action to reinstate controls upon petroleum prices. That it did so was undoubtedly driven by very real, genuine concern for consumers.
That concern is fully justified, but the proposed remedy of intensified controls is not, for such controls will be counterproductive in the extreme.
Instead of regimented prices, which will destroy supply-lines, and therefore further decimate the economy, and intensify the affliction of consumers, government, and the rest of society, needs to bring inflation under control. A social contract must halt inflation driving inflation, exchange rates must move to restore export viability and, thereby, increase productivity, government must cut its spending, money supply growth must be curbed, and parastatals must be made effective (why is no-one demanding a control upon Zimpost’s recurrent increases in charges, or querying why Zupco is realising a profit of more than $180 billion in three months, whilst increasing fares?).
If inflation would be driven down by effective measures, instead of fruitless attempts to do so with price controls, and if at the same time competition would be encouraged and productivity assured, then prices would be very much more constant, and the pressure upon consumers would progressively decline. The hard fact is that price controls have never been an effective economic measure — they don’t work, and Zimbabwe must resort to measures that do work!