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Eric Bloch Column

Making profits is not criminal

By Eric Bloch

PRIOR to the introduction of price controls a little over six months ago, and again upon their implementation, most of commerce and industry made strong

representations to government that price controls would be counter-productive and economically destructive. Their representations were reinforced by the majority of Zimbabwe’s economists, the only exceptions being those continuing in their prolonged endeavours to ingratiate themselves with government.

The substance of the representations was that price controls would be ineffective in containing inflation, unless all production and operational costs were controlled. A social contract in terms of which prices, wages, salaries, charges for government services and taxes would be frozen would have the prospect of success provided that there would be no imported inflation. For there to be no imported inflation, not only would prices have to remain stable in the countries of supply of Zimbabwe’s needs, but there would also have to be exchange rate stability, which would only be so if Zimbabwe had a sufficiency of foreign exchange. In the absence of all these economic elements, price controls could not conceivably operate effectively and bring Zimbabwe’s runaway inflation under control.

Private sector representations also contended that in a regime of price controls in general, and of unrealistic, politically driven price controls in particular, the inevitable consequences would be massive shortages of many products, for much of industry would be unable to maintain viability if prices were rigid whilst operating costs rose. This would apply similarly to distributors of goods, be they wholesalers or retailers. And the representations also contained warnings that if price controls were promulgated in Zimbabwe, and scarcities of product became the resultant norm, a thriving black market would be brought into being. With demand vastly exceeding supply, black market prices would rise unchecked. The result of all these circumstances would be that far from bringing inflation under control, it would soar.

Government obdurately disregarded all these representations, dismissing them as being the deliberate endeavours to deceive government, and thereby dissuade it from its intended actions, and believing that the representations were driven only by the perceived private sector vested interests. No matter how soundly based and substantive the representations, they went unheeded by government. And whilst government gained some very temporary approval of consumers, labour movements and the like, that approval was soon dissipated as inflation continued its upward surge. Its dogmatic rejection of well-intentioned and concerned advice resulted in “the chickens coming home to roost”.

Thus last week government succumbed to the realities of the ineffectiveness of price controls and after six very troubled and catastrophic months, revoked them, with the exception of a very few basic commodities, including bread, maize-meal and flour. However, in respect of many products the lifting of the controls were qualified, for government requires that the profit margin on such products not exceed 20%. Whilst such a margin may be more than adequate for some enterprises, it can be grossly inadequate for others.

In instances where volumes of sales may be restricted by operational resources, levels of market demand and other factors, and yet the enterprise has an unavoidably high cost of marketing, administration and finance, the permitted margin may well not suffice to cover those costs, forcing the enterprise into closure or into concentration wholly upon export markets where possible, with resultant continuing shortages in the Zimbabwean market, and resultant continued trade in the black market. The extent that such black market activity functions is evidenced by the extent that, during the period of price controls, the only cement available in Zimbabwe was that imported from neighbouring territories, but which had been produced in Zimbabwe and exported to those territories, for to have sold the cement in Zimbabwe would have resulted in gross losses for the producers.

Imposing a constraint upon profit margins is as foolhardy as were the price controls of the last six months. It will be almost impossible to monitor until long after sales have occurred, and will only motivate commerce and industry, in the interests of survival, to resort to ingenious, innovative and creative operating structures and accounting so as to circumvent the regulations. Government continues to impose upon many the unenviable choices of economic demise or recourse to circumvention of law in order to survive. Instead, government should recognise — even if very considerably belatedly — that to bring down inflation it must curb its spending and implement stringent fiscal disciplines, it must effectively restore export performance and it must facilitate greater productivity and efficiency. It must also recognise that the most effective containment of prices is maximised by competition, for competition induces productivity and price reductions.

Notwithstanding the total failure of the price controls enforced since last November, exacerbating inflation instead of bringing it down, the removal of the controls immediately provoked howls of anguish from consumers’ representative bodies, and castigation of the private sector by the state-controlled media. Both accused private enterprise of “scurrilous profiteering”. The attack upon Zimbabwean businesses in the lead story of ZTV last Friday was a vicious, vitriolic outpouring, alleging that the business sector is bent upon making profits, it alleging that to do so is so scurrilous as to verge upon the criminal.

How far detached from the fundamental facts of economic life can anyone be? How can any possibly contemplate investing their capital, energy and other resources in a commercial enterprise if not motivated by the prospects of profits? Surely investment is entitled to a yield? And the extent of that yield should be commensurate with that attainable, without effort, within the money and securities markets, enhanced in recognition of greater risk associated with the investment, and by equitable reward upon other resources applied. But the media, undoubtedly driven to it by the Minister of Fiction, Fable and Myth, contends that making profits out of the consumer is, at the very least, morally abhorrent.

Do they really wish businesses to close down due to inadequacy of profits, and do they really wish for those closures to result in yet further devastating and debilitating unemployment? And do they really wish the state’s already bankrupt exchequer to become even more impoverished due to a lessening flow of taxes on profits, as profits fall and then businesses fail, no longer yielding anything to the fiscus?

“Profiteering” is defined in the Concise Oxford Dictionary as being “to make excessive profits out of others’ needs, especially in times of scarcity”, and it defines “excessive” as “exceeding of the proper amount or degree”, but in the context of realising profits, what levels can be regarded as being excessive in an economic environment wherein real inflation exceeds 260%? Surely not a margin of 20% on sales, reduced by overhead, administration and finance costs? (At time of writing, the interest rate on Bankers’ Acceptances approximates 90% pa!)

Many have long cried out in near fury at the profits which have been realised by most banks and other financial institutions, and by many industries. However, if those profits would be discounted for the impact of inflation (as demonstrated in inflation-adjusted financial statements prepared in accord with International Accounting Standard 29 on accounting in hyperinflationary conditions), and they would then be related to the extent of capital employed, and regard had to the magnitude of risk undertaken, there would be few, if any, instances where profiteering could justifiably be contended.

Inflation will eventually come down, but only when government is prepared to take a quantum leap in formulating and implementing economic policy, including the creation of a conducive environment, which requires restoration of law and order, democracy, political stability, genuine collaboration with the private sector, and harmonious relationships with the international community. It will not come down by price controls, even if now muted to regulated profit margins. It will not come down by allegations of profiteering.

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