Pricing models will be another blunder
A LITTLE more than a fortnight ago, Industry and International Trade minister Sam
uel Mumbengegwi announced that his ministry was far advanced in its plans to introduce pricing models. Reacting to the dissatisfaction of almost all Zimbabweans to the never-ending upward spiral of inflation, the minister was at pains to demonstrate government’s intent to address inflation and thereby reduce the hardships affecting most of the populace.
To that end, he said, pricing models would soon be introduced to determined price reviews of diverse consumer products, although those models are to be complemented by continuance of prevailing price control regulations. A few days later, the Secretary for Industry and International Trade, Ronald Madamombe, expanded upon the minister’s statement. Madamombe is reported as saying that it is intended to resuscitate the previously operational price control surveillance unit, it being charged with the responsibility to track price variables and to recommend price increases, so as to ensure adherence to the models.
Those models are to be applied to a range of basic consumer needs, including cooking oil, flour, bread, mealie meal, milk, sugar, salt, beef and public transport. Madamombe contended that the pricing models are easy to implement, transparent and comprehensive, provided that the technological processes are confirmed and the data used is verified. He explained that “the methodology of the models focuses on establishing relative weights of various cost components on total production costs. When costs move, the selling price is adjusted in order to maintain originally established cost proportions to total product costs.” He emphasised that “the use of the pricing models will still be complemented by price control regulations”. And thereby hangs the sting!
Clearly, the proposed pricing models will be nothing other than tools to be used in fixing controlled prices and, therefore, merely a change of approach in computing price levels (basically by way of the ministry’s surveillance unit, reinforced by some private sector representation, tracking price variables and “recommending” price increases). The exercise will be little more than a façade to imply that the controlled prices are not imposed by government, but determined transparently by a collaboration between public and private sectors.
But price controls do not work and an introduction of a window-dressing mode of fixing prices cannot, and will not, make them work. One of the greatest contributors to the continuing decline of the Zimbabwean economy is government’s total inability to learn from its mistakes, to learn from previous experiences, and to recognise, and admit to, past failures. When the unlawful, Rhodesian Front government applied price controls during the period of UDI, they failed. When the present government applied price controls in the late 1980s, they failed. And when that same government reintroduced price controls in recent years, they also failed.
Price controls do not, in practice, stabilise prices and minimise inflation. What they achieve is the creation of shortages, as manufacturers discontinue or reduce production progressively as rising costs destroy operational viability. The minister, his secretary, and the advocates of the proposed pricing models will argue that those models will recognise cost increases, and will thereby justify price revisions necessary to give producers, manufacturers, wholesalers and retailers a fair return sufficient to preserve viability.
But, it doesn’t work that way. Production costs will vary considerably from one manufacturer to another, dependent upon the extent of their respective technological infrastructures, the ability or otherwise to achieve economies of scale, their respective marketing, administrative and financing structures, and other factors. Thus, the calculation of prices by application of the model will work for those whose costs accord with the average as results from the model, but for others the resultant can well be that operating at such prices can only yield losses. Where that occurs, there will inevitably be recourse to one of two alternative action opportunities. The first option will be to discontinue production, which generally will result in enterprise closures or down-sizing, with consequential increased unemployment, reduced downstream contribution to the economy, and reduced revenue flows to the fiscus.
The other option will be to divert supply of the products to the black market. That may assist the producer’s survival, but it does not assist the hard-hit, struggling consumer, for inflation thereby continues to impact upon him. If, however, diversion of product to the black market does not occur, and instead the producer discontinues or reduces production, shortages will once again be the norm. The very extended queues outside every bakery, which was a characteristic of the economy less than a year ago, will return, as will the queues for almost all the other commodities to which price controls will apply.
The defects of a model for price determination applicable to all must include that the model will undoubtedly be oblivious to disparities in costs between one operator and another. By way of example (and it is only one of many that can be cited), rentals payable by an enterprise operating within the central business district of a city or town will be markedly different to those payable by a suburban-based enterprise, or by one in the rural areas.
Similarly, the business which is reliant upon heavy borrowings for working capital sustains a considerable funding cost which it must recover through its selling prices, whilst a well-capitalised business does not incur that cost, although it will rightly wish for a fair return on capital. And a business which transacts high volumes of trade can, to all intents and purposes, apportion its overheads across those high volumes, with the proportion attributable to each unit of sales being small, whilst that which is a small-scale operation has to seek a greater cost recovery per unit sold.
The pricing element is demonstrated by the frequency that retailers necessarily increase prices of goods already on their shelves. Consumers become very irate when they observe the repricing of goods. They contend that they are victims of exploitation and profiteering, arguing that as the enterprise had already acquired the goods, their price was fixed and price revision cannot be justified. But, whilst the acquisition cost is fixed, the operation costs are not. If wages and salaries rise subsequent to the original pricing of the goods, or telecommunication charges double, interest rates soar upwards, and so forth, the entrepreneur has no alternative but to raise prices, if he is to stay in business.
Government, and the advocates of price controls, need to know that the only ways whereby prices can be stabilised or reduced are by the elimination of shortages, and the stimulation of competition. If availability exceeds demand, prices will fall as suppliers strive to dispose of their products. To achieve such a fall, and yet retain viability, they look to greater productivity and operational efficiency, and to increased sale volumes.
Of course, government should always be conscious of the needs of the consumer. To that end it must strive to bring the rampant inflation under control, and thereafter to reduce it to acceptable, low, single digit levels. But it cannot do so by price regulation. It can do so by curbing its own expenditure, by containing corruption, by achieving exchange rate stability (through a restoration of relationships with the international community, incentivisation of exports, and stimulation of foreign investment), and by encouraging productivity growth and enhanced production efficiencies.
Regrettably, the government is wholly wed to the concept that total regulation and decree are the only way of running a country, instead of recognising that they are actually a way of ruining a country. Government must heed the wailing of consumers, but not by once again doing so by resorting to regulation, even if disguised by a fine-sounding, but inevitably ineffectual, range of pricing models.