HomeBusiness DigestEric Bloch: Price controls a death knell

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WITH surprising and uncharacteristic concern for the wellbeing of the populace, government is disturbed that, after almost a year of deflation, the first signs of inflation are emerging, albeit at this stage at relatively minimal levels. 

It is, unfortunately, very rare that Zimbabwe’s government have been deserving of commendation, and equally rare for it to develop awareness of a possible problem, as distinct from only recognising the problem when it has reached gargantuan proportions.  However, within only a few months of Zimbabwe moving from deflation to inflation (however marginal that inflation is at this stage!), government has demonstrated a consciousness that an inflationary trend is developing, and needs to be addressed.
Regrettably, although it is more often than not the case, government’s reaction and its contemplated remedial actions, are not commensurate with the unexpected realism that it has demonstrated by its expeditious recognition of a developing inflation trend.  Instead, taking a leaf out of the book that appears to have been the Zimbabwean government’s manual for most of the last three decades, it has cast its eyes upon whom it can blame for the development, and concurrently considers draconian, drastic and prejudicial regulatory controls perceived to counter a rise in inflation. 
As addressed in this column last week, it has ascribed culpability for the inflationary developments to commerce and industry in general, and to the manufacturing sector in particular, contending that the motive was undue, excessive profiteering, with callous disregard for the economic consequences, and for the inflation-attributable hardships suffered by the mass of the Zimbabwean population. 
This was an “easy out” for government, in an endeavour to divert recognition from the fact that it was the unstable political environment, foolhardy and exceptionally damaging legislation, and recurrent conflict with much of the international community that has been the continuing catalyst of economic morass.  It has been these acts of omission and commission that crippled industrial productivity, minimising manufacturing outputs, and resulting in unavoidable price increases in order to survive, not to profiteer.
The tragedy of government’s inability to recognise realities is exacerbated by its contemplation to resort, yet again, to regulation which it misguidedly expects will address the issue.  In fact, such regulation will only worsen the circumstance, intensifying inflation and undermining the targetted economic recovery.  And that tragedy is compounded by the blatant inability to learn from past experiences, for the regulation that government is apparently contemplating is the reinstatement of price controls.
When price controls were introduced in June 2008, they proved to be an economic tsunami.  Instead of aiding consumers by assuring price affordability, they destroyed the viability of almost all formal sector businesses, be they manufacturers, wholesalers or retailers.  Within weeks many were forced into near-total cessation of operations and, as a result, commodity shortages developed at a rapid pace.  Within weeks, shops were full of empty shelves, but of nothing else.  Even the most basic essentials ceased to be available, be they mealie meal, bread, flour, sugar, cooking oil, soap, or otherwise.  The only way that some manufacturers were able to continue in operations was by resorting to exports (to a very major extent to the neighbouring territories of Botswana, South Africa, Zambia, and Mozambique.)
The principal resultant was the resurgence of an extraordinarily vigorous and virile black market which sources the commodities so desperately needed by the consumers.  The market operated (sometimes with extreme blatancy) at bus terminii in Bulawayo, Harare and other cities and towns, in back alleys, and from innumerable homes in high-density areas.  To an overwhelming extent they obtained the goods they marketed from retail dealers in towns of the neighbouring states, and especially those close to Zimbabwean boarders, including Francistown in Botswana, Messina and Louis Trichardt in the northern province of South Africa, and Livingstone in Zambia.  Many of the goods were of Zimbabwean manufacture, exported by producers who could not afford to sell them in Zimbabwe at the unacceptably low controlled prices.  Speciously, and wholly unsubstantiated, the then government repeatedly suggested that the manufacturers were the black market operators or suppliers, voicing that contention repeatedly and endlessly, although devoid of any corroborative evidence.
Those black market supplied goods generally attracted import duties upon entry into the neighbouring states, then were subjected to the operating margin mark-ups of the traders in those states, and on occasion also attracted import duties upon being brought into Zimbabwe by the black marketeers although many resorted to inward smuggling of the goods.  In addition, the black market operators paid premiums in obtaining — from unlawful sources — the foreign currency needed for their purchase of the goods.   Superimposed over all these charges, the market then added substantial margins to their total costs, in order to yield their targetted profits.  Hence, the consumers that government was allegedly protecting, were confronted with the combined hardships of non-accessibility to a sufficiency of their critical needs, and of the most pronouncedly horrendous hyperinflation ever sustained, anywhere in the world, at any time in recorded history.
Concurrently, most industries were forced into intense downsizing, with unavoidably having to resort to intense reduction in numbers employed, raising the unemployed population levels to more than  80% of the employable population, thereby  further intensifying the country’s economic decline, and exponentially increasing the extent of the nation’s suffering and hardships.  Some enterprises could not merely downsize, but had wholly to discontinue operations.  Allied consequences of those circumstances were to yet further deter much needed foreign investment, a yet greater lowering of Zimbabwe’s international credit rating and, therefore, jeopardising access to suppliers’ lines of credit, and a marked fall in revenue flows to the fiscus.
In contradistinction, once price controls were discontinued, Zimbabwe enjoyed a slow recovery of the economy, including marginal increases in industrial productivity. It was enhanced by the subsequent demonetisation of Zimbabwean currency, by diminished fiscal profligacy, and other constructive economic recovery measures.  This should have taught government that excessive economic regulation is counterproductive, whereas deregulation and minimised State controls fuel economic growth.
The most effective constraints upon inflation are to stimulate that availability of product exceeds demand, thereby encouraging competitive pricing, and to ensure stability in production costs instead of excessive, frequently rising, utility and other public sector charges. Government needs to address the causes of the economic ills, instead of the ills themselves, thereby progressively minimising and curing those ills. However, if it persists in its envisaged intent to implement price controls, the economy is once again doomed. All economic recovery gains being reversed, and decline becoming even greater than previously.  Price controls will sound a death knell for commerce and industry, for the economy, and for the populace at large.

 

Eric Bloch

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