Opinion / Columnist
Dictators like Mugabe never learn
27 Sep 2017 at 23:09hrs | Views
I want to remind Mr Mugabe that prices are rising because of uncertainty and difficulties in procuring supplies as the result of his currency manipulation; any draconian measures he is planning are unrelated to the underlying causes of price increases. His measures will be popular because they are politically expedient.
He wants to show the masses that he is attacking a problem to make some commodity affordable by introducing price controls but I have some news for him; price controls are nothing but another set of state measures that actually exacerbate the problem they are intended to solve. He tried it in 2008 and it did not work and will not work today. Price controls create shortages and black markets and destroy the productive base of the economy by killing the incentive to produce. If the market price of cooking oil is $8 and he forces producers to accept a government-dictated price of $3, producers will withdraw their goods. The result will be more shortages.
The effect of a price control is the creation of shortages, a first-generation problem. The shortages, in turn, create a black market where the commodities are illegally sold above the control price - a second-generation problem or a secondary unintended consequence. On the black market, hoarding, bribery, profiteering, and shady deals will flourish as the commodities becomes more and more scarce. Measures designed to curb profiteering or hoarding attack the second generation problem; that is, they attack the symptoms rather than the root cause of the disease.
Furthermore, if the official price of oil is $3, but the price on the black market is $8, this creates an incentive for anyone to buy the oil at the official price and resell it on the black market to reap a huge profit. Everyone then wants to acquire the oil at the official price. Political connections can be an advantage. Even government officials themselves engage in this practice, using their office to acquire commodities at official prices and having their wives, relatives, and cronies resell on the black market.
Contrary to popular misconceptions, price controls do not make commodities available or affordable; rather, they make them more expensive.
For example, Nigerians believe they have the God-given entitlement to cheap gasoline. So the state fixes the price of petrol (gasoline) at $2 a gallon. However, its dilapidated state-owned oil refineries cannot produce enough gasoline to supply the country with gasoline at that price. Funds allocated for repairs during the Abacha era were embezzled. So to supply gasoline at that price, Nigeria's government imports about US$4 billion a year of petroleum products to sell at a loss of about US$2 billion a year. But there is more to this economic insanity. Since the price of subsidized petrol is only a third of the price charged in neighboring countries, much of Nigerian petrol is smuggled across the border, aggravating the already chronic fuel shortages in Nigeria. Then the same government re-imports, at market rates, what is presumably the same Nigerian fuel back into Nigeria to sell at lower subsidized prices!
He wants to show the masses that he is attacking a problem to make some commodity affordable by introducing price controls but I have some news for him; price controls are nothing but another set of state measures that actually exacerbate the problem they are intended to solve. He tried it in 2008 and it did not work and will not work today. Price controls create shortages and black markets and destroy the productive base of the economy by killing the incentive to produce. If the market price of cooking oil is $8 and he forces producers to accept a government-dictated price of $3, producers will withdraw their goods. The result will be more shortages.
Furthermore, if the official price of oil is $3, but the price on the black market is $8, this creates an incentive for anyone to buy the oil at the official price and resell it on the black market to reap a huge profit. Everyone then wants to acquire the oil at the official price. Political connections can be an advantage. Even government officials themselves engage in this practice, using their office to acquire commodities at official prices and having their wives, relatives, and cronies resell on the black market.
Contrary to popular misconceptions, price controls do not make commodities available or affordable; rather, they make them more expensive.
For example, Nigerians believe they have the God-given entitlement to cheap gasoline. So the state fixes the price of petrol (gasoline) at $2 a gallon. However, its dilapidated state-owned oil refineries cannot produce enough gasoline to supply the country with gasoline at that price. Funds allocated for repairs during the Abacha era were embezzled. So to supply gasoline at that price, Nigeria's government imports about US$4 billion a year of petroleum products to sell at a loss of about US$2 billion a year. But there is more to this economic insanity. Since the price of subsidized petrol is only a third of the price charged in neighboring countries, much of Nigerian petrol is smuggled across the border, aggravating the already chronic fuel shortages in Nigeria. Then the same government re-imports, at market rates, what is presumably the same Nigerian fuel back into Nigeria to sell at lower subsidized prices!
Source - Sam Wezhira
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