Zimbabwe continues its Mugabe-shaped implosion, this time with government-mandated price controls that are being enforced at the point of a gun.

(For simplicity’s sake, the quotes in today’s blog will be in 3 different colors, to represent 3 different sources:

In Yellow: Associated Press article dated July 14th, 2007

In Green: New York Times article dated May 2nd, 2006

In Pink: Canadian government report on Zimbabwe using data provided by STAT-USA, dated 2004

HARARE, Zimbabwe — Police impounded taxis that had not complied with government orders to cut fares, stranding commuters, state media reported, while shoppers stampeded stores as cornmeal, bread, meat and other staples vanished from groceries.

At least 100 taxis had been impounded since Wednesday, state radio said, in the latest crackdown since the government ordered price cuts of about 50 percent in response to the country’s rampant inflation. Since the June 25 order, consumers have wrestled over sudden bargains, and chief executives have been hauled into court for failing to cut prices.

This is why price controls don’t work. All they do is create shortages, and then the goods are not available at all, at any price.

Market forces will cause a business to resist lowering prices below its costs. That is, if a gas station buys its gasoline supply at $1.00 / gallon, and the government tells them they can only sell it for $0.75 / gallon and no more, then the gas station has two choices: refuse and survive, or obey and go out of business.

Devil’s Advocate: “Then the government just makes the gasoline supplier charge less for the gas, and then the gas station can buy it and make a profit.”

Counterargument: There are two possible sources for the gasoline: internal to the country, and imported from outside. If it’s imported, the supplier is going to tell the country to go to Hell, and then stop selling fuel there (because the profit is either lousy or nonexistent – no incentive). If the supply is from within the country, the supplier faces the same dilemma: is the government forcing a price reduction that is below the cost of producing the fuel? If so, to survive the company must refuse the price reduction.

Even a state-owned supplier is not immune to this economic truth. Producing goods has costs associated with it: Capital equipment such as refineries, wages to employees, raw materials (crude oil).

The report on Zimbabwe by the Canadian government back in 2004 made a parallel observation:

Construction has experienced very tough times recently, with income off more than 80 percent since 1999, as inflation and high capital costs have stifled spending on projects and building, a situation exacerbated by the hard currency shortage that prevents the importation of required equipment and fixtures for new buildings. Private companies in the transportation sector have similarly been hit hard by price controls and the hard currency shortage, the latter causing maintenance and fleet replacement difficulties. The private telecommunication sector is, on the whole, doing well; although rising equipment import costs and the need to pay international connection charges in hard currency have tested their strength and resiliency. Price controls, corruption and mismanagement have resulted in huge losses at many of Zimbabwe’s largest parastatals, including the Posts & Telecommunications Company, the national railway, the national oil company and the Zimbabwe Electricity Supply Authority. . .

Manufacturing, which has suffered extensively in recent years, is a victim of spiraling inflation, limited capital availability, declining real consumer incomes, critical hard currency and imported component shortages, and a shrinking human capital base, and as a result faces extreme uncertainty.

As government forces those costs to go down the results are poor quality equipment, poor quality or nonexistent employees, and insufficient raw materials. The 2006 article in the New York Times indicates what the consequences of this are:

The purity of Harare’s drinking water, siphoned from a lake downstream of its sewer outfall, has been unreliable for months, and dysentery and cholera swept the city in December and January. The city suffers rolling electrical blackouts. Mounds of uncollected garbage pile up on the streets of the slums.

These problems have been going on for at least a year now, probably longer. When the sanitary infrastructure breaks down, and people start getting sick and dying, panic sets in. People will become more and more desperate, and more and more willing to resort to violence to survive. Keeping order is already impossible, and the country is descending into anarchy:

Riot police were called Thursday to a wholesale store to control a stampede of shoppers gathering up reduced goods. Extra police were posted at downtown clothing and shoe stores.

People rush to buy what they can while the items are available. The lower prices are a primary incentive, but many people also realize that once the existing stock is gone, more will not be forthcoming. The paper currency is losing its value from day to day. Physical goods are what has value. So they hoard what they can get. This also causes people to take more than they need, leading to a distribution of goods that is unequal to actual demand:

“There’s a surrealism here that’s hard to get across to people,” Mike Davies, the chairman of a civic-watchdog group called the Combined Harare Residents Association, said in an interview. “If you need something and have cash, you buy it. If you have cash you spend it today, because tomorrow it’s going to be worth 5 percent less.”

Earlier in the week, the government withdrew the licenses of all private slaughterhouses, accusing them of refusing to reduce meat prices.

Restaurants and fast food outlets were also ordered to slash their prices. Police told one restaurant owner to “redesign the menu,” to eliminate more expensive gourmet dishes.

In several restaurants, steak was out of stock, waiters said.

Police even shut down the canteen at the Harare law courts, used by court officials, magistrates and police, for failing to comply with the price order, state media reported Friday.

Notice the direct connection here. Restaurants are asked to cut prices, but they can’t unless they can acquire the raw foods they need at lower prices, also. If the butcher refuses to sell them meat at the government-mandated lower prices, then the restaurant cannot survive. The butcher cannot comply with the lower prices because it, too, will die if it obeys. That leads to this:

Butcheries, stores, factories and gas stations were unable to replace materials sold at below the original cost since the prices edict.

The rush of people to buy up goods while they can causes existing stocks to run out more quickly. Then, no more supplies arrive, because suppliers either go out of business or they simply cannot provide more at the prices the government has fixed.

The Zimbabwe Independent newspaper, a respected privately owned business and political weekly, on Friday reported that central bank governor Gideon Gono expressed concerns over the prices crackdown, saying it likely would lead to widespread closures of businesses.

The fact that this newspaper is able to even print something resembling the truth, rather than Mugabe’s propaganda, is largely due to it being privately owned. The central bank governor, at least, appears to be reasonably intelligent about economics, which one would expect of a banking administrator.

State radio on Friday quoted Simon Khaya Moyo, Zimbabwe’s ambassador in neighboring South Africa, dismissing media reports there predicting the collapse of the economy, ending President Robert Mugabe’s long reign.

Translation: Simon Moyo is 1) Mugabe’s lapdog, 2) an idiot, or 3) both.

Official inflation is 4,500 percent, the highest in the world, though independent financial institutions estimate real inflation is closer to 9,000 percent.

I like how the article just presents this naked fact right after reporting denials that the economy is in bad shape.

The New York Times article provides some context for these inflation numbers. Keep in mind that at the time of the article, inflation in Zimbabwe had not yet reached 1000%:

. . .at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417.

No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 — in American currency, about 69 cents.

The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe’s $500 bill, now the smallest in circulation.

But what is happening is no laughing matter. For untold numbers of Zimbabweans, toilet paper — and bread, margarine, meat, even the once ubiquitous morning cup of tea — have become unimaginable luxuries. All are casualties of the hyperinflation that is roaring toward 1,000 percent a year, a rate usually seen only in war zones.

The article is accompanied by this interesting graphic:

zimb_graphic.jpg

The opposition Movement for Democratic Change described the price cuts as a political gimmick to shore up support for Mugabe’s party.

If that is Mugabe’s intent, then he’s an idiot, too. But we already knew that. I’m surprised the guy hasn’t been assassinated yet (although I hear there have been attempts). This is an absolute catastrophe that will have a severe impact on Africa as a whole, and set back the general level of civilization there by many decades.

It is, however, an object lesson in how certain kinds of economic policies don’t work, and often have the opposite effect from that intended. Price controls Do. Not. Work. I can’t say it enough, folks.

One Response to “Zimbabwe: Price Controls Object Lesson”
  1. Kyle Haight says:

    FYI, I think the best short reference for understanding the full function and operation of the free market price system (and the consequences of its destruction via price controls) is George Reisman’s book The Government Against The Economy. The material in there is also in his magnum opus, Capitalism, along with a bunch of other good stuff, but Capitalism is around a thousand pages long and costs around a hundred bucks if memory serves me correctly.

    I would also note, in your counterargument, that there is the theoretical possibility of the government imposing a comprehensive system of price controls on *all* the producers in the economy. In this case, the supplier’s monetary costs would also be forcibly reduced, and the process can continue until all the costs are subject to price control.

    This is functionally equivalent to complete socialization of the entire economy, and leads to total economic breakdown through systematic misallocation of resources due to the inability to perform economic calculations. So it still doesn’t work, but the reason for it is more subtle than the simple question of cash flow into and out of the businesses in question.

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