Price Controls Prove Counterproductive

The Zimbabwean government’s decision to enforce 50 per cent price cuts for basic commodities to counter inflation has had the opposite effect from that intended.



Shoppers have cleared the shelves – hastening the very shortages they were anticipating - and retailers say they cannot replenish their stock because the price cuts have not affected the wholesale sector. With the market collapsed and no new orders being placed, their suppliers face the prospect of downsizing.



On June 26, after a week when price rises skyrocketed even by the standards of Zimbabwe’s 4,500 per cent annual inflation figures, International Trade Minister Obert Mpofu ordered retailers to shift prices back to the levels they were at eight days earlier. On average, this translated into cuts of about 50 per cent.



Speaking the following day, President Robert Mugabe accused business of trying to provoke “regime change” by hiking food prices and creating unrest.



“This nonsense of price increases must come to an end immediately,” he said, warning that his government would nationalise companies which failed to comply.



The pace of inflation has accelerated in recent months. At the end of May, prices were 100 per cent higher than they had been at the end of April. The annual inflation figure for May stood at 4,500 per cent compared with the same month in 2006.



Several businesspeople have been arrested since a subsequent order was issued on June 28 extending the price controls to goods and services beyond the basics.



However, the business sector has been largely compliant.



"We are law-abiding citizens. We will do what we have been ordered to do," said Callisto Jokonya, president of the Confederation of Zimbabwe Industries, after meeting the price-monitoring task force that the government has set up to keep tabs on the situation.



"We are calling on all our members to comply with the directive."



The venom in Mugabe’s voice during his June 27 speech appears to have made the business community sit up and pay attention.



“When we were first given the directive, we did not take it seriously. To us it was just one of the usual threats by government,” a top executive of the major supermarket chain Spar told IWPR. “But after Mugabe’s speech, we knew he meant business. The tone and atmosphere in the business community changed drastically. We hadn’t seen him so mad in years.



“We just had to comply or be nationalised. No one wanted to be caught in between and be made examples.”



In the short term, the government is trying to head off the consequences of its price controls by issuing a further order that outlaws bulk buying. However, restrictive measures are unlikely to be enough to address the problems created by an attempt to hold prices down.



Retailers like Spar have already felt the pinch. The company executive, who did not want to be named, said the shops were losing a lot of money by implementing the cuts.



“It is a lot of money and we still need to pay our workers and meet our other costs,” he said. “We might have to retrench big time if nothing is done. Most supermarkets are owned by indigenous businesspeople, not foreigners as Mugabe alludes.



“We have told ourselves that when the products are finished on the shelves and if the suppliers don’t reduce their prices, we will just not order and we might be forced to close some of our outlets. This will make life even more difficult for our workers and thousands others. Already, beef is no longer available in most shops.”



Economists are warning that by focusing on the retail side, the government risks blocking up the trading system by making it impossible for traders to buy more stock from their suppliers.



“If there is no cushioning to make sure the price cuts go back to the source level, it will lead to retrenchments and company closures. It will be disastrous for government,” said economist Witness Chinyama.



Chinyama said that ordering companies to drop their prices, the government was looking only at their income and ignoring the real costs of production.



“There should be a balance between revenue and costs. Whether the increases were justified or not, any end producer has to buy at a cost and put on a mark-up. But since the directive, they have made huge losses,” he said.



One immediate consequence will be higher unemployment as retailers stop placing orders, and suppliers and manufacturers have to mitigate their losses by shedding staff.



“Reports indicate that quite a number of companies are downsizing. Others have closed altogether,” said Lovemore Matombo, the head of the Zimbabwe Congress of Trade Unions. “The government might have to come up with more innovative ways of solving the economic crisis. The measures being implemented will only serve to worsen the plight of ordinary workers. Many workers have already been told of salary cuts because of non-productivity."



One possible government intervention might be to offer subsidies to the producers of basic commodities to keep them in business. But there is a danger that this measure in turn could be funded by printing more banknotes – leading directly to accelerated inflation, the very thing the authorities want to keep in check.



“If they try to subsidise, there is also the inflationary side to consider – how will they fund the subsidies without printing money?” said Chinyama, who predicted that the government was likely to be resistant to the other option – raising interest rates – because that would increase its domestic debt.



Another Zimbabwean economist, who did not want to be named, recalled the long history of government-imposed price controls, which have had unexpected and ruinous consequences from ancient Roman times to the French Revolution and Communist states such as the Soviet Union and China.



John Robertson, an economist based in Harare, predicted that businesses would not be able to cover their costs and would stop producing.



“The directive is more damaging to the consumer than the government realises. The desired effect will not be realised. If the government insists on the policy, we will see company closures and huge retrenchments,” he said.



Already, he said, the country was heading for severe shortages. Instead of benefiting from price controls on staple products, shoppers facing empty shelves would have to turn to the black market where prices are unchecked.



Maria Chitova is the pseudonym of a reporter in Zimbabwe.