On Price control | A 6-point reply to doomsayers |Ethiopia

On Jan. 6/2011, on the eve of Ethiopian Christmas, PM Meles Zenawi, Director of Ethiopian Revenue and Customs Authority Melaku Fanta and State Minister of Trade Ahmed Tussa convened some 200-300 businessmen and announced retail price ceilings for 12 food and 4 non-food items. The measure was received with cheer but also with a healthy dose of skepticism among consumers and observers.

But that is not all. It did also trigger another round of criticism from the rejectionist camp. Alas, it served only to demonstrate the bankruptcy of the camp.

Let’s take a quick look at some 6 points observed so far.

1.Dergue is back

It was from the first day of the announcement of the price control measure that the rejectionists started to associate it with Command Economy System(or, as usually said, Socialism). This claim can be countered by citing wage-price controls imposed by President Roosevelt and Nixon in USA or its prevalence in the Scandinavian, especially the Netherlands. But it would be futile, because the main thrust of this claim is to evoke memories of the Dergue era.

That is why the rejectionists chose to use a word from the Dergue era, ‘segebgeb negadewoch’(avaricious traders),  instead of using Melaku Fanta’s words, ‘oligopoly and collusion’. This is obvious, because it is followed by an argument that the traders are not to be blamed for the inflation or it’s their ‘right’ to set the price as they wish.

2. The measure is not thought-through

Another tiring line of the rejectionists is that ‘the price control measure lacks proper planning’. How is that? To back up the claim, they raise possible ways of maneuvering the price control or cite to news reports of such happenings. What kind of planning can preempt all noncompliance? Isn’t monitoring and punishing the noncompliant a legitimate part of any regulatory measure? Again, isn’t it prudent to place simpler measures and see how the market reacts? In fact, it is only appropriate to set ceilings for a dozen items, urge the traders, as the Prime Minister did, to cooperate and see if they will get the message. In deed, the Premier didn’t fail to note he got Plan B, to distribute goods through public enterprises, and Plan C, to open up the wholesale-retail sector to foreign firms. But that doesn’t mean Plan A is only what we have seen to date.

Yet again, it would be naive to expect the government to disclose its game plan.

Nonetheless, all this responses wont satisfy the rejectionists. Because, in their view, whatever this government does, be it currency devaluation, export promotion or agricultural investment promotion, is unplanned, spontaneous, not thought-out. Yes, it is appropriate to question the wisdom of a governmental action, especially when it is stuck down by a foreseeable problem. But it is arrogant to habitually demonstrate such a know-it all attitude. Ironically, this is coming from a rejectionist camp that is bereft of coherent world-view and bogged-down in reactive politics.

3. It is the law of supply-demand that pushed prices up

The rejectionists claim the price control is doomed to fail, because the prices are results of the law of demand and supply.  Of course, there is an economic theory that states price is determined by supply-demand relationship – when supply exceeds demand, sellers must lower prices to stimulate sales; conversely, when demand exceeds supply, buyers bid prices up as they compete to buy goods. But that is not the whole story. The price-determining mechanism of supply and demand functions properly in a perfectly competitive market. That is in a market where no individual seller can perceptibly influence the market price at which he sells but must accept a market price that is impersonally determined by the total supply of the product offered by all sellers and the total demand for the product of all buyers.

That is not the case in Ethiopia, where 60% of the imported food and related items are supplied by less than 80 firms. In fact, if the count is narrowed to individual items, the number of major suppliers dwindles further. Thus, this is an oligopoly, where few sellers have large share of the market. Of course, they may compete amongst themselves and lower prices as a result, but not necessarily. At any rate, prices will be determined by the suppliers, and the consumer will have to ‘take it or leave it’. And, with food items, the consumer would have no option but to take. That is why the economist call oligopolistic prices “seller administered” prices.

4. Where is the evidence of Oligopolistic collusion?

Some of the rejectionists are subtler. They ask, ‘if there is an oligopolistic collusion, as Melaku Fenta said, then where is the evidence?’. Of course, where is it? But then, if the government has an evidence to show it publicly, then it should rather prosecute those traders, since price-fixing is a crime under the Trade Practice law. However, it is one thing to have an intelligence that suffice for taking a regulatory action, and it is different to be able to establish guilt in the court of law.

But who said collusive agreements are only made formally and expressly? In fact, it is tacit agreement that is the norm in oligopolistic industries. As Joe S. Bain, Professor of Economics at Berkeley and Author of Industrial Organization; Barriers to New Competition, notes:

in an oligopoly viable collusive agreements among rival sellers are quite possible. They may be express agreements established by contract or tacit understandings that develop as a pattern of reactions among sellers to changes in each others’ prices or market policies becomes customary. In the United States, express collusive agreements are forbidden by law, but tacit agreements, or “gentlemen’s understandings,” are common in oligopolistic industries.

5. It is production decrease that pushed prices up

Another line, closely related to the supply-demand argument, is that ‘the root cause of the price hike is decrease in production, thus price control wont solve it.’ If you ask for a data that shows production decrease, they will point to the supply-demand theory. We have already seen how sellers may set the price regardless of the supply-demand law.

But wait, where did the production decrease took place? Half of the items covered by the price control measure are either imported or locally manufactured. So, is there a decrease at the international level or in the manufacturing industry? Mind you, we are not considering the production level of a farmer at some remote rural district.

Of course, the rejectionists are making an implicit point that the economy is not growing as the government says. Ok, lets say, for the sake of argument, Ethiopia’s GDP didn’t grow at double-digit rate. How much is it then? 8% or 5%? That would still be sufficient to stabilize general price level, as it would be well-above the population growth rate.

There are various inflationary factors in play, but production decrease is not amongst them.

6. It will fail

Almost all in the rejectionist camp are certain that the price control measure is going to fail. In fact, they even predict it will have ‘disastrous consequences’ Well, it might. Any human plan is prone to fail.

But the question is what made the rejectionists sure about that? The answer is: Nothing. It is just that rejecting everything and constantly predicting an upcoming disaster is their timeworn strategy.

After all, that’s what earned them the dual title – naysayers and doomsayers.


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Daniel Berhane