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Monday, March 17, 2008

The MT on Price Controls

A Moscow Times editorial on price controls:

Two ministries are caught in a struggle, and it doesn't matter who wins. Either way, merchants and shoppers will end up the losers.

The Economic Development and Trade Ministry is sparring with the Agriculture Ministry over legislation they are drafting to control food prices. The bill would introduce a maximum markup on prices for staple foods and open the door to voluntary price freezes and outright price regulation by the state. What the ministries cannot agree upon is the duration of these measures, as Staff Writer Tai Adelaja reported Wednesday.

Agriculture Minister Alexei Gordeyev believes that staples such as bread and milk should have retail markups capped at 10 percent to 15 percent and that the caps should be long term. Economic Development and Trade Minister Elvira Nabiullina, however, said this week that "such a measure can only be imposed temporarily when there are external shocks," such as price growth on the world markets. Nabiullina's proposal is clearly the lesser of the two evils, offering hope that the state will phase out price controls someday. But, as the Russian saying goes, there is nothing more permanent than something temporary. This is especially true with the government, where temporary measures have a tendency of staying in place.

Long-term price controls would have disastrous consequences. One consequence, as Nabiullina rightly predicted, would be food shortages. That price controls are ineffective and eventually backfire is elementary economics. It is also a basic fact of economics that you can influence prices through less devastating means, including import and export tariffs and supply-side measures such as the liberalization of land ownership laws and the de-bureaucratization of the system regulating agricultural production. Furthermore, food stamps or cash allowances for the neediest would be far more efficient and less detrimental to consumers and the economy than price controls.

The state also would do well to transform the Federal Anti-Monopoly Service into a potent force with capable regional branches armed with tough laws to investigate and prosecute cartels or any tacit price collusion by retailers or producers.

Maybe these alternative methods and the negative impact of price controls seem too hypothetical for some civil servants, especially those who attended Soviet institutes that offered courses on "political economy," which is of little use in a market economy. But even Soviet-educated civil servants will not be able to ignore the impact of long-term price controls if Gordeyev wins this debate.

In a flashback to Soviet times, food lines would form, with the neediest people spending hours waiting to buy meat and eggs and those lucky enough to be at the front reselling their purchases on the black market. When this happens, it will not take the next prime minister long to start thinking about whether he wants a minister like Gordeyev in his Cabinet.

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