From the land of Kazakhstan

The same country in which Borat hails from is in a little bit of trouble….

In the Economist, it seems that bread prices have jumped 30%, while prices of sugar, flour, and sunflower oil has also gone up. The people began to hoard bread when the price started to go up because they have not so very distant memories of hyper-inflation with the Soviet-Union. Elders even complain that during the days of Stalin at least they had bread.

Now, the Chief of the World Bank in Kazakhstan, John Litwack says that the world market prices have gone up and people hoarding it has also caused prices to go up.

This brings up a lot of good questions…..
Can the government do anything to fix this?
Will the government do anything to fix this?
Is this going to create an attack on capitalism in a vulnerable country?

My opinion is re-look at tariffs on these goods and see if they can reduce this. The problem is that government usually does’t do this and like when there was a rise in the United States in the price of oil during the 70s, the temptation is to create price controls.

Price controls are bad in many ways. First they reduce the incentives for business to product the same amount as the free-market demands. It also helps put businesses out of business that are on the margin (barely making a profit).

Take this example: You own a lemonade stand and this year there is an increase demand for lemon pie. The price of lemons will rise. As the price rises on one of your inputs you will have to raise your price to make up for it. If the government steps in and says it is “for the good of the people” to prevent you from selling your lemonade for more than 25 cents a glass, you will then still have to pay the lemon producer whatever price was raised to, lets say from10 to 30 cents a lemon (assume 1 lemon per glass). Factor in labor per glass and rent per glass which was 10 cents and 5 cents, respectively. Before you were keeping 10 cents for yourself, you are your own labor. Now after this price hike of 20 cents more for lemons you would raise your price from 25 cents to 45 cents. Now you can’t because you would be breaking the law. And guess what you are now losing 10 cents instead of making 10 cents. You are going to go out of business.

That was obviously a simplified version of price controls and their effects. But when I see situations like this one it worries me.

so I urge the Kazakhstan government whatever you do, do not create price controls!

Like I said, there would be a shortage of the good, which is bread, and people will starve. They will look at their government and blame democracy and capitalism for it. When price controls are not capitalist’s ideas at all.


Published in: on November 18, 2007 at 6:15 am  Leave a Comment  
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