Tag Archives | Graduate Certificate in Public Policy

Shopping at Supermarkets in Argentina? No, Thanks!


Image credit: Vauvau, flickr/The Argentina Independent

How the price freeze at supermarkets in Argentina left consumers in an unrelenting dilemma with regard to grocery shopping

By Sreetama Sen (@SenSreetama)

The Argentinian government, under the presidency of Cristina Fernandez de Kirchner in 2013, imposed a strict price control mechanism on necessary goods being sold at larger supermarkets across the country. This action of capping the price is a price freeze scenario, which is similar to a price ceiling, wherein the prices of goods are fixed in such a way that they can’t increase beyond the set limit.

This measure was introduced in the aftermath of the International Monetary Fund (“IMF”) censuring Argentina for providing inaccurate data. Also, we must keep in mind that Argentina’s inflation and hyperinflation woes date back to several years.

In 2013, the official records stated an inflation of around 10.9-11% in Argentina whereas, according to independent analysts, the actual figures were 25-28%. The price control mechanism was implemented by the government to bring down this double-digit inflation rate as well as to protect the interests of consumers by maintaining their standard of living in the short term. Additionally, the supermarkets utilised the already high inflation rates to sell the goods at an even higher rate to the final consumers while they themselves continued to pay six times lesser than the final price to the producers. Hence, this measure was aimed at ensuring that such producers were not at a disadvantage in addition to controlling the soaring inflation rates in the country. Even in recent days, there have been instances of protests by these producers for not being paid the adequate price.

In the initial stages, the government followed a two-pronged action plan – (i) identifying several goods which were daily necessities, including groceries (cooking oil, cereals, beer, etc.); and (ii) capping the prices at which such goods could be sold by large retailers for a period of two months. This period was subsequently extended in phases till Mauricio Macri took over as President in 2015.

By December 2013, the Argentinian government entered into an accord with the popular supermarkets operating in the country like Carrefour SA, Wal-Mart Stores Inc. Cencosud SA, etc. whereby the prices of these goods were frozen for one whole year. During the time when this mechanism operated in Argentina, the number of regulated goods, rose to as many as five hundred. Interestingly, the accord also included an understanding between the parties that such price fixation on goods should not result in shortage of supplies by the supermarkets.

The question that arises now, is whether the inflation rates were actually controlled? Well no, as of 2015, the inflation rate was at 23.5% as per data released by the World Bank. Secondly, the effect on consumers was also undesirable. This mainly happened because the supermarkets found a way to counter the fixed price by displaying lesser supply of those goods and in turn, the smaller sellers, due to a rise in demand also raised the prices of those goods – hence demand for the particular good kept increasing for the consumer and yet he/she was unable to purchase it because the supply was considerably reduced, artificially or by market forces. As a result, the producers were not getting paid for sales, and thus, were unable to produce any good due to lack of capital.

So, why is any of this still baffling, considering that the IMF has lifted the censure on the country in November, 2016? Here is why:

The first and foremost unintended consequence was a deficit in the supply of the goods – whole point of fixing the prices was because they were ‘necessary’ goods and yet consumers found it difficult to purchase the same items. The smaller vendors, taking advantage of the fact that supermarkets were unwilling to sell these items, further increased the prices of those items, leaving consumers in a limbo. It also resulted in black marketing of such goods, catering only to those consumers who could afford to pay higher costs to meet their demands.

The intended recipients did not receive the intended benefits of this price control mechanism. It most definitely did not achieve what it set out to achieve. But, what is even more surprising is that, three years and a government change later, the condition in Argentina is not very different. This is important because – it is one thing to know that a control mechanism did not work and it is another to see the same control being removed and yet the same issues still persisting. The recent proposal by the legislators in Argentina in relation to regulation of prices in supermarkets in Argentina to curb rising prices and inflation rates is that there needs to be a law that governs this sector and a law that is passed after due consultation with all stakeholders.

Thus, it remains to be seen whether the extremely high double digit inflation rates in the country is a consequence of continuous economic mismanagement by the authorities or misplaced causation by the stakeholders.

Sreetama Sen is an alumna of the Takshashila GCPP15 and tweets at @SenSreetama

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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When Economic Policy Saved India from the Mongols

By Anirudh Kanisetti


Featured Image: coinindia.com

13th century, an era when the Mongols were considered the Scourge of God, had rulers from Hungary to China quaking in their boots at the mere thought of a Mongol attack. One potentate however was a notable exception: he was, in fact, in the habit of defeating Mongol raids and keeping his dominion, among the world’s most prosperous, conspicuously safe from pony-riding barbarians.

Sultan Alauddin Khilji of the Delhi Sultanate was one of the finest generals in the history of the Indian subcontinent. He came to the throne after a coup against his uncle, and his successful military expeditions against the Mongols required a large and efficient standing army. It would take one of history’s most innovative economic policies to maintain it.

The Sultan’s solution to the problem was as brutally efficient as his military campaigns. The larger the army, the higher its upkeep. However, if prices of essential commodities were lowered, he could assure the same quality of life for his soldiers at a lower cost to the treasury without compromising their fighting calibre.

If the prices of essential commodities were fixed to buy the support of the military, the prices of every other commodity would also have to be controlled to ensure a similar quality of life for cultivators and merchants. The controls, therefore, were extended to every commodity available in Delhi’s markets – ranging from fine cloth to ponies – in an ever-expanding bureaucratic maze.

Fundamental market rules haven’t really changed much from the 13th to the 21st century. Price controls inevitably led to black market trading as a new equilibrium is reached between buyers and sellers. In addition, famines inevitably led to hoarding and shortages.

A policy like this would be impossible to maintain in a state which had to adhere to human rights. Luckily for the Sultan, the Delhi Sultanate was famous for many things, but humanitarianism was not one of them.

Draconian punishments were applied to any merchant who dared to hoard and sell items on the black market. Peasants were forced to come to Delhi and sell only to government-approved merchants at government-approved prices. This is in addition to the land revenue they already paid – which the Sultan paid back to the merchants, allowing for a small profit margin.

An intricate spy network ensured that any violations to the system were reported and dealt with. In times of scarcity, the entire city of Delhi was put on rations and fed only from government granaries, which acquired grain at fixed prices.

Within a few years of Alauddin’s accession, Delhi became unrecognizable. A totalitarian state where the Big Sultan knew all, its markets boasted possibly the most elaborate system of price controls ever conceived, at relatively cheap prices compared to global standards. In times of famine, amazingly, every household in the city had something to eat. Contemporary travellers’ accounts describe the fixed prices, come hell or high water, as a wonder of the world. But the downsides of the policy are not difficult to comprehend.

First, the peasantry had absolutely no incentive to increase production, as they would earn the same regardless. The Sultan refused to lower the taxes they paid. The countryside was essentially bled dry so that Delhi could live as he ordained. Merchants, too, could not pursue profits beyond what the Sultan allowed. This led to the economy stagnating for the duration of Alauddin’s rule: nearly twenty years.

Second, in a stagnating economy, it became more and more difficult for non-military professions to lead a good life. The prices of goods did not change for years, but incomes inevitably rose and fell with the Sultan’s military campaigns. “The price of a camel is two coins,” laments a contemporary, “But where do I get the two coins?”

The policy was clearly meant to benefit the army first, and the average Delhiite second. On the first criterion, it was a success, on the second it was a disaster (except in times of famine). Its implementation required a massive, expanding bureaucracy and spy network to fix everything from trading licences to profit margins and to discover and punish violators. Finally, it led to a miserable existence for the non-military classes, who could only live as well as the Sultan permitted them, and thus had no incentive to increase production, leading to economic stagnation and a long-term weakening of the Sultanate.

Was the policy a success? In terms of Alauddin’s objectives, yes. Was it a success on other counts? The answer is a qualified no – in purely economic terms, it was a disaster. But the positive externalities of keeping the entire Subcontinent safe from the Mongols justified the massive transaction cost to the economy of Delhi: the ends justified the means.

Besides, the citizens of Delhi were still eating Alauddin’s cheap grain in 1334 (he died in 1316), so perhaps they didn’t mind all that much?

Anirudh Kanisetti is an alumnus of the Takshashila GCPP15.

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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