Lessons from the Zimbabwe economic protests
seen this situation play out in many other countries? What were they thinking? On the surface it seems like yet another government taking the people for granted and enacting a policy that has turned the masses against them. But what is the real story here?
Zimbabwe like many other countries fixes the prices of some goods like fuel and foreign exchange. In some cases, the country does not actually produce the goods whose prices it fixes. In this instance the Zimbabwean government does not produce any crude oil and it certainly does not print any US dollars. It attempted to fix these prices regardless.
Fixing prices is expensive though. Because governments are typically filled with politicians, they always want to make the people happy, sometimes by refusing to adjust prices when they should be adjusted. For example, say the price at which they import fuel goes up by five percent, the typical politician would say “Oh my people will be unhappy with this increase. Let us see what we can do to protect them.”
They then go on to prevent higher prices from transmitting to consumers. As time goes on, the cost of protecting the con- sumer increases and the burden on the government increases as well. Some governments can maintain this burden for a long time but eventually they always get to the point where the burden gets so large that something has to be done. Essentially they get to the point where they can no longer afford to protect the consumer and large adjustments to prices are needed.
The Zimbabwean case is little bit more complicated than this, but the underlying actions were the same. The government while fixing the prices of fuel and its indirect currency, their US bond notes or “zollars” as they are sometimes called, got to the point where it could no longer afford to do so and was faced with no option but to let prices go. Prices for fuel at least. Cue the protests.
So, what was the policy error here? You might be forgiven for thinking that adjusting prices and sparking a protest was error. If you did that you would be wrong. The real error was fixing them in the first place and refusing to adjust them in tandem with reality. What policy makers in these countries always fail to realize is that people are generally okay with small price increases.
We may grumble and com- plain but you would struggle to hear of a case where mass protests erupted because prices went up by two percent. A 100 percent increase though and the story is different. The message then for policy makers is obvious. Try to never end up in a scenario where you require big increases in prices overnight. The economy and the polity are always much better off allowing small changes over time than trying to hang on to fixed prices until a day of reckoning.
Don’t fix prices but if you must, be smart about it. Like South Africa who has a formula for setting prices for fuel and adjusts prices every month even if the consumers grumble.
Why is this story important? If you have followed the Nigerian policy space you would know that we are fixing key prices in Nigeria again and are heading towards the inevitable point where large overnight adjustments are required. The foreign exchange rate has been fixed for almost two years with policy makers clapping for themselves in spite of significant pressures building as is obvious if you observe the movement in foreign reserves. The prices for fuel and electricity have also been fixed for some time now with pressures building there as well.
The NNPC spent an estimated one trillion naira in 2018, maybe more if you add the exchange rate disparity, to keep prices fixed with grumbling coming from the state governors. The consequences of fixing prices for electricity are also clear with the distribution companies and other players in the sector in dire straits.
The official line by most politicians is that you can’t heat up the polity by allowing these sharp adjustments before elections. No doubt we will have the same debates about whether or not these prices need to adjust after the elections as well. I hope we correct the real policy error, which is to stop fixing prices in the first place and allow flexibility so that we never end up in a scenario where large adjustments are needed.
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