President Edgar Lungu’s warning that the government will be compelled to introduce statutory price controls, nationalize milling companies or close down the companies if they continue to hike mealie meal prices is a clear revelation of his intention to unilaterally re-introduce the socialist policies that were characteristic of the UNIP era between 1968 and 1991.
Potential and current investors in any of our beloved country’s commercial and industrial sectors are rational actors who are likely to be fanned away by the President’s threats. There is a need for our President to realize that the statements he makes in public actually become the country’s policy initiatives.
2. Reversion to Socialist Policies
Nevertheless, it is already clear that the Patriotic Front (PF) and the President have decided to re-introduce the socialist system of government in Zambia. The creation (or is it resurrection?) of the Industrial Development Corporation (INDECO or IDC) and the recent transfer of 29 state companies to the IDC are tell-tale signs of the country’s re-adoption of the socialist ideology.
Another manifestation of the resurrection of socialist policies is the creation of government-operated maize milling plants, which will certainly lead to the establishment of retail outlets akin to the infamous ZCBC, Mwaiseni and NIEC Stores, and the eventual nationalization or fanning away of private milling companies and large-scale retail outlets.
3. Effects of Socialist Policies
From the late 1960s to 1991, the Zambian economy was captained by nationalized private companies and state enterprises created by the government. The government’s socialist policies barred both local and foreign private investors from certain commercial and industrial sectors of the country’s economy.
Naturally, the monopolistic position enjoyed by the state-owned enterprises culminated in complacence and gross inefficiency because, in the absence of competition, the companies apparently found it unnecessary to seek or use discoveries that would have improved the quality and quantity of their outputs.
Unfortunately, the creation of monopolistic state companies culminated in widespread shortages of essential commodities, the evolvement of black markets, and rampant smuggling of commodities. (I have explained how these effects evolved in the ensuing sub-sections.)
This, in part, prompted the next government of the late Dr. Frederick Chiluba to embark on an economic liberalization program upon inauguration in October 1991 in a deliberate attempt to boost competition in commerce and industry, as well as wean the national government from direct involvement in commercial and industrial activities.
The program was later adopted and sustained by the late Dr. Levy Mwanawasa (who succeeded Dr. Chiluba in 2002) and President Rupiah Banda, who succeeded Dr. Mwanawasa in 2008.
Price controls and the nationalization of private companies are among important elements of the socialist system of government. In the ensuing sub-sections, let us consider the negative effects associated with these two elements of socialism. (I leave the discussion of any potential benefits to society of the socialist ideology to proponents of such an ideology.)
3.1 Price Controls
The term “price control” refers to the unilateral setting, by a government, of maximum prices at which certain goods or services are to be transacted in the marketplace. Ordinarily, such price ceilings are set against a background of commodity shortages. Important factors which give rise to an imbalance between supply and demand, thereby necessitating price controls, tend to vary from country to country and from situation to situation.
In modern times, price controls were first used during the last two World Wars when the war effort caused disruptions in normal production, and further necessitated the diversion of limited resources from the civilian population to the military effort, leaving the barest minimum for the civilian population.
It was, therefore, considered necessary by governments in affected economies to institute price controls on the limited supplies available to ensure that there were enough supplies to sustain not only the war effort, but also the civilian population.
Price controls have also been instituted when shortages have been occasioned by the process of economic development, prompting governments in affected countries to divert resources to higher priority projects. Further, price controls have been instituted in many developing countries as a response to shortages occasioned by lack of adequate foreign exchange reserves for importing essential production inputs, shipping problems, delays in the delivery of imported consumer goods, and unprecedented growth in the demand for manufactured goods.
Shortages, however, may also be caused by an inability of local suppliers of commodities which are in short supply to satisfy demand, such as in situations where a government nationalizes or expropriates privately owned business entities and creates inefficient state monopolies to supply commodities. In some instances, price controls may themselves cause or exacerbate commodity shortages, as Sanderson has maintained in the following words:
“Price controls have the effect of discouraging supply while encouraging demand. The inevitable result is scarcity of commodities; and when there is scarcity, you always get people who buy up commodities wherever they can and resell them on the black market. In Zambia, we call them ‘black marketeers.’ It is a useful term, for it puts the blame upon them rather than the authorities.”
The objectives of price control in response to shortages have tended to have distributive overtones. During the two World Wars, price controls were aimed at discouraging the making of high profits on scarce goods, which tended to skew the distribution of scarce goods against the poor. Price controls on food were particularly important because it was felt that, in the absence of such controls, the poor would not be able to afford to maintain a decent level of subsistence.
In developing countries, price controls on scarce commodities have similarly been aimed at preventing the making of high profits and effecting a more egalitarian distribution of the scarce commodities than would obtain if prices were allowed to rise in response to the market forces of supply and demand.
Among the goals of price control measures instituted by the government in Tanzania during the 1970s, for instance, were as follows: (a) to prevent the income of peasants and workers from being affected adversely by unnecessary and unjustified price increases; (b) to facilitate the development of trade and commerce in rural as well as in urban areas; and (c) to maintain fair relationships among incomes of different sectors of the country’s economy.
In Zambia, the distributive goals of price controls were not explicitly spelt out in the Control of Goods Act (Chapter 690 of the Laws of Zambia). However, the objectives of price controls could be inferred from the rationale for the formal establishment of a government department responsible for price controls, as well as the speeches of government leaders and the National Development Plans.
First, the period beginning from 1966 through 1992 was characterized by serious commodity shortages in the Zambian economy; the Control of Goods Regulations were prescribed during the same period, and the Price Control Department was also formally established in 1966.
The essential elements of the regulations were as follows: (a) to prescribe a maximum price at which certain specified commodities would be sold; (b) to provide for the government to direct the display of prices at which such commodities could be sold; and (c) to determine acceptable business costs for the purpose of arriving at a prescribed price.
Second, it was widely recognized that standards of living had to be evenly spread among all segments of society if the country was to achieve well-integrated and balanced economic development. Control of prices of essential commodities was one sure way in which it was hoped that basic necessities of life would be made available to a larger segment of the country’s people.
Accordingly, the Third National Development Plan envisaged uniform prices on essential commodities throughout the country. This was further reinforced by expanded state participation in trade through state-owned wholesale and retail outlets.
Effectiveness of Price Controls:
The effectiveness of a ceiling price in making commodities widely available depends on a number of factors. The first factor pertains to the severity of shortages. Price control functions better the smaller the difference between disposable income and the value placed on a commodity whose price is controlled.
It has been maintained that there would be a tendency to violate price controls among those who feel deprived of a given commodity at the controlled price; these would be the relatively wealthier people who can afford to pay a higher price than the one prescribed. They would, therefore, be more willing to pay a higher price to those who might buy the commodity and offer it for sale outside regular retail outlets than face the prospect of going without it.
Besides, they are likely to form coalitions with suppliers to violate price controls, and the greater the disparity between the market price and the government-fixed price, the greater would be the proportion of potential buyers willing to violate the controls.
The second factor relates to the cost structure. Price controls are less likely to be violated if they are instituted in relation to the cost structure. Thus, there are likely to be fewer temptations to violate the controls in constant and decreasing cost industries than in increasing cost industries unless, in the case of increasing cost industries, the permitted price provides for business entities to maintain their profit margins.
Although reasonable business costs (such as those pertaining to wages and salaries, bank charges, procurement of raw materials, and so forth) are taken into account in arriving at a ceiling price, these costs would tend to change faster than controlled prices.
Moreover, the controlled prices are not sensitive to individual traders’ costs of dealing in price-controlled commodities.
The third factor pertains to the nature of the market structure. Imperfect markets, characterized by few and large sellers, are less likely to violate price controls than competitive markets. This is mainly due to the fact that it is much easier to police a few, large traders than it is to police numerous and small traders that are characteristic of competitive markets.
Besides, large business undertakings tend to be more sensitive to political and public sentiments since they are aware that they can be singled out very easily if they violate price controls.
An additional factor which can affect the effectiveness of price controls is formal rationing. By themselves, price controls cannot work effectively in re-distributing scarce commodities equitably. In situations where shortages are particularly severe, price controls work better when they are accompanied by rationing.
Without rationing, price controls merely make commodities affordable even to the poorest, but this does not ensure that the commodities are easily obtainable by all those who can afford to pay the maximum prices set for the commodities.
Rationing, if properly administered, can provide a mechanism for directing commodities to those who are in possession of ration coupons in the sense that commodities can only be obtained in exchange for coupons—no more, no less—and can, therefore, protect each and every individual’s right to obtain commodities that are in short supply.
Economic Effects of Price Controls:
The unilateral setting, by a government, of a maximum price at which a given commodity is to be sold hinders the free distribution of the commodity in the marketplace. Specifically, it interferes with the right of those who distribute the affected commodity to: (a) use the commodity or exclude others from its use; (b) receive income generated from the exclusive use of the commodity; and (c) transfer the ownership of the commodity to preferred parties in the marketplace.
Cheung has contributed two propositions for examining the effects of price control; they are as follows:
(a) When the right to receive income is partly or fully taken away from a contracting party, the diverted income will tend to dissipate unless the right to it is exclusively assigned to another party. The dissipation of non exclusive income will occur either through a change in contractual behavior or through a combination of the two. And
(b) Given the existence of non?exclusive income and its tendency to dissipate, each and every party involved will seek to maximize the dissipation subject to constraints. This will be done either through seeking alternatives in using or producing the commodity or through forming alternative contractual arrangements to govern the use or production of the commodity with the least possible transaction costs, or through a less-costly combination of the two procedures.
By and large, the alternative arrangements which suppliers may resort to in an effort to maximize income, or minimize costs, under a regime of price controls will tend to have adverse effects on economic welfare; examples of such arrangements include the following:
(a) Discontinuing the production or sale of affected commodities;
(b) Restricting or reducing the quantity and/or quality of affected commodities;
(c) Dispensing with marginal customers;
(d) Restricting or abandoning attendant marketing services, such as delivery service, and after-sales service;
(e) Imposing conditional sales, such as tying contracts;
(f) Engaging in under-the-counter sales manifested by sales to favored customers, black market operations, or speculation in the controlled commodity;
(g) Engaging in speculation in the controlled commodity; and/or
(h) Smuggling of affected commodities to countries where prices are higher than controlled prices obtaining in the domestic market.
There are several important elements which suppliers take into account when making pricing decisions other than transportation and storage costs; they include costs relating to labor, insurance, advertising, buildings, and contributions to host communities. These costs may not necessarily be the same among the retailers or manufacturers of controlled products in any given country.
Among other things, adoption of socialist policies can have the following adverse effects on a country’s economy:
(a) It can culminate in increased public-sector borrowing and government spending to finance its operations, and the operations of its subsidiaries, especially in times when it will not generate profits.
(b) It can culminate in stunted economic growth, rampant shortages of commodities, and cross-border smuggling of commodities. For example, the infamous long queues for essential commodities like sugar and cooking oil during the UNIP era, which would start building up as early as 03:00 hours even without the assurance that everyone in the queue would eventually buy the commodities they needed, are still fresh in the minds of those who endured the economic hardships of such an era.
(c) It can be an enormous consumer of our beloved country’s meager foreign exchange reserves, like the defunct INDECO, and also lead to the rationing of foreign exchange and the re-introduction of exchange-rate controls.
(d) It can certainly put our country at odds with the International Monetary Fund (IMF), the World Bank, and our development partners—institutions and countries which have worked so hard in bolstering our efforts at meeting the development needs of our country and the needs and expectations of the majority of our people since 1991. That will leave only profit-seeking commercial creditors to lend us money at exorbitant interest rates!
(e) It can stifle competition and innovation in commerce and industry in the national economy, which, as stated elsewhere in this article, can lead to lower prices, high-quality products, and greater variety and abundance of products in the economy, as well as cure the problem of black markets.
(f) Re-introduction of socialism can very easily drive our country from a potentially wealthy nation to a nation saddled with unprecedented socioeconomic malaise as experience during the UNIP era has already taught us.
(g) In socialist economies, constraints on the process of innovation, as Goldman and Simon have discerned, are ideological in nature; and since socialist ideology regards S&T knowledge as belonging to all the people in a given country, it treats such knowledge as a free good. This undervalues the knowledge and, as a result, removes the necessary incentive for creativity and innovation.
(h) Socialism largely depends on a government’s suppression of civil liberties, and certainly on authoritarian rule by government authorities. And it would eventually require the creation of a one-party system of government! And
(i) It can reverse the benefits of the privatization of state-owned enterprises, which, according David Chilipamushi, has the potential to stimulate private investment, has given economic power to a greater number of people through stock ownership, has promoted competition and consequently encouraged efficiency in commerce and industry, has beefed up government coffers through the sale of government holdings in state companies, and has eased the financial burden of state companies on the public treasury.
These disadvantages relating to socialism are real, and they outweigh any theoretical, ideological, and/or philosophical arguments for (or advantages of) socialist ideals. In all, history should offer us guidance on this matter. Socialist policies are simply a pain in the neck! There is, therefore, no justification for re-introducing an ideology that economically traumatized our people from the late 1960s to 1991.
What our beloved country needs now is the creation of what may be referred to as a “social welfare state”—that is, a dynamic free-market economy that has a human face; or, more precisely, a socioeconomic setting that simultaneously provides for a highly competitive business system and an effective mechanism for re-distributing wealth to the needy.
Countries which have succeeded in meeting the basic needs and aspirations of the majority of their people—such as Australia, the United States of America, Luxembourg, Norway, Switzerland, Canada, Japan, the Netherlands (Holland), and Germany—are essentially social welfare states!
So, neither socialist nor crude capitalism in its quest for profit maximization can facilitate the attainment of improvements in the livelihoods of the majority of citizens in any given country.
4. The Global Hunger Index
On the 2015 Global Hunger Index (GHI), Zambia is ranked 3rd from the bottom out of 117 countries surveyed, excluding higher income countries where the prevalence of hunger is very low. Among the indicators measured by the Index include undernourishment, child mortality, and child wasting and stunting.
This is, no doubt, an embarrassment to us all as bona fide citizens of the Republic of Zambia! Equally embarrassment is the revelation by the Zambia Civil Society Scaling Up Nutrition (CSOSUN) Alliance in March 9, 2014 that 45% of Zambian children who are below the age of 5 are stunted due to malnutrition.
We should be concerned about this because undernourished children are more vulnerable to disease due to weakened immune response. Besides, they are at a greater risk of having difficulties in learning, playing or engaging in normal childhood activities.
These statistics are among the unfortunate consequences of the high levels of poverty in the country, and limited variety and availability of affordable foodstuff—a situation that can be remedied through ambitious agricultural policies designed to enhance the country’s food security, which, according to the World Food Summit (1996) “exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.”
A meaningful level of food security can be achieved easily within 1½ years of adequate support and appropriate incentives to agribusinesses and to both small and large-scale farmers. Widespread hunger and malnutrition can, therefore, be addressed within a very short period of time!
In this regard, we need to take the following measures, among other things:
(a) Address the following factors identified by the COMESA Secretary General in 2000 as having contributed to the low levels of agricultural production in Zambia: non-availability of financial capital, and the high cost of agricultural credit; inadequate transport and storage infrastructure, and the high cost of transport; the under-provision and high cost of agricultural inputs; an inefficient agricultural marketing system; inadequate skills in agricultural production and marketing; inconsistent and unrealistic agricultural policies; and inadequate investment in agricultural development by the national government.
(b) Revive and revitalize the Zambia National Service (ZNS) production camps, which should accept enrollment by Zambian citizens on a voluntary basis, as well as promote and bolster agricultural production in the camps through greater financial support and generous conditions of service for ZNS personnel.
(c) Utilize the vacated refugee camps dotted across Zambia for agriculture-related training, crop production, and other vocations to be facilitated by a cadre of skilled and professional trainers.
(d) Require all provinces to create revenue-generating Provincial Agricultural Estates, and to use a portion of the output of the schemes to maintain their own local food reserves, and also require all district councils, educational and training institutions, police camps, military barracks, garrisons, and prisons to initiate and maintain agricultural production units.
(e) Encourage resettlement schemes to produce more food by providing for irrigation dams and canals at all such schemes, and provide for attractive agricultural incentives to boost both small-scale and large-scale farmers.
(f) Promote efficiency in processing, sourcing, and distribution of agricultural inputs by providing for informal trade in agricultural inputs among farmers.
(g) Promote efficiency in processing, sourcing, and distribution of agricultural inputs by providing for informal trade in agricultural inputs among farmers, and the creation of a “Farmers’ Holding Company” by farmers (through a low-interest loan, if needed), to supply low-cost inputs nationwide at zero value-added tax—including seeds, seedlings, fertilizers, pesticides, insecticides, stock feeds, and grain bags. The cooperating farmers will assume ownership of the company as founding shareholders, and the company will preferably be registered and operated as a corporate entity.
(h) Create and maintain irrigation schemes at taxpayer expense, including the damming of rivers and construction of irrigation canals nationwide. We want to promote all-season crop production—January through December. In this regard, we appreciate the pledge made by donor countries to bolster the viability of the envisaged National Irrigation Plan (NIP), which we will earnestly embrace.
(i) Create feeder roads and maintain old ones nationwide, improve training conducted in agricultural research centers, provide for low-interest loans for erecting secure storage facilities, and extend incentives to agribusinesses and canners and processors of agricultural produce.
(j) Create—in collaboration with the Zambia National Farmers Union (ZNFU), the Millers Association of Zambia (MAZ), the Zambia Cooperative Federation (ZCF), and other relevant stakeholders—a marketing system for all kinds of agricultural produce designed to provide for the following: direct sourcing of such produce from farmers by millers, retailers and other industrial buyers; and procurement of unsold produce by the Food Reserve Agency at wholesale prices for preservation and/or distribution to government institutions like boarding schools, colleges and hospitals. And
(k) Ensure that the various kinds of imports that are currently exempted from customs duty will continue to enjoy the duty-free status—including fertilizer, irrigation equipment, irrigation pumps, tractors, machinery for soil preparation and cultivation, harvesting and threshing machinery, poultry machinery, fungicides, and herbicides.
Besides, there is a need to support all kinds of agricultural pursuits and endeavors, including poultry, dairy farming, cattle ranching, fish-farming, horticulture, and crop husbandry.
These kinds of measures can make it possible for us to attain greater levels of agricultural output, the greater supply of which can culminate in lower prices of food and enhanced food security. Imposition of price controls on mealie meal and/or nationalization of privately owned milling companies would be counterproductive.
The author, Mr. Henry Kyambalesa, is a Zambian academic currently living in the City and County of Denver in the State of Colorado, USA.