The return of price controls in Argentina, Russia and China

Several countries – nations that in recent years have purportedly moved from command-and-control economies toward market capitalism – are rolling out the blunt instrument of price controls to combat inflation, says Daniel Gross on Slate.com.

Take Argentina, for instance:

Argentina's overheating economy has produced an inflation fate of 12.3 per cent (as measured in 2005).

As a result, it was reported that Argentina initially tried to persuade producers and stores to agree to voluntary freezes on prices of hundreds of products, including sugar, flour, noodles, bread, shampoo and pencils.

When those failed to work, Argentina simply changed the method by which it calculates the consumer price index (CPI); leading to an official inflation rate 2 or 3 times below the real rate.

Russia is another example. As the Financial Times reported, the country's biggest food retailers and producers have reached an agreement, expected to be signed with the Russian government, to freeze prices at predetermined levels on selected types of bread, cheese, milk, eggs and vegetable oil until the end of the year.

Last is China, says Gross:

China's CPI rose 6.5 per cent between August 2006 and August 2007, thanks in part to an 18.2 per cent year-over-year increase in the price of food.

Beijing has responded in part by telling government officials not to use the word inflation.

The International Herald Tribune reported that China hasn't permitted gasoline prices to rise since May 2006; and in September, China froze prices on certain household staples.

What all this means is that this isn't a good time to invest in a cattle farm in Argentina, a cheese plant in Russia or a gasoline refinery in China. If the price controls continue much longer, these economies could see the revival of another distressing factor that defined socialist economies in the 20th century: rationing.

Source: Daniel Gross, Cry for Me, Argentina (and Russia and China), Slate, October 30, 2007.

For text: http://www.slate.com/id/2176963/fr/flyout

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 13 November 2007