09/2018
By Ricardo Amorim
According to Albert Einstein, doing the same thing over and over again and expecting a different result is a sign of insanity. Many Latin American politicians must be insane. There is no shortage of experiments with price freezes, but there was never a successful one. Yet, our politicians keep trying. The most recent disaster happened in Nicolás Maduro’s Venezuela. The government decided to fix and control the prices of basic consumer products.
There are two types of consequences when you fix and control prices. The first, as was the case, when the fixed price is below what it should be if defined by a balance between supply and demand for the product, that is, the price defined by the market. If it is lower than it should be, everyone will want to buy the product, but no-one will want to sell it. Result? The product vanishes from the market, shelves sit empty and whoever did not get the product will have to do without it, as the shortage of food in Venezuela clearly shows. In Brazil we have often lived the same script in unsuccessful economic plans in the 80s and the first half of the 90s.
The opposite happens when prices are fixed above market prices. This is what is happening in Brazil with controlled freight rates. When the set price is higher than it should be the producer or service provider is happy to sell it, but no-one wants to buy their product or service and the producer or service provider is stuck with the product or service. Result? Once again, set prices end up harming both who wants to sell and who wants to buy. In Brazil, freight rate control was intended to help truckers, but it is putting them out of work to such a point that strong rumours hint at new strikes.
In short, magical solutions by our populistic politicians never work. With elections knocking on the door, it is more important than ever to remember that and to avoid the political siren song promising benefits at no cost. There is a solution for Brazil, but it does not require just integrity and good intentions, it requires discipline and sacrifice from all of us. As it is easier to be elected by promising the sky rather than by telling the truth about the required sacrifice, Latin American politicians insist on the madness of preaching the same false solutions that are forever doomed to fail. It remains to be seen if voters also suffer from the madness of continuing to vote for bogus “magicians” – only to regret it. Hope not.
Ricardo Amorim is the author of the best-seller After the Storm, a host of Manhattan Connection at Globonews, the most influential economist in Brazil according to Forbes Magazine, the most influential Brazilian on LinkedIn, the only Brazilian among the best world lecturers at Speakers Corner and the winner of the “Most Admired in the Economy, Business and Finance Press”.
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Translation: Simone Montgomery Troula
