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Inflation, inherent goodness and the like February 7, 2007

Posted by Sharath Rao in economics.

Perfect example of the horror of inflation :

Problems :

The government awarded all civil servants a 300 percent raise two weeks ago. Doctors and nurses have been on strike for five weeks, seeking a pay increase of nearly 9,000 percent, and health care is all but nonexistent.The trigger of this crisis — hyperinflation — reached an annual rate of 1,281 percent this month, and has been near or over 1,000 percent since last April. Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms. Pay increases have so utterly failed to keep pace with price increases that some Harare workers now complain that bus fare to and from work consumes their entire salaries.

Solutions 1 :

Mr. Mugabe, who blames a Western plot against him for Zimbabwe’s problems, has rejected all calls for economic reform….The central bank’s latest response to these problems, announced this week, was to declare inflation illegal. From March 1 to June 30, anyone who raises prices or wages will be arrested and punished.

Consequences 1 :

That growing loss of control is apparent. The black market, which already flourishes beyond the reach of tax collectors and regulators, is likely to grab an even larger share of the economy when the government freezes prices in March, because stores will be unable to make a profit selling products at government-fixed prices.

Solution 2 :

Seeking to revive farm production, for example, the government sells gasoline to farmers at a bargain rate of 330 Zimbabwe dollars per liter

Consequences :

— and farmers promptly resell it on the black market for 10 times that, leaving their fields idle.

Solution 2 and its consequence is another evidence of the assertion that whether people are inherently good/bad/fair can be debated forever, but that they respond to incentives need not ( be debated ). Dont blame the people – blame those who set skewed incentives directly or encourage conditions that usher in such incentive structures.



1. achala - February 8, 2007

Link’s broken. Double http. I got the page but you might want to change it (the link) for future reference.

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