Oct 28 2007

Russia goes “Mugabe” on food prices as elections approach!

Published by at 4:07 pm under Price controls

Kremlin Secures Price Controls on Food Items Before Elections – New York Times

Okay, students. This article needs to introduction, no summary, no analysis, no passages quoted, I barely even glanced at the article myself! Read the headline… if you’re interested, read the article; but it should be nothing new to you at this point. It’s the same flawed economic thinking that led Zimbabweans to attempt to eat a poor giraffe, and the Chinese decision to freeze certain prices in the run up to the 17th meeting of the Chinese Communist Party Congress earlier this month.

What’s wrong with this sort of economic policy? Why do governments still attempt such policies, and why do people still fall for such tricks played by paranoid leaders obsessed with placating the masses through “generous” price controls? What do you expect will result from Russia’s price controls?

Hat tip to Greg Mankiw for the link.Mugabe, can't do economics good

Speaking of our old friend Robert Mugabe, the president of Zimbabwe has just announced he’s launching The Robert Mugabe Intelligence Academy. His stated purpose for opening this institute, which will train government officials from the greater Southern African region?

“The important role of defending our country cannot be left to mediocre officers incapable of comprehending and analytically evaluating the operational environment to ensure that the sovereignty of our state is not only preserved, but enhanced,” Mugabe said.

Before settling on the institutes’s official name, several options were tossed around, including the close runner up: “The Robert Mugabe Institute for People Who Can’t Do Economics Good and Want to Learn to Do Other Things Good Too.”

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

23 responses so far

23 Responses to “Russia goes “Mugabe” on food prices as elections approach!”

  1. HowardJingon 28 Oct 2007 at 7:33 pm

    Even though this is a horrendously stupid move if you were to consider Russia's future well-being, it might not be so dumb if you consider the time that the price freeze was announced. Since elections are only a month away, the current regime is probably just trying to curry favor with the masses in a last ditch attempt to get reelected. The average Russian only has basic knowledge of a market economy, considering that they have been under a command economy for most of their lives. To them, this price freeze is a godsend in light of the recently soaring prices of basic necessities.

    Of course, if I were part of the Russian government, I would have had the price freeze take effect after the elections so that people would have already voted for me when the economy goes to hell.

  2. Drew Venkatramanon 28 Oct 2007 at 7:48 pm

    Howard is right. As far as the concept is concerned, only knowing 2 units worth of AP Econ, this guys is making a stupid mistake. But what percentage of Russians know that its a bad mistake. Instead he may seem like he has their good intentions at heart, but we all know that deep down he is really messing up his countries economy which will only bring him problems after he is reelected. oh man.

  3. kevinchiuon 28 Oct 2007 at 8:06 pm

    Its obvious that the result will end up being the same as the price-control of Zimbabwe and Chinese price control previously posted; firms will not get enough revenue to produce enough supply to meet the demands of all the consumers, thus causing a shortage in goods. Like stated above, it seems the incentive for doing so is to garner as many election votes as possible because common people do not have the knowledge of economics to forsee the disaster and will perceive this as a purely good thing.

  4. Jo Loon 28 Oct 2007 at 10:34 pm

    Because this is a temporary move by the Kremlin to freeze prices, it is probably a move to make the general public happy ahead of the elections. Because this freeze is only temporary as said by the Kremlin, it shouldn't cause much problem. Hopefully whoever wins the election has enough economic knowledge to lift the agreement, thus preventing any product shortage.

  5. Alex Goldmanon 29 Oct 2007 at 12:05 am

    Yes, as Howard said this is just another manipulation of economics to appease the ignorant masses in order to garner votes. Ultimately this will contribute to further instability in the Russian economy – something they hardly need since the enormous crash they took when the Soviet Union broke up in 1991. If the politicians have any sense at all they will lift the agreement and allow the market to shape the price, which should in the end benefit all.

  6. kevinyehon 29 Oct 2007 at 4:12 am

    It's clear that these rulers actually know what they might be causing, but as everyone before me has said, it's the common people who know nothing about economics that these rulers are trying to please. These consumers only want short term gratification, and don't realize the ramifications of these price controls.

  7. Hansen Guon 29 Oct 2007 at 6:12 pm

    "Ekho Moskvy, a radio station often sharply critical of the government, titled a Wednesday talk show, 'The restoration of Socialism: until election day or for years ahead?'"

    That passage in the article pretty much sums it up. It's a short term fix to garner some support for the upcoming elections. Some Russian government officials have warned against freezing prices in a market but have stated that this short term freezing is acceptable…Which really just points this move in the direction of politics, not smart economics.

  8. Jonathan Lauon 29 Oct 2007 at 10:20 pm

    This is a pretty clever idea by the Kremlin of Russia but one that he might regret later on, if he is re-elected. It is a great way to manipulate the ignorant people of Russia into voting for him, but the economic consequences his country might face could overshadow his re-election when he is actually in office again. I guess we will see in a few months whether his sneaky tactics will be a win-win or win-lose situation.

  9. Ji Eun Hwangon 30 Oct 2007 at 1:07 am

    The price control to make more people affordablt to purchase the products like sugar and bread seems to be a great idea on the surface; however, it will soon cause a shortage of such goods.

    The type of the price control mentioned in this article is price ceiling, which sets a legal maximum price that sellers can charge for a product or service. When it sets the price ceiling, the quantity demanded increases but the quantity supplied decreases. Shortage or excess demand occurs, thus consumers will experience a harsh competition to get the goods they want. There will be an unfairness of distribution of goods, which goes against the purpose of the set of price ceiling.

    However, the enforcement of the price ceiling is only temporary, so the outcome will not be so severe, for the price will get to the normal equilibrium price.

  10. davidgolesworthyon 01 Nov 2007 at 11:44 am

    Our dear friend, Mr. Mugabe, whom I happen to have experienced first hand, maybe one of the hated politicians throughout the world, yet somehow finds a way to remain in power.

    In this article, the price ceiling which the Russian government has put in place may be a smart idea for a short term solution, but eventually they will have to find a better long term solution. If price ceilings are around for too long, producers will just find ways around them, and the prices will increase, as well as the use of the black market. Also, I sense they just may be a little bit of propaganda and pre- election jostling going on in order to try and sway the neutral voter.

    back on the subject of our dear friend, Mr. Mugabe. Once revered as a great African political, and a fighter of democracy and freedom, Mr. Mugabe over the last decade has continuously ruined his reputation, and many would say his tenure as leader of Zimbabwe. Obviously this is a subject I feel very strongly about, and having visited Zimbabwe when the Mugabe era was in order, and having seen it now, there are total parallels. Basic goods and needs for the people are no where to be found, and even the most dramatic economic policies won't even work on the Zimbabwean economy.

    The rapid inflation of the country is so high, that is now known as the country with the highest inflation rate. For an example, when i went to Zimbabwe in 1999, it was 44 Zimbabwean dollars to 1 U.S Dollar. Now its several thousand, eventually leading to ten's of thousands.

    I just wonder how such a crippled economy will be able to recover, and just how long it will take. Decades at least, and perhaps it may not even fully recover.

  11. andreason 02 Nov 2007 at 12:15 am

    Just like the oil article, there is again a price ceiling set in this setting, in this case the russian government setting it on food prices. Price ceilings are ineffective in many cases and in the long run as in the oil scenario in china, will probably only end up hurting the economy more than it does it good. Although price ceilings are set, there are usually ways the suppliers can sell at higher prices, as there are always buyers who are willing to pay higher prices. If this price ceiling is only temporary, however, it should be alright as the equilibrium price and quantity should go back to normal, as there will only be a short term effect of the price ceiling.

  12. Shan Verne Liewon 06 Nov 2007 at 2:47 pm

    I remember reading about some modern time historically back (makes sense eh?) that either the Russians or another of their cold war era cronies suffered from inflation so severe that their people actually began burning their cash as a substitute for gas to cook food, the price for which had far surpassed the excess availability of paper money.

    Given today's relatively subtle economic crises, I hope Putin recends these policies before their reported annual inflation trends begin screaming "too late".

    In addition to these price floors, there's been abundant talk among the higher within Russia that the government has been slyly indicting owners oflarge commodity firms with petty or overblown corruption charges in pursuit of nationalizing their firms and capital resources.

    Price floors, unethical acquisition methods, violation of NATO airspace, and an apparent act of reverence to Mugabeism? This won't fare well for the locals whom only recently have seen a rise in foreign trust of Russia's stable "buisness environment" (and thus investment into the domestic economy). Putin may be carpeting his nation's future for superior political leverage, but what can ya do?

  13. yunqimokon 11 Nov 2007 at 12:39 am

    Clearly the Russian government is very manipulative and sneaky. Waiting for election times to impose a price ceiling! Consumers who haven't taken economics will gloat at the sound of it, not understanding that ceilings lead to shortages and thus leaving them worse off. So yet again, the politicians win. The producers will fume under the ceiling and produce less to incur smaller profits, and consumers will be under the semblance of low prices. In the long run, there is dead weight loss, and no one benefits…except of course, he who sits on the Russian throne.

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