Latin America: If You Want to Lower Inflation, Avoid Price Controls!

Sergio Daga /

Photo: EFE/Newscom

The recently reelected president of Ecuador, Rafael Correa, wants people to know he is determined to fight inflation through combating “speculation.” A noble goal, to be sure. But the weapons chosen for that battle by President Correa—a PhD economist trained at the University of Illinois—actually will doom his anti-inflation campaign.

Surely he knows that. So why is he doing it?

A few days ago Correa signed an executive decree establishing reference prices (i.e., price controls) on 46 different categories of food products. Correa claims the new price controls will enable the government to head off price speculators, reduce inflation, and help the poor gain access to basic food products.

Such a step might lead one to think that inflation is rampant in Ecuador. Yet as for 2012, inflation in the dollarized Ecuadorian economy was a relatively modest 4.5 percent, below the Latin American average of 5.1 percent and much lower than inflation rates in countries like Venezuela (26 percent) and Argentina (10 percent). Both of those countries long ago imposed price controls on food and other products, with notably undesirable but predictable effects.

It is true that the percentage of income spent by the poor on food in developing countries is pretty substantial. But price controls cause shortages—that is a fundamental economic law, like gravity. So, no matter what you do to control food prices, in the end these policies never help the poor to get better access to food products.

Worse still, the only ones in Ecuador that are certain to benefit from price controls are the bureaucrats hired to write the Byzantine rules by which to enforce them. Cronyism, black markets, and parallel or unofficial prices are other unintended consequences of price controls and, given that we are talking about basic food products here, these are just the sorts of policy outcomes to avoid.

Last, and most importantly, these policies also undermine free market mechanisms and will reduce opportunities for Ecuadorians to become freer and more prosperous. As reported in The Heritage Foundation/Wall Street Journal’s 2013 Index of Economic Freedom, Ecuador is already ranked as a country where economic freedom is repressed—President Correa’s recent action is the latest confirmation of that finding.