By Hjoe Moono
Following the approval of the 75% increase in electricity tariffs, I have heard on radio and TV, and even read in the newspapers that government is warning manufacturers and business houses not to adjust their prices upwards in light of the increase in electricity tariffs. The Minister of Energy, Hon. David Mabumba has been quoted as saying increase in commodity prices -following the increase in electricity tariffs – will be unwise as this will only cause shocks and distortions in the economy.
I know many too think as the Hon. Minister is thinking – that just because electricity costs have risen shouldn’t be justification for increase in costs of commodities. This thinking is nested in the need to keep the prices of goods and services low so that every Zambian can have a decent life. Sane as this thinking might be, noble as it might sound, sadly, it is rather a reflection of the lack of a clearer understanding of basic economic principles. So, allow me to introduce you to Econ 101 – Introduction to Economics:
In any economy, goods and services(Outputs) are produced by Inputs. Inputs range from human resources(Labour) to technology(Capital). The cost of goods and services produced, and therefore the price at which they will be sold on the market is dependent upon the costs of the inputs. Electricity tariff is one such cost of inputs. It follows therefore that IF the cost of inputs (such as electricity) increases, the cost of producing goods and services also increases.
Contrary to what the Hon. Minister said, the wise thing to do in such a scenario is to increase the price of goods and services that use electricity as a factor in their production. For any profit maximizing business, or any business for that matter, the wise and sober thing to do is to increase their prices by the same amount as the increase in the costs of production. So for example, if electricity is the only factor in production, then goods and services produced by electricity should have their prices increased by 75%, otherwise the business will have to shut down.
This is how things work in a liberalized economy. No magic wand. Prices should adjust to account for changes in the economy.
That said, however, there is something the government can do to avoid the ‘shocks and distortions in the economy’:
1. Government can increase the incomes of people so that the increase in electricity costs will have a null effect on people’s lives. This is called ‘Indexation’.
2. Government can subsidize manufacturers so that they can therefore sell their goods and services at low prices (since government will be giving them money to keep prices low).
3. Government can force manufacturers to sell at a set price that government feels is ideal for people. This is called ‘Price Control’.
4. Government can start the manufacture of goods and provision of services and then sell these at low prices. This way, the private sector will have to think twice about getting into competition with government.
If none of the above can be effected, then we should expect the prices of commodities to go up in response to the 75% electricity tariff increase.