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Colombia’s Price Controls a Cure Worse than the Disease

By: PanAm Post Staff - Feb 25, 2015, 8:52 am
Despite his formal training in economics, Alejandro Gaviria still touts price controls as a medicine for Colombia, to the detriment of citizens. (MinSaludCol / YouTube)
Despite his formal training in economics, Health Minister Alejandro Gaviria still touts price controls as a medicine for Colombia, to the detriment of consumers and the nation’s development. (MinSaludCol / YouTube)

EspañolAn astute academic once noted that the first lesson of economics is scarcity, but the first lesson of politics is to disregard the first lesson of economics.

One might be tempted to attribute this enduring conflict, between hard truths and demagoguery, to obstinate and naive politicos. But too often the political sphere rewards them for promulgating misperceptions and shortsighted rallying cries, as opposed to sound thinking for the long-term benefit of a nation.

Colombia’s health minister, Alejandro Gaviria, is one such official who knows these perverse incentives all too well. This past week he informed constituents that the central government will mandate prices on medical supplies — or, to be precise, expand the price-control regime to include more items, such as coronary stents, cochlear implants, and osteosynthesis products.

Heart disease is a leading cause of death in Colombia, he lamented. Meanwhile, medical suppliers enjoy markups of 40 percent, and manage to charge the state even higher prices.

Not only does Gaviria claim he will put an end to the purported price gouging, he will make these supplies more accessible and save taxpayers US$5 million per year. What heartless person could oppose such an honorable plan?

There’s just one small problem: this ploy will have the exact opposite effect when it comes to accessibility, both in the short and long run.

How imposing lower prices could ever attract more goods to the market remains an unsolved mystery, perhaps because it won’t. As if anyone needed a reminder, Argentina, Panama, Venezuela, and other Latin-American nations have been playing the price-control game, and somehow those enforcing the policies are still surprised when shelves empty out.

Of even greater concern than the inevitable shortages and black markets, though, is the disincentive to invest in Colombia. Capital flows to where it can garner the greatest return, so Gaviria’s efforts to mitigate returns will likewise mitigate Colombia’s development.

There are ways to address a lack of accessibility that don’t merely deride the symptom of high prices and demonize corporations. Gaviria might wish to consider, for example, why his own department is so incompetent that it pays up to twice what private vendors pay, along with the costs of doing business in Colombia that get passed on to consumers. That includes rampant corruption, an excessive tax burden (p. 57), and unnecessary steps before one can open a business.

These root causes for inflated prices cannot be whisked away with a speech and a few ad hoc mandates, and require government officials to take a hard look in the mirror. Not surprisingly, Gaviria and his allies have chosen the easy option, one of shallow promises.

Worse, they are expanding a price-control apparatus that will be a magnet for campaign donations and shady deals. When officials decide prices based on their whims, the incentive to get into bed with them to manipulate those prices is glaring.

Such sinister outcomes may not be the chief motives of those leading this policy, but whether they are or not, constituents will suffer all the same.

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