Andrew Mwenda: Let The Free Market Work

The worst danger for the government in troubled times like these is to adopt a public policy position over matters it has no control over.

Uganda is in bad times and almost everything seems to be going wrong. The country’s electricity supply is drying out rapidly; even areas like Kololo which never used to suffer blackouts are affected now as electricity is cut almost every other day. The country has run out of sugar; supermarkets are allowed to sell only one kilogram per person per day; now the president has directed that politicians should not trade. Finally, the dollar is appreciating rapidly against the shilling; as I write this article it has hit Shs 2850.

Many Ugandans think the country has run out of electricity, sugar and dollars. Yet it is the attempt by the government to subsidise prices of these commodities that is creating artificial shortages. If the government allowed the free market to work, demand would adjust automatically to meet supply through the price mechanism: If the quantity supplied of any commodity exceeds demand, prices will go down; and if the quantity of a commodity demanded exceeds its supply, the prices go up. The forces of demand and supply will always produce an equilibrium price that will eliminate shortages.

Subsidies actually tend to be dysfunctional because in cases of acute scarcities they make everyone not only angry but also worse-off. For example, many who would otherwise be off the grid are on it because of the subsidy; and they are angry that they are constantly suffering from blackouts. Those who can actually afford electricity at market prices and therefore should enjoy its full benefits are suffering from constant blackouts as well; and they are unhappy that in spite of their capacity, they cannot enjoy the service.

The country has blackouts because of attempts by government to disregard the principles of the price mechanism. By making electricity cheaper than it should be at market price, the government is actually encouraging bad behavior of the part of many users. You visit households and find every room lit – even when it is not being used. People forget their water heaters on, boil water unnecessarily, leave most of their electrical appliances on standby power, and use high energy consuming bulbs.

Right now, the country is in constant blackouts because the producers of thermal energy have not been paid Shs 300 billion worth of the subsidy by government. If government had not committed to this subsidy, it would owe them nothing. This would have allowed Umeme to charge the market price and pass on the needed money to Uganda Electricity Transmission Company who would promptly pay the thermal generator plants.

More critically, the beneficiaries of the electricity subsidy are only 12 percent of the population who are on the grid. These are largely, certainly not entirely, elites in urban areas. Why should government spend hundreds of billions of taxpayers’ money subsidising this minority? It is because in our distorted democracy, only this minority has voice through the various platforms of “free” expression like the press, radio and television, blogs, websites, social networking sites, civic society and political parties.

Mid this year the Walk to Work campaign put pressure on government to address the problem of increasing food prices. Traders went on strike demanding that the government intervenes to control the price of the dollar. I rejected both demands because the beneficiaries of high food prices and an appreciating dollar are the poor majority who produce food crops for domestic consumption and cash crops for export. The losers are the urban minority who buy food and depend on imported goods.

My critics accused me of having “changed” and “supporting” President Yoweri Museveni whom they claim has bribed me. As I wait for his bribe to come, I know Museveni is a politician and takes economic policy decisions on the basis of what will please the public. But what is often politically attractive to public sentiment can be economically damaging. It is Museveni who allowed the current subsidies to be built in the electricity tariff.

Although Museveni would intellectually agree with my position, he often takes his decisions on public policy politically. However, because during his campaign he spent a lot of money that contributed significantly to inflation in April, Museveni found himself in a difficult position to intervene in the market to influence food prices. Secondly, because of depleting foreign exchange reserves to buy expensive jet fighters, he found himself in a weak position to subsidise the growing cost of the dollar.

Thus, when Museveni refused to intervene in the market for food crops or the exchange rate, he was doing something uncharacteristic of his attitude of meeting public sentiments with state patronage. It is therefore Museveni who adopted my position of relying on the price mechanism rather than government manipulation of the market. Yet I know many Ugandans do not accept that the market should be allowed to work.

For example, if the price of sugar shoots to Shs 10,000, it will force many people to either stop drinking it or to try substitutes like raw cane, honey or other sweeteners. Currently, the market price of a unit of electricity is Shs 1,000 yet households pay only shs 358 and industries pay only Shs 180. The balance is paid by the government.

If government allowed the price mechanism to work, the unit cost of electricity would jump to Shs 1,000 or even shs 1500 per unit. This will force many people who cannot afford this price to get off the grid and look for alternative sources of energy like solar and gas for lighting, cooking, boiling water and refrigeration; or employ innovative energy saving strategies. Only those who can afford will remain on the grid. So without a subsidy there would be not be blackouts. There are many people on the grid who cannot afford electricity at market price causing blackouts for those who can.

The worst danger for the government in troubled times like these is to adopt a public policy position over matters it has little or no control over. Assuming the government had decided to “defend” the shilling with already drying out foreign exchange reserves, when and where would it stop – and then what? If there is advice I would give to government, it would be: Allow the price.

Andrew Mwenda is a Ugandan journalist and the founder and owner of The Independent, a current affairs newsmagazine.

Article culled from Andrew Mwenda’s Blog