Thursday, April 03, 2008

Export bans

When governments ban exports it has the temporary effect -- sometimes vanishingly temporary -- of leaving more on the domestic market and thereby reducing the domestic price. But the long run effect is undercut the incentive of producers to invest in that market, and -- more broadly -- and, because bans harm the government's reputation not to behave opportunistically, to undercut incentives to invest throughout the economy.

Yet governments still do it, and things like it, in an effort to control prices.

Lastest cases in point:

1. India's rice ban. (The story also details the UAE's price ceiling on rice -- another attempt to violate economic laws akin to the law of gravity. For more about UAE concerns see the Gulf News.)

2. Argentina's tax on agricultural exports. (More recent story here.)

India is led by an economist who had been doing a great good job of instituting market-based reforms. Indeed, one of the reasons the price of rice is up is that domestic demand has grown as the Indian economy has expanded. (Likewise, China's economy.) Another reason is that the cost of transporting rice is up due to fuel costs -- which can be traced back to growing demand for oil in reformed economies.

Is India's leader now following the lead of another leader with an economics degree? I'm referring to Robert Mugabe. One of the many things he's done to destroy Zimbawe's economy is to try to control prices.

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