June 17, 2014

Last month, Juan Carlos Varela, of the center-right Panamenista Party (PP), won the presidential elections in Panama based on a promise of “an honest, humane government of national unity, a government of social peace.” Noting that Varela will take office on July 1, Atlas Network partner, Fundación Libertad, wrote an op-ed for La Prensa, one of Panama’s leading newspapers, warning the new administration against the dangers of price controls. The article listed three economic phenomena that occur when governments interfere with the natural price of commodities. Here are some of the phenomena that Jaime Narbon, analyst at Fundación Libertad, points out: 1)   By imposing an artificial limit on a price, lower than what the market determines, demand on the corresponding commodity rises. 2)   By establishing price controls on commodities, production incentive is removed and price contraction occurs. This brings about shortages as has been observed in countries where individual rights are not respected, such as in Venezuela. 3)   Companies whose operating margins are low and depend on the production, purchase and sale of the very products that are to be controlled will experience financial failures and monetary losses. Such failures and losses occur because competition is reduced in favor of industries with higher operating margins. Panama has enjoyed strong GDP growth in the last year and may continue to do so, so long as Varela remains true to his promise of avoiding any major economic changes. As the article suggests, Panama’s new administration would do well to focus on “breaking up monopolies and oligopolies that have resulted from artificial state privileges such as subsidies and laws that favor specific industries or companies over others.” That is how cost of living can be reduced. To read the op-ed in its entirety, click here.