November 26, 2009

Face Mask and Price Control: Ukraine’s Government Fights off H1N1 Virus

Over the last two weeks, Ukraine's Prime Minister Tymoshenko provided a classic example about when price controls and government misinformation could go awry. The government spread panic among Ukrainians by announcing that the country had an outbreak of swine flu in the Western regions. It stated that soon enough the whole nation would be infected with the epidemic and deadly swine flu. In all major TV channels, prime minister told the nation that "the world sent the second greatest trial, after the global financial crisis, to Ukraine and that the nation was not ready to cope with the new disaster". Even Ukraine's president Yushchenko who usually avoids populist decisions wobbled under political pressure and asked for emergency financial and medical aid from the European Union and other countries. In another televised address to the nation, the prime minister announced a three-week recess in schools and universities. The government also banned any public gatherings during the same time period.

From UkraineWatch

Can you guess what happened next to a demand for all medical supplies that could somehow help to fight off the imminent virus? The demand for medicals supplies simply skyrocketed. Shelves of local pharmacies were emptied within two days. Ukrainians bought everything starting from face masks to herbal supplements to flu medications. The price of face masks went up three times across the country until it became impossible to find it in the stores. Some small-scale apparel producers quickly added a new production line to meet the surge in demand. Several boutique stores even tried to add chick to the dismal face masks by putting funky designs on them including a happy face. The government officials, that caused the panic in the market in the first place, responded with an old-school approach by imposing price controls on all necessary medical supplies and face masks. Ukraine's government even went further by threatening entrepreneurs with arrests if they try to make an extra buck on the "swine flu panic". The Leviathan of the Ukrainian government was unleashed. All imaginable regulatory agencies ranging from anti-trust agents to fire-control inspectors swamped local pharmacies and markets to enforce this crazy edict. Subsequently, many privately-owned pharmacies cut down their working hours and even shut down in order to avoid conflict with ravaging regulatory agencies. Even black-market entrepreneurs scaled down their operations to avoid any interaction with law enforcement. Could you guess what happened next? The anti-market behavior of the Ukrainian government proved the law of unintended consequences once again when all medical supplies vanished almost overnight.

Unfortunately, the story does not end there. When fidgety consumers faced the empty shelves in the pharmacies, they retreated to all kinds of substitute goods. Traditional Ukrainian medicine prescribes garlic, onion, and lemon to combat the cold. The demand for these goods rose and their prices doubled. In Kharkiv, the second largest city of Ukraine, the price of garlic skyrocketed from 5 hryvnia per bundle to 55 hryvnia (approximately, 7 USD). The government stepped in again. The government accused retailers of making windfall profits on the virus outbreak. However, a public outrage spurred by several public whistleblowers such as Ukraine's celebrity doctor Dr. Komarovksy made the government back away from another price control. The World Health Organization made an official statement saying that Ukraine did not have a very serious H1N1 outbreak. The government rushed to announce that its "quarantine measures" prevented the outbreak of swine flu. Indeed, everything seems to be back to normal though it is still hard to find lemons in the grocery stores. Many Ukrainians also wonder what they should do with the surplus of home medical supplies. Everyone seems to realize the government caused the panic in the markets in the first place by misinformation, and then they try to correct the markets by using anti-market policy instruments. And you know what happened.

Thus, after two decades of post-socialist development Ukraine's government seems to misunderstand its role in a market economy. Sequences of policy lapses like these represent the importance of understanding basic economics, the law of unintended consequences, and resisting populist pressures. Otherwise, the government hurts its own people instead of protecting them.

5 comments:

  1. Hello Leo,

    Really interesting post, thanks for this. I wasn't aware of the full situation, but reading through it struck me that a likely consequence of the market interventions would be an increase in fake medicines (due to unmet supply, increased panic-driven demand, barriers to market entry for high quality products et cetera). Another article I noticed recently cited very high levels of fakes in the Ukraine, and equally reactionary and misguided attempts to solve that problem.

    ReplyDelete
  2. The article I refer to is this one:

    http://www.securingpharma.com/40/articles/289.php

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  3. Like people, pigs can get influenza (flu), but the swine flu virus flu virus does not like people. Swine flu is not often infecting humans, and the rare cases that have occurred in the past have mainly affected people who had direct contact with pigs. But the current outbreak of swine flu is different.

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