Sri Lanka hotel minimum room rates unhealthy

ECONOMYNEXT – Sri Lanka’s minimum room rate policy for star-class Colombo city hotels was an unhealthy practice that creates market distortions and is open to abuse, said Ajit Gunewardene, Deputy Chairman of John Keells Holdings.

"Fixing prices as a government policy is unhealthy, should not be done, and is not sustainable," declared Gunewardene, whose JKH group is a big hotel operater in Sri Lanka and the Maldives.

Price controls either way – minimum or maximum – should be done only for "macro-national interests" for limited periods of time until certain corrections are made, Gunewardene told a tourism forum in Colombo.

"If not, it will create distortions in the economy, it opens up areas for abuse, for manipulation and most importantly it misallocates resources,” he told the Tourism, Hotel Investment & Networking Conference (THINC) organised by HVS, a hospitality consulting firm.

Gunewardene said the imposition of a minimum rate and not allowing demand and supply and price competition to work had led to the proliferation of informal establishments not governed by the floor price.

"Today the informal sector in Colombo city outnumbers the so-called formal sector," he said.
 
A viewpoint being propagated that the minimum room rate structure had attracted large investments in to the hotels sector was misinformation, Gunewardene said.
 
"It is a fallacy, completely wrong,” he said. "We (JKH) have the largest single investment in this industry happening as we speak – an 850 million US dollar investment going on right now. That was not conceptualised around controlled prices."

Market forces should be allowed to dictate hotel room prices, Gunewardene said.

"In this case it’s not nationwide but only a small sliver of the industry governed by this."

Sri Lanka this week presented a minimum wage bill, egged on by the Janatha Vimukthi Peramuna, a Marxist party.

Minimum wages if set above the market rate, keeps the poorest and least skilled out of work.

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"Price controls – any government-imposed price controls, be they price ceilings or price floors blind us to the full range of reality that we would see and respond to absent such controls," explains Donald J. Boudreaux, Professor of Economics at George Mason University.

"Price controls distort and restrict our vision. They misrepresent reality. 

"They spread lies about the relative values that buyers attach to different goods and services and about the relative sacrifices that suppliers must make to exchange different goods and services with buyers.

"Price controls reflect the economic misunderstanding of everyone who endorses them – the failure of such people to adequately understand the process by which prices are formed on markets and the role that such prices play. 

"Price controls are a form of government censorship of people’s ability to communicate to each other information about economic reality." (Colombo/Feb03/2016)
 

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