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Sri Lanka on an ill-thought out slippery slope of price controls: economists

ECONOMYNEXT – Sri Lanka is on a slippery slope of undermining markets with ill-thought of experiments on price controls, economists have warned, while private sector workers struggle to sell better quality goods as the currency collapses amid money printing, driving prices up.

Sri Lanka’s Trade Ministry slammed a series of price controls on basic goods Thursday, including the some foods which have been artificially pushed up by the current regime with import taxes slammed by a midnight gazette.

Currency Debasement

The price controls came as the Central Bank kept cut rates, printed money and generated a balance of payments crisis destroying the currency from 131 to 142 to the US dollar since the new administration came to power and pushing the price of traded goods (exports and imports) up.

The Trade Ministry in a novel (or deceptive) move this week claimed that the price controls were ‘maximum retail prices.’

"Usually the governments fix prices when the open market prices are high so that the markets are forced to sell the products to consumers at prices determined by bureaucrats," top economist W A Wijewardene told EconomyNext.

"A maximum retail price is fixed by a producer to prevent the retailers selling it at higher prices than the permitted profit margins so that the competitors cannot sell below and compete them out.

"The objective here appears to be protecting the consumer against the falling rupee in the forex market.

"The adjustment of the rupee is needed in order to protect the competitiveness of the country’s products and fixing maximum prices will go against it."

Wijewardene is an economist who also pointed out the wrong policies of the last regime, long before matters came to crisis point.





Feudal Experiment

When price controls or price ceilings are imposed, (including when there is rationing), goods go off the shelf, generating a ‘shortage’ and ‘black market’ where an unhampered market clearing price prevails.

In promoting low quality goods with price controls after the central bank pushed up costs by debasing the currency, the Consumer Affairs Authority of the Trade Ministry is simply following on the food steps of earlier oppressions of the ordinary people by rulers who try their luck with various state interventions.

Some of the oldest documented price controls, (Ä’dictum DÄ“ PretiÄ«s RÄ“rum VÄ“nālium) came during the reign of Roman emperor Diocletian who was destroying the value of the country’s currency by over-issuing copper coins, which sent prices up and the value of money down.

Just like Sri Lanka’s central bank is now printing billions of rupees of pay a 10,000 rupee salary hike to state workers and enforce rate cuts, Diocletian also debased the country’s money and sent prices racing up, by producing extra copper coins to pay the salaries of state workers and soldiers.

Wijewardene observed that some of the ‘maximum retail prices’ slammed this week, seems to be above retail prices, with some private sector supermarkets are selling Mysoor Dhal below 185 rupees which may undermine competition in the short term.

"Now that its maximum price is fixed at 190 per kg, everyone will raise the price to that level. This will happen in the case of other prices too," Wijewardene said.

"It appears to be another ill-thought out experiment by the government."

Slippery Slope

The Trade Ministry also slammed a series of price controls shortly after the new administration came to power in January, in a blatantly deceptive move, which lowered the quality of foods sold to the people.

Among the items brought under price controls were tea and hoppers, a bowl-like crispy pan cake made out of a fermented batter that is a popular take-away food in the evenings.

"Price controls are a slippery slope. Where will the line be drawn? We saw unprecedented price controls on hoppers and plain tea," Anushka Wijesinha, Chief Economist at Sri Lanka’s Ceylon Chamber of Commerce said.

"Entrepreneurs will always find a way of circumventing these. Reducing quality or trying other cheeky ways of getting around it. Governments will always be trying to catch up. Ultimately consumers suffer from substandard products.

"Price controls are not a sustainable strategy for a competitive market-oriented economy."

Yahapalanaya Hoppers

The hoppers of the ‘Yahapalanaya’ or ‘Good Governance’ regime are now smaller than the hoppers sold during the Rajapaksa administration.

The hoppers are now smaller and thinner with some partly burnt, while the softer bump in the middle is also smaller or absent altogether. Some hopper makers have stopped giving lunu miris (a salad made of onions and chili) with hoppers.

Others are giving smaller amounts or only giving them if a larger volume of hoppers are bought.

Higher quality Illegal ‘blackmarket’ hoppers are available at shops a little away from main roads at 12 to 14 rupees. The hopper makers sell better quality good defying punishment by Trade Minister Rishard Bathiudeen’s price control police.

When price controls are imposed, goods disappear from the shelves into so-called markets, where the market clearing price is available to keep supply and demand balanced. That is why black markets were rife during the 1970s era.

The Trade Ministry said the price controls were brought to keep ‘errant traders’ in line, using words employed from the 1970s by those wielding coercive power to demonize private citizens who strive to keep citizens supplied with goods when currencies are debased and markets distorted by the State.

The hopper makers known as ‘appa bas’ work hard with skill born of long practice, toiling in the heat in front of multiple gas burners to increase labour productivity and give the lowest possible price to the hungry, while bureaucrats and ministers decree laws by gazette from air-conditioned offices.

Ironically the current administration was mostly voted in by private sector workers, who are now being rewarded with currency depreciation and price controls. Some of their workplaces have also been slapped with retrospective taxes.

Law Breaking

The most dangerous results of price controls, which cannot be followed in practice to keep people supplied are that they make previously law-abiding citizens lose respect for the law turning into ‘black marketers’, encouraging a lawless society.

The entire ‘Russian mafia’ was a product of exchange, trade and price controls communist era which generated smugglers and black marketers who tried to supply the people with goods are market price.

In most other East European states also the only private sector that existed when communism broke up were smugglers and black marketers.

The current administration however came to power promising freedom and rule of law, not to generate a nation of law breakers made up of black marketers who are flouting the law, however impractical.

The Trade Ministry also raised the controlled price of some foods like chicken, for which demand has gone up with money printing and state salary hikes.

Critics however say in most countries the enduring reason that reason that bureaucrats and ministers love the idea of price controls is because that they can later give administrative increments getting bribes from large players in the sectors.

Even in Sri Lanka there has been cases where campaign finance has been given in return for raising price controlled ceilings.

The price controls also show that the current regime does not practice the ‘social market economy’ it promised to follow when in the opposition, as actions speak louder than words.

The new administration has increased several civil freedoms, including freedom of expression, but in the economics sphere, it is lagging behind.

As Sri Lanka’s citizens look to build a freer country, analysts say reform of the central bank to reduce its discretion to print money and generate inflation and currency depreciation and reform of the Consumer Affairs Authority prevent the promotion of low quality goods and generate law breakers out of law-abiding citizens would be vital steps. (COLOMBO/Nov20/2015)

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