COLOMBO (EconomyNext) – Sri Lanka’s latest price controls are the most "intrusive and bizarre" and will lead to lower quality, products going of shelves, and worsening hygiene standards, an economist has said, if the controls are forcefully implemented.
Sri Lanka’s hapless tea and hopper sellers now face the prospect of being dragged to court after the Consumer Affairs Authority slapped a 10 rupee price control on hoppers a popular food made out of rice flour and 25 rupees for tea with milk and 10 without milk.
"Last month, we saw one of the most intrusive and bizarre examples of administered prices (or price controls) being introduced by a government in recent times," tech savvy economist Anushka Wijesinha said in a podcast on his blog The Curionomist.
"What this has done is cause perverse incentives among those making and selling these items. Using poorer quality ingredients, shaving off quantity, skimping on the add-ons.
"Government-imposed fixed prices not only completely violates basic economic freedoms enjoyed by firms – like the freedom (and ability) to use price to signal quality or differentiation – but it is also notoriously difficult for a government to enforce fully and fairly."
Perverse outcomes Wijesinha explains, are unintended result of government actions that has the opposite effects than planned.
Rulers usually impose price controls after printing money, and anybody from Roman Emperors (Edict Maxima) to Sri Lankan post – independent rulers have resorted to them.
Price controls generate black markets with goods disappearing off the shelves.
This time the Consumer Affairs Authority, a state agency, unblushingly imposed price controls after the state which had pushed up prices with high taxes in the first place, claimed goods could be sold at a lower price because fuel or other goods were now cheaper.
If the CAA enforces the rules, in order to stay in business, and pay salaries producers will now have to skimp or simply withdraw products. Not all producers have the same costs.
Cost depends on the facilities offered (air conditioning, hygiene standards), quality of inputs and the final products, worker salary level and above all, the sales volumes, which allow fixed costs to be recovered.
Wijesinha says some shops fearing the CAA has already stopped selling, because they cannot produce the good at the dictated price.
"This only hurts consumer welfare, because there is less choice in the market, but it also infringes on individual entrepreneurship and also business freedoms," Wijesinha said.
"Another reaction is that some have cut back on quality and service. So for instance that spicy onion sambol that used to come free with your hoppers, some shops have cut that out.
"Some shops are making smaller hoppers, or some using less batter."
Wijesinha said the price controls hurts the ability of firms to compete through differentiation such as by getting better ingredients to make the product taste better.
All of Sri Lanka experienced the effects of 3.50 rupee bread in the mid-1990s after President Chandrika Kumaratunga came to power.
Bread became smaller and when the weight was enforced, they became water logged and spoiled in a few hours.
Price controls while pushing some producers out of businesses can create more work and jobs for bureaucrats and enforcers of rules, catching and punishing black marketers other analysts say.
Other state agencies could also go after producers when hygiene standards fall after price controls.
In the mid 1990s, President Chandrika Kumaratunga promised bread at 3.50 rupees. It led to bad quality and underweight bread. When the weight was enforced, water logged bread that was hardly edible and spoiled quickly were made.
Bread was also not available after 3.00 pm because fewer numbers were made, and people had to eat buns and other bakery products whose prices were jacked up.
The CAA also created hardships for house builders by imposing price controls on cement creating shortages and forcing work to be halted when global cement and clinker prices spiked a few years ago.
Critics say if Sri Lanka has to regain lost economic freedoms, create competition, innovation and and prosper the CAA will have to be reformed and its ability to control prices arbitrarily and hurt the public should be taken away.