Sri Lanka price controls reduces quality, creates distortions: economist

ECONOMYNEXT – Sri Lanka’s price controls is reducing quality and hurting consumers, a top economist said as the country’s consumer authority’s activities makes nonsense of a government claim to build a ‘social market economy’.

"When you resort to price controls what happens is that the low quality products will flourish," Sirimal Abeyratne, a professor at Sri Lanka’s Colombo University told an economic forum in Colombo.

"And the more efficient and quality products will disappear."

He said price controls were imposed for political considerations, with the expectation of catering to people who were affected by higher prices, but they created distortions in the economy.

What the architects of the ‘social market economy’ did in Germany after World War I was to lift the Nazi-era price controls allowing the economy to take off.

Simultaneously they reformed the central bank and the currency, ending money printing and creating a strong Deutsche Mark in place of the Nazi era depreciating Reichsmark.

The Deutsche Mark was a strong currency which ended inflation in Germany, setting the foundation for an economic take-off.

Price controls had driven goods underground and there were shortages when the new economic managers including economy minister Ludwig Erhard took over.

Erhard faced opposition from the socialists, who were strangely enough backed by Britain one of the occupying power, where socialists had taken power.

Some of the earliest known price controls happened in the Roman Empire (The Edict on Maximum Prices) when money was de-based with copper coins under Emperor Diocletian.






The equivalent of central bank reform happened under Emperor Constantine, who returned to sound money in the same way as Chancellor Conrad Ardenuer and Ludwig Erhard created the Deutsche Mark.

In Sri Lanka in addition to the Consumer Affairs Authority slamming price controls, the Central Bank is also printing money and busting the currency, undermining the very concept of a social market economy, driving the prices up by destroying the currency.

The rupee has fallen from 131 to 144 to the US dollar so far this year. The currency fall drives up prices, requiring more price controls. Price controls drive goods out of legal markets and generate black markets.

The lack of a central bank which has its discretion to print money restrained, creates the political need for more price controls, in a vicious circle and the blame falls on the usual suspects, the ‘errant traders’. (Colombo/Jan08/2015)

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