Return of price controls last thing ailing economy needs
FINANCIAL STANDARD | By XN Iraki | October 19th 2021
The high-octane politics going into next year’s General Election will obscure some important national issues.
This is not accidental; politicians know we are most gullible and emotional around election time.
They are willing to make laws and regulations that will guarantee them votes. In their thinking, the country can address the unintended consequences later.
They will try giving political solutions to economic problems. The most glaring of such populist moves is price controls.
The prices of petrol and education (school fees) are controlled. The recent attempt by one of the public universities to increase fees, which had not changed for two decades, was met by a huge public outcry. Maintaining the status quo means a father and his son could pay the same fees.
There have been attempts to control rent and dowry too. Do you recall when we tried to control the price of unga (maize meal)? Did it work?
Price controls ended in the early 1990s just as multipartyism set in. We should give the late President Moi credit for keeping the country together during these turbulent times.
Liberalising the economy and politics at the same time was not a walk in the park. Why do we want to go back to an era when prices of beer, cigarettes, sugar and other essential items were controlled?
Do you recall the shortages? Price controls usually look at the market price from the buyers’ perspective or demand side. What about the supply side? If you control the price of unga, will you control the price of maize, transport, power, fertiliser, labour and the other factors of production?
If you control rent, will you control the price of quarry stones, metal bars, labour and other inputs of construction? If you control dowry, will control procreation and supply of marriageable girls?
We often forget that higher prices bring more products and services to the market because of the expected profits. If we let the market work, suppliers, as they compete for profit, will bring the prices down.
Once they can’t compete on price, they compete on quality, customer support or branding. Noted how fresh produce is costlier in the morning compared with bei ya jioni (closing price)?
The market has fewer complications. Increase the number of oil importers, and the supply of oil goes up resulting in lower prices. After all, the number of cars won’t go up overnight.
Build more schools and school fees will come down. This is the case with universities as they compete for fewer students.
For unga, allowing maize imports or improving the supply chain would increase supply and reduce prices.
In housing, make it easier to get mortgages, float a housing bond or even encourage the use of local materials.
Why do we insist on stone blocks when mud would do as well? One mud house in Happy Valley (Nyandarua) has been there for over 100 years. It was built by Geoffrey Buxton around 1908.
For dowry, I will leave it at that. I, however, feel it should fall in some regions because of the oversupply of women. Any guesses which region that might be?
Despite overwhelming evidence that price controls do not work, we are reverting to them. Why?
One, our top political leaders have not gotten over the price controls era when hoarding was common as traders awaited the presentation of the annual budget.
Two, it will make voters happy. But what of maize farmers? We’d love lower rents, but what of the developers?
As for lower school fees, what of overcrowding? Noted that drugs rarely miss in expensive hospitals?
Three, by resorting to price controls, we are refusing to address the root cause of the problem.
In other words, we would be treating the symptoms and not the problem. Price controls are the easy option. They are in the same class with new laws. For instance, imposing longer prison sentences may not address the root cause of crime. Also, controlling the price of fuel has not prevented it from climbing. The same applies to electricity and water prices. Yet, matatu fares have largely remained stable.
Four, price controls give politicians power, instead of those who own the factors of production.
Why should the government control the price of maize when it has no single maize farm? Why control rents, while it owns no houses?
By the way, why are the charges for Intensive Care Unit services not controlled?
We can’t dispute that the market often fails. But the solution is not the emotions of bureaucrats but good regulators who balance the interests of key stakeholders.
A good example is the flower market that continues to thrive without a flower board like the National Cereals and Produce Board as American academician Michael Porter has pointed out.
Let’s be honest: the power of the market has been tested and found to work even in politics.
That’s why multipartyism is preferred to a single-party system; that is why capitalism has outlasted communism. Let’s not wind back the economic clock.
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