The pain of controlling consumer prices

By XN Iraki The advocates of price controls either must be suffering from selective amnesia or must have something up their sleeves. Those who lived through the age of price controls in 1970s know its evils and know why eventually prices were freed, left to the "invisible hands of the market" to quote Adam Smith the classical economist. The advocates even know the benefits of market economy and the evils of command system or communism system. Even communist China has seen the power of the market.Though I never saw the Union Jack come down, I recall vividly being dispatched to buy sugar in mid 1970s. I found a queue but that was not my surprise, it was humbly informed by the shopkeeper that to buy sugar, I needed to buy tea leaves and a few other items. Shortages of essential commodities was very common at that time when prices were fixed or capped.If the evils of price controls are so well known, why are we still toying with the idea, why are we trying to re-introduce a tired and moribund idea? Why would one think of price controls, an idea tried by communists for 70 years and found unworkable?Big confusionIt may be that our politicians are confusing price controls with regulation. Price controls or price capping is a crude method of stopping the upward spiral in prices. It is often not based on anything but the mood of politicians or bureaucrats. It is popular for that reason!Though a number are greedy, the truth is that few businessmen or entrepreneurs are in business for charity. Rather, they are motivated by profits. That profit is uncertain, if the market is competitive. The Kenyan markets particularly for essential goods are not competitive. There are too few suppliers in the oil industry and there might be too few millers in maize industry. Regulation comes in to ensure that an industry is competitive and no businessman or firm is a monopoly. Regulations ought to take care of market failures.It might not be an exaggeration to state that our regulators have not been very successful, the reason we are resorting to old tired ideas. What are the likely consequences if the bill becomes law? We have been here before, lots of shortages. Capping prices is a Herculean task. If you control the price of maize flour, shall you also control the price of fertilisers, labour, transport, seeds, milling and all the activities along the supply chain? How shall you ensure the costly compliance?Black marketClearly, capping will punish everyone. How? If a two-kilogramme packet of unga costs Sh20 in Kenya, I can makes lots of money by buying in bulk and smuggling it to Uganda or the neighbouring countries where the prices are not controlled. I may not even cross the borders; I can sell it in Kenya because of shortage. Price controls create the black market.Smuggling is likely to become a lucrative business with price controls. We have seen black markets in currency markets where an official exchange rate and a black market rate co-exist. Why would anyone produce a good that is price controlled if entrepreneurs and businessmen are driven by profits? It is likely that investors will shift away from any industry that is price controlled. This will make the shortages worse. Why should I grow maize and someone sets the price for me? The bill would make lots of sense if the government was growing maize! Manufacturers were quick to point out, there will be lots of job loses as investors shy away, who knows what next to be price capped?The consequences of price capping are so obvious that one would struggle to find a good reason for the idea. There is, however, a possibility that our politicians have run out of options to bring down the prices and fear the political backlash. Others observers have boldly suggested that the bill might be a ploy to sway voters in the coming referendum. Are there better alternatives than price capping?Invisible handWhy not let the invisible hand of the market work, making every sector competitive? A good example, those who travel to Nakuru may have noticed that bus fares adjust upwards very slowly despite the rise in petrol price over the years. It is not that matatu owners in that town do not like money, the route is very competitive. There are so many alternatives to Nakuru, from Moline to Mololine to Easycoach. It is for the same reason that airfares are so high in Africa, there is not much competition. In the US, buses are often more expensive than flights!The suggestion in the current budget for setting a Commodity Futures Exchange is an idea whose time has come. Such a market will create more competition for commodities like maize leading to better prices. Such an initiative is better than price capping.National securityMost countries despite WTO rules give subsidies to farmers citing national security or strategic concerns. That might be another option. If we ensured that farmers got a fair return for their maize or any other crop, the supply of maize would go up and the price of maize flour would naturally go down.But it is the taxpayers who pay for subsidies and such an arrangement is likely to create lots of "ghost farmers" Recall the Guarantee minimum returns (GMR) systems in the 1970s? And what happened to cheap flour for the poor project?What of getting substitutes to price caps through innovations? Who said we must eat Ugali? Why not use biogas instead kerosene? Who said cars must run on petrol? Why not a car I can charge like my mobile phone? The best alternative for now remains regulation whose main objective should be to ensure competition, we need a Kenyan version of the US Sherman Act with the Government boldly moving to break monopolies and cartels. My suspicion is that the regulators might be unduly influenced by politicians, who often appoint them.It seems that despite its popularity, price capping will take us back in time.The writer is a lecturer at the University of Nairobi, School of Business. xniraki@aol.com

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