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Main » 2009 » October » 18 » Why price controls will fail
Why price controls will fail
6:44 AM

is the transcript of the segment “Analysis by Winnie Monsod” which
aired on News on Q on October 13, 2009. Prof. Winnie Monsod is the
resident analyst of New on Q which airs weeknights at 9:30 p.m. on Q
Channel 11.)

A book entitled “40 Centuries of Wage and Price Controls” traces price
control attempts from as far back as to the Old Testament of the Bible,
to the Code of Hammurabi, to the Roman Republic and Empire, to medieval
Europe, to the first centuries of the USA and Canada, to the French
Revolution, the 19th century, world wars I and II, the Nazis, the
Soviets, including rent controls in the US in the 1970s under Nixon and

The Philippines is no exception.

Republic Act 4164, which was passed during the Commonwealth Era, aimed
to prevent excessive price increases after public calamities – which is
exactly what this government is attempting to do at present, after the
ravages of Ondoy and Pepeng.

Both typhoons have damaged regions that account for over 60 percent of
the country's GDP, over 40 percent of our agricultural production, and
close to 40 percent of our rice production.

What do the lessons of history tell us?

Have price controls over 40 centuries been successful in achieving the
objective of ensuring that the poor get their basic commodities at
reasonable or affordable prices?

The answer, unfortunately, is a big fat no, whether for the Philippines or anywhere else in the world.

In fact, the complete title of the book is: “40 Centuries of wage and price controls: How Not to Fight Inflation."

Not only did imposing controls not work, they also caused additional
damage, such as continued shortages and crime, and the encouragement of
corrupt practices.

Let us explain once again, using a market demand and supply curve to illustrate the issue.

Suppose that the demand and supply for a basic commodity, say rice, are
balanced at the current price, and that the government then fixes a
lower maximum price.

The quantity of rice supply will decrease because the producers – whose
costs are higher than the maximum price – cannot, of course, be forced
to sell their products at a loss.

In the meantime, the quantity demanded will increase. The result will be an excess in demand.

The problem will be: how are you going to allocate the limited supply to those who want to buy?

Obviously, not all who want to buy will be lucky enough to purchase the
rice at the lower price – those who are ahead of the long queues, those
who have connections with the sellers (maybe long-time customers), and
of course, those who are willing to pay a little cash on the side.

The creation and operation of black markets would be next.

Or government could issue ration coupons, which will require additional
bureaucracy with, of course, the incentives for corruption or
"patronage politics" coming to the fore. This essentially means that
the poor, marginalized, and unconnected are not going to be among the
lucky ones.

On the part of the suppliers, the imposition of price controls provide incentives to evade those controls.

One of the simplest forms of evasion is quality deterioration.

In the Philippines, when there were price controls on paper, the
quality of notebook paper and pad paper was so bad that you could not
use both sides of a sheet of paper because the ink on one side would
show on the other side.

Newsprint was the same way – anyone reading the newspapers had to wash
their hands because the inkprint would come off onto their hands.

Of course, the excuse for price controls is that they are temporary, and will last only a very short time.

But again, history does not back up that claim.

If price controls are not the solution, what alternatives are there to
make sure the poor are really being helped through hard times?

For one, one can have a program targeted specifically at the poor instead of general price controls.

Last year, when the price of rice was spiraling up, the [Department of
Social Welfare and Development] had already identified households that
comprised the "core poor" or the "food poor."

Why not build on that?

And have the government purchase basic commodities, either here or from
abroad, and allow the poor to use their cards to qualify them to buy
these commodities at subsidized prices?

That way, the price system is allowed to work, there will be less
distortion in the allocation of resources, and the poor are at least
assured of access to food at prices they can afford.
Views: 469 | Added by: henry | Rating: 0.0/0 |
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