The wrong kind of fix

By Shahid Mehmood

Published in The Express Tribune, May 25th, 2016

The price fixing season is upon us again; one of the most go-to tools that rulers use to further their popularity. And it sells well with the people. Unfortunately, as borne out by historical evidence and logic, this fixation with ‘fixing’ prices reflects a bad policy that usually ends up in disaster.

This time around, the consequences of this bad policy were borne by the citizens of Punjab in the form of ghee being in short supply. Come Ramazan and it is likely to completely vanish or be available only at black market prices. All this owes to the policies of the Punjab government, which is adamant that it will ‘set’ the price so that vanaspati ghee becomes ‘affordable’.

The denizens of Punjab have gone through this exercise and its implications before in the form of ‘sasti roti’ and other such political gimmickry. As soon as the sasti roti scheme was initiated, flour gradually vanished from the open market. Failing to learn any lesson from this debacle, the move to fix prices of basic commodities continues unabated. The irony is that it ends up hurting the welfare of the consumer more rather than helping them.

And it’s not just the Punjab government that takes recourse to this failed policy. The federal government and other provincial governments have also displayed an infatuation with setting prices of goods and services. For example, one of the most favourite items to fall victim to this policy is medicine. In these pages, I have previously narrated how the policy of fixing prices of medicine has led to a situation where almost 25 percent of essential life-saving medicines are in shortage every year. Moreover, the medicines that are not available in the open market become easily available in the black market at double the normal price. These consequences are true in case of other goods and services as well.

Price control has a long history. One of the earliest known incidents dates back to the Roman Empire. Emperor Diocletian issued an edict in the early fourth century that ordered a controlled level of prices of various commodities. The result was debasing of currency (leading to more inflation), loss in total production, emergence of an underground economy, and availability of goods on even more inflated prices than the comparative market price.

Similarly, in the early days of the French Revolution when France was governed by the Convention, the imposition of price controls on flour led to some disastrous consequences. The controls were enacted in order to arrest the upward price movement of grain (largely the result of the government’s procurement and distribution policies). Egged on by public fervour and worried about rising prices, the ruling junta imposed restrictions on flour prices. The result was the unavailability of flour and the emergence of a black market where flour was available at a price higher than a competitive market price.

In more recent examples, the rent control experiment in New York turned out to be a disaster as apartment availability became scarce to the point that they were not available even on market prices. In the superpower of yesteryears, the Soviet Union, long queues for such basic staples as bread were common since it was never available to cater to the overall demand. This was due to price control administered from the top by the politburo.

Given that price caps or freezes ultimately fizzle out, what explains the attractiveness of a price control policy? To begin with, they sound attractive to the consumer. Who doesn’t like an inexpensive good? However, historical evidence and research suggest that reduction in prices as a result of competition is superior compared to forced reduction of prices since the quality of the good is maintained.

For example, people may be buying drugs at less than market rates, but they are not necessarily quality products. They are, at worse, counterfeit medicines that can prove fatal.

Another major reason is that politicians are good readers of voters’ psychology; and they try to cash in on the consumer bias towards lower prices. Hence, we have price control policies, which usually form a fundamental tenet of economic manifestos of various parties. These policies ultimately fail, but are still a popular means of garnering popular appeal.

There are various reasons why policies of fixing prices do not work. Administratively, it is impossible for governments to administer lower prices and ensure proper supply and quality at the same time. Sellers and producers too have more than one way of rendering this policy toothless. And more importantly, this kind of policy is detrimental to the supply side of the economy. If policymakers are looking towards enhancing production, then the last thing they need to take recourse to is fixing prices. Let the market fundamentals of demand and supply take care of that. The government should regulate to ensure quantity and quality.

Tailpiece: A request to the respected interior minister. He must take account of the increasing instances of people using green number plates on their private vehicles. This is becoming a pandemic, especially in Islamabad. And civilian law-enforcement institutions treat this matter lightly. If terrorists get hold of these cars, there could be a major incident.

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