While price controls have seen frequent use in Sri Lanka, with politicians deploying them liberally to address the cost of living, these controls have largely proven to be counterproductive.
In Sri Lanka, the regulation of prices is carried out by the Consumer Affairs Authority (CAA), which is authorised to regulate trade in a number of ways. Primarily, in terms of price regulation, any item of goods or services, which is considered as essential to the life of the community, may be ‘specified’ as an essential commodity by way of gazette notification by the minister responsible for the authority.
However, speaking to The Sunday Morning, CAA Chairman Hemantha Samarakoon pointed out that there were no Maximum Retail Prices (MRPs) on goods other than rice at the moment, pointing out that the open economy could not be risked through such price controls.
He stressed that the MRP was currently being implemented on the goods it was imposed on, and that should there be complaints about it not being applied, the CAA would investigate and file cases.
CAA mandate
Currently, the CAA website displays a list of ‘Indicative Prices of Selected Essential Food Commodities,’ which a spokesperson described as a ‘price guide,’ providing a suggested acceptable range of prices for certain selected goods on a weekly basis.
According to the CAA Act of 2003, manufacturers or traders cannot increase the price of the product without the prior written approval of the authority. A period of 30 days is provided for the authority to examine the application for any price revision and convey the decision to the applicant company.
Further, the CAA can intervene in the market in order to curb malpractices and safeguard consumers, take action to assure the quality of the goods and services, and investigate or inquire into products and services which do not conform with standards or warranties.
It may enter into agreements with manufacturers or traders on maximum price, standards, and specifications or other conditions of manufacture, import, supply, storage, distribution, transportation, marking, labelling, or sale of any goods.
While the CAA conducts periodic raids and fines traders, the nominal nature of the fine ensures that it does not serve as an effective deterrent. The final result is that the controlled price is not followed.
Drawbacks of price control
A 2018 report on price controls by the Advocata Institute highlighted that price controls were primarily for political expediency – in order to be seen to be doing something about the rising cost of living. However, it points out that this does not work since price controls ultimately do not benefit consumers.
Accordingly, the report identifies that price controls, far from being an effective tool to achieve the objective of controlling the cost of living or improving overall welfare, actually raise retail prices. “The price control regime appears to be little more than a charade. The way to reduce the cost of living is not through price controls but by reducing taxes and dismantling the controls,” it notes.
The report identifies that the typical problems associated with controls are not immediately visible in Sri Lanka given loose enforcement, loopholes for producers, and industry influences in setting controls on prices.
It highlights the negative effects of previous price controls, such as traders admitting to sourcing low-quality items, especially bulk lots close to expiry, importing substandard goods they can then sell at the controlled price.
Economists point out that the strict enforcement of controlled prices is not a solution as it will almost certainly cause shortages, as traders will then curtail imports that are uneconomical to import. Although traders may attempt to minimise the difference between the selling price and the controlled price, the controlled price is not observed and quality suffers as a result.
Especially when price controls and taxes on food imports change in an ad hoc manner, there is little incentive for traders to develop supplier relationships based on quality, reliability, or regular supply, which could possibly lead to better prices in the long term, the report notes.
An ‘ill-conceived’ scheme
Independent consultant Ravi Ratnasabapathy, a contributor to the Advocata study, pointed out that while price controls can change the incentives that people face, they would not necessarily change how people behave, leading to various perverse outcomes such as shortages and drops in quality.
Explaining the ill effects of price controls with a recent example, he said: “When they imposed price controls for gas, Laugfs said it was unable to supply at that price, while Litro Gas was compelled to supply. It then reduced its cost to meet and supply at this price by changing the composition of the gas. However, this caused the pressure in the cylinder to change and led to gas leaks, ultimately leading to explosions.”
Moreover, the utility of price controls is a question of whether the Government has the capacity to enforce price controls. Ratnasabapathy noted that their previous research had found that in the normal open market of smaller traders and informal markets, such price controls were not being followed given enforcement difficulties.
However, he pointed out that in cases of large producers and through the formal trade, such as supermarkets, controls could be enforced, since such traders complied due to the risk of penalties and reputational risk.
“The CAA is successful in enforcing prices on items supplied by large businesses or corporates. Whether this actually keeps prices low is questionable. Large businesses are relatively easy to monitor and they are open to pressure to supply even at a loss, on the implicit understanding that they will be allowed to recoup this at some point,” he notes in the study.
Meanwhile, consumer rights activist Asela Sampath told The Sunday Morning that an MRP would only be useful in Sri Lanka if the CAA was capable of enforcing it, pointing out that the authority lacked the necessary human resources.
“While we appreciate the focus of the new Government on consumer issues, what needs to be done is to legally amend and update the CAA Act to suit the needs of the present. This situation would be resolved if the CAA mandated that all shops display their prices,” he posited.
Sampath pointed out that the MRP was not functional in Sri Lanka, especially because consumers were unaware of the measures to take.
Ultimately, Ratnasabapathy notes in the study that price controls are not a viable measure to provide relief to consumers: “Using controls to reduce prices does not appear to work. The scheme itself is ill conceived and there seems little intent or capacity to enforce. Reducing taxes, and increasing competition and productivity in local agriculture is a surer path to lower consumer prices.”