‘The only way prices can be controlled is not by gazette or emergency rule, but via the market itself’ 

In principle price controls fail, and they create shortages and black markets. The only way prices can be controlled is not by gazette or emergency rule, but via the market itself, says top Samagi Jana Balavegaya spokesman and economist Dr. Harsha de Silva.

Issuing a statement in the wake of the government doing away with price control, Dr. de Silva has said: “To do so, the reason why prices are increasing must be determined. Is it a temporary increase due to a supply shortage, say a drought or flood or is it because aggregate demand has increased due to increased money supply? The answer will depend on what is causing prices to rise.

“In the case of Sri Lanka, the massive expansion of money is the cause for continuous increase in prices or inflation. This is the reason for the rapid depreciation of the currency as well. The only short-term solution to reduce this excessive rate of money growth is to stop excessive money printing. If monetary accommodation is continued inflation could turn into hyperinflation and further depreciation of the currency leading to serious social unrest.

“However, the reality is that much of the population cannot bear the increasing costs. It is not a secret that middle-class families have had to cut down on expenses. The situation among the low-income families is a lot worse. People have had to give up meals. It is the responsibility of the government to ensure people don’t starve due to the total mess up of the economy by the politicized Central Bank that continuously ran its printing press a la modern monetary theory that was bound to fail. It is imperative that an income support mechanism be implemented for the most vulnerable immediately. This can be implemented via the Samurdhi scheme even though it is nowhere near ideal.

“Beyond the short term and in a more stable macroeconomic environment, we need to be more productive. For instance, accurate information on weather, better use of technology, application of right amounts of fertiliser, efficient storage and logistics would help improve the supply of agricultural produce. Similarly, the productivity must increase in manufacturing and services.

“In the meantime, the government must correct market failures by appropriate regulation to foster competition in the market. Take for instance the rice market. While there is more than enough paddy harvested there is a huge shortage of rice. That is because the rice manufacturing market has been captured by a few big millers and competition has been wiped out. The way to correct that market failure is to empower the hundreds of SME rice millers by providing them working capital and get their supply into the market. Instead, the government has now decided to import rice to control the prices. This wrong policy will make the problem worse, from market failure to government failure. When imports are stopped, all the SME millers would be out of business the big players will completely dominate the market.

“The SJB believes in a social market economy where competition will be encouraged with necessary amount of regulation to maintain a stable market. We will ensure that all parties to a transaction, the firm or the investor, the worker or the farmer and the regulator or government would together arrive at sustainable equilibrium so that longer term growth with equity could be maintained. However, given that the economy is in such dire straits, the truth must be told to the public that there is no free lunch and we as a nation will have no option but to work hard to a plan. And that plan will call for significant economic reforms and integrating Sri Lanka with global production networks. The resulting export-led growth, as opposed to the current import-substitution led growth, would significantly elevate living standards of our people while allowing for sufficient funding to provide safety nets for those in need.”