Wise decision to remove price controls on rice | Print edition
By Professor Samson Ekanayake
Various parties have attempted to portray the government’s decision to abolish rice price controls as a defeat, consumer betrayal, surrender to rice mill owners, a foolish act, an understanding of reality, or a wise decision. Most of these “framing” seem to have been made on the basis of preconceptions, partisan or ignorance. The aim of this article is to analyze this decision from a distance with an independent eye.
Precarious situation of
It is a well known fact that the ill-advised decisions taken by the government at the start of this problem put consumers, farmers, the economy as well as the government in a precarious situation. As for consumers, they had to pay a higher price than the control price when buying rice, which was even higher than the price that prevailed before the introduction of price controls. Farmers who had low yields, especially due to lack of fertilizer, were unable to sell the paddy and earn sufficient income to cover their production costs. In addition, they were on the verge of giving up paddy cultivation in the coming seasons as they did not have the option of selling their paddy crop at the highest price offered to them. Although the mill owners were willing to buy paddy at a price higher than the price guaranteed by the government, they could not do so without incurring losses due to the price controls that had been imposed on the rice. Some mill owners have even hidden their rice stocks to make “unwarranted” profits. The government had to use force to bring the accumulated rice stocks to the market. The mill owners were also unable to use the full capacity of their mills. There were signs that the country was sliding into an era of rice distribution under a ration / quota system. The government was forced to import rice at high cost (eg from Pakistan) using scarce foreign currency to ensure food security. The government, too, was in an embarrassing situation as its popularity and credibility collapsed. (The author has published three previous articles explaining issues relating to the rice problem).
Currently, the control price imposed on rice has been abolished. The advantages and disadvantages of this decision are as follows.
Theoretically, it will now be possible to determine a competitive price for rice based on market supply and demand. If the market is competitive then the price thus determined is an “equilibrium price” because, at this price, both consumers and manufacturers (farmers and millers) will be “satisfied”. All the inconveniences and disturbances mentioned in the previous paragraph will be avoided. Isn’t that a better situation for the farmers, the mill owners, the consumers, the government and for the country?
However, there are two drawbacks to removing price controls. The first is that consumers must pay more than the price of control. We have to stop for a bit and ask ourselves; Did we actually get the amount of rice we needed at the controlled price? Didn’t we have to queue in Sathosa to receive the rice at the check price? Didn’t we buy the extra rice we needed on the black market? Wasn’t the price paid on the black market still higher than before the imposition of the control price? We have to think about it.
To reduce the hardships faced by those with no or very low income, the government should provide them with additional financial assistance (a rice allowance) through Samurdhi or other means to cover the difference between the previous check price. and the new market price. The author in his previous articles has suggested a methodology that can be implemented by the government to provide such financial assistance without burdening the treasury.
The second downside is that we may have to pay an unfair price for rice due to the monopoly hold of the mill owners. This can happen when a monopoly (one factory owner) or an oligopoly (several factory owners like in Sri Lanka) controls the production and supply of rice. It is very clear that the owners of the main rice mills are using their market power to fix the prices of rice. There are several steps the government can take (without price controls) to prevent this from happening. The main ones are:
1. Encouragement and facilitation of registration of more rice mills in order to increase competition in the rice market.
2. Prohibition of “collusion” between rice mills and their “price fixing”. While there are currently no appropriate laws in Sri Lanka, new laws would have to be passed by Parliament, immediately making price fixing illegal. It will then be illegal for large factories to set prices. Factory owners will then be forced by law to allow free markets to set prices competitively. For example, under Section 45 of the Australian Competition and Consumer Act, any agreement, arrangement or activity that reduces competition in the market is illegal. “Competition and Consumer Law prohibits contracts, arrangements, understandings or concerted practices that have the object, effect or probable effect of significantly reducing competition in a market, even if such behavior does not meet the more stringent definitions of other anti-competitive behavior such as cartels ”(see https://www.accc.gov.au/business/anti-competitive-behaviour). The Australian Consumer Commission has successfully prosecuted companies under this law. You can use a search term such as “legal cases” on their website to find such cases.
3. Licensing with quotas to all those who wish to import the country’s pre-estimated rice import needs. Let the importers make a business decision and assume the business risk of such an import. This will not only maintain the country’s rice supply and ensure food security, but also maintain a ceiling price to protect consumers. To do this, it is essential to estimate the harvest for the coming season / year and to issue licenses to importers only to import the estimated deficit (take the current system in Japan as an example). If there is adequate production and supply of rice in the country, it is not necessary to issue such licenses during this season / year. This is a task that should be carried out systematically by the competent officers.
4. Ensure that the Paddy Marketing Board performs its role effectively and without corruption. The guaranteed price of paddy is there to protect farmers. If the mill owners buy paddy at a higher price, this is a good result.
Instead of setting a control price for rice, the above measures can be used effectively to prevent mill owners from unfairly raising / fixing the price of rice.
It seems that most people in Sri Lanka consider price controls on rice and on products like powdered milk, dhal, gas to mean the same thing. This is not correct because the end result is not the same. Sri Lanka imports almost all powdered milk, dhal and gas. Therefore, the price we pay (money) goes abroad as income for the producers of these goods. In contrast, the price we pay for rice is income for the farmers and millers of our country. Therefore, removing the price of rice is quite reasonable from this aspect as well. It will be very useful for the economy of the country.
Based on the above reasons, it can be concluded that the removal of price controls on rice by the government is a wise move. It is promising to see the government depart from its rigid policies when reality sets in. But this is only the first step. The immediate next step is to pass appropriate new laws through Parliament if they do not already exist. This requires careful study of the laws of developed democratic countries with competitive open markets. In addition, the actions suggested above (i.e. 1,3,4) should also be implemented promptly and in good faith.
(The author is a former head of the Department of Finance and Financial Planning at Deakin University, Australia. He can be contacted at [email protected]).