Last week opposition leaders took to the street with “the walk to work” campaign to protest against rising prices.
The opposition blame government for mounting inflation and in places talk of introducing price controls.
Economy watchers have attributed current price rises to seasonal factors – this time every year there is an inflationary spike as food stocks are depleted, the depreciating shilling – last month traded at sh2,400 to the dollar, a historical low, and subsequent fuel price increases.
Inflation is too much money chasing too few goods, so to the extent that government is not promoting policies that boost productivity the opposition have a point.
But the issue that would have seen me join “The walk to work” campaign is the reckless talk of instituting price controls on commodities as a way to stem price increases.
In December the Kenyan government bowed to popular pressure and instituted a cap on fuel prices. But now it has been forced to raise the cap by as much 11% in response to rising international oil prices and one wonders whether this is enough.
Price controls attempt to subvert the natural laws of supply and demand. Contravening the natural order of things is never a good idea.
Let us take an example of matooke, say government put a ceiling on the price of matooke at say sh5000. To begin with producers would be unamused that government has cut down their margins.
Many of them, deciding there is no money to be made in matooke any more, would cut down their plantations and shift their efforts to something else, decreasing supply of the matooke. The producers who soldiered on with their plantations may decide to ship the crop off to more lucrative markets --- further stressing local supplies. Or they may create a black market, which would price a bunch at a level that reflects the true market conditions, often times much higher than the prices people complained about in the first place.
We have had our own experiences with price controls in recent memory. But about two years ago Zimbabwe Robert Mugabe suspecting economic sabotage decreed that the prices of household commodities should return to previous lower levels. His huffing and puffing was met by empty shelves and run away prices.
The Bank of Uganda used to control foreign exchange supply in this country – or so they thought. Right outside its gates a black market in hard currency thrived, ironically off the foreign exchange issued by the central bank. The black market in dollars was such a permanent fixture of our lives it was inconceivable it would ever go.
So against a lot of resistance – probably from the beneficiaries of the Kibanda market, government liberalized forex trading and not only did we not see dollars leaving the country at unprecedented rate, we have seen a stabilization of currencies due to competition in the market.
As a final example, the government’s refusal in the 1980s to employ rent controls has meant that housing rent has found its own level depending on supply and demand, as a result private developers have found the sector lucrative to invest in therefore pushing up the stock of housing and keeping rents manageable.
Examples abound here and abroad and they all point to one thing; that as night follows day price controls serve as a disincentive to new investment, which inevitably leads to shortages and eventually higher prices.
Prices will rise regardless of whether there are price controls or not, but by letting prices find their level the increases will be gradual rather than dramatic and more easier to adjust too.
It’s like the experiment of the frog in a beaker of water. If you heat the beaker gradually over time the frog will stay in the water longer before it leaps out, because it has had time to aclimatise to the gradual increase in temperature. But if you throw the same frog in a beaker of hot water, it will not take long before it has jumped out even though the temperature is lower than the eventual temperature in the first beaker.
Price controls are a politically attractive short term solution but economically and eventually, politically disastrous.