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Why price controls on food?

Why price controls on food?
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First Published: Wed, Feb 13 2008. 11 58 PM IST

Updated: Wed, Feb 13 2008. 11 58 PM IST
Many developing countries are experiencing rapidly rising food prices. According to data from the Bank of America, annual food price inflation has been 11% in large developing countries, up from about 4.5% in 2006.
Prices of staple foods in Indonesia in January rose so rapidly that the monthly inflation rate hit 1.77%. In China, consumer prices rose 6.9% last November, the highest in a decade.
And these problems are likely to worsen, given that US inventories of wheat are at a 60-year low, while global stocks edge close to a 30-year low with prices hitting a new record.
In response, many countries are shunning economic orthodoxies that prove price controls for food or other goods will be ­ineffective and probably counterproductive.
Beijing froze oil, gas and electricity prices and other utility charges. It also intervenes in markets to stabilize prices of grains, meat and other food items while producers of certain agricultural products must have permission before raising prices.
Thailand has meddled with food prices for many years, but the number of goods overseen by the government was recently doubled. Meanwhile, Russia has sought to cap prices for certain foods, Mexico has sought to control the price of tortillas, and Venezuela placed limits on prices of food staples. Malaysia’s National Price Council will monitor food costs and plan to form stockpiles of foods.
Several issues at hand here.
The first is to understand how government policies caused the prices of food to be so expensive and how those at fault refuse to accept blame. Following from the first, the second issue is that government intervention in the form of price controls only addresses a symptom and will be ineffective in halting price rises.
In the first instance, central bankers have been adept at deflecting blame for their role in inflating the money supply, which is the fundamental cause of rising prices. In the not-so-distant past, rising consumer prices were taken as evidence that monetary policy needed to be reined in, usually by hiking interest rates or curbing credit. But a reconstituted definition of “core” inflation allows them to blithely ignore issues that loom large in most people’s lives: energy and food costs. Blinded by this misguided benchmark, they engage in ruinous monetary and credit expansions driven by artificially low interest rates.
While America’s central bankers are the worst offenders, most of their counterparts in other countries are complicit in flooding global markets with excess liquidity. One island of monetary sanity in holding the line against temptations to fiddle with interest rates has been the European Central Bank. The bank’s refusal to play God with the money supply has allowed the euro to be an exemplary store of value to replace the dollar in many international transactions.
Other public officials contribute to the problem of grasping the impact of rising price levels. Consider that calculations of a consumer price index (CPI) require deciding which goods and services to include or exclude. An accurate estimate would then involve assigning an appropriate weight to those that are included before collecting the data in a timely manner.
It is almost impossible to select the “correct” basket of goods with the “correct” weighting since spending habits and the array of goods constantly change. And the selection, collection and reporting of these data will be politicized since public officials prefer to report low increases in the value of the index.
While there are practical problems with measuring a CPI, it turns out that the process is conceptually flawed. At best, price indices are lagging indicators.
In all events, CPI is but one of many consequences of an inflated money supply. Rising price levels along with soaring trade deficits, rising commodity prices and asset bubbles are all symptoms of excessive rates of monetary expansions.
A better definition of inflation is that it is the result of increases in the quantity of money and money substitutes. This implies that trying to avoid “inflation” depicted as rising price levels will involve a confusion of cause with effect that is doomed to fail. Trying to hold down prices while allowing the quantity of money to increase will inevitably lead to rising price levels.
Now, to the second issue of price controls that must be seen to be a political response with no economic merits. In the first place, they interfere with responses to rising prices that normally induce producers to produce more and consumers to consume less. Textbook analysis of price controls indicates that since they encourage people to hoard, they contribute to persistent shortages that can lead to social and political unrest.
To deal with rising prices of food (or anything else), central bankers must refrain from inflating the money supply. In the meantime, governments wishing to be seen as actively involved in stabilizing prices of food can start with a permanent elimination of import taxes for all foodstuffs!
Christopher Lingle is research scholar at the Centre for Civil ­Society in New Delhi. Comments are welcome at ­theirview@livemint.com
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First Published: Wed, Feb 13 2008. 11 58 PM IST