Government price control is wrong

Prices are the outcome of market forces, not determined by the cost of production, as believed conventionally, but by what people are "willing to pay." There is no opportunity for a government to fix and impose prices on people. Price is the lifeblood of an economy and when controlled irretrievably damages the economy.

A book entitled Forty Centuries of Wage and Price Controls by Robert Schuettinger and Dr. Eamon Butler of London's Adam Smith Institute cites a four-thousand year historical record of economic catastrophe caused by price controls.

In Athens, there was "omnipresence of the state in regulating grain production and distribution with an army of inspectors." At hand, was the death penalty for those evading price controls, but smuggling was rampant, and traders risked lives to supply grains thus saving lives.

French politicians, after the Revolution, invented the "Law of the Maximum" in 1793, imposing price controls on grain and a list of other items. With such controls, a famine-like situation quickly developed.

The "German economic miracle" began in 1948 after abolition of price controls that the US opposed (rations and price controls were still popular in Washington and the thinking was that controls would benefit a war-devastated economy).

In the US, price controls caused the energy crisis in the 1970s under President Nixon. The US government controlled prices at domestic well-heads and at the pump in response to overseas oil instability. The result was public chaos and long queues at petrol stations.

Government price controls do work at times, but when faced with uncertainties such as international price shocks, war, trouble at refineries, congestion at ports, increase in demand, unionism, hartals, and the like, government pricing falls apart.

The governments then aggressively accuses retailers and traders of hoarding, smuggling, and dishonesty. Government high-handedness pushes prices further up as traders, fearful of their lives, refrain from normal trading. Criminalisation sweeps over the country and too often in conjunction with the authorities.

In 1974, Bangladesh's regulative controls such as food grain permits worsened the famine and may have even caused it, as no famine situation occurred again with the removal of such regulations. Without price and movement controls, market prices do jump, but traders procure more and move goods from low-priced areas to high, thus avoiding total scarcities as in famine.

Consumer prices today have sky-rocketed, as producers did not get cold storage facilities due to power failures. Furthermore, costly dollar, credit crunch, trade obstacles, anti-smuggling drives, hartals, extortion, and lawlessness have all swelled market prices -- not the cartels or syndicates that the government holds responsible.

To counter high consumer prices, the government can turn existing Export Processing Zones to Free Trading Zones as in China, or as India is contemplating. The ideal, however, would be free trade with expanding economies as India and China, and developed economies as the US. South Korea boomed by its de facto free trade with Japan and US, notes Prof. Sudha Shenoy at Australia's University of Newcastle.

Bangladesh today also faces acute fuel shortage or supply disruptions. A major cause for this is government's price control of fuel. Fixed prices severely distort the fuel market. IMF recommends an increase in price to reduce budgetary shortfalls, which the government rejects as a political folly. However, the issue is not whether to hike or when to do it, but never to do it.

Fuel price controls promote smuggling to neighbouring countries, and engaging the security forces to stop it is an invitation to join the illegal trade. Government power cannot stop smuggling, but liberal reformation of the economic system will. Fuel prices, if freed, can be fluctuating and when high, consumers can take various options to counter the rise.

For example, when prices rise, consumers may conserve fuel, plan their travels better, rely more on public transport such as rickshaws and the like. Moreover, high prices would prompt traders to increase supply and reduce fuel price but government forbids this. Furthermore, in response to continuous price hike there can be investments in cheaper public transportation. Similarly, farmers would respond suitably to diesel prices. Prices when fixed do not create positive consumer, producer, and entrepreneurial response, but perpetual scarcities, smuggling, and suffering.

Nonetheless, other than domestic reasons for high fuel price there are also international ones. The first being state ownership and control of oil resources.

The American Petroleum Institute estimates that state oil companies nearly own 80 percent of the world's oil reserves. State-owned companies do not reinvest oil profits in exploration or production but spend on politically motivated economic development plans. Clawing profits to state coffers hampers the output, exploration, and development that keep prices down.

However, Bangladesh's high fuel prices and short supplies are not due to the global oil situation as much as they are of its own making. The government not only controls price but also enjoys monopoly of oil importation and refining that causes the crisis. If BPC were a fully corporate structure, the market would have exposed its weaknesses, and the management, responsible to shareholders, would have to consider investments or reformative measures to satisfy demand.

At present, the reflexes and responses of BPC managers, responsible to state bureaucrats, are inefficient and unresponsive to market needs. Furthermore, as there is no transparency, no one knows what is happening until faced with acute shortages, steep prices, and street agitations.

Similarly, had the state-owned electricity provider, PDB, been a corporate entity, the government, the opposition, and the agitators would not have to wait for years to know that the virtual monopolist is a total failure. BPC or PDB must face private competition.

The government should back-pedal to its core function: the security of life, property, and liberty. To distribute wealth or to attain full employment is not their task and the process has left the country poorer and corrupt, without electricity, without fuel, and with consumer prices beyond reach.

Professor Wahiduddin Mahmud, in a recent seminar, said it is too late for the sitting government to provide electricity but it is never too late for the government to pen down radical reforms that will yield results, not in a few months, but if correctly made, in a few years.

Reforms do not need the World Bank or the IMF, or a consultant, but common sense, a belief in the people, and in transforming the government from a failed provider of food, water, electricity, and fuel to a trustworthy warden of law and order.

Nizam Ahmad is Director of Liberal Bangla, UK.