ML Nattakorn Devakula on the futility of
price controls on consumer goods
By Jon Fernquest |
In his weekly column ML Nattakorn Devakula lashes out at the futility of recent attempts by the Commerce Ministry to control the prices of consumer goods.
Tampering with prices usually determined by market supply and demand is: 1. not really working in the short run, and 2. might well make things worse in the long-run.
Granted, everyone is surprised and worried about skyrocketing consumer goods prices:
"...the economy has seen inflation nearly skyrocket within the past couple of months. To kick off the year, we had 4.3% inflation in January, 5.4% in February, and possibly another number above the 5% mark for March. Produce prices in the first month of 2008 increased a whopping 10% on the year..."
Capital controls created a two-tiered onshore and offshore market for the baht when they were imposed after the coup.
Likewise price controls on consumer goods are likely to create a two-tiered market for consumer goods with excess demand for the good at the low controlled price resulting in either shortages or rationing.
The "six-month freeze on prices of 60 different goods and services" has had unintended consequences:
"It was not forecast that after only two months into the term, vendors are beginning to contemplate - if they had not already - the creation of a second-tier market where particular consumer items would be sold at market-determined prices."
Apparently, there is no problem with larger producers who are able to absorb the costs:
"In the case of shampoo and laundry detergents, where big sellers like Unilever Thai Trading and Saha Group participate in the price freeze/reduction, then no conflict or confusion arises."
The problem arises with smaller producers presumably not able to absorb the costs:
"However, in other cases, the disagreements did exist and divisions became visible among operators and differing prices for the same goods were beginning to be apparent in the markets. You had the products presented on shelves at lower prices with the ministry's stamp of approval, and then you had the "underground" real private sector-presented products. This is a perverse modification, with a resonating resemblance, to the Blue Flag rice w/curry at 10 baht/plate while real vendors were selling at 25 baht/plate."
To control the price of pork, the price of pork feed has to be controlled, creating a ripple effect down the whole supply chain for pork, a situation impossible to monitor or really control:
This dual market was seen in the case of pork, with the dynamic being more intricate than just another item in the supermarket. Animal feed producers have been unwilling to supply much-needed pig-food at lower rates. This inaction translates into the inability of pig-raisers to lower prices at their farms. Fresh market vendors found themselves in a position where they were unable to cooperate fully with authorities because the actual pork-acquiring costs had not declined. This is while those who received fresh supply of the government-sponsored stuff are able to sell at lower-than-market prices.As a result of this, reporters were confused for a couple of weeks as to which prices they were supposed to quote, since there was no uniformity in the market.
There was the market-engendered equilibrium and the Internal Trade Department-encouraged disequilibrium.
An underground black market can come to form as producers - though willing to cooperate - decide that they are unable to do so due to potentially realised financial losses.
It is not unkind to imagine that consumers would still demand the pork at higher prices if it came with greater quality and convenience. This scenario is also probable for other products covered under the ministry's price-monitoring scheme.
Price controls are only temporary which means in the end prices will rise anyway, so what really is the point of temporary price controls?
Isn't it easier for consumers to adjust gradually to small changes now than to much larger and disconcerting changes in six months:
"We have not even asked the next logical question. What's the point of freezing prices for two months, let alone six months, or even a year? If the cost-push pressure is there, would it not be even worse come the time consumers have to readjust - instead of gradually adjusting - to higher levels of prices? What if, as soon as everyone is used to a lower cost of living, the price of pork moves to 130 baht/kilogramme one month from now? What if six months down the road, shampoo, laundry detergent and vegetable oil end up becoming more expensive again? It is illogical to assume that consumers would not in the back of their minds prefer to know in advance how much they have to dig out of their pockets a year from now."
(Source: Bangkok Post, op-ed section, ML NATTAKORN DEVAKULA, 27-03-08, temp-link)
Vocabulary:
vendors - the sellers of goods (retail stores and wholesalers)
the futility of Y - action Y is useless, will not achieve useful result
price controls - government regulations limiting the prices that can be charged by vendors
consumer goods - goods bought by households and people for use at home rather than by businesses (food, cleaning products, cloths)
lashes out at X - speak very critically and harshly of X
tampering with Z - interfere with Z or try to change Z when you shouldn't
Granted, X - admitting or conceding that a point is true before you comment on it
prices skyrocket - prices increase suddenly by large amounts
kick off the year - start the new year (by doing something)
whopping - a very large amount
increased a whopping 10% on the year - increased by a very large amount: 10%
a tier - a level
two-tiered - has two levels
excess demand - demand for the good is greater than supply at this low price
shortages - when the goods you usually buy are suddenly not available in shops anymore
rationing - everyone allowed to buy a small share of the limited quantity available (less than they need) (See Wikipedia on rationing)
unintended consequences - things happened which you didn't expect
absorb the costs - when the producer pays for new costs themselves without passing them on to the consumer in the form of higher prices
presumably - likely true, you think, but not sure
underground - secret, hidden from authorities, illegal
perverse - doing unreasonable things, even when you know that they are unreasonable
a ripple effect - when one change causes another change causes another change, and so on
supply chain - the chain of one producer providing goods used by the next producer to produce goods, followed by another producer that buys those goods, and so on
dual market - two markets
intricate - has many small details or parts
X engenders Y - X causes Y
equilibrium - a balance between several different influences, the condition of a system in which competing influences are balanced (See Wikipedia on Economic Equilibrium)
market-engendered equilibrium - when the price of a good is determined by the demand of buyers and the supply of sellers in the market (if a price of a good is lower than this "market clearing" equilibrium price there is excess demand for this good, which will result in either shortages or rationing)
disequilibrium - a state without equilibrium, when competing influences are not balanced
a black market - a market in which goods are sold illegally, usually cheap goods illegally brought in from another country
price-monitoring scheme - a system for checking vendor prices to ensure they are only charging the legal controlled price
