Promoting competition over price controls

Originally appeared on The Morning.

By Dhananath Fernando

The decision to import eggs is a classic example of how price controls are backfiring. It proves once again the main argument put forth by Advocata’s research report ‘Price Controls in Sri Lanka – Political Theatre’ published in 2018. It suggests that price controls are merely politically motivated and have never succeeded in bringing prices down.

The story of price controls imposed on eggs has two sides. Firstly, it is about competitiveness. According to media reports, an imported egg can be sold for Rs. 25-30 while a local egg costs over Rs. 60. When an egg is imported, it involves both a value chain and the distribution of margins. At the production stage, the farmer keeps a margin.

Secondly, there are taxes and storage charges at customs of the particular country we import eggs from. There are also charges for insurance and shipping. Once the consignment reaches Sri Lanka, there will be tariffs and handling charges imposed by Sri Lanka Customs. There may also be storage expenses in Sri Lanka and the importer and retailer will keep the margins. Even with all these costs, local eggs are almost twice as expensive as imported ones. This indicates the inefficiency of local egg production.

Restrictions hamstring production

A primary reason for the uncompetitive and expensive nature of local egg production is the price controls imposed by the Consumer Affairs Authority (CAA). A few months ago, the CAA imposed price controls, expecting a drop in prices. As we all remember, eggs simply disappeared from the market.

The poultry industry as a whole was also challenged. No poultry farmer could survive at the prices set by the CAA. Some micro- and small-scale poultry farmers had to scale down while some had to close down. They sold their laying hens for meat amid the price controls. Daily production of eggs dropped to about four million per day from seven million. The price cap was later increased but the damage had already been done. Additionally, due to import controls, essential chemicals for the poultry industry were in shortage.

As a result, the poultry supply contracted and led to a price hike. Now we expect to import eggs. Accordingly, the price controls not only increased prices but also damaged the efficiency of the industry.

We often forget that markets are interconnected. The poultry industry is often interlinked with maize production as it is the main source of food for poultry. Price fluctuations of maize affect the prices of chicken and eggs. Any intervention in the form of price controls, import controls, or regulation has a direct impact on the industry.

It was not the first time we faced such a situation. Many governments and many trade ministers fell into the same trap over and over again by failing to understand the fundamentals.

To recall some incidents in the recent past, there was a price cap of Rs. 60 per 1 kg of dhal and Rs. 100 for tin fish during the Covid-19 pandemic. Just compare these prices now. There was also a price cap for rice and at one point, a former military officer was appointed to conduct field raids on rice mills.

There were times a price ceiling was imposed on hoppers and egg hoppers. Similarly, in 2015, there was a price cap on plain tea and tea. In the same year, price controls were imposed on broiler chicken. Traders started selling chicken parts instead of whole chicken to avoid price controls. Have you ever noticed prices being reduced due to price controls? The simple answer is no.

Instead, things worsened. After repeating the same mistake over and over again, the poultry industry experienced the same bitter results. Its effect was felt not only by the poultry industry, but by the poorest sections of the population as well.

Eggs are a necessary protein intake for the poor as they do not have refrigerators for storage. Eggs are also one of the main ingredients in the bakery and restaurants industries, which involve an extended value chain. Everything has been affected and some restaurants have even had to downsize their menus due to unavailability of eggs at one point.

Solution

Improved efficiency in local egg production is important to reduce the cost per egg and increase the output, thereby reducing the price of eggs. The farmers in India and Pakistan are doing something right to be able to sell eggs at Rs. 35 after passing through many touchpoints and cost centres.

We have to make ourselves productive and efficient. Efficiency works when there is competition and when we allow competition to work. We cannot restrict competition for selected markets because one way or the other, all markets are interconnected. We have to redesign the CAA as an agency to promote competition and not as an agency to regulate prices.

The same is valid for the Public Utilities Commission of Sri Lanka (PUCSL). The solution is setting up institutions to accelerate competition across all industries. The role of the Government is to remove barriers for market operations, not to control prices. Price controls make things worse and it cannot bring down prices, but it will kill the industry and many other connected industries.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.