The control of prices as a means to control the cost of living
The ‘cost of living’ is a topic that is never far from the minds of voters. When inflation rises, the clamour
to do something mounts, in both political circles and the media. Freezing prices seems to be an obvious
answer; something that goes back to 1970 in Sri Lanka.
Several years of monetary expansion had by 1970, created a cumulatively increasing inflationary pressure
and an escalation in prices. The country was basically living beyond its means and corrective measures
were urgently needed. Accordingly, a system of higher taxation (capital levy, wealth tax, etc.), income
ceilings and forced and voluntary savings were introduced, accompanied by price control and rationing of
essential commodities. The intervention increased as the performance of the economy deteriorated, so
much so that Ronald Herring, in an article in the Economic and Political Weekly in 1987, identified the Sri
Lankan economy at that time as the most controlled and restricted economy outside the Soviet bloc.
While prices and controls were partially freed in the post-1977 era they never completely disappeared.
With increasing mismanagement of the economy, the fundamental problems that confronted the
government in 1970; external and internal deficits and rising prices have returned to haunt Governments
of today. It is not entirely surprising therefore to see the Government reverting to price controls once
again.
The price controls of the 1970’s were rigidly enforced; imports were strictly controlled through licensing
procedures, state monopolies and rationing of hard currency. Essential commodities were rationed
and offered at subsidised prices. The widely-recognised result was scarcities, corruption, and blackmarketeering, as well as shortages.
The price controls of today do not seem to cause these problems, has the Government succeeded in
finding the means by which prices may be controlled with no ill-effects?
This limited study attempts to unravel some of the questions around price controls in Sri Lanka, the
economic and theoretical aspects on price controls, trader perceptions and the reality of some markets
where price controls are applicable.
Authors
- Published in
- Sri Lanka