Price Controls in Sri Lanka: Political theatre

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.