Price Controls

While the predominant instruments of agricultural pricing policy are those at the macroeco-nomic level, policies exist at the sector level which can also have an influence on real producer prices. The most obvious pricing instrument is administered prices, or direct price controls. Although this instrument has been utilized in many countries, more for food prices than for non-food prices, it is increasingly being left by the wayside as policy reforms are implemented.

A fundamental problem with schemes of administered prices is that it is impossible for a centralized agency to continuously gauge with accuracy the balance of supply and demand, and therefore at most points in time there will be either excess supply or excess demand at the administered price. Excess supply is likely to mean that in reality producers will receive less than the producer equivalent of the administered price, or the government will accumulate costly stocks of the product. Through informal channels consumers may pay less, too. Excess demand translates into queuing, the classic symptom of shortages. It should be recalled that a basic role of prices is to equilibrate supply and demand, and prices need to have flexibility to be able to play that role.

When prices are fixed, the only element in the market process which can vary is quantity, and so

70. R. D. Norton, Agricultural Issues in Structural Adjustment Programs, FAO Economic and Social Development Paper No. 66, Food and Agriculture Organization of the United Nations, Rome, 1987, p. 42.

71. Patrick Guillaumont, 'Adjustment Policy and Agricultural Development', in G. H. Peters and B. F. Stanton (Eds), Sustainable Agricultural Development: The Role of International Cooperation, Proceedings of the XXI International Conference of Agricultural Economists, International Association of Agricultural Economists, Dartmouth Publishing Company, Aldershot, UK, 1992, p. 221.

shocks to the system (variations in harvests, for example, or declines in aggregate demand in the economy) are all converted into fluctuations in quantities, thus exacerbating the occasional problems of surplus and shortages.

Another problem with this policy is that, in order to sustain fixed prices, trade needs to be controlled. One kind of intervention into the market breeds another kind. For this reason, imports often cannot alleviate temporary shortages, for governments usually do not react swiftly enough to modify the trade controls, taking into account the lead times necessary to bring in imports. Furthermore, attempts to get around the surpluses and shortages created by price controls may lead to black markets and corruption.

It should be noted that administered prices are almost always used to favor consumers rather than producers, especially for basic foods such as cereals, dairy products and cooking oils.

Apart from these essentially operational problems, there is a more fundamental difficulty with price controls: they are almost certain to lead to a misallocation of resources, in the sense of over- or under-investment in the production of the commodities subject to the controls. A market price not only balances supply and demand, but if foreign trade is unrestricted also, then such a price encourages supply to be at the level indicated by the country's comparative advantage. The counter-argument is sometimes advanced that the presence of oligopolies and monopolies in food processing requires the imposition of price controls, but there is no assurance that administered prices will better approximate the outcome of a competitive market, especially as they are subject to political influences. Other policy responses are available for the problem of monopolies and oligopolies, as commented upon below.

For all of these reasons, price controls often worsen problems of shortages of supply, thus defeating in the long run the attempt to control inflation by use of this instrument. A study of the transition from planned to market economies in

Eastern Europe concluded that price liberalization actually leads to lower inflation than a policy of price controls.72

A special case of administered prices is panterritorial pricing which has been put into practice at times in Zambia, Peru and some other countries. This kind of policy tries to make a commodity's price equal throughout all regions of the country, by administrative decree. The fallacy in such pricing is that it tries to suppress the reality of transport and marketing costs, to move products from regions of surplus supplies to those of deficits. Since these costs are not allowed to be reflected in the product's price variations by location, they have to be paid by someone else, i.e. the government, producers or consumers. If the government pays, then usually it takes control of the marketing process, something that it is not well qualified to do efficiently. If the cost is assigned to producers or consumers, through the level of the price which is set, usually producers are the ones who pay, and that implies a negative incentive for production. On the other hand, if the price is set artificially high in major producing regions, then a surplus can result. Often, such a surplus can be exported only at a cost to the government's budget, since the producer price may have been higher than the equivalent international price, taking into account margins for transport and marketing.

One of the most important challenges in agricultural development is fostering the growth of an efficient private marketing system, and denying that this activity has a legitimate cost marks a step backward in terms of meeting that challenge.

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