Kyrgyz government recently announced its intentions to intervene if prices of 'important' commodities rise above the acceptable threshold. This policy will not only fail to achieve its stated objectives but also further exacerbate the shortages of vital commodities. The economists do not agree on many issues, but they all agree that price controls are ineffective, to say the least.
A simple theoretical economic reasoning suggests that price controls will create a wedge between the amount of good supplied and the amount that will be demanded. At lower prices, suppliers have incentives to reduce the amount of goods they will bring to the market and consumers will want to buy more than before. Effectively, the total amount of goods exchanged in the market place will be less than it had been before the price control. This reasoning seems pretty simple to understand, yet governments around the world still attempt to keep the prices artificially low. The real question is who gains from these policies?
Price control is not a novel concept. Historical records indicate that Roman Empire around the time of Emperor Claudius II engaged in massive debasement of the currency to finance large subsidies to welfare recipients that exceeded the productive capabilities of the empire. According to the Professor Prodromidis, the price of Egyptian wheat rose from 19 drachmas to 982 drachmas by the end of the third century. In 301 AD, Emperor Diocletian, who believed that higher prices were primarily caused by price speculations and conspiracy among suppliers to benefit at the expense of the 'good' citizens of Rome, imposed massive price controls on over 900 commodities. The results were less than encouraging: the markets were empty and many violators, often small time tradesmen with little political influence, were punished by horrific executions.
We do not need to delve into far past to understand the real consequences of price controls. Recently, Ethiopian government imposed price caps on primary food items in an attempt to bring the prices down to affordable levels and to fight the inflationary pressures. The results were repetition of Roman experience: empty shelves and more people joining the ranks of starving citizens.
Clearly, these policies do more harm than good. Then why do we see governments systematically employing price controls? Economists Pierre-Richard Agenor and Carlos M. Asilis investigated the historical episodes of price controls in Brazil, Argentina, Uruguay, and Israel and concluded that the immediate political gains to governments were overwhelming, even after controlling for the disastrous economic consequences of these policies.
Kyrgyz government is at the brink of another political reshuffling. Any means to 'buy' the constituents' support, especially if they are relatively easy to implement and their success is hard to assess, will be attractive policy options. These options may be politically feasible but they often have large and permanent economic costs. Mr. Bekov's recent bold claims that the government stands ready to intervene are nothing but a terrifying echoes from the past, Diocletian past of brutal persecution and empty shelves.
The main thing the Kyrgyz government should not forget with regards to price control is not so far away Soviet experience with price controls. It was utterly disastrous, and most middle-age and older people living in Kyrgyzstan should remember the long queues after bread and milk they had to endure everyday. This is not the path a country like Kyrgyzstan should take. We are too poor to afford such a thing. Even in Egypt where bread prices were controlled by the government, as they had revenues to subsidize it, still collapsed as people need more than just cheap bread.
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