Comment - Ad hoc solutions in economic management risky

Let markets function and it would set the best fair prices for customers and businesses. That is a free market economy. In such an economy the role of the government is limited to controlling the law and order of a country and to ensure that a "fair price" is adopted by the sellers.

That is to say, the government, having no role in administering the price of a commodity, has to see that the prices levied by the sellers are commensurate with the price determined by the forces of demand and supply.

After 30 years of opening the economy and introducing the free market economy, still there are some remnants of a closely managed economy that create many issues. This was evident last week with the Supreme Court verdict against the Consumer Affairs Authority (CAA) chief.

The CAA chief was found guilty of contempt of court as he had disregarded the court order on two fundamental rights violation petitions filed by Laugfs Gas Ltd and Dialog TV.

Earlier a pricing formula comprising 15 items formulated by the CAA had been submitted to the court and Laugfs Gas had sought amendments to three items in the formula and it had been agreed upon and the court held that it would be referred to the CAA for approval. However, the CAA had failed to carry out the order.

This is not the only conflict between government authorities such as the CAA. The CAA has to often wrangle with essential consumer goods supplying companies such as Prima, milk food companies and gas companies.

Though the CAA acts with the best of intentions in the interests of the consumers, in some instances such as this its chief has to pay the price. In the free market economy price control is not an easy task, because the price of the goods is determined by many factors that are not under the control of producers or traders.

As the Laugfs Gas Company maintained, the company needed a price increase due to the steep increases in world market prices of LP gas and the adverse impact on the costs of imports due to the increases in the exchange rate as a result of the depreciation of the rupee.

Soaring prices of essential goods have become a serious issue and today it is the biggest challenge for the government. The government has victories in the battle with terrorists, political games with the opposition and breakaway factions of the SLFP.

However, the management of the economy is more challenging than all others and the fate of the CAA chief is only one instance.

Ad hoc solutions in economic management are risky and finally officials responsible would face the same fate that the CAA chief faced last week. Finally the government would be called upon to pay the accumulated costs.

Today if we were to consider the price issue, almost all such issues are in non-competitive monopolies or cartels. All essential imports are controlled by a cartel of a few traders or the state.

State organisations that influenced the consumer goods market no longer exists. The CEB, the state monopoly charges the highest rate in the region. The petroleum and gas markets have duopolies. The wheat market is a Prima monopoly. The milk food market is also controlled by a few companies. The cement and steel markets are also oligopolies.

These companies have the power to arbitrarily increase prices and that right has been upheld by the Supreme Court.

However, in a competitive market consumers get this power. Even in an oligopoly market where a few companies are competing, the market prices can drop. The best example is the telecommunication market in Sri Lanka. Earlier it was a state monopoly and to secure a telephone one had go behind politicians.

Today after the private players came into the market together with parallel developments in technology the telephone rates are dropping. This is the only service where the price is dropping today.

Factors such as depreciation of the rupee and resultant cost increase cannot be resolved by the market but it would set a minimum competitive price. Milk food prices have already increased manifold and the prices are not affordable by the masses in this country. According to recent reports, a 'tsunami type' price increase is on the way.

The competition has inherent weaknesses as the theory itself explains. The best example is the price increase of Highland milk powder. According to sources the milk powder price increase is a result of the rupee depreciation and international short supply.

After the price of imported products increased the demand for Highland milk powder increased but it is crystal clear that the company does not incur any additional costs. But recently Highland prices too shot up to the same level.

If the authorities realise the market behaviour and draw up strategies, they can find the most appropriate solutions to the problem. If these assumptions are correct, today Highland earns a huge profit.

If the government strategically price Highland milk powder (because the government has control over the company) the same market can be used to keep milk powder prices lower, boost dairy farming and the milk food industry in the country.

As a society we are used to blaming this free market economy and for any issue we blame neo liberal economic theories. We also seek solutions from closed economic models or socialist models. However, we are living in a 90% or more capitalist free market economy.

Though it is backward and inherently fails to deliver the maximum results that a developed capitalist system can deliver, we have to live with it. Therefore the most practical solutions should be found within it and not anywhere else.