Price controls, subsidies to worsen food supply

It’s a slippery path that many governments have taken to their ever-lasting regret. It usually starts off as a temporary measure to tackle rising prices for food, fuel and other basic commodities.

Prime Minister Raila Odinga and his Agriculture Minister, William Ruto, did not say it openly but the Kenyan government is now subsidizing foodstuffs.

Subsidies and price controls are used to calm a restive population from engaging in food riots. In some countries, food riots have toppled governments, hence the Kenyan leadership’s rush to re-introduce price controls and food subsidies.

Economists say that subsidizing food is the worst decision any government can make. It is not sustainable because food prices always rise as a growing population demands more food.

The Kenya government has announced two different prices for maize: one for the poor, the other for the middle class. The government will sell ‘government branded maize meal’ to the poor using a chain of government regulated retail outlets.

If there ever was a way of creating Zimbabwe-style shortages, this is it.

It gets worse: The government has instructed the National Cereals and Produce Board (NCPB) to buy maize at Kshs1,950 (US$25) a bag from farmers then sell to millers at lower rates. This means the government has to pay NCPB the difference. The decision was made after maize millers argued that they could not lower prices due to tight margins. With annual consumption of maize in Kenya in the millions of bags, the treasury must find hundreds of millions of dollars for the new subsidy.

The Kenyan government’s intervention will distort the food market to such an extent that the poor will be the biggest losers. There is no guarantee that only the poor will by the cheap, ‘government-branded’ maize. The nature of economics is such that entrepreneurs will strive to obtain the cheap maize at Shs52, then supply it to upper-income retail outlets at Shs72, thereby making a huge profit.

The poor will eventually realize that, while their shops are empty, the supermarkets of the upperclasses will be fully stocked. This is exactly the case in Zimbabwe, where government price controls have twisted the market into epic proportions. It is not that goods are not available in Zimbabwe, but nobody is willing to sell at the state-sanctioned rates. The black market has pushed inflation to world record levels.

With time, the Kenya government will find it impossible to sustain food subsidies. The millers will find it difficult to operate in a restricted market. Yesterday, the government banned millers from buying directly from farmers. Several millers may close shop under such a stifling business environment.

The supply of maize will get worse because a government-controlled distribution chain inevitably breeds corruption. Unlike a free market situation which is dictated by forces of supply and demand, a state-controlled supply chain will create opportunities for kickbacks, horse trading and extortion.

Creating two sets of prices for the same commodity is ill-informed decision making. Why should a supplier sell maize to the poor at Shs52 yet the same commodity can fetch Shs72 a couple of hundred meters away?

The government’s plans to launch ‘branded’ packets of cheap maize are likely to draw the wrath of the World Bank and IMF. In the early 1990s, the Kenyan government implemented the two institution’s recommendations to open up the economy following rampant inflation, shortages and corruption by officials who were supposed to supply the commodities. Since then, supply has been constant even though prices have risen.

In the 1980s, Kenyans had to walk long distances looking for maize, wheat and milk because price controls encouraged hoarding. A similar situation is in store for a population already used to the abundance of liberalization.

There are fears that a black market in maize and other food stuffs may emerge. A black market will fuel inflation and put food prices outside the reach of the majority.

Black markets are controlled by criminal organizations and groups like Mungiki will have a new source of income. At the same time, black markets are not subjected to quality standards and consumers will be exposed to poor quality and dangerous food stuffs.

Follow

Get every new post delivered to your Inbox.

Join 137 other followers