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Thu, 17 January 2019 18:29:06
Sri Lanka debate over inflation: rice price crisis
06 Jan, 2010 06:51:03
By W A Wijewardene
Jan 06, 2010 (LBO) - Rice, the staple food of Sri Lankans, is in short supply and its price is on the increase. At retail shops, many popular varieties of rice are not available. Rice available at controlled prices is of inferior quality.

The popular varieties are available, according to traders, at premium prices above the controlled prices.

So, the consumers have only two choices. One is to buy the inferior quality rice available in the shops at controlled prices. The other is to go for the branded super rice sold by some retailers at substantially higher prices.

Government’s Reaction

The government leaders have started to blame black marketeering rice traders and millers for the shortage. They have accused these two important participants in the rice market of conspiring to create an artificial shortage of rice to make super profits in the future.

So, to thwart the perceived conspiracies, budget packs containing rice and a few other essential items have been offered to consumers through state run retail shops. Then again, complaints have been made by consumers that such budget packs are not sufficiently and universally available. Even when they are available, complaints have been made that rice that is offered is not of the required quality.

Free Market and Government’s Interventions

In a free market situation, such a crisis cannot last long. If there is a shortage, imports may flow in to fill the temporary gap in the market. In the medium term, the shortage will cause the prices to appropriately adjust so that the local producers are encouraged to step up production.

Hence, a rice crisis is, at most, a short term phenomenon.

But, the free market has not been allowed to function by governmental interventions and controls.

Hence, the current crisis is basically a government made crisis.

How was the crisis created by the government? It was through two conflicting interventionist policies, one to protect the farmer and the other to relieve the consumer.

To protect the farmer, the free importation of rice was prevented and a substantial tax was imposed on the imported rice to keep the local market prices high.

To relieve the consumers, the retail price of rice was controlled in the midst of a sharp increase in market prices exacerbated by a global rice shortage. This was meant to be a short term strategy, since the global shortage was expected to be short lived. However, like most other government policies, the short term price controls became a permanent feature of the country’s interventionist policies.

Price controls do not harm producers as long as the controlled prices enabled them a sufficient compensation. For that, the controlled prices should be set above the cost of production of the respective items. However, in the case of controlling rice prices, the prices were fixed arbitrarily without regard for the cost of production. It, therefore, worsened the position of the farmers who had already been hit by rising costs of production.

Natural Increase in the Demand for Rice

Historically, Sri Lankans have been gluttonous rice eaters compared to other nations that consume rice as their staple food. A Sri Lankan, on average, eats about 105 to 110 kg of rice per annum, up from 95 kg fifteen years ago. But his counterparts in neighbouring countries eat much less rice: 50 in Taiwan, 60 in Japan, 65 in Thailand, 81 in India and 96 in China.

The increase in per head rice consumption by Sri Lankans in the recent past has been due to two reasons. The first is the elimination of the subsidy on bread removing its price attractiveness relative to rice. The second is the nationalistic propaganda launched in the country to wean the people away from bread and for domestically produced rice.

Both have caused the demand for rice to rise faster than the supply of rice, exerting pressure for the market prices to move upward. This is a salutary development from the point of view of farmers, because they will be getting a fair price above the costs to remain in farming business. But, the consumers would not have viewed it in the same way, because they have now been forced to make a painful adjustment to accommodate the rising rice prices in their constrained family budgets.

How to Relieve the Consumers

The consumers need be relieved, but not at the expense of the farmers or the others who participate in milling, distributing and selling of rice.

The best way to relieve the consumers is to keep inflation at a low level, around 1 – 2 percent per annum so that their real purchasing power will be left intact. Hence, inflation brought about either deliberately or unknowingly, is the real culprit that brings disorder to a market. If authorities feel that price controls are necessary to bring order to an extremely chaotic market, then, they should be imposed only as a temporary measure and removed within a pre – determined time frame.

So, the current permanent price controls imposed on rice has done an irreparable damage to the smooth adjustment that would have otherwise taken place in the rice market.

Rice Shortage is Going to Last Longer than Expected

According to the Government statistics, during the third quarter of 2009, domestic rice production has declined by 28%. This decline is recorded in the Yala harvest which is low even in normal circumstances. Since it is a double hazard, its adverse impact would be strongly felt in the market till the middle of April in the following year, by which time the market is expected to be supplied with the early stocks from the Maha crop.

Hence, the current shortage of rice is not a temporary phenomenon and expected to haunt Sri Lanka for at least another four months. That again is predicted on the assumption that the Maha harvest of 2009 – 10 would be an above normal crop.

In these circumstances, the normal course of action which the government would have taken would have been opening the rice market and allowing imports to flow in. At the same time, as a medium term strategy, the price controls imposed on rice should have been removed.

Rice imports were permitted towards the end of December, 2009, but it has already been too late for making that decision. Given a time lag of three months for the rice ordered today to arrive in the country, the chances are that the imported rice will flood the market when the Maha harvest is reaped, thereby causing the prices to tumble to uneconomical levels.

Hence, the solution made to the current rice shortage will create a further problem in the rice market, because the decision was not made in the correct time.

The Bureaucratic Reaction Function

Why didn’t the authorities gain that wisdom at the correct time? The answer is simple. That is because the bureaucracies are notorious for failing to co – ordinate decisions at the appropriate time, because there is no stake held by bureaucrats at risk unlike a private market participant.

Instead of making the correct decision, that is, to remove the price controls and allow the importation of rice, the authorities have been engaged in more harmful and less productive actions. They offered budget packs, started to blame millers and traders and cooked up stories of conspiracies.

Budget Packs are Inefficient

Budget packs are an inefficient way of distributing goods, because they offer an ‘all or nothing’ proposition to consumers. Consumers, who have no desire to buy the other items in the pack, have no choice but to buy them too in order to have the desired commodity, rice. This type of arbitrary interference with the consumers’ preferences and tastes against their desires, will not work in the long run.

Hence, budget packs, in a market shortage of rice, will serve only as a propaganda gimmick.

Do not blame Milers and Traders

Both millers and traders are essential participants in the rice market and setting the public opinion against them by cooking conspiracy stories will not augur well for developing an orderly rice market in the long run. The removal of these two important participants from the market will bring greater chaos to the rice market by increasing the inconvenience to both consumers and farmers (higher transaction costs), drying essential funding flows to the market and removing an effective risk pooling mechanism.

Have Budget Shops and not Budget Packs

If the government is really interested in relieving the low income people of rising cost of living, what it should do is to encourage the establishment of ‘budget shops’ and not offering budget packs.

In North America, budget shops are run profitably by the private sector with unbranded consumer items, known as ‘no – name’ products where there are no marketing expenses, advertising expenses and wrapping and delivery expenses. These shops are managed just by a minimum number of workers and the most of the work relating to buying is done by the consumers themselves.

So, the need of the day is to remove the price controls on rice and free the rice market.

The writer is a retired deputy governor of the Central Bank of Sri Lanka. To read previous columns in the series go to the WatchTower section on the main navigation panel or click on the links below.

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4. Cura Mar 15
Not only in case of rice, most of the economic chaos this country is facing today is due to lack of vision and lack of respect to the reality that short term ad hoc measures will never help us solve chronic economic problems that have been haunting for generations.

As long as the society at large is ignorant of the misery politicians impose on them, we will continue to hear and read this type stories.

3. W.A Wijewardena Jan 06
To Sri below:
It is a misconception held by many of us that traders are there to exploit the consumers. Perhaps, this would have been established due to the presence of some traders who are bent on maximising their own profits without regard for the consumers. Even in the Buddha's time, there were some errant traders like the Serivanija in the Serivanija Jataka.

However, to the relief of us, there was also a trader by the name of Kachchaputa who was guided purely by ethical values. Hence, it is unfair to brand all traders as Serivanijas.

Without traders, it is unthinkable that a market can properly function. If they do not bring all the ware we need at great cost and risk to them, we all have to go look for them and acquire them. It involves for us search costs, quality assessment costs, transportation costs, storage costs, delivery costs and finally financing costs. Hence, they contribute to reduce our transaction costs to virtually zero level.

You can blame them and kill them. But the result will be that you have to be prepared to incur a heavy cost by yourself. It is a choice which everyone of us can make.

2. Sri Jan 06
Leaving consumers at the mercy of the traders may be a convenient idea. But the recent global economic crisis painfully showed us it was not a wise idea.
1. ajith perera Jan 06
I went to 10 shops to buy locally produced samba rice it is not available at black market. few days ago available at 90 Rs a kilo. Where they cultivated under api wawamu progarm. may be old slogan Koheda yako waga kale, redda asse waga kale is more appropriate for this government