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July 05, 2010

Kenya : Short-term gains of price controls outweighed in long term, say analysts

 If a new bill seeking price controls on maize, wheat and other essential commodities is implemented, it may benefit the poor who have been priced out of food in the short term but is unsustainable in the long term, warn analysts.

Kenya’s parliament recently passed the Price Controls (Essential Goods) Bill, which is awaiting presidential approval.

"The goal of having low stable prices is noble; it benefits the poor and supports growth. However, I do not think that price controls are the best policy option," said Dickson Khainga, head of the macroeconomics division at the Kenya Institute for Public Policy Research and Analysis (KIPPRA).  "Kenyans have gone through a regime of price controls and it did not help investment and productivity.”

Price controls in the 1990s were dogged by claims of manipulation, corruption and political interference.

“Price controls would most likely drive out investment given that in most of these sectors, producers are [also] asking for higher prices,” added Khainga. Foreign direct investment in Kenya has been increasing and experts fear price controls will lead to massive job losses as investors shift to neighbouring countries where they can make a profit.

The practice by small-holder farmers of hoarding maize harvests to protest against low prices is common. There are also concerns that farmers may switch to more profitable crops, which would reduce supply.

Maize prices rose by up to 130 percent in Nairobi in 2009 after several failed harvests. In addition to poor weather, poor infrastructure and high input costs have continued to drive up essential commodity prices. According to a World Bank economic update for December 2009, power outages and transport bottlenecks were blamed for close to a 10 percent reduction in sales in the manufacturing sector.

“The final [commodity] price is a factor of many things in the whole chain of production,” Betty Maina, chief executive of the Kenya Association of Manufacturers (KAM), said. “If you are a miller and the price of maize is high and the cost of electricity is also high and you are not able to sell it [the maize flour] at a decent profit, there is a possibility of shortages,” said Maina. “If the input costs are high and the output costs are set too low - there will be a problem.”

Though price controls hold the promise of protecting groups struggling to meet price increases, economists are sceptical about them due to their distortion of resource allocation.

Price controls are often imposed to check inflation; Kenya’s overall inflation has, however, been declining from 19.5 percent at the end of 2008 to below 5 percent at end-2009, according to the World Bank update.

Among the arguments for the bill is that it seeks to cushion the vulnerable against cartels. “…Maize and wheat millers are a cartel that makes supernormal profits and should not, therefore, be allowed to control the grains trade in its entirety,” wrote commentator Kwendo Opanga in the 26 June Daily Nation.

However, KAM’s Maina said: “If there is suspicion of collusive competitive behaviour there are anti-trust, anti-competitive behaviour laws. Kenya’s monopoly and prices [commission] should [prevent] any collusive behaviour.”

There are also quality concerns as manufacturers cut costs to sell at lower prices. The government can fight quality deterioration through product standard specifications and enforcement - but this would add to expenses.

The emergence of black markets due to shortages is also a concern, as are other expected costs from queuing, tie-in sales and subsequent commodity rationing.

While some analysts are calling for keener price regulation by the commission as opposed to price controls, others are urging a balance whereby there will be price controls but at levels that do not drive out business while making products available to consumers.

A retailer in the Ruaka area of Kiambu, in central Kenya, Lameck Mwalumba, expressed mixed feelings: "It may be beneficial if everybody sells at the same price. Then it will be up to the individual shopkeeper to retain his customers.

“However, if the price is too low there may be a higher demand than the supply. These should balance.

“But how does this relate to things like COMESA [the Common Market for Eastern and Southern Africa],” Mwalumba asked. "We might be excited about something that will harm us later."

Cheaper quality imports from neighbouring markets where prices are competitive would further upset local production, for instance.

KIPPRA’s Khainga said: “[Implementing] price controls is treating the symptoms and not curing the underlying disease; in the long run it is not sustainable and is not consistent with regional integration and globalization.

“The focus should be on increasing agricultural productivity, encouraging production and consumption of so-called 'orphan' commodities such as millet, sorghum, cassava etc [to diversify consumption patterns] and enhance private sector competition."


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