Some cracks are showing?

Our recent, and decidedly costly, experience with some price caps on onions did not seem to impress on our government technocrats that by no means should we administer prices. In the first place, it was the Department of Agriculture (DA) that failed to make accurate projections of onion supply despite the warnings from the industry about an impending shortage of the commodity. To make matters worse, the DA refused to authorize importation when the demand for onions was about to rise with the holidays in December last year.

These were the fundamentals of that phenomenal rise in onion prices — rising to as much as P750 per kilo — but DA officials would rather blame the so-called criminal syndicates cornering and hoarding onions. It was only when prices skyrocketed during the holiday season that the government started taking action, and of all options available it chose to prescribe a “suggested retail price” (SRP) of P250 per kilo. No matter how one looks at it, it’s no less than a price ceiling. No amount of police action or Department of Trade and Industry (DTI) market monitoring could ever enforce price controls, or threaten traders to abide by the ceilings. But it was the harvest season and the delayed arrival of imports of about 22,000 tons that mitigated the absurdity of it all.

The Time Magazine issue of Jan. 9 said that it is only in the Philippines where a kilo of onion could sell for as much as P600 or about $5 per pound, or 25-50% more expensive than pork or beef. “The cost of a kilogram of onions is greater than the minimum wage for a day’s work in the Philippines.”

Much as we wish we are on the path to the new Philippines, that situation in the first quarter of 2023 actually enfeebled the claim that “the state of the nation is sound and improving.”

For we have just committed a parallel blunder in rice.

Near the end of August this year, with galloping rice prices, Malacañang ordered the executive branch to use all legal tools to control them and ensure that the staple is readily available to the poor. What this directive actually proved was that public policy is sub-par for the course. Legal means do not, and cannot, arrest rising rice prices. Correct rice policy does not blame consumers for eating rice in large quantities. Instead, it focuses on modernizing agriculture, improving farm productivity, consolidating fragmented rice farms, rationalizing the cost of farm inputs and seedlings, and, at this time, lowering the tariff for rice imports.

As the budget process is still in progress, all that the President has to say is to reallocate the enormous confidential and intelligence funds to agriculture, and it shall be done. Of course, the way the 2024 budget is shaping up, it looks like we would instead have a bigger number of public agencies with confidential funds — from 21 in 2016 to 28 next year. One can just imagine how much additional support for agriculture can be put up out of the DA’s own P2.25-billion intelligence fund and P50 million in confidential funds for this year alone.

Even the legislative proposal to impose jail terms of up to 40 years on rice and corn hoarders and profiteers as economic saboteurs also missed the point. Even the death penalty failed to stop many heinous crimes. It’s the robustness of our justice system that could help minimize criminal incidence in this country — including hoarding and profiteering on rice, onions, and sugar.

And finally, on Aug. 31, the President, through Executive Order 39, mandated price ceilings of P41 per kilo for regular-milled rice and P45 per kilo for well-milled rice. At the time of the EO issuance, regular-milled rice was selling at between P42 and P55 per kilo and well-milled rice at between P48 and P56 per kilo. Some people must be losing not only profits but perhaps their whole business.

This is not the first time that we resorted to price caps in the face of severe rice price inflation. Price caps were a regular fixture of public policy during martial law, and even before that period. This is not the first time we realized we could never attain self-sufficiency in rice given, one, our large rice-eating population; two, we don’t have the natural advantages of our rice-producing neighbors like Thailand and Vietnam; three, we lack rural infrastructure; four, the fragmented structure of palay (unmilled rice) production; and five, our hopelessly low farm productivity.

We need to remind ourselves that under the Price Act or RA 7581 of 1992, price caps may be justified only when there are “undue price increases during emergency situations and like occasions.” But the President’s Executive Order (EO) 39 was rather silent on what justified this imposition of price ceilings on rice. The only semblance of an “emergency” situation one can find in the EO is one of the “whereases” saying that the current surge in retail prices of rice has resulted in a considerable economic strain on Filipinos, and that such a situation may compromise the availability of rice for the people.

Could this be the reason why some lawmakers filed House Bill No. 130 a few days ago, to justify the declaration of a national rice emergency and address the legal infirmity of EO 39?

Under that bill, the following conditions could warrant a presidential declaration: an extreme shortage in rice supply, a sustained increase in rice prices, or an extraordinary increase in rice prices. With good and strategic public policy in rice, those three conditions could easily be managed. The House Bill is therefore saying that the deficit in public policy on rice may be solved by price administration!

But that’s precisely the issue. Price caps will never solve rising prices of rice because they would incentivize hoarding and profiteering, waiting for the ceilings to be lifted because everybody knows they could at best be temporary. Supply shortages will be the direct outcome because very few would sell at the maximum; they would rather hoard and wait for the right time. If ever they would sell rice at the caps, consumers would end up with the lowest quality of rice, or a mixed variety of good and bad rice selling at the price cap of well-milled rice.

Ultimately, there would be more harmful shortages until the authorities are forced to lift the price ceilings.

And the cracks are now showing.

The broadsheets reported the assertions of the National Economic and Development Authority (NEDA) that price ceilings are justified and are temporary. The NEDA seems to have set aside the economics of price ceilings and the legalities of the EO in the absence of any emergency situation.

As proof of the limitations of price ceilings as a response to a rice shortage, the President announced the intent of government to subsidize rice retailers. But it’s the whole supply chain that is affected by the price caps when the price caps are prolonged. The wholesalers, middlemen, and the farmers themselves will have to adjust their returns — or the lack of them. Subsidies may have to be extended to them, following the logic of government. How and where the funding will be sourced is something that would definitely be a really big issue.

How the government will administer the subsidies promises to be as problematic. Two days ago, the broadsheets reported that compliance with rice price ceilings was still low. True, with price ceilings, rice prices have started to come down. Thanks to those who chose to follow the executive order. But see how they sold their stocks (see the image that accompanies this story).

But for those vendors who could not obviously afford it, they decided to close down and wait until rice prices start to stabilize. While clarifying that their resistance to the price cap is purely economic, the retailers disclosed that it would take them weeks to be able to dispose of their current inventory which was secured at a much higher price.

Bottom line: price controls impose significant costs that increase with their duration and breadth. Price controls distort signals for allocating rice as a scarce commodity. As such, they could only result in inefficient allocation of the same commodity. If fiscal and monetary policies could be deployed with appropriate policies in rice production and importation, like temporary reduction in rice tariffs, inflation could be reduced without the costs attendant to price caps.

By all reckoning, the latest inflation report of 5.3% for August should be a wake-up call. For the first time in seven months, inflation spiked again due to the sharp inflation for food and non-alcoholic beverages, with rice surging by 8.7% from 4.2% in July, the fastest since November 2018. Rice is a main driver of inflation because it accounts for 8.9% of the headline total consumer basket index and 17.9% for the bottom 30% of our population.

No wonder, some wise guys from the Federal Reserve Bank of St. Louis wrote that price controls should stay in the history books.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

Neil Banzuelo

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