Price controls: Dangerous repetition of history

In an attempt to manage the escalating cost of living, the Government has recently announced price controls on essential food items, including canned fish, and earlier, rice. While these measures are often presented as a quick fix to alleviate the financial burden on the public, they have historically proven to be ineffective—and, in some cases, catastrophic for the economy. 

The Government’s decision to impose price controls might seem like a well-intentioned response to the economic situation, but history offers a stark reminder of why such policies rarely work and often worsen the situation.

The most glaring example of the failure of price controls can be found in Sri Lanka’s experience during the 1970s. In the wake of an economic collapse, the Government imposed heavy restrictions on prices, which led to widespread shortages of goods, black markets, and long-term harm to the national economy. This period is a clear warning against the temptation to rely on artificial price caps as a tool for economic management. Price controls undermine the functioning of markets, disrupt supply chains, and discourage domestic production, all of which exacerbate rather than alleviate economic challenges.

Even more recently, the Gotabaya Rajapaksa administration attempted to control the prices of various commodities in response to the economic difficulties facing the country. However, these efforts did not end in success. Far from bringing stability, the controls led to significant shortfalls, creating a supply-demand imbalance. When the market eventually corrected itself, commodity prices surged, further straining households and businesses alike. The failure of this policy highlights a key flaw in Government intervention—when prices are artificially capped, the natural forces of supply and demand are distorted, leading to unintended consequences such as shortages, inflation, and market inefficiencies.

Price controls may be politically popular in the short term, but they represent a fundamental misunderstanding of market dynamics. When governments step in to regulate prices, they ignore the incentives that drive producers and sellers. In the case of rice, for example, when prices are set too low, farmers are discouraged from producing enough to meet the demand. This leads to a shortage, forcing people to rely on imports or alternative products that may not meet the same quality or nutritional standards. Similarly, price controls on canned fish or other food items create artificial barriers between what consumers are willing to pay and what producers are willing to supply.

Rather than resorting to price controls, a more prudent approach is necessary—one that focuses on long-term solutions that address the underlying causes of inflation and economic distress. This includes encouraging domestic production, improving supply chain efficiency, investing in agriculture, and fostering a competitive market environment. Furthermore, strengthening social safety nets and providing targeted assistance to vulnerable groups can help cushion the impact of price increases without resorting to drastic and damaging interventions.

In the long run, Sri Lanka needs to move away from populist policies that offer immediate relief at the cost of economic stability. Price controls may seem like a quick way to win public approval, but they are ultimately a short-sighted and dangerous path. By learning from past mistakes and embracing more sustainable, market-driven policies, the Government can chart a course that leads to lasting economic recovery and prosperity.