Leslie Koh, Straits Times 5 Feb 08;
SPIRALLING food prices around the region are pushing governments into resorting to an old but potentially hazardous solution: price controls.
From Malaysia and Indonesia to China and Thailand, governments are turning to capping prices and stabilising them artificially in a bid to protect citizens from rising costs of food staples.
This comes with potential risks: Analysts warn that fighting market forces could trigger shortages and black-market activities - the very things the controls were meant to counter.
Unfortunately, alternative options are limited. Millions of people in countries like Indonesia and China are living below the poverty line, and the soaring prices put their survival at risk.
Governments also cannot afford to ignore the political fallout, as recent food riots and anti-inflation protests in Malaysia, Indonesia and Pakistan show.
A combination of factors, including poor weather, changing diets and rising demand for biofuels made from crops have cut the supply of staples such as rice and wheat, pushing up prices worldwide.
Last year saw food prices rise by a record 40 per cent, and more price hikes are expected this year. Yesterday, Bloomberg news agency reported the Asian Development Bank (ADB) warning that rising cereal prices worldwide may threaten 300 million rural poor in South Asia.
The threat of starvation and political instability has prompted governments to clamp down hard on the price hikes.
Some, like China and Indonesia, which have long had such price controls in place, recently increased the number of items for which government permission is required to raise prices.
Others, like Malaysia, are looking into stockpiling essential goods or cutting import duties.
However, economists and even some politicians remain wary of the potential pitfalls of fighting the free market.
'It's very difficult to have partial capitalism and partial socialism,' economist Dong Tao at Credit Suisse in Hong Kong told the International Herald Tribune.
'Market mechanisms will eventually kick in and a shortage will force the government to make adjustments later.'
Price controls not only give rise to trade on the black market, but also discourage food producers from increasing their output.
In subsidising food items, price caps enable people to keep buying what they would not be able to afford otherwise. Ironically, the sustained demand keeps market prices of the items up.
The costs of price controls are enormous. Subsidies on fuel, power, water and food cost the Malaysian government, for instance, some RM35 billion (S$15.3 billion) or more a year.
Such high bills put a great strain on national budgets, but governments often have little choice.
The rising cost of living has been a major source of political upheaval in the region, from the Tiananmen Square student protests in 1989 to the unprecedented clashes in Myanmar last year.
Malaysia, which is expected to hold elections soon, has also had to deal with several protests recently.
Even cutting back on subsidies, as countries like Indonesia have found out, can be a political challenge.
Director of agriculture Frederick Roche of the ADB's South Asia Department notes that it is the poor who bear the greatest brunt of rising prices.
'These are the people who are most vulnerable to food prices and in greatest need of protective mechanisms in the event of unexpectedly high food prices,' he told Bloomberg.
For people like Bangkok store clerk Rampai Krongtong, the government is their only hope.
'Everything is more expensive from goods to gas,' she said. 'We don't know how we can survive. The government has to fix the problem quickly or we're dead.'
