Most people know Hammurabi’s Code as “an eye for an eye, a tooth for a tooth”. Yet what few realize is that the code was actually one of the original attempts at government wage and price controls. Hammurabi’s Code decreed, for example, that the daily rate of pay for a tailor would be five grains of silver, and a farm laborer would be six grains of silver. The cost of hiring a small animal for field work would be four bushels of corn. Etc. Of course, Hammurabi’s attempts to control prices didn’t work one bit…Despite the economic failures of Hammurabi’s experiment, though, wage and price controls have been tried again and again throughout history. 2,000 years later, Emperor Diocletian of the failing Roman Empire issued his Edict on Wages and Prices. The ancient Athenians tried (and failed) to set grain prices, and even had a small army of regulators to oversee the price controls. So did the Zhou dynasty in ancient China—Simon Black
In this Issue
Philippine Rice Crisis 2.0: Why the Price Ceiling Policy Will Fail! The Role of Protectionism and the Real Estate Bubble
I. Rice Crisis 2.0 is Here! Why the Price Ceiling Policy Will Fail!
II. Price Controls: The Path Towards Socialism
III. The Impact of Price Ceilings on the Food CPI (1995 and 2021)
IV. Evidence: The Rice Crisis is a Product of Protectionism and the Real Estate Bubble
V. The Rice Crisis: The Role of Populist Politics
VI. Solutions: Short-Term Dismantle or Lower the Tariffs, Long Term Liberalize the Agri Sector and Establish a Commodity Futures Market
Philippine Rice Crisis 2.0: Why the Price Ceiling Policy Will Fail! The Role of Protectionism and the Real Estate Bubble
I. Rice Crisis 2.0 is Here! Why the Price Ceiling Policy Will Fail!
As expected, the rice crisis 2.0 is upon us.
And no other evidence of this than from a panicked reaction from officials.
A few hours after the announcement, I tweeted…
Figure 1
Here are excerpts from the numerous news reports of the public opposing the rice price cap, which takes effect on September 5th.
Inquirer.net, September 2: The National Economic and Development Authority reported that the rice inflation rate increased from 1 percent in January 2022 to 4.2 percent in July 2023 due to the rising demand and tight supply as other countries beefed up their own rice supplies in anticipation of El Niño.
When people deem statistics as representing the economy, the idea that price controls work looks enticing.
Nonetheless, the impact on retailers.
Inquirer.net, September 2: Small rice merchants said they expected significant losses that could even force them out of business from the sudden imposition of the price ceilings on the staple ordered by President Marcos on Friday. Rice retailers in Bulacan, Oriental Mindoro, Leyte and Cebu interviewed by the Inquirer said that the government should have given them more time to sell their existing stocks which they had bought at prices higher than the ceilings mandated by the President.
Retailers openly challenge the price caps.
Inquirer.net, September 3: Retailers on Saturday said they would defy President Ferdinand Marcos Jr.’s order setting price ceilings on rice effective Sept. 5. A day earlier when the directive was announced, it met immediate opposition from small merchants…Dy and other retailers in Bohol said they needed at least two weeks to dispose of their present supplies. But he noted that their stocks were not selling as fast as they used to after rice prices went up. Some consumers had cut down on the amount of rice they normally purchased by at least half, he added
Its ramifications on traders, millers, and farmers.
Inquirer.net, September 2: For Federation of Free Farmers national manager Raul Montemayor, the price ceiling being set looks “unrealistically low.” “If traders and millers cannot sell at that price, then either they will stop selling rice or they will shift to, or rebrand their rice products—to grades other than regular milled rice or well-milled rice in order to evade the price cap,” Montemayor said on Friday. “This will certainly affect the quantity supplied; that is, (it will) reduce it as costs are high but prices capped. This will lead to shortages, cheating and black market activity,” said Roehlano Briones, a senior research fellow at the think tank Philippine Institute for Development Studies.
More from the same article…
Cathy Estavillo, secretary general of Amihan National Federation of Peasant Women and spokesperson for Bantay Bigas, said price ceilings would hurt the income of palay producers. “The buying price of palay could substantially decline because the rule of thumb is the retail price of rice is twice the farm-gate price),” she said.
Media cited a former lawmaker…
CNN Philippines, September 2: Former Senator Kiko Pangilinan also pointed out that such price ceilings do not work in the long run. He said on X (formerly Twitter) that “[w]ith a rice price cap, tendency is traders will hesitate to buy palay from our farmers for fear of losing money due to the cap.” “Farmers will suffer. Imports as a means of addressing the shortfall in production is iffy too due to the unprecedented high world market rice prices. Traders will also hesitate to release current stock because of the cap and if at all they will only release in increments rather than the usual bulk releases,” he added. “If this happens, supply will be greatly affected and prices will shoot up. Rice caps must include other immediate interventions,” he also said.
Some people get it…
Inquirer.net, September 2: Meanwhile, the head of the Federation of Filipino-Chinese Chambers of Commerce and Industry Inc. (FFCCCII) also aired concerns over the price cap. “If the set prices are low, if people are selling at a loss, then no one will produce rice,” FFCCCII president Cecilio Pedro said at a media forum in Quezon City. “Price control will never work in any economy. It is a function of demand and supply.”
So, these anecdotes provide evidence that since the rice production to distribution (supply) chain will suffer substantial losses from the price ceiling, the expected outcome would be:
1) A reduction of trade and production, which means less quantity of rice available to consumers. To worsen the scenario, farmers could shift production to more profitable crops or stop producing altogether.
2) To work around the price cap (by rebranding, among other evasion measures)
3) To move trade underground (black market)
Once the supply deficit deepens, authorities could ration rice supplies to the public. Think about the snaking lines of people waiting for their turns to procure a limited allotment of rice supply.
So yes, there will be rice at the capped price, but buying will consume lots of time—unless someone knows or is close to authorities in charge of distribution.
In essence, the price ceiling would increase the cost or burden of consumers to acquire limited rice supplies.
Or, consumers will get less rice (in quantity and quality) for more time and resources spent.
The articles and the interviewed experts omit its impact on consumers and political agencies.
What if many consumers opt for substitution, i.e., from rice to bread, noodles, or corn (shown above)?
Should prices of these food products surge, would authorities not be forced to expand the coverage of the price ceiling?
In response to the mounting backlash, authorities have even floated the idea that the price ceiling could involve a short period.
Then, they asked small businesses to "sacrifice" for the consumers and suggested a subsidy in return, viz., as if businesses are not consumers.
CNN Philippines, September 2: The government is eyeing possible subsidies and other ways to assist small businesses that will be affected by the price ceiling on rice, an official of the Department of Trade and Industry (DTI) said on Saturday. Trade Assistant Secretary Agaton Uvero said an assistance program is “in the works” to help keep small traders and retailers afloat until rice prices stabilize, according to the Presidential Communications Office…Uvero said the price ceiling may be in effect for less than two months, or after additional rice supply arrives to help stabilize prices. He added that the recommendation to lift the price cap will come from the DA. “It may be shorter than the usual 60 days," UVero explained. "It depends on the members and the studies, but it may be shorter even from the usual 60-day period from price freeze. Ito kasi price cap, ang price cap kasi walang fixed period [This is a price cap, which doesn’t have a fixed period].”
Subsidies should boost public spending and fiscal deficits, increasing pressures on debt and inflation.
Authorities also asked the public to snitch on businesses or vendors who violate the caps.
GMA News, September 1: President Ferdinand "Bongbong" Marcos Jr. on Friday called on the public to report to authorities vendors and retailers not observing the mandated price ceiling on rice.
The price ceiling edict gives authorities unilateral power over the citizens, who would dispense arbitrary power—through violence—on how people should conduct commerce.
There will be substantial leaks in its enforcement. And that will be due to the actions of authorities from:
A. Providing privilege to favored parties in exchange for some benefits,
B. Exemption of some parties due to personal connections,
C. Arresting (oppressing) some of the average citizenry for political publicity purposes,
D. Using such opportunities to extort finances or resources from the public and or,
E. Using other forms of abuse of power for personal gains.
Inquirer.net, September 3: The EO did not specify penalties for violators of the order, which was issued by the president under the authority of the Price Act. But Trade Assistant Secretary Agaton Uvero on Saturday warned hoarders and profiteers that under the law, a person who commits illegal price manipulation of prime commodities would face five years of imprisonment and a fine of not more than P2 million. The government could also seize his rice stocks, he added.
That said, because the price ceiling increases the political power of officials over their subject, it magnifies corruption.
As the great Austrian economist Robert Higgs wrote,
Price controls, at most, only create a population of liars. True prices continue to do what the existing economic conditions cause them to do. No one can control the amount of precipitation by passing a law against reporting more than a stipulated amount of rain and snow. (Higgs, 2012)
After all, didn't the leadership admit that their "war on drugs" failed?
Price controls represent a "war on the citizenry" or a "war on the people." With broader participants and more complex interdependent chains, how would they succeed?
So, there you have it: an extended discussion of my tweet, which served as an outline.
II. Price Controls: The Path Towards Socialism
But it doesn't stop here.
Because the economic leaks will likely be so substantial, the failure of the price ceiling policy could compel authorities to widen their dragnet, which requires expansive and comprehensive interventions.
1. Should the black market spread, authorities would likely counter by increasing the centralization of supply. Officials are likely to nationalize or appoint select private-sector rice distribution centers.
2. The government could also assert control over logistics.
3. Authorities could broaden interventions to impose complete control of the industry. It could dictate to farmers the crops to produce, the land, seeds, the fertilizers to use, and their compensation, among many other interventions in the industry's supply chain.
4. They would also extend control on the production and imports of farm inputs and so forth.
5. Because the rice price ceiling could influence a shift in consumer behavior, as mentioned, another risk will be to expand this on other food products, which translates to the same expansive process of interventions.
6. Step by step, in pursuit of its goal of price controls, authorities will exercise command of an extensive breadth of the economy.
Intervention begets intervention until the market economy grinds to a halt and morphs into a complete socialist political-economic model.
The end path of a broadening series of price controls results in socialism, as the preeminent Ludwig von Mises explained,
The government considered those items to be so important that it interfered; it wanted to increase the quantity and improve the supply. The result was the opposite: the isolated interference brought about a condition which from the point of view of the government—is even more undesirable than the previous state of affairs which the government wanted to alter. And as the government goes farther and farther, it will finally arrive at a point where all prices, all wage rates, all interest rates, in short, everything in the whole economic system, is determined by the government. And this, clearly, is socialism. (Mises, 1980)
III. The Impact of Price Ceilings on the Food CPI (1995 and 2021)
This rice crisis 2.0 (circa 2023) represents an extension of the 2018 episode.
Despite urgings by a lawmaker, an avowed socialist, Rodrigo Duterte, the former Philippine President, refrained from imposing price ceilings on rice when the crisis surfaced in 2018.
But he did mandate a 60-day price ceiling on pork and chicken in February 2021.
Instead, Mr. Duterte decreed the "Rice Tariffication Act or Republic Act (RA) 11203," which shifted import controls from Quantitative Restrictions (quota system) to a pure tariff system. Critics condemn this shift to the market system. Unfortunately, tariffs are barriers to free markets.
In any case, the Rice Tariffication Law (RTL) allowed more imports, which helped ease pressures on rice prices.
The last time authorities implemented a price ceiling on rice was in 1995.
Inquirer.net, September 2: The order is the first price ceiling imposed on rice since July 1995 when the price council set a ceiling on basic commodities in Metro Manila to protect consumers against artificial cost increases that may be caused by the foot-and-mouth disease that was then afflicting livestock.
So, how did those price ceilings fare?
Figure 2
The price ceiling of July 1995 resulted in the explosion or the doubling of the food CPI a few months later! Food CPI jumped from 6.7% in July 1995 to 13.9 in March 1996. And though it collapsed to a low of 2% in February 1997, food CPI went hot anew in the 1997-98 Asian Financial Crisis. (Figure 2 upper chart)
As an aside, the PSA Food CPI data started in January 1995.
Meanwhile, the February 2021 pork-chicken price ceiling seemed to have worked: Food CPI fell from 6.2% to 1.2% in February 2022, but that's primarily due to the side effects of the recession. (Figure 2, lowest graph)
The implementation of the pork price ceiling coincided with the 3.8% contraction of the headline GDP in Q1 2021. The GDP started to recover in Q2 2021.
Eventually, the liquidity-driven CPI helped by mounting imbalances from various policies, including the price caps, in the food sector, viz., the rice industry, produced today's crisis.
In any case, price ceilings magnify imbalances in the agricultural or food sector, which may surface immediately or over time.
IV. Evidence: The Rice Crisis is a Product of Protectionism and the Real Estate Bubble
All talks about rice "self-sufficiency" signify an incredible smoke and mirrors or virtue signaling political platitudes.
Let us be clear: We agree that the shift from agriculture to industrial to the information age translates to a lower contribution of agriculture to the economy. But this transition should have been accompanied by increases in productivity.
Instead, excessive interventionism via protectionism combined with the parallel ramifications of asset bubbles, viz., real estate, are the roots of the current crisis.
Figure 3
Evidence? The share of palay GDP to the agricultural GDP has been on a downtrend since at least 2000. From the apex of 35.3% real GDP in Q4 2002, its share plummeted to 20% in Q2 2023. To emphasize: that's the contribution of rice to the agricultural sector. (Figure 3, topmost graph)
Over the last 23 years, the rice sector has consistently shed productivity growth.
The CAGR of the total area of rice harvested in the last 21 years was .35%. The CAGR of the total average yield per hectare was 1.08%. (Figure 3, middle and lowest charts)
Figure 4
Meanwhile, the CAGR of the total palay production (in million metric tons) was 1.9%. (Figure 4, topmost chart)
Since demand outpaced domestic production growth, imports filled this gap, which expanded from 14% in 2018 (RTL took effect) to 19% of total requirements as of 2021. (Figure 4 middle graph)
With an 85% share, Vietnam was the primary source of rice imports in 2020. (Figure 4, lowest diagram)
Figure 5
Further, agriculture’s share of total bank loans steadily dwindled from 4.7% in June 2014 to 2.1% in June 2023. (Figure 5, topmost graph)
Adding these together, the lower productivity growth was a function of the lack of investments.
Why the deficiency of investments?
Seduced by the low rates regime, the populace jumped into the real estate bubble.
Proof? No less than the Philippine Statistical Agency (PSA) said it.
GMA News, August 30, 2023: During the launch of the 2022 Census of Agriculture and Fisheries (CAF), PSA chief and National Statistician Claire Dennis Mapa said, “We need to update our resources in terms of, for example, the size of our farm area… this [decade] 2022, relative to the previous decades.” “We saw in the data that our farm areas have declined in terms of hectares,” Mapa said. For example, the PSA chief said that in the 1980 CAF, the area of farm lands in the country totaled 9.73 million hectares. In 2002, it shrunk to 9.67 million hectares and further trimmed to 7.27 million hectares based on the 2012 round of CAF, according to Mapa. Likewise, data from Center for Agrarian Reform and Rural Development (CARRD) showed that farm lands for rice—the country’s main staple—have shrunk by 48% since 1980. Citing PSA data, CARRD said that from 3,649,882 hectares in 1980, rice lands all over the country have shrunk to 1,904,301 hectares in 2012, translating to a loss of up to 1.7 million hectares of rice lands blamed on land conversion and selling of farm lands to developers.
Has the real estate sector been adding productivity to the economy?
Not according to the GDP, which saw its contribution slide from 2013 to the present.
Even as investment spending on the real estate sector rose, which came at the cost of agriculture, its decaying contribution showcased malinvestments. (Figure 5, middle window)
Or, the value-added contributions of the agriculture and real estate sectors continue to shrink, even as the latter piles up on debt.
Worst, declining productivity growth in agriculture—namely, the rice industry, represents the trade-off from overinvestments in the property sector.
With the evolving structural transition in the banking system focusing on financing the "consumption demand" of the households, where consumer credit has been rocketing, this has only widened the imbalances between the food industry (the rice crisis is just a symptom) that cements the inflationary pressure in the economy. The credit card % share of total banking loans hit an all-time of 5.2% last June 2023. (Figure 5, lowest chart)
In short, expect excess financing of consumers (and the government via deficit spending) relative to the general economy, including the agri-aqua industry, to power inflationary pressures, which will be blamed on rice "hoarders and profiteers."
V. The Rice Crisis: The Role of Populist Politics
The present events represent developing outcomes of popular choices expressed by the democratic elections through their anointed leaders. That is tosay, the public favored the "trickle-down" politics of protectionism and asset bubbles: the present food crisis is its consequence.
People forget short-term outlook also brings about long-term effects.
If your government is big enough to give you everything you want, it is big enough to take away everything you have—attributed to various authors
But upon hearing mainstream experts, who demand more of the same thing, except a redistribution benefiting other sectors than the status quo, reforms from these would likely be superficial.
Unlike the fabled King Canute the Great, who famously ordered the waves to stop—to show to his sycophantic courtiers the limits of his power, price controls exhibit the delusions of grandeur by powers that be, in the belief that the law of scarcity is subservient to politics.
The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics—Thomas Sowell
Actions have consequences.
Populist politics always looks at or focuses on the "seen" and the short-term, but forgets or ignores that incentives power the purposeful actions of the "human action" economy.
The government can price anything on zero-bound, but they can only dream that it would be complied with. Instead, it incites distortions in the market mechanism and induces economic dis-coordination.
VI. Solutions: Short-Term Dismantle or Lower the Tariffs, Long Term Liberalize the Agri Sector and Establish a Commodity Futures Market
How to solve the problem?
First, withdraw the price ceiling.
Next, the government asked small businesses to "sacrifice for the consumers." They are in a better position to do that: dismantle the tariffs (35-40%) on rice imports, or at least reduce them to 10% or less. That should bring down prices materially.
I have long been a proponent of this: commodity futures.
The Philippines is the largest ASEAN country WITHOUT a commodity futures market. Here are the websites of the commodity markets of Indonesia, Malaysia, Thailand, Singapore, and believe it or not, even "socialist" Vietnam!
As a commodity-producing nation, the futures market helps farmers/producers do away with the middle man, generate pricing efficiency, take insurance on their products against various risks, including natural calamities and other force majeure, and increase productivity, which should promote investments.
This leads us to the third long-term fix: a genuine domestic futures market should accompany the liberalization of the agricultural sector.
The public has to believe that the free markets, though imperfect, can deliver more than the government. The above tells us that years of demagoguery, protectionism, and easy money asset bubbles have led to the current predicament.
Ironically, the anti-free market mentality even prevails in the PSE.
Finally, going back to the issue where the incumbent administration has appealed to the public to squeal on violators of the price ceiling; in predicting the arrival of Rice crisis 2.0 last January, I wrote:
Worse, it will push higher hunger incidents nationwide that could amplify risks of social unrest. (Prudent Investor, January 2023)
"Unity," anyone?
___
References:
Simon Black, Here come the wage and price controls, March 13, 2014
Robert Higgs, A Bogus Example of Controlling Inflation with Price Controls, The Beacon by the Independent Institute, December 31, 2012
Ludwig von Mises, Intervention, Foundation for Economic Education, February 1, 1990
Prudent Investor, Will Rice be the Next Source of Philippine Food Inflation? January 30, 2023: Substack, Blogger
