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[In This Economy] The bad economics of Marcos’ rice price ceilings

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[In This Economy] The bad economics of Marcos’ rice price ceilings

DR CASTUCIANO

This is a rookie mistake, one you wouldn’t expect from a government that has PhD economists among its top advisers.

On Friday, August 31, 2023, amid skyrocketing rice prices, President Ferdinand Marcos Jr. issued an executive order imposing mandatory price ceilings on rice.

So starting today, September 5, retailers must sell regular-milled rice at no more than P41 per kilo and well-milled rice at no more than P45 per kilo.

Doing otherwise will be illegal. In fact, violators face hefty penalties : they can be imprisoned for “less than a year” and be fined anywhere from P5,000 to P1 million.

As with any price ceiling, the intention is well-meaning. Marcos cited the “current surge in retail prices of rice” that has “resulted in considerable economic strain on Filipinos, particularly those who are underprivileged and marginalized.”

Indeed, the graph below shows that in July, regular-milled rice was being sold at an average price of P41.5 per kilo, while well-milled rice was more than P45.5 per kilo.

Meanwhile, the average price of special rice (think dinorado and jasmine) was already at P54.6 per kilo. These prices are at their highest in about four years.

Marcos added, “It is crucial and urgent for the State to guarantee that basic necessities are not only sufficient but also reasonably priced and conveniently accessible to every Filipino.”

The big problem is that this is not the solution he thinks it is. In fact, it will likely cause even more considerable economic strain among Filipinos, and will make rice less (not more) accessible.

Brace for shortages

Econ 101 tells us that price ceilings do more harm than good. Marcos’ new policy will inadvertently hurt both consumers and producers of rice.

First, think of the plight of rice producers.

Retailers who bought rice at high prices before will, starting September 5, be forced to sell at most P41 or P45 per kilo. This means enormous losses for them, and they will continue to incur such losses so long as they can only buy rice at prices higher than the price ceilings.

Seeing the unsustainability of this, many retailers may eventually choose to exit the market and not sell any rice at all. In fact, some retailers are threatening to do so as early as now.

Farmers, too, will be hurt by the price ceilings. Unable to have their rice sold in markets because of rising costs (farmgate is already at or near P20 per kilo), they themselves may choose to stop planting rice. Alternatively, they may cut corners or produce cheap but bad-quality rice.

What Marcos doesn’t see is that consumers – the people he’s supposedly looking after – are also in peril.

With large demand but not enough sellers of rice, his price ceilings will almost certainly cause shortages. Expect queues at the select outlets that choose to stay in the market and sell cheap but bad-quality rice.

In short, both producers and consumers will be hurt. Good-quality rice will be cheap but increasingly inaccessible to many Filipinos.

Oddly, Marcos cited in his executive order that “the country’s rice supplies have reached a stable level and are sufficient.” In other words, they themselves say there’s no shortage now. But do they realize that their very response – price ceilings – will create the shortages they so want to avoid?

We’ve seen the ill effects of price ceilings before.

Not too long ago, in February 2021, former president Rodrigo Duterte imposed price caps on pork and chicken in the National Capital Region as a response to skyrocketing prices.

But as I noted in a previous piece, “pork essentially evaporated across Metro Manila’s wet markets.” Also, “Stalls that remained open had little else to offer besides innards or low-quality pork, and the lucky few that had choice cuts invariably sold those at a loss.” (READ: [ANALYSIS] Why Duterte’s pork price ceilings backfired )

In the more distant past, the late dictator Ferdinand E. Marcos also relied a lot on price ceilings on rice, corn, sugar, and coconut oil. But this also predictably led to shortages.

As early as August 9, 1973, not one year since Martial Law was imposed, the New York Times reported that, in response to a rice and cereal shortage, Marcos Sr. ordered the military to “take control of all cereal stocks and arrest all hoarders and price‐manipulators.”

In addition, Marcos Sr. had “ordered the National Grains Authority to stop selling pure rice and to substitute a mixture of rice and corn grits.” The defense department was to “take control of distribution of all rice and corn stocks.”

The next day, another report (“ Philippines facing rice famine ”) came out saying: “For the past week in Manila and, it is reported, in communities in the provinces, block‐long double lines of people wait before guarded government trucks as rice is rationed out.”

The Philippine Constabulary (the progenitor of the Philippine National Police) “sent inspectors to warehouses and stores around the country to seize hoarded stocks.” Marcos Sr. then instructed the police to “show no mercy to profiteers and hoarders.”

Price ceilings will promote hoarding, smuggling

Just like his father before him, Marcos Jr. is justifying his rice price ceiling due to rice hoarders and profiteers.

In his executive order, Marcos said there’s “widespread practice of alleged illegal price manipulation, such as hoarding by opportunistic traders and collusion among industry cartels…”

The National Economic and Development Authority (NEDA) itself leaned into this narrative: they said in a statement that they support the price ceilings on rice “to combat hoarding, profiteering, smuggling, and cartelization.”

Before leaving for Indonesia on September 4, Marcos said , “In our studies, the only reason for this is really because of smugglers and hoarders…”

There are many problems with this.

First, zeroing in on anticompetitive practices contradicts Marcos’ executive order, where he cited other reasons like “global events taking place beyond the Philippines’ control, such as the Russia-Ukraine conflict, India’s ban on rice exportation, and the unpredictability of oil prices in the world market.” Clearly, hoarding isn’t the only cause of the rice price crisis.

Second, Marcos may be exaggerating the role of hoarding and smuggling. Said the head of the Federation of Free Farmers Cooperatives, “For us, we read it differently. We think that the supply left is very low. I think they are barking at the wrong tree if they point to hoarding and price manipulation. Meron sigurong gumagawa niyan (There may be some who do that), but that is not the cause of the high prices.”

Third and most importantly, Marcos’ price ceilings will promote rather than hinder profiteering, hoarding, smuggling, and cartelization.

As for profiteering, later on black markets may mushroom where rice will be sold at higher prices, away from the eyes of law enforcement. Consumers might choose to buy from these sellers and endure higher prices, if that means easier access to rice.

As for hoarding, sellers may be incentivized to hoard rice now and sell their stocks later at higher prices in black markets. Consumers, too, may hoard rice now in anticipation of future shortages.

As for smuggling, it may occur between provinces of the Philippines if the rice price ceilings are implemented better than in others. Sellers may also want to smuggle cheaper rice from abroad, and they can sell that in regulated markets where the price ceilings are strictly enforced.

As for cartelization, smaller rice retailers may opt out of the market, reducing competition and leaving bigger players to form cartels that have a vice grip on the limited supply of rice that can be sold under the price ceilings.

In sum, Marcos’ price ceilings will likely result in the very things he wants to avoid.

What can be done instead?

The unintended consequences of rice price ceilings are as clear as day. There’s a good reason the last rice price ceiling was imposed in July 1995 or more than 28 years ago.

Presidents must not toy with or, using the word attributed to former president Ramon Magsaysay, “repeal” the law of supply and demand. Yet somehow lessons from the past escape Marcos and his team of PhD-wielding technocrats. (We shouldn’t be surprised, really, given how the current crop of economic managers has been reduced to yes men and yes women; think Maharlika.)

What can government do instead? Many things.

First, government can and should beef up our rice stocks – something they could have done earlier by importing a lot and negotiating with the biggest rice exporters like India, Thailand, and Vietnam.

Second, government can lower rice tariffs (import taxes) to make it easier for traders to import cheap rice from abroad that can be sold here cheaply.

Third, government can give targeted and time-bound subsidies for farmers to help them shoulder the rising costs of inputs. However, this might be difficult given tight fiscal constraints. Last year alone, the government’s revenue shortfall was P1.6 trillion.

Fourth, government must credibly go after alleged hoarders and cartels – and, in general, promote market competition. This can be done without (and in fact is a separate task from) imposing price caps.

Fifth, government must seriously provide a lifeline for our flatlining agriculture sector, in the form of irrigation, storage facilities, infrastructure, R&D, etc. There’s no shortcut to many of the chronic ills plaguing Philippine agriculture.

Totally avoidable crisis

Perhaps what the government should not do is gaslight the public, give them false hope, or ask them to “sacrifice” for the greater good.

For instance, NEDA said they’re “confident that the imposition of a price ceiling is only a temporary measure.”

But when exactly will the price ceilings be lifted? World rice prices are set to increase even more in the latter part of 2023, and possibly until early 2024. Even with the upcoming harvest season, we’re looking at El Niño and tighter global rice supplies (due to, say, geopolitical conflicts and rice export bans). (READ: [In This Economy] Brace yourselves for higher rice prices under Marcos )

So world rice prices won’t go down any time soon, and the Marcos government may be forced to keep its price ceilings for several months. Consequently, we might all suffer the associated problems for quite some time.

Meanwhile, one trade undersecretary added that “government is asking for the sacrifice of retailers, to help out citizens, the majority of Filipinos…”

That’s rich coming from a government that has miserably failed to rein in prices over the past year or so. Citizens are sick and tired of economic hardships needlessly inflicted by the present government.

More importantly, they must not be made to pay for policymakers’ bad decisions – especially ones that could be easily avoided if only they picked up and reviewed their Econ 101 textbook. – Rappler.com

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them . J C’s views are independent of his affiliations. Follow him on Twitter ( @jcpunongbayan ) and Usapang Econ Podcast .

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Thanks to Prof. JC Punongbayan for his enlightening analysis on the recent price ceilings imposed by the Marcos Jr. Administration. The primary motive of President Marcos Jr. is to copy what his father had done decades ago (“Strongman image which controls Price Increase”) and hence, perhaps, at least, earn the right have his father’s “shadow” behind him.

But would Marcos Jr. care if in case his price cap would lead to more importations and hoardings? Perhaps, he would not (at least secretly). Importations is all right as long as it is for the benefit of his relatives and election campaign fund donors. The same is true with respect to hoarding.

Just watch if there would be a single violator who will be apprehended and penalized. Probably not. In case there will be, those violators perhaps have NO connections at the Palace or they will later be immediately released (just like that son of a powerful government official in a drug case).

If such price ceilings would really lead our country to greater crisis in the coming months, there might be a Worse Scenario. For hoarders upon whom government enforcers will turn a blind eye (due to political and/or economic reasons), the New People’s Army (NPA) may enter into the picture. They can do anything against those hoarders to gain vital supplies and propaganda mileage.

Government is considering reducing tariff duties for imported rice. Why not give our farmers a fighting chance. Why not reduce to zero tariff duties on fertilizers and pesticides used in rice production.

How does this make you feel?