CME: Price Ceilings and Export Bans Are a Recipe for Inflation and Food Insecurity

WEDNESDAY, 25 MAY 2022: In the past weeks, the Malaysian government issued three measures affecting the poultry industry, in order to try to contain inflation and ensure supply. They are:

  • Price ceilings;
  • Removal of Approved Permits (APs);
  • Export ban.

According to the Center for Market Education (CME), only the second one (APs removal) can be considered beneficial in the fight against price tensions and to improve food security. Price ceilings and export ban, instead, are the perfect recipe for prolonging inflation and ensuring food insecurity.

“First and foremost – explained Dr Carmelo Ferlito, CEO of the Center for Market Education – it is necessary to recognize that, in pushing for these measures, the government fails to recognize who is behind the current issues with poultry prices and supply: the government itself. In fact, supply chain disruptions were caused by lockdowns; those supply chain disruptions created price tensions, while general inflationary pressures have been generated by excessive money creation: both lockdowns and money creation were decided by the government”.

“It is difficult to trust government planned initiatives to fight problems that were generated by policies implemented by the same people”, continued Dr. Ferlito.

Why are price ceilings and export ban not helpful?

  1. Lockdowns created a shock both on the supply and the demand sides.
  2. With the reopening of the economy and the bettering of the economic conditions, demand started to scale up.
  3. In this scenario, it is easier for demand than for supply to adapt to the new conditions. In fact, during the Great Lockdown, production plants were switched off, machinery dismantled, workers laid off; such a process of capital destruction was faster than any process of capital creation can be – and capital creation requires positive profit expectations.
  4. Price tensions created by increasing demand met buy insufficient supply are necessary to signal to the supply side that this is the moment to scale up.
  1. If the market is allowed to work, that price tensions will be resolved quicker, as the supply can recognize and exploit profit opportunities.
  2. With the scaling up of supply, prices can finally cool down.

With price ceilings, it happens exactly the opposite: profit expectations are frustrated, and suppliers would avoid investing in the necessary process of capital creation and subsequent production.

With profit expectations domestically frustrated by price ceilings, poultry producers can look at foreign markets to keep on their production in a profitable way. But then the government decides to ban export, further stopping the supply process of scaling up.

The negative consequences generated by price ceilings and export ban can summarized as below:

  • Price tensions are not solved and, when the ceilings are removed, consumers will meet again high prices.
  • The necessary process of increasing supply is blocked because profit expectations are frustrated. Consumers will not get more chicken on the market, but less, as some producers may abandon the market: this means even higher prices.
  • Some of the producers may decide to abandon domestic production, generating unemployment.

“The road to hell is paved with good intensions”, reminded Dr Ferlito. 

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About CME: The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia. As an academic and educational institution, CME aims to promote a more pluralistic and multidisciplinary approach to economics and to spread the knowledge of a sounder economics, grounded in the understanding of market forces. In order to do so, CME is not only involved in academic initiatives, but it organizes seminars, webinars and tailor-made economics classes for students, journalists, businesspeople and professionals who wish to better understand the relevance of economics for their daily lives and activities. Economics matters and needs to be presented in a fashion in which the link with reality is clearly visible. In this sense, we look not only at theoretical economics but also at policy making, with an emphasis on the unintended consequences generated by political actions.