Market interferenceThe Lee Myung-bak administration has selected 52 commodities for price monitoring. They include cram school tuition, soju and mackerel. The aim is to stabilize prices of items popular with low-income households. The administration said it would monitor the items’ prices, but would not control them.
If this is the case, we have to question why the government selected the items for monitoring in the first place.
We understand the difficult position of the government: It cannot allow inflation but, at the same time, it cannot control prices like an old authoritarian regime.
Of course, some countries control commodity prices as a way of dealing with global inflation. In China, you need government approval to raise the price of fuels, cooking oil, meat and grain. The Thai government controls the price of noodles and cooking oil. The Indonesian government ordered state-funded companies to freeze the price of rice in the past. And the Russian government introduced price caps on bread, eggs and milk.
These nations have two things in common. They are developing countries and their governments are afraid of hungry people. The other commonality is these countries are suffering the aftermath of price control policies. Their stores have signs that say “We are out of gas,” or “We are out of rice and cooking oil,” and people run to stores to buy commodities in bulk.
It is also notable that the share price of PetroChina, China’s largest oil company, fell 50 percent.
However, advanced countries are not showing any sign of controlling prices. They control macroeconomic variables, such as interest rates or exchange rates, but they try to leave prices to the “invisible hand.”
They learned a lesson from the world’s first oil shock, from 1973 to 1974, when inflation spiraled out of control as price control strategies effectively choked off supply.
The government no doubt is tempted to interfere with market dynamics for people with low incomes. But with price control, it can never resolve the imbalance between demand and supply. By easing regulations and reducing tariffs, the government should minimize pressure from cost-pushed inflation and wait for better supply and demand conditions in the global market.
At least we know the cause of the inflation and we can endure its inevitable ensuing difficulties. The government has to trust people and refrain from making a hasty decision of interfering with market forces.