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Consequences of price controls will ‘bite you’

Posted by vmsalama on April 24, 2008

By Vivian Salama

The National


Dubai // Price caps at a number of the country’s largest supermarket chains are sparking scepticism from industry insiders who say “artificial” price adjustments will not reverse the effects of global inflation.

“With costs going up, there will be shortages,” said Andy Barnett, a professor of economics at the American University of Sharjah. “The worst thing you can do is contain prices at an artificially low level.”

Carrefour is the latest hypermarket in the UAE to sign a memorandum of understanding (MoU) with the Economy Ministry, freezing last year’s prices on 52 basic commodities. Last month, the Union Co-operative Society signed a similar pact capping prices on 16 items, followed by Lulu hypermarkets, which agreed to maintain last year’s prices on more than a dozen essential items.

“The UAE is an importing market as far as commodities go, so of course we are going to experience the burdens of inflation,” explained V Nandakumar, the corporate communications director for Lulu hypermarkets. “When we cap prices, we don’t see it as an economic decision, we see it as CSR [corporate social responsibility], because we are conscious of how inflation is impacting the community.”

Dr Barnett warned that whatever the incentive, the consequences of price controls “will jump up and bite you”.

“Good policy, good economics and good politics are not always the same thing,” he said. “If costs go up and some supermarkets hold prices constant, what happens to them? They’re out of business.”

The prices of staple items including cooking oil, flour, sugar and eggs have been affected by the controls. The latest commodities price list released this week by the Economy Ministry revealed a rise in the cost of various items. Short cucumbers at Carrefour in Dubai, for example, went up from Dh1.55 to Dh1.90 in just a week. Similar price rises are being reported at supermarkets across the region.

Earlier this month, officials with the Economy Ministry announced that 15 items – including dry and condensed milk, frozen and canned vegetables, baby food, chicken, edible oil, rice, flour, fish, meat and tea – were to be placed on a free import list. The Government is also studying the benefits of keeping stockpiles of at least 15 essential items.

“We must start educating people that their normal spending or consumption is different than during crisis times,” said Ahmed bin Shabib el Thahari, first deputy speaker at the Federal National Council, which is conducting the stockpiling study. “Not just when something wrong is happening should they rush to consumption – this will create a direct inflation.”

Crop shortages and lower yields worldwide have fuelled recent riots in countries like Egypt, Indonesia, Cameroon and Peru, with the UN World Food Programme comparing the impact of soaring food prices worldwide to a “silent tsunami”.

Many Government officials estimate that inflation of food prices could soar as high as 40 per cent this year, up from last year’s high of 27 per cent. The Abu Dhabi Department for Planning and Economy has reported a 10.7 per cent jump in inflation last year, driven by rents, transport and food costs. Food, beverages and tobacco accounted for 11 per cent of that increase.

“In every country that tries to control prices, shortages develop,” noted Dr Barnett. “We’ve seen it time after time – there’s no mystery here.”



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