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Friday, 24 November 2017

Egypt: Why can’t we stop runaway prices?

Ziad Bahaa-Eldin , Wednesday 12 Jul 2017
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Views: 3466

It’s widely thought among the public and media that steep price increases over the last year were a result of government decisions to float the pound, institute a VAT, and cut energy subsidies. While largely true—all these measures have inflationary effects—it doesn’t entirely explain the huge, recent spikes. There are other factors at work, related to the nature of markets and tools of state administration.


The majority of our serious economists agree that the inflation seen in Egyptian markets in the past several months cannot be solely explained by higher import costs due to the devaluation of the pound or increases in fuel and electricity prices. We’re now dealing with market instability that has pushed up prices beyond what can be explained by economics, especially for goods and services that are largely unaffected by the price of the dollar or fuel, even taking into account the secondary impact of inflation.


A major cause of this instability arises from the tools the state uses to regulate markets and limit exploitative practices. A strong belief persists that government agencies can regulate markets using the three following means: price controls coupled with strict oversight and penalties for offenders; the direct provision and distribution of necessary goods to the public at appropriate prices by civil and military state arms; or raising interest rates to curb demand.


But these methods are no longer effective in reining in market chaos and runaway prices. The state can’t set prices and employ hundreds of thousands of inspectors to monitor all markets and transactions as it could when the population was smaller, the state was the primary producer, and consumption patterns were simpler. Nor can it provide goods and services directly to the public in any sustainable way; that kind of intervention should be reserved for emergencies and not be seen as an alternative to regular mechanisms for producing, buying, and selling. And raising interest rates will not stop inflation given weak demand and a sluggish economy.


The obvious option, which I mentioned last week, is to boost investment, production, and employment. That is ultimately the way out of our current crisis. But in the meantime, the state has another rarely used tool at its disposal to restore market stability and bring prices to heel. It can foster competition by letting small producers and distributors enter the market without unnecessary restrictions or costs thus curbing monopolistic conditions. It can do this by cutting through the bureaucratic red tape that ostensibly exists to monitor the market, maintain security, and protect consumers, but actually does the exact opposite, that is allow larger producers and distributors of necessary goods and services to exploit these bureaucratic barriers in order to manipulate prices, pushing them beyond what is economically justifiable.


There is an urgent need to clear the way not only for small producers and distributors in the private sector, but also for civic associations, cooperatives, associations of small farmers, producers, and traders, consumer protection groups, and other civil society actors who can pool resources and mobilize efforts to take advantage of alternative mechanisms, which have proved extremely effective elsewhere in reining in price fluctuations and countering exploitation by monopolistic networks. Unfortunately the state’s drive to fight and circumscribe independent civil society, for political reasons, has tamped down civic activity, denying society a significant tool of effective market oversight and collective intervention to stop excessive price increases.


What is needed is not merely a new government policy to help small producers and distributors compete, but a wholesale shift in how we view state tools to regulate markets. The Egyptian economy is a mixed one, which is fine provided it pursues a coherent, consistent policies and utilizes effective tools to achieve development goals. We are, as a society, however stuck in a persistent contradiction: believing that the state can regulate markets by conventional means that are no longer effective while not quite convinced that unleashing competition is good for citizens and the national economy. Until we adjust this view, citizens won’t benefit from either effective state regulation or free competition that can fight existing monopolies.

 

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