.

Prices of many essential items (including food items) in Kenya have sharply
risen in the last few years. Such rises can have adverse consequences, including
political and economic instability. In an attempt to address the problem, Kenya’s
Parliament recently passed a Bill that proposes to control the prices of essential
goods, including maize, rice, wheat, cooking oil, petrol, diesel and paraffin.
This study assesses whether there is a problem to justify the decision taken by
Parliament; determines the most important causes of the problem; and whether
price control is the most cost-effective intervention to solve the problem. The study
recommends alternative policy options that may achieve what the Members of
Parliament (MPs) are targeting.
From review of literature and situational analysis of the commodity markets,
the study comes to several conclusions. First, as prices were rising from 2007
onwards, per capita income was shrinking, eroding the consumers’ purchasing
power and ability to afford essential goods. Thus, the problem that the MPs
sought to address with price control is real. Second, the prices for all the targeted
commodities have been rising over the last few years and, in almost all the
cases, domestic prices were above international prices. Third, consumption
of the commodities in the country outstrips domestic production, leading to
shortages and higher prices. In fact, the situation seems to be getting worse for
most of the essential commodities, with domestic production either declining
or remaining stagnant while consumption is rising. Several sector constraints
have been identified as the main causes of the high food prices, including high
production costs, poor weather conditions, poor governance, rising population
and diversification of consumption patterns, wastage as well as trade policy
issues.
The study observes that even though price controls have merit when markets
are not perfect, direct price controls as a long term measure have not worked
in the past in Kenya and elsewhere. In addition, price controls will violate
international and regional trade agreements that the country has signed; will
lead to shortages of the goods targeted, leading to queues and black markets,
which will hurt the consumer even more; may lead to collapse of the sectors
targeted when producers cannot make reasonable profits; will require policing
which, other than increasing administration costs, will lead to corruption.
Further, the price controllers may not have full information to be able to set prices
at optimum levels, and the prices set may end up having more adverse welfare
impacts than those set by the market even with its imperfections. Moreover,
while a case can be made for setting quality standards, prescribing “… the type
of packing, weight, size, quality, marking and the processing and ingredients of
iv
Should Kenya revert to price controls?
any such goods manufactured in Kenya” is another form of direct control that
would curtail innovation to the ultimate disadvantage of the consumer, who is
supposed to be the beneficiary of the legislation.
The study, therefore, concludes that direct price controls will not be beneficial
in the long term and recommends alternative policy options to address the
escalating cost of essential commodities. The options include social benefit
programmes to cushion the consumers in the short term, and long term measures
to address trade policy and governance issues, as well as supply and demand
constraints to ensure domestic production is sufficient to cater for demand. The
long term measures that would improve food security and reduce food prices
include increased funding for agricultural projects, increasing the acreage of
food crops under irrigation, and investment in alternative sources of energy,
among other measures. Strengthening the regulatory framework for competition
to check against anti-competitive trade practices and consumer protection as
envisaged in the Draft Competition Bill 2009 and Article 46 of the Constitution
will also be important. Moreover, regular monitoring of anti-competitive
market behaviour and conduct in these sectors, and taking of remedial action
are imperative.