The law and inflation – a history of price control legislation

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Recently in Ghana, some sellers have increased the price of their goods by as much as 300 percent. The inflation rate in Ghana as measured by Combined Consumer Price Index as at October 2022, was 40.4 percent[1].

Inflation is a perennial problem that has plagued Ghana. Inflation may be considered good or bad. Two percent is the safe level of good inflation – meaning the kind of inflation that is natural and expected for a healthy economy without being malignant to economic growth. Lower than that and you have deflation, which is also toxic for an economy. Since 1965, Ghana has only achieved 2 to 3 percent inflation four (4) times; 2005, 2009, 2014 and 2020 respectively. That means there’s been a whopping 61 years when Ghana has been within dangerous levels of inflation.[2]

Before we dive into the battle that successive governments have waged against inflation, we need to clarify what inflation is. The general misconception is that inflation is ‘when prices go up’; however, it is more complex than that. The standard definition of inflation as defined by the Federal Reserve of the United States and which most economists would apply is this: a general increase in the overall price level of the goods and services in the economy.

Economists use a more technical explanation: Inflation is caused by an increased quantity of money in the system. Inflation does not have anything to do with the physical goods themselves, it is concerned with excessive money. The effect of inflation is rising prices.[3]

An inflation rate of 2% annually, which is considered as good inflation, has certain benefits.  Good inflation allows prices and wages to adjust upward.  Bad inflation or deflation can deplete the value of savings, it can trigger a feedback loop of hoarding and supply shortages; and it discourages local and external investment in the economy because the profit margin ceases to justify the risk taken.

Successive governments have tried to fight back the scourge of inflation since independence, with varying degrees of success, through things like penalising hoarding or subsidies for essential goods. One of the weapons used against inflation is legislation, particularly in the form of price controls. Price control is when the legal minimum or maximum prices are set for specified goods. Price controls are usually implemented as a means of direct economic intervention to manage the affordability of certain goods and services.[4]

Price controls have been employed as a top-down means of creating economic stability since the 3rd century BCE in Ancient Egypt for regulating the price of grain. Much reviled by free-market capitalists and libertarians, they have been received with much criticism – usually associated with less democratic governments and a centrally-planned economy. But how have price control laws worked particularly? And how did they attempt to do it? Are there laws that can be engineered to make price controls work? And if not, why not?

The colonial era – origination of price control

Price control legislation began under the colonial government in 1949 with the Control of Prices Regulations. Passing the ordinance was sparked by an increase in prices and general suffering of the population following a global supply shortage.

The Nkrumah erahoarding and food shortages

The Nkrumah government sustained the import trade policy of the Colonial covernment till 1962. However, all consumer goods were placed on an open general licence. The new policy was expected to reduce prices, increase foreign exchange and reduce economic hardship; but it actually had the opposite effect, sending prices skyrocketing. In order to save the country from the brink, government decided to criminalise infringement of price controls. The bill was set before the National Assembly in 1962 and duly passed as the Control of Prices Act, 1962 LI 181.1, to replace the Control of Prices Regulations, 1949. The memorandum of the bill declared that it was an act “designed to replace the present machinery for the control of prices which is considered very unsatisfactory“.

The Act faced a myriad of setbacks in its implementation. First of all, the law had a legal loophole that allowed many sellers to get away with setting unlawful prices. If an agent was caught breaking the law, they would simply blame their employer, and the employer could in turn blame the agent for insubordination and setting the unlawful price – which meant that the employer had to be acquitted.  Secondly, there existed an operative phrase in section 2(5) which was a “willingness to enter into any transaction of sale“. The defence of the sellers was often that the foods were not exposed for sale, or that owners of the goods were absent.

The price inspectors, even though empowered by the Act, did not have powers of arrest. This severely undercut their ability to enforce provisions of the Act.

Another limitation was that the law ended up being enforced mostly in departmental stores and high-end shops, leaving the majority of the population that shopped in local markets without protection of the Act.

This led to importers and retailers hoarding in order not to lose profits they would otherwise have received – and a resulting problem of hoarding and food shortages. This situation compelled government to amend the existing law. The law was thus amended with the Control of Prices (Amendment) Act, 1965, which made hoarding an offence.

Section 4A (4) provided that any person who purchased or caused any other person to purchase on his behalf any goods with intent to hoard the goods, was guilty of the offence of hoarding. It was also an offence to purchase goods in excess of one’s immediate requirements.  A person could not obtain goods in quantities unreasonably in excess of his/her immediate requirements.  The law further empowered the Minister of Trade, either by himself or by any person authorized by him in writing, to sell such seized goods to such members of the consuming public who required them. Despite these ambitious measures, unfair trade practices persisted.

The National Liberation Council era – price control inspectors

After the National Liberation Council (NLC) ousted the Nkrumah regime in 1966, they made commitments to fixing the country’s economic woes. They started by reducing consumer goods importation – which led to further supply shortages and had the opposite effect to what they desired, a further increase in prices. To curb this predicament, the N.L.C. passed the Control of Prices Act, 1962 (Amendment) (No. 2) Decree, 1966.

The amendment empowered every police officer not below the rank of inspector – and every officer in the Armed Forces not below the rank of sergeant in the Ghana Army and its equivalent in the Ghana Air Force and in the Ghana Navy – with all the powers of a price control inspector.

This amendment was a reaction to the lack of enforcement that beset the previous Act. The police were conferred with the powers of arrest and detention.

The overall goal of the Act – to help consumers get goods at government-regulated prices – was not successful, as few traders actually sold their goods at the controlled prices; and when they were caught, only a minority were successfully prosecuted. Enforcement was ineffective outside of departmental stores in middle- to high-income neighbourhoods.

The massive inflation rate did taper off in the months between 1968 and 1969 since importation increased and supply outstripped demand, as the purchasing power of Ghanaian consumers also shrunk – leaving excess goods available and consequently a natural price stabilisation.

The Busia era – currency devaluation

From 1969 the Busia government inherited a myriad of problems, including a crippling national debt. This made importers angsty and threaten to cut supplies of various goods. In order to be more competitive with Ghana’s products abroad, government decided to devalue the currency by 48.3%, causing prices to catapult.

The National Redemption Council (N.R.C.) era – restricted import list and house to house checks

The National Redemption Council (N.R.C) took the reins of government, and on 29th January 1972 abolished the open general licence and introduced the Restricted Import List. This triggered a chain reaction of events that would necessitate another price control law. Under the Restricted Import List, many goods were blocked from being imported into the country. This saw a massive shortage of those goods. The N.R.C also unilaterally cancelled Ghana’s external debt obligation – triggering an international backlash and a trade blockade against Ghana. Shortages ratcheted up, as well as massive increases in inflation. To curb this, government passed the Price Control Decree, 1972.

The Price Control Decree, 1972, had provisions that were very similar to the prior price control laws. The penalty for contravening a price control order on summary conviction was a fine not exceeding one thousand cedis or imprisonment not exceeding five years or both, on summary conviction. Section 4(a) of the Price Control Decree, 1972, authorised forfeiture of goods upon conviction of an offence under the Act. The offender was also compelled to pay a person sold goods beyond the controlled price double the price that he charged the person, or in default of such payment to be imprisoned for a term not exceeding six months.  This was to encourage reporting by customers who were charged above regulation prices.

Section 5 of the Price Control Decree, 1972, sustained the criminalisation of hoarding.  Traders had started the practice of circumventing the anti-hoarding provision by storing goods in scattered locations. Hence, the Decree stated in Section 6(3): In considering whether goods have been kept or obtained for the purposes of hoarding, it is immaterial that such goods are kept in several places or have been obtained in separate lots or upon separate occasions. In addition to fines or imprisonment for hoarding, all goods in connection with the offence committed were to be forfeited to the Republic.

In order to counter the loophole that traders were regularly taking advantage of by claiming that goods on display were not up for sale under the pretext of ‘the owner is not here”, Section 7(1) decreed that any uniformed Police Officer not below the rank of Inspector, or its equivalent for the Armed Forces, was empowered to seize goods where they were satisfied that the seller was unreasonably refraining from selling them.

Furthermore, no civil action could be instituted against any officer who acted under section 7 in good faith.  It also criminalised smuggling, on the penalty of an imprisonment term not exceeding five years on summary conviction without the option of a fine; and all goods in respect of which the offence was committed were to be forfeited to the Republic.

Section 10 of the Price Control Decree, 1972, maintained the defence available to employers and shop owners that were acquitted. The Schedule to the Decree also provided that it was an offence to smuggle goods like corned beef, sardines, rice, sugar, milk, flour, bar soap, codfish (kako) matchets and baby foods out of Ghana.

In spite of the ruthless measures instituted by the Price Control Decree, 1972, to deal ruthlessly and swiftly with those who infringed price control orders, some traders continued to sell above controlled prices.

Lack of conformity with the laws became so pernicious that the Head of State, Colonel I. K. Acheampong, issued a warning to traders on 7 April 1972 – that “a house-to-house check would be introduced to uncover hoarded goods if middlemen continued to hoard goods to create artificial shortages”.

Following this, the penalty for hoarding was significantly stiffened to a term of imprisonment not less than fifteen years nor more than thirty years.

The Prices and Incomes Board Regulations, 1973 – Prices and Income Board Consent

In 1973, the Prices and Incomes Board issued the Prices and Incomes Regulations, with perhaps the most flagrant and over-exuberant price control legislation in the nation’s history.

The Regulations provided that no person should increase the price of any goods without the prior consent in writing of the Prices and Incomes Board. Further, where a person intended to sell any goods not previously available in Ghana or which he had not previously sold, he could only sell such goods after the proposed price for the goods had been approved in writing by the Prices and Incomes Board.

This caused such controversy that Professor Date-Bah described this regulation as an “obviously preposterous and unworkable provision in an inflationary economy, in the sense that the board would need to have a vast bureaucracy reaching into the remotest villages”.[5]

On paper, it brought a solution to the inflation problems of the country. But in practice, implementation was ineffective, leading to the next legislation a year after: the Price Control Decree, 1974.

The Price Control Decree, 1974 (N.R.C.D 17) – a mysterious act

The decree repealed the Price Control Decree, 1972, and the Price Control (Amendment) Decree, 1974. It is important to note that the new law did not make any significant changes, thus the motivation behind its passing was a mystery. Was it a response to public backlash? Or a reinforcement of the resolute provisions of the prior Act?

The Price Control Decree, 1974, provided that the Commissioner of Trade would act on the advice of the Prices and Incomes Board in prescribing the controlled prices of consumer goods.

The Price Control Decree, 1974, introduced a new provision which provided a sanction of imprisonment with no availability of fines for repeat offenders. Where an offender charged 20% above a regulated price, and had been previously convicted under the law within the past two years, he/she would be liable on summary conviction to be jailed not less than a month and not more than five years.

The courts were empowered to impose the further sanction of forfeiting all goods in respect of which the offence was committed to be given to the Republic, as well as ordering the offender to refund a sum equal to double the price which he charged the purchaser.

The refund of any illegal excess on the price charged by the seller and extracted from the employer must be paid immediately after conviction, where in the prior act the refund could be brought at any time.

The Decree further banned sellers from selling for one year after conviction for an offence under the Act.  It also eliminated the option of a fine for the offence of hoarding and mandated the court to impose a term of imprisonment not exceeding five years, in addition to forfeiting the goods to the Republic. The law also provided that vehicles used in the offence of smuggling would be forfeited to the state if the owner of the vehicle could not be found within 30 days.

The Decree banning traders from selling for a year if convicted was particularly ineffective in local markets, because the ban only forfeited the trader’s market stall where they operated. They could simply set up stalls in other markets.

Like its predecessors, the Price Control Decree, 1974, could not effectively protect the consuming and buying public due to the national shortage of basic goods. Hoarding and profiteering still ran rampant. This led to passage the Commercial Houses and Supermarkets (Sale of Specified Goods) Decree, 1976.

Commercial Houses and Supermarkets (Sale of Specified Goods) Decree, 1976 (S.M.C.D. 17) – Black Market Trade

This law provided that the goods specified in the decree’s Schedule could not be sold except by a commercial house or supermarket designated by the Commissioner for Trade.

In order that consumers would not give unapproved stores their money and purchase goods from them, government passed the Commercial Houses and Supermarkets (Sale of Specified Goods) (Amendment) (No. 3) Decree, 1976, which made it an offence even to purchase specified goods from any source other than the designated commercial houses and markets.

The decree was ineffective due to the fact that there were severe shortages of food in the country, which made black market trade flourish and consumers to ignore the prohibition of buying goods from unapproved stores.

The A.F.R.C. era up to the present day

During the era of the Armed Forces Revolutionary Council (A.F.R.C.) some traders were forced to sell their goods at the controlled prices. However, no official price control laws were passed.

By the time the A.F.R.C. handed over power to the People’s National Party led by Dr. Hila Limann on 24 September 1979, the supply situation had deteriorated. The prices of goods continued to escalate; and by 31st December, 1981 – when Flight-Lieutenant Jerry Rawlings again took over the government of Ghana and set up the Provisional National Defence Council (P.N.D.C.) – many everyday consumer items (rice, maize, oil, milk etc.) were being sold for four or five times the controlled price. Therefore, the immediate post-coup period was again devoted to curbing increases in the prices of consumer goods through the application of physical force. That did not do much to curb the rising prices of the time.

Modern price regulation policy: the age of subsidisation

In sub-Saharan Africa, most price control legislation has slowly been phased out since the military era; but it has not disappeared in all its forms. As recently as 2020 during the COVID-19 pandemic, the South African Trade and Industry Minister, Mr. Ebrahim Patel, announced regulations to control the pricing of goods from major retailers in the country. This came after South Africans embarked on panic-shopping sprees in the wake of riots, general public unrest and rising food prices.[6]

Across the continent, price regulation policy has taken a new dimension. Instead of saddling the wholesalers and producers with the burden of losing profits due to brute-forced lower prices, price regulation has taken a new form in Africa: government subsidies.

This policy, mainly manifesting in the form of petroleum, food and fertiliser subsidies, avoids the shortages and economic upheaval brought by price control laws while keeping the benefits; ensuring that fuel and food costs are lower than the prevailing global rate, making the cost of living much more affordable for the ordinary citizen.

However, this is not without its own perverse effects and is fast becoming a load that governments may soon no longer be able to afford to carry.

Deputy Managing Director of the International Monetary Fund (IMF), Antoinette M. Sayeh, has cautioned on the slippery slope of subsidies as a means of price regulation.[7] She states:

“Indeed, these subsidies come at a high fiscal cost. Across 10 sub-Saharan African countries we have data on the cost ranging from 9 percent to 45 percent of public agricultural spending (or some 1.5 percent of GDP on average) in 2014. Country experiences from the region, however, suggest that the contribution of agricultural subsidies to improving food security and reducing poverty has only been weak.”

In a paper published in 2013 by the International Monetary Fund (IMF), titled Energy Subsidy Reform in sub-Saharan Africa: Experiences and Lessons, the cost of price regulation for petroleum is an open wound steadily bleeding cash from African states; cumulatively adding up to a significant expense over time. It states:

“In spite of reform efforts, energy subsidies still absorb a large share of scarce public resources in sub-Saharan Africa.” The argument could be made that this is a long-term investment that will be paid back in the long-term in form of taxes and revenue by the citizens that are able to grow their businesses due to these subsidies; but the statistics show a nuanced ramification of these policies. Ultimately, energy subsidies benefit the rich the most (those less likely to need it); however, the poor are also helped by it, but not to a proportionate degree. The IMF study says:

“These energy subsidies mostly benefit the better off, but their removal also would hurt the poor. Energy subsidies benefit mostly higher-income groups because they consume the most. Electricity subsidies are particularly regressive because connection to the electricity grid is highly skewed toward higher-income groups. Nevertheless, the welfare impact of eliminating subsidies (without compensating measures) would be significant for the poor because the share of total energy in their total household consumption is the same as the rich, although there are important differences in the types of energy products consumed across income groups.”

Regarding the economies of sub-Saharan African countries, the effects of price regulation with government subsidies were found to have grave effects. The report says:

“Energy subsidies have a negative impact on economic efficiency, in particular on allocation of resources and on competitiveness and growth. Energy subsidies can lead to resource misallocation through overconsumption. They may crowd out more productive government spending, as indicated by a negative relationship between fuel subsidies and public spending on health and education.”

In summary, the landscape of price regulation has gotten less draconian on traders, which is something to be desired; but the massive government spending required to lower prices on the end consumer might be a slowly ticking time-bomb for the continent.

Why conventional price control laws don’t work

Price is information. Price serves as a signal to people regarding where and whether or not to invest their money in a particular good or sector. Higher prices encourage consumers to conserve their money for a better time to buy, or to buy other products. Likewise, prices show innovators where they should commit their time and effort. They help entrepreneurs decide where they should invest their money.

But prices are effective only when they reflect actual economic realities. They should rise and fall as natural consumer preferences change, or when inputs become more or less scarce. When prices don’t reflect these changes, and are synthetically forced to be low, the result will be shortages or excess. In the case of shortages, the cost to make more of the good is less than its value to society, yet no one has the incentive to produce more. Conversely, an excess supply means resources are wasted on goods that cost more to make than their value to society. Whether it is a shortage or an excess, the outcome is that society gets less of what it wants.

Price control leads to scarcity for essential goods because suppliers are forced to sell at lower prices than the default market value. This does not provide incentives to increase output. Just like a signal of coming rain encourages people to get their umbrellas out, a price signal of increased demand triggers a supply response because suppliers see a potential increase in profit. This only happens if they are not constrained in price-setting.

Therefore, the most helpful weapon against shortage of essential goods is less price control, not more.

How price control laws can work

Legislation enforcing fixed prices have not all been failures throughout history. There is a version of them that operates, quite successfully in fact, for modern liberalised free market economies like the United States, United Kingdom and the European Union. This is in the form of anti-price gouging legislation.

Price gouging is when sellers take advantage of spikes in demand by charging exorbitant prices for necessities, beyond the average market price of those goods – often after a natural disaster or other state of emergency.

The reason why this works is chiefly because the authoritative hand of the state only intervenes as a matter of rare exception, not permanently. The laws of supply and demand are allowed to operate and signal sellers as to what the market wants, which prevents the shortage and hoarding cycles that rigid price-controlled markets typically devolve into.

Anti-Price Gouging Legislation Round the World

Thirty-seven states in the United States, including the territories of Guam, Puerto Rico and U.S. Virgin Islands, deem price gouging during a disaster or state of emergency as a violation of unfair or deceptive trade practices law. Most of these laws provide for civil penalties, as enforced by the state attorney general, while some state laws also enforce criminal penalties for price gouging violations.[8]

South Africa has legislation like the Competition Act, which only prohibits excessive pricing by ‘dominant’ businesses. The law provides that a business with a market share above 45 percent is presumed dominant in absolute, while one with a market share of above 35 percent is rebuttably presumed dominant – unless it can demonstrate that it does not have ‘market power’. Companies with market shares of less than 35 percent may also be dominant where they are found to possess highly influential market power.

With the European Union, while there are no price gouging laws, under EU competition law companies can be sanctioned for using their market power to exploit consumers, including by price gouging. Article 102 of the Treaty on the Functioning of the European Union (TFEU) provides that an abuse by a ‘dominant’ business may consist of “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions”. Dominance has been defined as “the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumer”. Other rules may also be applied, like the EU Unfair Trade Practices Rules (May 11, 2005 Directive 2005/29/EC) which is implemented and enforced at the member-state level; and several European jurisdictions have persuaded platforms such as Amazon and eBay to delist products advertised for sale at inflated prices when the seller is not a ‘trusted seller’ on that platform.

Similarly, there are no price gouging specific laws in the United Kingdom. The UK’s Competition and Markets Authority (CMA), however – which “works to promote competition for the benefit of consumers” –  launched a COVID-19 Taskforce to monitor price gouging and set up a form for consumers to report businesses that were perceived as behaving ‘unfairly’.[9]

The key ingredient to drafting price regulation laws – that do not trigger destructive shortage and hoarding downward spirals – appears to be employing them sparingly; and  they must be  necessitated by exceptional, specific circumstances or only affect a limited class of sellers.

However, there is a school of thought which posits that anti-price gouging laws are just as bad as hardline price control legislation. The argument is that anti-price gouging laws prevent allocative efficiency. Allocative efficiency holds that when prices function properly, markets tend to allocate resources to their most valued uses. In turn, those who value the good the most and are able to afford it will pay a higher price than those who do not value the good as much or who are unable to afford it.

When a good is in short supply and highly valuable in a crisis, but yet affordable for all, shortages happen much faster if the seller cannot price its value higher than average market price.[10]

Conclusion

Price controls have absolutely failed to achieve their desired impacts, besides short-term gains which are outweighed by long-term disastrous effects on the economy. This is because of:

  1. Lack of capacity to enforce: There are simply too many shops in too many places for security services to moderate always everywhere. Unless we morph into an Orwellian police state, which is in the territory of fascism and authoritarian tyranny, that is not something practicable – nor should we even desire it.
  2. Corruption: The enforcers of these price control laws were ineffective also due to the corruption culture wherein you can get eyes to look away in exchange for some compensation… and our culture is sadly not past that yet.
  3. Business Interests:  Business owners would rather just not sell than sell at a loss. Business owners have demonstrated over and over in the nation’s history that in the face of government-mandated sale at an unfavourable price, they can simply hoard the goods and wait out the storm. As long as that natural self-preservation instinct remains, price control laws cannot work in any meaningful way.

The bottom line is this: short-term gains versus long-term gains.

  • Do we want fleeting success followed by scarcity, hoarding and a depleted economy? Then your answer is stiff price control laws.
  • Do we want short-term grinding hard times followed by an inevitable market correction when sellers reduce prices because there are not enough willing buyers and supply exceeds demand? Then we should let the forces of supply and demand work, supported by light government subsidies.

These are the hard choices facing us today, and we must make the hard choice and choose liberalised trade – for the best choices are almost always the ones that demand sacrificing instant gratification.

The writer is an Associate of Koranteng and Koranteng Legal Advisors, a corporate and commercial law firm in Accra, Ghana. He can be reached by [email protected]

 

[1] Ghana Statistical Service, ‘Consumer Price Index ‘ November, 9, 2022, pg 3

[2] In research conducted by Macrotrends.net (https://www.macrotrends.net/countries/GHA/ghana/inflation-rate-cpi )

[3] ( https://www.managementstudyguide.com/myth-inflation-and-scarcity.htm )

[4] ( https://www.investopedia.com/terms/p/price-controls.asp )

[5]S. K. Date-Bah “Legislative Control of Freedom of Contract” in Essays in Ghanaian Law p. 125

[6] https://www.sabcnews.com/sabcnews/patel-announces-regulations-to-control-pricing-of-goods/

[7] A speech titled Supporting Food Security in Sub-Saharan Africa amid the COVID-19 Pandemic and Climate Change, calling for structural reforms in the agricultural sector.

[8] https://www.ncsl.org/research/financial-services-and-commerce/price-gouging-state-statutes.  

[9] https://www.proskauer.com/blog/price-gouging-restrictions-beyond-the-50-states#.

[10] (M. Zwolinski (2008). “The Ethics of Price Gouging”. Business Ethics Quarterly.)

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