Price Controls do not Reduce Inflation

The “What” of what I want to say today is already pretty clearfrom the title of my paper. However, I should explain to you the “Why”of the paper: why in the fIrst place I want to bring to your attentionthe fact that price controls do not reduce inflation. We probably allagree that Pakistan has more inflation than it needs and we share thepopular desire to lower inflation or at least to keep it from rising.Unfortunately, fear of inflation seems to dominate Pakistan’s discussionof many economic policies that have little to do with inflation or thecost of living. For example, both the public debate and the politicaldebate over what prices the government should set for its agencies’sales of wheat and fuels is dominated by a widespread belief thatraising these prices, or using a flexible market -determined pricingpolicy, would be inflationary. Tax reforms and export development arealso constrained in Pakistan by the popular fear that they would beinflationary. In my view, none of these fears of inflation is justifIed.However, false fears of inflation exist, and the longer we let themdistort policy, the more we delay many of the important steps Pakistanneeds to take to increase both the national rate of private investmentand the level of government spending on social programmes for the worst-off groups in the population. In this paper, I will very brieflyexplain why some of these widespread fears of inflation are unfounded. Iwill also suggest some non-technical arguments that economists can use,not in scholarly debate, but in the popular and political debate overeconomic policy to bring home some of these points.