LICs are also more vulnerable to the collateral damage from other countries’ price controls on food and energy, because of the high share of food and energy in their consumption baskets and trade. Policies by individual countries to contain the effects of spikes in global commodity process in their local markets have been shown to have had the perverse effect of raising global prices (Laborde, Lakatos, and Martin 2019). Export restrictions in major commodity producers exacerbate global shortages, thus contributing to higher prices on the international market. In the case of the 2007-08 surge in food prices, a majority of EMDEs put in place policies to insulate domestic markets from the rise in international prices (World Bank 2009).

# **5. Policy implications**

Price controls have been used to mitigate the impact of commodity price volatility on the most vulnerable members of society. For instance, the use of temporary stabilization funds, as introduced in Chile and Peru, or national hedging strategies, as introduced in Mexico, have been used to protect domestic consumers and firms from spikes in the prices of basic commodities on international markets (Kojima 2013; Ma and Valencia 2018). However, most governments have had difficulty designing frameworks that deliver lasting benefits. Over time, price stabilization policies often result in costly and distortionary subsidies, posing important challenges to growth, development, and macroeconomic policy, suggesting that other policy instruments may be more effective in achieving social protection objectives.

Replacing price controls with expanded and better-targeted social safety nets, coupled with structural reforms, can be both pro-poor and pro-growth. Indeed, policies to lower subsidies that underpin price controls appear to be associated with higher per capita output growth, in part because savings generated by lower subsidies can fund productivity-enhancing education and infrastructure (Mundaca 2017). The removal of price controls needs to be coupled with targeted support for those segments of the population that might be adversely affected. Despite the regressive nature of price controls and subsidies, poor households spend a higher share of their income on products subject to price controls and are liable to suffer distressful real income losses when price restrictions are lifted (World Bank 2014a). In India, for example, the removal of price controls was accompanied by targeted cash transfers and in Brazil by targeted assistance to lowincome households for energy conservation (Deichmann and Zhang 2013). The different prongs of reforms, however, need to be carefully sequenced and communicated.

Improving the competitive environment can be a more effective means of lowering costs to consumers and producers than the use of price controls. Carefully-designed and properly enforced antitrust laws and consumer protection legislation are essential components of institutional frameworks that support market mechanisms. A sound legal and regulatory framework favoring competitive markets provides a more effective response to many of the problems that price controls attempt to address (Kovasic 1995). For example, the removal of price controls and barriers to entry in the transportation sector significantly increased competition and lowered transportation costs in Rwanda (Teravaninthorn and Raballand 2009). Even in the case where incumbent firms maintained outsized market shares, the presence of competition, and the potential for new entrants, significantly lowered their markups (World Bank 2006).

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