# **1. Introduction**

Price distortions are defined as instances “when prices and production are higher or lower than the level that would usually exist in a competitive market” (WTO 2019). One source of such distortions is price controls. Price controls have a long history with well documented examples stretching back to Revolutionary France (Morton 2001). In the 20th century, these policies were used extensively in several Western countries during the Second World War, culminating with widespread controls in the United States and the United Kingdom in the 1970s (Coyne and Coyne 2015). Price controls were also ubiquitous in communist countries with planned economies, such as Poland (Tarr 1994). Generalized price controls fell out of favor in the 1980s, as inflation declined, and governments pursued deregulation.<sup>1</sup> However, controlled pricing for certain goods and services, including rent and pharmaceuticals, remain in use to this day (Morton 2001).

Price controls can be imposed in a variety of ways. They may involve price ceilings, or price floors, imposed on selected goods and services by the authorities. Government management of prices can also occur as a by-product of other policies. For instance, preferential exchange rates for certain goods and the imposition of non-tariff barriers can all push prices away from that which would prevail in a competitive market. In emerging markets and developing economies (EMDEs), price controls on goods are often imposed to serve social and economic objectives. They may be part of government efforts to protect vulnerable consumers, by addressing market failures or subsidizing the cost of essential goods. Or they may be intended to maintain the incomes of producers, as part of a price-support program. Alternatively, they can serve the purpose of price smoothing, especially for key commodities subject to high volatility in international markets. This can lower uncertainty about households’ real incomes and firms’ production costs.

The modern micro-founded theory of price controls was developed in part to examine the case of commodity producers in developing countries (Stiglitz and Newbery 1979; Newbery and Stiglitz 1982). More recently, for EMDEs, price controls for petroleum products have been studied extensively, while those on food products have received less attention (Verme and Araar 2017; Kojima 2013; Devarajan 2013; Murphy et al. 2019; Shi and Sun 2017; Clements, Jung and Gupta 2007; Ghosh and Whalley 2004). The World Bank’s Energy Sector Management Assistance Program (ESMAP) has conducted in-depth studies of subsidy reforms for energy markets across EMDEs (ESMAP 2019; Ore et al. 2018). The use of price controls for pharmaceutical products, wages and rent has been widely studied in advanced economies (e.g., Coyne and Coyne 2015; Nguyen et al. 1994). Studies for individual EMDEs include China, Indonesia and several MENA countries (Shi and Sun 2017; Clements, Jung and Gupta 2007; Verme and Araar 2017).

> 1 The use of price controls has also often coincided with historical episodes of hyperinflation. In Brazil in the 1980s, for example, the use of price controls proved ineffective at addressing hyperinflation (Cardoso 1991). More recently, in the case of Zimbabwe, widespread shortages of goods in part due to excessively accommodative monetary policy were accompanied by extensive price controls (Munoz 2006; Coomer and Gstraunthaler 2011). Similarly, high inflation in the República Bolivariana de Venezuela was accompanied by highly restrictive price controls (Vera 2017; Contreras and Guarata 2013).

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