Free market or state-targeted price interventions
Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 20 January 2022
The new year brought with it a stark reminder of the phenomenon of rising prices. Global food prices soared 28%, on an annual average, for all of 2021 compared to the previous year, according to a statement released last week by the United Nations Food and Agriculture Organization. This is partly attributed to the high cost of energy, high freight charges and the ongoing restrictions caused by the global Covid-19 pandemic.
Such factors leave little room for optimism about a return to more stable market conditions in 2022. Recent figures from the OECD, a group of 38 most developed countries, indicate that inflation is at a 25-year high, largely driven by soaring food and energy prices. Prime Minister Robert Abela was questioned by journalists on how the government intends to fight price inflation. He said the government is “sensitive” to the reality of inflation, recounting how it has reduced fuel taxes and absorbed higher energy costs to prevent fuel and electricity from becoming more expensive.
A new political party, Volt Malta is proposing the minimum wage increase to €1,100 per month over a three-year period to address poverty. The party said a living wage directorate should be set up within the National Statistics Office to regularly calculate the living wage. It said that the recommendation of the European Commission for a decent minimum wage is 60% of the median wage in the country.
Eurostat data shows Malta’s current minimum wage is 43% of the median wage. The Nationalist Party in opposition has urged the government to convince the European Commission to set up a €40 million rescue fund to help Maltese importers and exporters cope with higher transportation costs.
The question rises whether Malta can afford to borrow more to help quell the rising tide of imported inflation. The answer is that the island is highly leveraged. It entered the European Union with a 150% corporate debt-to-GDP ratio and GDP at €4.8 billion, this estimates that corporate debt totalled €7.2 billion. Corporate debt peaked in 2011 at 230% of GDP and remained at over double GDP during the 2010s. The European Commission had warned Malta on its high corporate debt levels back in 2013.
Back to the issue of price explosion, it is relevant to mention how last week the Hungarian Prime Minister announced that his government would cap the prices of six basic foodstuffs in order to fight rising inflation. This may not come as a surprise given the sudden rise in essential food items.
As can be expected, the wholesalers and importers lobby objected to this move saying consumers may be negatively affected by the decision, as shops will compensate for the losses on the six products by increasing the prices of others. Most blame the ‘robbing Peter to pay back Paul’ scheme as a futile exercise that will not solve the basic problem of imported inflation. For these reasons, it is not clear why consumers would benefit from the cap while having the prices of other products in their basket rise significantly.
Does this mean that the State must not intervene in the free market to help stabilise prices? As can be expected, social instability will result caused by inflation-linked with reduced mobility due to Covid health measures will exacerbate the level of protest by consumers. In Hungary, the government contends that the recent price caps are capable of reducing inflation by two percent.
Opponents to the cap, argued that it is better to reduce vat on consumer purchases but the Fidesz government disagreed with tax-cutting - saying it would only benefit retailers and would not reach consumers, which is the goal of the current measure. Can history teach us a lesson as to the effectiveness (or otherwise) of state intervention to control imports and reduce the cost of essential items? To learn from past experience, we need to switch back the clock to inflation and unemployment have ridden times of the late seventies in Malta.
As a hasty solution, the Mintoff administration decided to ipso facto become the sole importer of all essential commodities including tinned milk, cheese, butter, coffee, sugar, canned tuna, corned beef and luncheon meat. It was in 1978 that 17 leading food importers were summoned to the Ministry of Trade and formally, politely but firmly, informed that the government had essentially taken over absolute control of the importation of essential commodities and that even communication with the principals abroad was henceforth banned as the Department of Trade would be solely responsible for sourcing the products from whoever and wherever. This spurred the birth of the bulk buying scheme.
Bulk buying was introduced as an attempt to keep the cost of living down. Linked to this was the imposition of a prices and wages freeze, in response to the massive hike in the price of oil. This State price intervention replaced a commercial activity previously handled by the private sector. Did it succeed to provide quality products at reasonable and stable prices? The jury is still out, but with hindsight, most agree that it was an intrinsically complex and flawed system that mostly served the purpose of stifling choice and spawned corruption at the expense of the consumer.
Such draconian measures had their detractors. State controls always give way to suspicions of preference and kickbacks from leaked import licenses to fuel the black market. In defence of this State intervention introduced at a time when the economy was in recession, one needs to weigh the restriction of consumer choice and importers’ freedom to trade with a flawed policy to cure chronic unemployment.
Still, today, one can never justify State bulk buying monopoly as a pragmatic solution to help young families and pensioners to survive the spiralling cost of living. Perhaps a solution suggested by MEA to reduce vat over a number of items will be beneficial provided adequate supervision is forthcoming from the regulatory bodies to ensure that the cost reduction is passed to consumers (this is not easy).
A fresh alternative is being suggested by the Opposition. It is advocating, that the State undertakes a large investment in a strategic international Intermodal hub that facilitates goods being transported by different modes of transport to and from the country. As freight costs are a major factor attributing to price increases this hub has the potential of easing prices of imported goods.
In conclusion, nothing is cast in stone and only time will tell if an effective cure to fight price inflation is found to lance the boil that is hurting consumers.