George M. Mangion is a partner in PKF, an audit and business advisory firm
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.
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? Yet, social instability will result caused by social deprivation linked with reduced mobility due to Covid health measures and will exacerbate the level of protest by consumers. In Hungary, government contends that the recent price caps are capable of reducing inflation by 2%.
Opponents to the cap argued that it is better to reduce VAT on consumer purchases. But the Fidesz government disagreed with this tax cut 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 cost of essential items. To reap the experience, we need to switch back the clock to inflation-ridden times of the late 1970s in Malta.
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 August 1978 that 17 leading food importers were summoned to the Ministry of Trade and formally, politely but firmly, informed that government had essentially taken over absolute control of 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.
All the measures had their detractors. Controls always give way to suspicions of preference. This replaced a commercial activity previously handled by the private sector and unceremoniously usurped by the State. Did it succeed in providing 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 which mostly served the purpose of stifling choice and spawned corruption at the expense of the consumer. In defense 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. The island, previously aided by a heavy UK military presence, strove to ease out of the remaining reliance on such expenditure replacing it under the deal Mintoff negotiated with Britain – and eventually her allies – about the phasing out by March 1979 of the British military base, which had both sustained and distorted the Maltese economy.
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 the reduction of 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. 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, which 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. Nothing is cast in stone and only time will tell if an effective cure is found to lance the boil that is hurting consumers.