George M. Mangion | Wednesday, 02 September 2009

Prices: waxing or waning?

George M. Mangion

In the pre-budget discussions much will be emphasised about the merits of brinkmanship by the ruling party on setting the country‘s finances in the black and protecting jobs. The magic solution is an efficient competition and regulatory policy which are vital for a recovery when the market economy in recession. Competition is a key driver to ensure increasing levels of efficiency and productivity. Excessive labour regulation has in the past led to a negative impact on our productivity growth. More needs to be done by the government to combat pockets of higher resistance to flexibility and open the doors to innovation. The IMF concluded that our productivity rates are still well below the European targets. By sheer contrast, other economies of countries such as Italy, Germany and Greece have flourished and registered positive GDP growth in the second quarter. They are currently allowing in limited numbers of east European workers thereby reducing their cost of outputs and improving productivity levels. In spite of this, most criticise lack of new jobs in the ‘old’ European group saying this is usurped by migrants. Back to Malta, jobs do not come easy. Perhaps we may try to work in tandem with the fundamental theorems of welfare economics. In this fashion, one expects a coherent and transparent reform policy in place to offload remaining loss-making public sector entities. Without a shadow of a doubt many analysts have been rallying government to forge ahead with a more liberalised and competitive environment primarily to nurture existing business and attract new foreign inward investment. We have forgotten the motto “it is export or die”. The unsavorily news is that while we have been regaled by endless rhetoric calling for better productivity in the civil service there has been no tangible tightening to ensure a higher delivery. Just try to ring for service with a case officer to check progress on your file application at MEPA and you will immediately be reminded that customer service is a joke. MEPA employs hundreds and yet like other public sector employment, one hopes that the anticipated reform will clear some of the backlog in applications. For such a small population which compares to a village in mainland Europe it is surprising how the State acts as a big brother when it comes to employment within its ranks. With all the millions invested in computer technology this decade one does not expect to find 43,000 in staff members inclusive of temporary employees. Naturally this has a dampening effect on our exchequer and the liberalisation of some of the human resources will improve productivity and generate more growth. Although there is talk about “flattening out” and “green shoots”, the local economy is still in dire straits registering even higher deficits. After a period of shock and disbelief associated with lower oil prices of 30 dollars a barrel, the jinx of speculation is pushing up the prices of oil and minerals as well as stock prices. Just this week the price of diesel was again increased to match imported cost of fuel. This is the third such adjustment this summer and does not help industry at all. In spite of the pitfalls, consumers are continuously reminded that the road to recovery is well mapped and that in good time the fruits of wise investment coupled with ongoing reforms. Politicians tell us this will be reaped by all. Reality shows otherwise as negative growth this year is firmly underpinned by a loser control over government expenditure thereby pushing deficit to over 3 per cent of GDP. It does not rain but pours and the other sad news is that the National Statistics Office report that manufacturing sales fell by €119.6 million to €456.4 million, €323.8 million of which consisted of exports.
This decrease in sales causes a drop recorded in manufacturing employment and of course reduces purchasing power in the hands of the workers. On the other side of the coin we note how manufacturers are hit with higher energy costs and thus squeezing their margins and are sometimes operating at a loss to retain the workforce and not lose the baby with the bath water.
Returning to inflation, can it be that the pricing mechanism is becoming dysfunctional due to distorted competition from dominant leaders. The IMF has stated that monopolistic behaviour in the retail and wholesale industries should be addressed and this is very evident to all consumers who daily pay inflated prices for everyday goods. We often pay more than double the UK price for certain food items, and prices (particularly medicines) do not just rise a few cents but leap up by Euros. How can bottled water imported from France be cheaper than that produced locally? Typically, cheese and all items in the imported delicatessen range are also more expensive here than in UK.
On a domestic level inflation hit a high rate of 5 per cent late last year and consumers are expecting vital action from the authorities to contain such burdens or be adequately compensated by a cost of living adjustment. This may reach a high of €7 a week and has understandably raised the ire with the employers that it will further exacerbate their dire condition. The opposition leader had hinted that a solution can be a sort of national bulk buying scheme to combat abuses in price rigging by cartels and other quasi-monopolies. It will take the form of a price monitoring agency investigating price–fixing. This suggestion has set the cat among the pigeons and the Chamber of Enterprise and other shop-owners have protested strongly. It was reported that the Chamber, any proposal related to price monitoring agencies is unacceptable. The Chamber believes that competition is the best form of ‘price control’, which no agency can ever seek to achieve.
So what can be proposed in the next budget to smooth the pain of cost –plus inflation?
The IMF’s formal recommendation is perhaps the most effective in the long term. We need to encourage more business activity and thus create new jobs which are sustainable and improve the spending power of the unemployed. This army of unlucky workers now exceed 16,000 while the government is doing its utmost to train and re-tool the capabilities of the ones on the dole. Given that the present state of national debts do not permit any large fiscal stimulus it is only by active promotion of the island‘s potential to lead to opportunities in qualitative human resources.
A positive note is the expansion of teaching facilities at the MCAST College which is doubling its student intake and offering them a variety of technical subjects. This is commendable once we aim to attract new investment since this invariably demands highly qualified and skilled young and not-so-young people. This also needs to be combined with measures that entice more women to enter the workforce.
To conclude, economists project that contraction this year may reach the one per cent figure and exports may lose momentum while interest-rates continue in their low levels and hopefully inflation starts to ease down to below the two percent range (which is double the EU average). All this high cost of living index continues to weigh negatively on our export potential unless we improve productivity and contain price and labour costs.
Better education will take us a number of years to catch up with our competitors but we have made a good start. Again the budget cautions us to be vigilant. Only by increasing productivity levels can we survive the onslaught of globalisation and tackle the trim inflation to an acceptable level.

George Mangion
Partner at PKF – an audit and business advisory firm

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