State regulation of prices: New panacea or new problem?

Author : Yuriy Hryhorenko

Source : 112 Ukraine

The electorate is dissatisfied with the constant increase in prices, and politicians are trying to meet these expectations, offering to return the good old state regulation of prices. The government refused it in 2017, because the system proved ineffective. On the other hand, we see maximum trade markups even in developed countries. So the fight for "price adjustment" will continue
23:36, 4 February 2019

112 Agency

The essence of the problem

The authorities of any country want to control the cost of necessary goods, so as not to annoy the electorate with rising prices. On the other hand, politicians start the price regulation usually on the eve of elections, trying to show concern for the vulnerable segments of the population, the support of which they are trying to achieve.

“Before the elections (and especially before the parliamentary ones), the likelihood of the adoption of so-called socially oriented laws and decrees increases substantially. Food price regulation is a double-edged sword. On the one hand, it can be a move by politicians who will try to show their “care" about ordinary customers. On the other hand, the introduction of such a norm will not have a tangible effect - Ukrainian business has long learned to circumvent such restrictions," emphasizes Viktor Shulyk, market research director of IBI-Rating agency.

However, not only Ukrainian politicians offer a return to this practice, but also the head of the National Bank Council, Bohdan Danylyshyn. He proposed, in particular, to reduce VAT rates on food products, to introduce maximum trade markups: for products - no more than 15% of the producer price, for ordinary goods - no more than 30%, and for imported goods - no more than 30% of the customs price. However, the position of Danylyshyn looks like a private opinion, and not the official position of the regulator. The National Bank, the Cabinet of Ministers and the Ministry of Economic Development and Trade do not share the viewpoint of Danylyshyn and do not consider the option of a return to price regulation.

It is important to note that from the point of view of the National Bank, Danylyshyn’s position is quite explicable: the regulator calls the fight against inflation the main goal, sometimes even with the detriment of the economy. Holding the discount rate at 18%, not only inflation will be restrained, but also lending, and, as a result, the economic development of the country as a whole.

On the other hand, the NBU managed to curb inflation in part: at the end of last year, it was 9.8%, whereas in 2016-2017 it was at the level of 12.4% and 13.7%, respectively. In the state budget-2019 its decline is mentioned at the level of 7.4%.

In addition to food, you can "regulate" the pharmaceutical market. It is no secret that the supply of imported medications is monopolized, and the prices of many drugs in pharmacies are significantly higher than in the neighboring countries (where the standard of living is much higher), and are too high for most pensioners. The state regulates only the prices of drugs sold under the program "Available drugs" (reference pricing - the base price of the drug is calculated on the basis of price comparisons in other countries). But the Radical Party wants to go further - to cancel the VAT on drugs and introduce state regulation of prices for drugs.

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According to the people's deputy Viktor Galasyuk, the fact is that the "Available drugs" program concerns only compensation of a part of the costs for a limited range of drugs at the expense of the state budget.

“We offer a comprehensive solution - the package of bills named “Let's make medicines cheaper”, which will reduce the cost of drugs on the shelves of pharmacies by at least a quarter, and individual drugs can be 3-4 times cheaper. By the way, Ukrainian pharmaceutical manufacturers support this initiative. But only introduction of the zero VAT rate on medicines is not enough for the substantial reduction of price. We also provided for such standards as: de-monopolization of pharmacies (destroying 40 percent kickbacks for “getting to the shelf”), the prohibition on using trade names in the recipes (elimination of agreements between doctors and pharmaceutical companies), an increase of the funding of “Available drugs” program 2.5 times (+1.5 billion UAH) and an expansion of the list of drugs (antiviral, antibiotics, etc.), the elimination of cartel monopolies through the improvement of patent protection and state control of prices of necessary medicines (so-called external reference pricing + profitability reduction)," says the parliamentarian.

Efficiency of state regulation of prices

The effectiveness of the regulation of food prices by the state causes great doubts. From October 1, 2016 to January 1, 2017, an experiment was conducted and state regulation of prices was suspended (to establish a maximum trade allowance of 15-20%) for 17 groups of goods, in particular, for bread, sugar, cereals, meat and sausages, cheese, sour cream, butter, baby food, eggs, etc. According to the results of the monitoring, the state regulation of food prices was considered ineffective (regulated prices grew on average 20% faster than others), and from July 1, 2017, the Cabinet of Ministers finally canceled these administrative measures. That is, such restrictions have little effect on prices and, especially, on the general level of inflation.

Many manufacturers produce goods that do not fall under the price regulation, although the quality of such products differs little. The most vivid example is that social sorts of bread were delivered to stores in limited quantities and ended very quickly, while the more expensive bread remained on the shelves. Milk is also a good example. In this case, the producers simply increased the fat content of milk by 0.1%, and thereby removed the product from the regulating prices. In addition, socially unprotected segments of the population, as a rule, purchase products not in supermarkets, but in markets where the ability to control prices remains questionable.

By and large, the constant rise in prices in Ukraine is the result of constant large-scale crises in the economy, and no government regulation will save from rising prices for goods and services that are affected by the instability of the national currency, rising costs of energy, raw materials and transport tariffs, the need to increase wages (due to for the increase in the "minimum salary" and shortage of personnel due to labor migration), etc.

According to Viktor Shulyk, the restriction of trade markups on certain commodity items made it possible to increase the availability of certain products for socially unprotected segments of the population. The price situation in the segment of individual products was more stable - prices did not change much. On the other hand, the strengthening of administrative pressure is perceived negatively by the business, therefore there have been many attempts to remove such norms.

For his part, the director of the Association of Retail Networks Suppliers, Olexiy Doroshenko, believes that the previous system of state regulation of prices really allowed restraining the growth of prices for socially important food products. But it also had many shortcomings, the main one - it provoked corruption, because inspectors for certain bribe "did not notice" the excess of the mark-up by retailers.

How can we curb prices?

According to Viktor Shulyk, the consequences of the return of state regulation of prices may be harsh. This is a possible revision of the ratings of ease of doing business in Ukraine, and the formation of supply-demand imbalances for individual products, and a slight increase in the availability of certain products for customers.

The power has a tool to monitor price collusion and the level of competition in the face of the Anti Monopoly Committee, which from time to time finds some errors, but these investigations usually never significantly affected the inflation index.

Under current conditions, it is easier to use other ways of keeping prices, than to return to the canceled system of state regulation. The old system is not comfortable, it is easier to switch to a new one, which would include setting maximum markups and reducing VAT.

"In most EU countries, there are maximum trade markups. In the Ukrainian realities, this can be done by adopting the Law on Trade (it has been waiting for 15 years already) or at the level of an industry agreement - the Code of Ethics - with the participation of the AMCU, retailers and manufacturers. The maximum markup could be, for example, 20-25%. Also, we can simply implement the Eurodirectives in our country and give the business a transitional period, for example, three years,” notes Olexiy Doroshenko.

According to him, there are several ways to reduce food prices.

Reduction of VAT can be compensated by redirecting the amount of reimbursement of this tax to agricultural producers. This would allow setting VAT on food products at the level of 16% (now it is 20%). Of course, agricultural holdings are against this idea.

It is necessary to reduce the period of deferment of payment for retailers, because under current conditions, manufacturers actually lend to retailers an average of 45 days. In Europe, the delay period is several times less.

Governors may also have an impact on prices in the regions: they can assist business in resolving operational issues within their powers, and instead “convince” them not to increase prices.

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