Cap prices for social care?
14 October, 2010

Georgian Parliament discusses amendment to the law on imposing cap prices on products making up the consumer basket so as to protect socially vulnerable people. Economic analysts assess the initiative as an economic nonsense and recommend working out proper anti-trust legislation instead.
Georgian Labor party submitted to the parliament a socially-oriented draft law aimed at protection of socially vulnerable people from eminent starvation. The draft law initiators’ understanding is that the social picture in the country is deteriorating and Georgian government

has to adopt price limits to prevent speculative price-hike in the country on substantial foods and also control monopolist enterprises. Adoption of cap prices for consumer basket products is one of the tools to protect socially vulnerable people, the bill stipulates.

It recommends the government to impose cap prices on products that make up a consumer basket including bread, cereals, butter, rice, flour, sugar, cheese, cottage cheese, oil and other products essential for health. The cap price will be calculated according to the market demand and supply proportion envisaging minimal profit of entrepreneurs. Ministry of Finances of Georgia is supposed to implement due calculations based on the official statistic data.

The draft law initiators assure that the bill was worked out due to extremely deteriorated social climate of the country, that a number of products making the consumer basket are not affordable to socially vulnerable stratum of Georgian citizens including pensioners,  people below poverty level unemployed, multi-children families,  whose income lags much behind the subsistence minimum. The figure of subsistence minimum is defined by GEL 118 per capita as of August of 2010. However price since August increased by at least 10-15% on milk and milk product, bread, cereals and other food products making the consumer basket. The point is that prices on bread and cereals, as well as on milk and milk product increased at the international market due to crop failure this year and this trend affected Georgia too. But the project initiators believe that besides economic reasons Georgian market monopolist enterprises cause artificial price hike and hope to curb their activities via the underway cap-price bill. They assure that similar practice is adopted worldwide and the draft bill in question is worked out based on the best world experience.
“Regulation of consumer prices imposed on product and pharmaceutical product and on other goods essential for human health is adopted in France, Germany, Japan, Austria and other countries,” the bill paper reads.
Georgian economic analysts find the project rather populist than reasonable. They dub the project on introduction of cap prices on food product as an economic nonsense for fixing limits on prices counters to principles of free market.  They find impossible to work out execution mechanism of this law if it is really adopted.
“It is return to the soviet economy, they were regulating prices, but it was a centralized economy and price regulation is impossible at free market, “Davit Narmania, an economic analyst believes. “Prices can be regulated in natural monopolist sector like gas, electricity, water and communication but the world does not know any limited prices on food and other products.”
He advises Georgian government to accomplish the anti-trust legislation instead of adoption unrealistic scheme of cap-prices. Almost all economic analysts bewildered over the cap-price initiative.
“This can be only temporary way-out,” Levan Surguladze, Head of Caucasus Financial Service (CFS), told Georgian Journal. “If we take into account that there are people who really cannot afford essential foods fixing cap prices can be understandable, but just in a short-term prospect during a crisis period. But at any rate it is not reasonable from economic point of view”

In quest of liberal reforms the post-Rose-Revolution Georgian government revoked the anti-trust legislation and agency in 2005 and established the Free Trade and Competition Agency (FTCA) [a sub-structure of the Ministry of Economic Development (MOED)] instead. However the agency was not the anti-trust body’s assignee. As a result trusts enjoyed cartel agreements and prices became completely uncontrolled. Governmental understanding was that monopolists’ activity should be restricted and regulated by market itself. However after strong EU recommendation stressing that the free trade agency is absolutely ineffective body Georgian government revoked the agency in spring of 2010 and created an independent anti-trust body. The detailed functions of the new anti-trust body and the legislation enabling effective regulation were supposed to come by fall. However the anti-trust still lacks proper legislation and remains on the paper actually.

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