The Israeli government is not fulfilling its basic duty to guarantee food security for its people, and it should set a basket of basic food items the prices of which should be tightly controlled, states State Comptroller Joseph Shapira in an opinion published today on price controls on food and dairy products. The opinion discloses a long list of serious flaws and negligence by government officials responsible for price controls, which have indirectly caused higher food prices.
"Food is a basic and existential need for people," says Shapira. "In Israel of the 2000s, regrettably, a large population continues to struggle to live with dignity and be able to ensure themselves the necessary consumption of food. Social justice is not an empty slogan, but should be expressed in equitable conduct of decision-makers.
"The rise in food prices in recent years, in view of market failures in some markets for essential food products has seriously worsened the condition of the poor. It is the government's duty to improve food security of the population in general and of the poor in particular."
Prices soared, income plummeted
Shapira examined price controls on food and dairy items, and found serious flaws in both areas. In 2005-10, food prices (especially bread, grains, meat, poultry, oil products, and dairy products) rose by 8% in real terms. Prices in the eurozone and EU as a whole rose by 1.1% and 3.6%, respectively, in real terms over the same period.
While food prices rose, households' net real income in six of the bottom seven deciles fell in 2007-10. The income of the bottom 10% of the population fell by 18%, and the income of the second-lowest 10% fell by 15%.
The Bank of Israel found that food prices in Israel in 2008 were 15% higher than the OECD average, and 20% higher when adjusted for the average income per capita.
Price controls on dairy items are carried out by a joint committee of the Ministry of Finance and the Ministry of Agriculture. Shapira found that the easing of price controls to the lowest level in an over-concentrated market, with no real competition, seriously harmed the public's economic interests.
Shapira's opinion confirms a "Globes" report about the deal between the Ministry of Finance and the Ministry of Agriculture in which the latter agreed to support the dairy market planning law in exchange for removing price controls on most products. This enabled companies to increase their profits unhindered at the consumers' expense.
For example, in July 2006, the price controls committee recommended the easing price controls on cottage cheese, despite a cabinet decision in August 2005 to keep them. As a consequence, the price of cottage cheese rose by an extraordinary 35%.
The same thing happened to other dairy products after price controls were removed, resulting in prices rising by 33-38%. Prices for price controlled dairy products rose by 10% over the same period. Although the price for raw milk fell by 11% between January 2009 and October 2010, this was not reflected by reduction in prices for dairy products.
Shapira's opinion also discloses that the prices supervisor failed to properly carry out his job. In 2007-10 dairies were not required to submit reports on the profit margins for products for which price controls were removed, and when they required to submit reports in 2011, it turned out the margins, which had been below 10%, and negative in some cases, had risen to 20-30%.
Government ignored consumers' welfare
Shapira states that price controls are necessary in highly concentrated markets with endemic market failures, stating that the Ministry of Finance and the Ministry of Industry, Trade and Labor ignored consumers' welfare. "The Ministry of Finance and the Ministry of Industry failed to properly carry out their duties to control prices of food items for which they were responsible. They failed to identify products on which prices controls should be imposed. They failed to act systematically when examining the possible removal of price controls. They did not consider social and health needs when making decisions. They did not consider consumers' welfare and they ignored the public interest. Moreover, from the moment price controls were removed for a product, they failed to monitor the price afterwards," he says.
Shapira concludes, "The government in general and the Ministry of Finance and the Ministry of Industry in particular, should discuss the findings of this report, correct the deficiencies that it finds in them, and it should implement the binding measures from the report to manage real price controls on basic food products. All these measures should be taken to ease the burden of expenditures of consumers in general, and the poor in particular."
Shapira also stated that his office intended to put special emphasis in the coming years on strengthening the rights of individuals and of the poor in society, and that this opinion is just the first link in this chain.
Published by Globes [online], Israel business news - www.globes-online.com - on September 12, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012