Infinite Observations

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Wladimir Kruythoff

Wladimir Kruythoff

Founder & CEO Infinite Observations

Commodity Price Ceiling of Staple Food Items – Policy and Legal Framework

Because of repeated natural and/or man-made disasters (flooding, droughts, hurricane, heat waves, wild fires, COVID-19 pandemic, climate change etc.) market prices of staple food commodities (and non-food items) can become extremely volatile, thus making necessary and vital food items inaccessible to many. However, governments would want to keep food prices steady despite these market fluctuations. Countries can implement various control mechanisms as a solution to stabilise market prices. One such tool at their disposal is a “price ceiling”. At the begin of September 2020, in the midst of the raging COVID-19 pandemic, Infinite Observations carried out a preliminary study of how governments, in particular Small Island Developing States, namely the Caribbean and South East Asia, can introduce price ceilings (or price floors) to stabilize market prices by understanding the legal challenges, advantages and disadvantages such a control mechanism might bring. In this article Infinite Observations will present a summary of the many topics of that preliminary study.  An overview is given of several issues that can be important for a price control mechanism then the legal frame work and the implementation of the two in a social-political-economic context of the Dutch Caribbean islands. 

Mr. Kruythoff, W. T. (Wladimir)

Research Supervisor, Engineering, Environment, Economics & Data Science, CEO & Owner Infinite Observations, Delft, The Netherlands

Mr. Brooks, C.A. (Carlvin)

Lecturer, Ad Accountancy & International Law, Rotterdam Business School, Rotterdam, The Netherlands

Economics & Data Science

Ms. Vergeer. C. (Charlotte)

Rotterdam University of Applied Sciences, The Netherlands. Study: Rotterdam University of Applied Sciences, The Netherlands, Global Marketing and Sales. Topic(s): “Price regulations in Europe”, “The impact of a price ceiling, comparing the European Union and the Dutch Caribbean”.

A comparison was made between the richer Western European countries, such as Norway, Sweden, Germany, Switzerland, The United Kingdom, The Netherlands, France and the less affluent Eastern European counterparts, such as Romania, Bulgaria, Albania, Kosovo, Moldova, and Ukraine, etc. First of all it became clear that government ideology, whether democratic, socialist, communist, etc., plays a very important role in dealing with market volatility.  The differences in prosperity between Eastern and Western Europe is partly because Eastern Europe was dominated by the former Soviet Union of the 20th century. The USSR was a dictatorship, where the population was oppressed. There was rampant poverty and  shortages. Unlike many other countries, the Soviet Union had a planned economy and usually produced by a two-category industry.  The “heavy industry”, group A which included all goods that serve as a source for the production of a final product. And “consumer goods”, group B, the final product that are used by the individual consumers such as clothing and shoes, housing, and such heavy-industry products as appliances and fuels. Under communism and political economy, where the effects of price controls become amplified, i.e. more shortages or surpluses of goods, lower product quality, more losses in gains from trade, and more misallocation of resources, etc., it becomes increasingly difficult for consumers to have access to commodities and services they want and need. It would take decades, after the collapse of the USSR, for former Eastern Blok to reform from Soviet style-controlled economics. However, any form of government oversight and enforcement means that the bureaucracy controlling consumer commodities prices usually tends to be more extensive, intrusive, and expensive. The role of public perception is also very important when a government introduces price ceilings. During adverse times (World Wars I and II, man-made and natural disasters, etc., periods of high inflation) the population can view the absence of price control mechanisms as callous disregard for the poor or unemployed by their governments. Price controls may have a positive contribution by calming the fears of a nations (panic buying) that is face an economic downturn. In the end, there are circumstances where (temporary) controls can be effective. But a trade-off must be made between the need to have a simple program generally perceived as fair and the need for sufficient flexibility to maintain efficiency.

Ms. Wouters. K. (Kim)

Rotterdam University of Applied Sciences, The Netherlands. Study:  International Business and Languages. Topic(s): “Responses to natural and man-made disasters”.

Africa has been taken as an example when looking at the level of price volatility in commodity markets and responses to natural and man-made disaster. Africa is the second largest continent in the word, consisting of 57 countries and has a total surface area of 30,065,000 square kilometres. Furthermore, the equator cuts directly across the African continent. The continent has a wide range of climates, comprising equatorial-, monsoon-, tropical savanna-, warm desert-, cold desert-, warm Mediterranean-, temperate Mediterranean-, temperate oceanic-, warm oceanic-, warm semi-arid-, cold semi-arid-and Humid subtropical climates. A country’s climate highly affects its agricultural output and food supply, as certain edibles only grow under specific weather conditions. Many parts of the African continent cope with a significant increase in the exposure, frequency and intensity of extreme droughts, flooding, decease outbreaks, in addition to climate-related impacts, which exacerbates food scarcity and thus puts additional pressure on the agricultural, health, clean water supply markets. 90% of natural disasters on the continent are climate driven. Predictions are that by 2030, 118 million extremely poor people will be exposed to severe weather conditions including cyclones, drought, floods, earthquakes and extreme heat.  Natural disasters are often followed by food shortages and ultimately episodes of chronic hunger or malnutrition, famine. One consideration that can be taken from preliminary studies is that famine like a food shortage, viewed from a socio-economic perspective, does not occur due to a lack of food, but has to do with distributional dynamics such as a rise in food prices, a fall in wages, logistical issues, land use planning, and so on. Thus, disaster response is a pivotal element when dealing with disaster risk reduction and price volatility in commodity markets. Other key elements of disaster response are roles and responsibilities with-in government, establishing accountability, regulatory framework to facilitate international cooperation, integrate and co-ordinate disaster management law, policy, regulations and guidelines, which will prevent or reduce disasters risk, emergency preparedness, rapid and effective response to disasters and post-disaster recovery, community empowerment. Another important topic was financial support National Development Aid (NDA) or Foreign Development Aid (FDA) in the form of coupon, ration tickets, subsidies, grants or trust funds.  

Ms. Panaskova, L. (Lubomira)

Breda University of Applied Sciences, The Netherlands. Study:  International Tourism Management. Topic(s):  “Price ceilings on staple food items in the Caribbean” and “How could the island government fit such a price ceiling into a legal framework?”

As mentioned in the previous section significant increase in the exposure, frequency and intensity of extreme natural and man-made disasters, including climate-related catastrophes, exacerbates food scarcity and increase to relevance of food safety and security. Food security can be defined as a situation when the inhabitants of a region or country, at all times, have physical, social, and economic access to sufficient, safe and nutritious food that meets their dietary needs and preferences for an active and healthy lifestyle. This means both the accessibility to food and availability of it, among many other factors. A household is considered food-secure when its occupants do not live in food deprivation and are not vulnerable to it in the near future. Poverty is the main cause of food insecurity – the  poor are not able to afford minimum nutritional needs as well as other basic human necessities that are important for food security, such as clean water, health care, education, clothing, and shelter. The Caribbean, which is the region that extends from the Bahamas in the North, to Guyana and Suriname in the South-American continent, together with Belize in Central America, is home to a population of 43.5 million. These small island economies of the Caribbean (SIDs) face formidable challenges in dealing with globalisation (or international trade), particularly in relation to the vital agricultural sector. Overexploitation of natural resources through colonial domination, which has left race, class and gender hierarchies have left a legacy of exclusion of the poor (intergenerational transfer of poverty, through stigmatisation and discrimination). Significant levels of poverty persist on some Caribbean islands, despite general improvements in living standards, take for example Haiti, that invariably records statistically the lowest. Accessibility, availability, utilization and stability of commodity food markets to meet nutritional demands of the population are critical for sustainable socio-economic growth of the Caribbean. Some form of price ceiling driven by political-will power (a legal basis) can help to protect the consumers from conditions that would make a vital product from being financially unattainable for consumers.

Ms. Ruijter, A. (Annelies)

Rotterdam University of Applied Sciences, The Netherlands. Study: Financial Services Management. Topic(s):  “International Travel, Shipping and Transport in The Caribbean” and “What must the government do to introduce a price ceiling on staple food?”

The COVID-19 pandemic and the implemented measures to slow its spread have had and will have long lasting adverse effect on the global economy as a whole. The economies of small island developing states (SIDs) of the Caribbean have seen the decimation the tourism-based, import-dependent sectors on which they so greatly depend due to the virtual disappearance of international travel. This will have grave consequences in the short, medium and long because of the expected recovery lag as consumers worldwide will less disposable income.

Prior to Covid-19, the Caribbean was a highly potential market for renewable and sustainable energy investment, especially the solar power industry. Moreover, recent catastrophic hurricane seasons, attributed to climate change, have stressed the importance for more modern and resilient energy grids on many islands. In normal times Caribbean governments would breathe a collective sigh of relief in a sudden drop in the prices, which has shown to be extremely volatile and often costly. Most Caribbean countries use thermal generators burning imported fuel oil and diesel for the majority of their power. Now however, eventhough Caribbean nations are heavily dependent on imported oil products for energy purposes and are likely to benefit from lower prices because of the Saudi triggered oil price collapse. However, the advantages of lower oil prices during this pandemic are unlikely to offset the fall in tourist arrivals and increases in commodity prices and taxes as a result of the coronavirus, which will ultimately be borne by the consumer. Investing in clean sustainable energy will lower operating costs and reduce the cost of electricity for businesses and households alike. It will also attract new investment opportunities for tourism, manufacturing, information technology, modern agricultural business (agro-business) and other high consuming electricity industries.

The long-term economic implications of the coronavirus are not yet well known but looking to the future, resiliency will be a major concern for the region because of the current economic adversity and there will be numerous questions and implications for the Caribbean.

Mr. Farahar, T. (Thomas)

Rotterdam University of Applied Sciences, The Netherlands. Study:  International Business and Languages. Topic(s): “Market Elasticity”

The most important factor in the formulation of any agricultural or price control mechanisms is consumer demand for commodity food products, also applies to non-food items. For purchasers, fluctuations in commodity food prices and per capita income are influential elements of food demand. Policymakers and researchers gain insight from consumers food purchasing behaviour based on quantifiable estimates of consumer total expenditure on the demand for food, which in turn aids policymakers to shape effective nutritional commodity food pricing control policy using two systems. Conditional demand system and unconditional demand system are the two systems that researchers use to formulate consumer demand. A conditional demand system comprises an interdependent relationship among a group of closely related foods items—for example, milk, yogurt, butter, cheese, frozen desserts, ice cream, and other products with in the dairy group. An unconditional demand system distinguishes the interdependent relationships among all products purchased—food and non-food products. To obtain a more complete picture of substitution or combination between products, policymakers, economists, etc. use estimates from an unconditional demand system. Whereas estimates derived from a conditional demand system ignore substitution for products not within the group. Elasticity is the term coined to quantify consumer demand. It is a useful relative measure providing a distinguishable instrument that transverses all ranges of quantities. The responsiveness of demand to a change in price can be equated in terms of the price elasticity of demand. There are many measures of elasticity to formulate supply and demand of food and non-food markets, i.e.  own-price elasticity of demand/supply, price inelastic (E < 1), price elastic (E > 1),  unit elastic (E = 1), cross-price elasticity (positive or negative) of demand/supply, expenditure elasticity of demand/supply, etc. From the elasticity measure, the quantity of supply and/or demand (Q) and the price, revenue(/lose) can be determined. Using the concept of “Market Elasticity” policymakers, researchers, etc. can design, i.e.  consumer/supplier subsidy programs, buffer stocks programs, rationing programs even housing/rent programs, etc.

Legal & Policy Framework

First of all The Kingdom of the Netherlands, a four part kingdom, consist of territory in Western Europe, The Netherlands, and with several small West Indian island territories in the Caribbean, Aruba, Curaçao and Sint Maarten, CAS islands, and three special municipalities (Bonaire, Sint Eustatius, and Saba, BES islands) but they do not fall under any of the Dutch European provinces. Each country is autonomous and has its own government. There is also a Council of Ministers for the Kingdom, made up of the Netherlands’ government ministers and one minister each for Aruba, Curaçao and St Maarten. The countries work independently on some issues and they work together on others, which are called ‘Kingdom affairs’. Because The Netherlands is part of Europe and a member state within the European Union is obvious to focus on the European Union and the process of a fitting price ceiling in the EU legal framework followed by how a price ceiling would fit into a legal context on Sint Maarten.

In 2002, the European Parliament and the Council adopted Regulation (EC) No 178/2002 laying down the general principles and requirements of food law (General Food Law Regulation). The General Food Law Regulation is the basis of food and feed law. It sets out an overarching and rational framework for the development of food and feed legislation both at Union and national levels. It also lays down common principles, requirements and procedures that strengthen decision making in matters of food and feed safety, including all stages of food and feed production and distribution. Because the incentives to evade price control mechanisms are ever present, and the forms that these evasion can take are infinite. The precise price control mechanisms and the forms of evasion depends, the nation, the region, the nature of the good or service, the organization of the industry, the degree of government oversight and enforcement, etc.

In 2006, Eurostat and the OECD issued a manual explaining the methods and processes employed by the Purchasing Power Parity Programme at the time. As was discussed a price ceiling is a government- or group-imposed price control, or limit, on how elevated a price is alleged for a product, commodity, or service, which is in essence purchasing power parity (PPP). The European Parliament and Council of the European Union formerly approved the PPP Regulation in December 2007. The Regulation establishes the rules for the collection and validation of data for PPPs as well as for the calculation and dissemination of PPPs and related price and volume measures.

Another interesting control mechanism is the Harmonised Indices of Consumer Prices (HICP), which are created for international evaluations of consumer price inflation. HICPs are used for the estimation of the inflation convergence criterion as required under Article 121 of the Treaty of Amsterdam and by the ECB for assessing price stability for monetary policy purposes. Conceptually, the HICP are Laspeyres-type price indices and are computed as annual chain-indices allowing for weights changing each year (Eurostat, 2020). The Laspeyres price index is an index formula used in price statistics for measuring the price development of the basket of economy’s general price level, cost of living, goods, services and to calculate inflation in the base period. The question it answers is how much a basket that consumers bought in the base period would cost in the current period. The index commonly uses a base year figure of 100, with periods of higher price levels shown by an index greater than 100 and periods of lower price levels by indexes lower than 100.

And, so there are various European and International tools (i.e. The transitional Netherlands-Belgium-Luxembourg Customs Convention, 1944; Treaty of Rome was introduced, 1958; Anti-dumping Trade policy) that Sint Maarten and many other SIDs can research, adjust, adopt and apply to circumstances in their own countries when deal with price control mechanisms or any other topic. To do this we must first understand the governmental structure of the island in question.

The Dutch island territory of Sint Maarten became an autonomous country in October 2010 and became a country within The Kingdom of The Netherlands. Sint Maarten has three separated, independent government bodies: The executive power, the legislative power and the judicial power. The executive power rests with the king of The Netherlands who is represented by the governor, who appointed for a period of six years. The Prime Minister, who heads the cabinet of ministers, and deputy Prime Minister are elected by the Members of Parliament (“Staten”) for four year-terms. The legislative power rests with the parliament that consists of 15 Members of Parliament (“Staten”)  each chosen for a period of four years in a general election. Judicial power that consists of the Constitutional Court, that consists of three judges, and Ombudsman.

New legislation (laws, regulations or policies) can be proposed by the government of Sint Maarten (minister or ministries). Members Parliament (MP’s or “Staten”) can also propose laws by themself and new laws must be approved by the Staten as well. Before the government proposes a law in Parliament (at the “Staten”) for approval, it first introduces this proposal by the “Raad voor advies”. As long as a law proposal is not approved by the Staten it can still be adjusted by the Staten, on proposal by one of the members or by the government itself. If a law proposal is not yet approved by the Staten it can still be withdrawn by the government. A new law will be made public by “landsverordering”. They will not be implemented before made public. (Staatsregeling, chapter six, article 89). Government and Parliament will inform each other about the new law before being implemented.

In the previous section the legal steps and standard procedures were described that the government would have to take to introduce a price ceiling. The minister or Ministry of Tourism, Economic Affairs, Traffic and Telecommunication (TEATT) and the minister or Ministry of Public Health, Social Development and Labour (Volksgezondheid, Sociale Ontwikkeling en Arbeid, VSA) would be the ones responsible for introducing a price ceiling, a socio-economic issue.

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