Report No. 5328-TUN Tunisia Country Economic Memorandum: Midterm Review of the Sixth Development Plan (1982-86) (In Two Vo.-nes) Volume II: Pricing Policy Issues in Tunisia October 1985 Countrv Programs Department II Europe, Middle East and North Africa FOR OFFICIAL USE ONLY Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS SDR 1.00 = dinars (TD) .8486 (as of March 1985) Official exchange Race: Dinar (TD) Per US Dollar Period End of Period Period Average 1973 0.4451 0.4200 1974 0.4065 0.4365 1975 0.4253 0.4023 1976 0.4309 0.',288 1977 0.4121 0.4290 1978 0.4034 0.4162 1979 0.3959 0.4065 1980 0.4187 0.4050 1981 0.5157 0.4938 1982 0.6158 0.5907 1983 0.7302 0.6785 1984 0.8666 0.7768 1985 0.8561 (March) 0.9107 (March) Source: LF, International Financial Statistics, May 1985 FISCAL YEAR January 1 to December 31 ABBREVATIONS API Agence de Promotion des Investissements CNP Comite National des Prix DGC Direction Gin6rale du Commerce DPC Direction des Prix et du Controle Economique DRC Domestic resource cost EMIs Electrical and mechanical industries IEQ Institut d'Economie Quantitative ali bach Mamba MEN Ministere de 1'Economie Nationale OC Office des Cereales ONAS Office National de l'Assainissement SMIG Salaire minimum interprofessionel garanti SONEDE Societe Nationale d'Exploitation des Eaux STEG Societe Tunisienne d'Electricite et du Gas TD Tunisian Dinar UTICA Union Tunisienne des Industriels, Commergants et Artisans. FOR OMCIAL USE ONLY Mid Term Plan Review: Volume II Pricing Policy Issues in Tunisia Table of Contents Paragraph Page Foreword Summary and Conclusions i - xviii i - vii Chapter I Introduction 1.1- 10 1 Chapter II General Description of the Price System 7 A. Overview of Pricing Policies and Procedures 7 1. The Interplay of Import Control, Investment Licensing and Price Regulation 2.1 -3 7 2. Objectives of Pricing Policies 2.4 - 6 9 3. The Basic Basic structure of Price Regimes 2.7 - 9 10 B. Specific Procedures in Domestic Price 14 Regulation 1. Present Coverage and Definitions 2.10 - 15 14 2. Evaluating Price Liberalization 2.16 - 20 16 3. The Administrative Burden 2.21 - 23 19 Chapter III. The Fixed-Price Regime: Key Consumption Goods 3.1 21 1. Stabilization Fund's Subsidies in Perspective - 3.2 - 4 22 2. Cereal Prices: Efficiency and Equity Effects 3.5 - 9 24 3. Potential Savings for Cereal-Based Products 3.10 - 13 26 4. Other CGC's Interventions 3.14 - 16 29 5. Direct Targeting Alternatives 3.17 - 19 30 6. Price Subsidy Policies in Medium and Long-term 3.20 - 21 31 This document has a restricted distribution and may be used by recipients only in the performance of their oflrcial duties. Its contents may not otherwise be disclosed without World Bank authorization. Paragraph Page Chapter IV. The Cost-Plus Price Regimes: Manufactured Goods and Services 33 A. Differences in Principles and in Practice Between Regimes 33 1. The Formulas 4.1 - 6 33 2. Procedures in Practice 4.7 - 10 35 3. The Administrative Problems of Price Controls 4.11 - 18 37 B. Theoretical Rationale and Implications of Cost-Plus Pricing 40 1. Main Justification and Effects 4.19 - 25 40 2. Collusion 4.26 42 3. Resource Allocation Distortions 4.27 - 34 42 4. Excess Profits 4.35 47 5. Excessive Capital/Labor ratios 4.36 47 6. Micro-Efficiency 4.37 - 38 48 7. Productivity and Quality Improvements 4.39 49 S. Increasing Administrative Complexity 4.40 - 47 50 C. Inflationary Effects 4.48 - 52 53 D. The Relation to Import and Competition Policies 4.53 57 1. The Structure of Industries 4.54 - 57 57 2. The Cost of Distorted Incentives in EMI's 4.58 - 59 59 3. Liberalizing Imports 4.60 - 61 60 Chapter V. Public Utilities and Social Services 61 A. Overview of Subsidy Costs and Tariff-Setting Procedures 5.1 - 10 61 B. Electricity Tariff-Setting 5.10 - 11 65 1. Procedure for Calculating and Cnanging Tariffs 5.12 66 2. The Principle of Long-run Marginal Cost Pricing 5.13 - 14 66 3. Financing Issues 5.15 - 17 67 4. Other Social Objectives for Electri- city Tariffs 5.18-23 68 ANNEX I: Wheat, Beef and Milk Pricing in Tunisia 70 ANNEX II: An Illustrative Analysis of Industrial Goods Pricing in Practice. 82 ANNEX III: Various Documents On Price Regimes (formulas, charts and figures). 89 List of Figures and Tables Page Figure I-1 : Schematic Approach for an Assessment of Price System 4 Figure I-2 : Potential Effects of Price Regulation 6 Figure II-1 : Schematic Overview of the Pricing Policy 8 Figure 11-2 : Principal Products by Type of Price Regime and Product Group, 1984 11 Table II-3 : Coverage of Expenditures by Price Regime, 1981 and 1983 18 Table III-1 : Expenditures of the Stabilization Fund, 1970-81 23 Table III-2 : Incidence of CGC Subsidies by Income Group, 1980 25 Table III-3 : Annual Subsidy and Per capita Expenditures According to Products, 1980 27 Figure IV-1 : Price Calculation Formulas: Homologation and Auto-homologation 34 Table IV-2 : Inflation and Price Regimes, 1981-83 54 Table IV-3 : Notional Estimate of Hidden Inflation, 1982-84 56 Table V-1 : Major Public Services and Approximate Subsidy Costs 62 Table V-2 : Electricity Tariffs for Agricultural Use 69 J FOREWORD This report was prepared by members of an economic mission that visited Tunisia in April 1984. The mission was composed of: Rene Vaurs Mission Chief Hinh T. Dinh Deputy Chief, General Economist Hans Reichelt Investment Program M'hamed Cherif Modelling Oli Havrylyshyn (Consultant) Pricing Policy Marto Ballesteros Agricultural Prices Margaret O'Donnell Research Assistant The report consists of two volumes. The first analyzes recent economic developments and assesses the achievements of the Five-Year Plan C1981-1986) macroeconomic tar3ets, as well as the implementation of structural policy reforms that the Plan recommended. The second volume focuses exclusively on pricing policy issues, the main recommendations on which were incorporated in the first volume. The preliminary version of the report was completed in September 1984 and was sent to the Government at its request for consideration in the preparation of the Budget 1985. Since then, data have been revised extensively, but the conclusions of the report stand, and the recent data will be reflected in forthcoming economic reports. This volume was prepared by Oli Havrylyshyn, with a contribution from Marto Ballesteros. The mission appreciates the full cooperation provided by the Tunisian Administration for its preparation, in particular by the General Directorates of Planning and Commerce and would like to acknowledge the valuable assistance given by the staff of the Directorate of Prices and Control. SUMMARY AND CONCLUSIONS i. To achieve the VIth Plan objective pricing policy was one of the key economic policies identified by the 1981 Plan Review Report. A dialog on pricing policy issues between the World Bank and the Tunisian Government has developed through the preparation of projects jointly financed; it has concentrated on public utility tariffs (electricity and power) and agricultural products. A preliminary review of the pricing system was carried out in 1981 (see Tunisia, Country Economic Memorandum, No 3399-TUN dated September 1981). The second volume of this report includes a study of the main methodological aspects of the price system and its impact on the economy. It aims at providing a coherent analytical framework to help future detailed reviews of the pricing system and prepare subsequent reforms. A) Main Features of the Price Regimes ii. In Tunisia, the price system can be characterized as a largely administered system; with complete free-market pricing limited to only about a third of consumption expenditures and considerably less for intermediate and capital goods. During the VIth Plan there has been some limited liberalization of the system. The principal intended benefits of price regulation have been social equity improvement using low prices for key consumer staples; promotion of industrial expansion while controlling any monopolistic tendencies to excessive profits; and more recently restraint of inflation. On the other side, negative effects can be created and have to be identified: resource allocation distortions; inducement to inefficient production at the micro-level; and in cases of below-cost prices the need to mobilize large budgetary subsidy payments, explicit or implicit, which create a heavy burden on the central Government budget. The functioning of an administered price system, its advantages and disadvantages, widely vary among products. iii. Key staple goods (bread, semolina, meat, sugar, milk, oil) as well as animalfeed, fertilizers and some minor items, are subject to fixed pricing, and explicit subsidies are paid out at several intermediate points (between producers (farmers) and consumers). In recent years producer p_ices - especially for cereals - have been allowed to approach world prices. But while this reduces the resource allocation distortions of the policy, it has required huge increase in the subsidy payments of the Stabilization Fund (CGC), which reached TD 250 million or 4 percent of GDP in 1984. Consumers do benefit from these subsidies, but two caveats are in order., First, the subsidies benefit both low and high income households, though the net effect on income distribution is a slight improvement. Second, the subsidies may be overly generous to intermediary processing (milling, baking, transport & storage). Attempts to use a system of direct-targeting to given social groups as an alternative to across-the- board prices subsidies have been almost non-existent, though the possibility has been considered, especially as part of the planne 10983-84 price increases. iv. Prices or tariffs in the major social services-health and education-are essentially zero, though very modest fees are applied differentiated by income to some health services. These costs are in budgetary terms quite large (TD400 to 500 million at present equivalent to 7 to 8 percent of GDP); with the need for reducing budgetary outlays (see Volume I), it is urgent to consider the principles and procedures of generalized systems of user fees in all social sectors. - ii - V. Public utility prices or tariffs (electricity, water, sewage, transport) are decided by the Government based on cost data proposed by the operating agencies but are adjusted by political decisions to reflect perceived social benefits such as economic externality or assistance to targeted groups. In spite of recent increases most utility tariffs are below economic cost. In the case of railroad tariffs, they are even below financial operating costs, thus requiring large explicit subsidies. If capital subsidies are included, budgetary outlays to utilities are over TD 100 million at present. The principles behind price calculations (marginal or average cost; short-run or long-run) need to be clarified, with justification for below cost pricing. vi. Most manufactured Production is under an administered cost-plus price regime which covers a large proportion and wide variety of items, entailing an annual review of over 5000 files by the Directorate of Prices and Control (DPC). In 1982 changes were introduced to ease this burden by shifting most products from homologation (a regime which requires DPC to calculate prices given enterprise cost data), to auto-homologation (a regime which gives enterprises the responsibility for price calculation). But in both regimes, the detailed cost files are still submitted to DPC for control, and thus, the changes have not reduced the purely logistic tasks. vii. The nexus of three elements-import protection, investment licensing, and price regulation - is so close that the price system must be considered in direct coordination with the other two regulatory policies. Small market size and consequent oligopolistic tendencies limiting competition are a key concern motivating price regulation in Tunisia. The objective of promoting economic activity means that domestic industry has been provided some protection as infant-industry against imports, and that domestic investments in manufacturing are limited by existing practices. The actual practice of price regulation does not always exhibit the necessary coordination, is generally ad-hoc, and is not sufficiently embodied in an overall sector strategy. In actual practice, it is difficult to tell how well price regulation has achieved its objectives as data are sketchy, and the effects, complex. viii. There is little doubt that many negative effects are created by the actual cost-plus price regime. These include in particular: 1. Tendency to collusive action among producers, resulting in excessive profits. 2. Tendency to distort prices from opportunity cost, hence resulting in allocation inefficiency. 3. Tendency to excessive capital intensive investments and under-utilization of capacity. 4. Tendency to micrc-inefficiency ("X-inefficiency)". 5. Tendency to inflationary cost increase. 6. Disincentive to productivity improvement. 7. Disincentive to quality improvement. - iii - Just how important each of these is, or what is the value of the economic loss through distortion, misallocation, inefficiency at factory level etc cannot be easily determined for the impacts are of a "general equilibrium" nature and difficult to trace. Two important consequences should be noted: first, any formula or rule devised to counter some of the above effects, invariably seems to cause other negative effects or contains a loophole, or finally leads to increasing complexity of price administration; secondly, the price fixing procedures based on a systematic consultation of producers may create favorable conditions for collusion, with the paradoxical situation that these price regimes require large competition to be efficient. ix. The combination of trade policies, competition policies and price regulation using the average (rather than marginal) cost formulas can only result in resource misallocation. In the mechanical and electrical sector, a study using effective protection calculations would indicate a resource allocation bias (mostly an anti-export bias) of about 25 percent loss in value added. Moreover, considerable excess capacity is identified, and y't requests for new investment licensing continue. Because of shortages domestic products, even of inferior quality, are sometimes sold for higher prices than imports. Finally Tunisian entrepreneurs do not show sufficient aggressiveness, in particular in foreign markets. But this is not because of any interior lack of enterprises but rather because the regulation policy broadly defined above (para. vii) has built-in tendencies to induce low levels of production with poor quality, excess costs, but with assured profits at a level high enough to satisfy industrialists and thus bias them towards the easier domestic market. x. One stated intention of the change to the auto-homologation system was to make producers more "responsible" for their actions. It is not clear that this change alone has had the desired effect for the formula is still cost-plus, and the administrative control is just as complex. In fact, the auto-homologation formula is in at least one respect inferior to the homologation one, for profits are calculated as a percent of costs rather than of invested capital inciting cost inflation even more strongly. It is also not clear how the capacity utilization rate intervenes in cost estimates. xi. An important issue in pricing policy has been whether the auto-homologation regime is more inflationary than homologation. Inflation ,actually declined from about 14 percent in 1982 to 7 percent in 1983 but this decline was mainly coincidental with the shift to auto-homologat ion. The success of curtailing inflation was due to a tough policy of "voluntary" price controls and even rollbacks, mechanically imposed through the price regime by tougher review of price increase requests, more frequent questioning of costs, and in the case of public enterprises, informal delays in ratification. But inherently the cost-plus formulas autogenerate inflationary tendencies, by inducing excessive direct costs and passing them on to other costs as intermediate inputs are used in other goods and as higher consumption prices trigger cost of living adjustments for wages. B. Recommendations xii. On general aspects, the report makes two main recommendations. First, Government should actively pursue the objective of gradual - iv - liberalization outlined in the VIth Plan, going beyond the steps already implemented. But in so doing it will be important to assure better coordination of the three inter-related policies: import protection and export incentives; domestic investment licensing; and price regulation of manufactured goods. It will also be important to consider whether and how much to compensate, at least partially, those who are hurt by any policy adjustment, so as to make it socially acceptable and economically viable. Secondly, the price system in the medium term should define clearly the various categories of goods and services to fall under the different price regimes. During the adjustment period the objective should be to have four levels of administrative price fixing and control: 1. Items for which domestic industry is competitive enough that neither price regulation nor import protection is necessary, and gradual liberalization should be envisaged. 2. Items for which domestic industry clearly is highly non-competitive, and prices and imports should be liberalized. 3. Items for which domestic production demonstrates some infant-industry potential and temporary support is retained, and non-liberal entry policies to restrain monopolistic effects. 4. Items whose prices will remain directly fixed. A limited number of key staples with significant equity effects and public goods with demonstrable social or economic spill-over effects. An appropriate institution to prepare such long and medium-term policy objectives could be the National Committee on Prices, reconvened in the context of the VIIth Plan preparation. The type of goods where some amount of price regulation may be retained for some time are broadly identical to the ones officially defined and actually used. However, what is recommended is to shorten the list of items to be actively controlled in the medium term, while moving progressively to full liberalization. xiii. Key staple goods. Liberalization of the price system related to consumer staples goods should be aimed at approaching opportunity cost pricing, achieving equity improvement, reducing the budgetary costs of CGC subsidies, and minimizing the adjustment burden to those who presently benefit from these policies. Because of the need for making budgetary expenditures, etc., freezing of the subsidy bill for key staple goods in 1985 and beyond at its 1984 level is recomnended. The following policy measures are recommended in this regard: 1. a policy decision considerably shortening the list of key staples comprising bread, durum flour, semolina, sugar and oil. 2. gradual but rapid removal of price control for most other items with some limited substitution of direct targeting for secondary staples such as school paper, dairy products, and perhaps agricultural inputs. - v - For key staples, still under direct price control: 3. to elimination any possible excesses in per unit subsidies, such as in baking and perhaps milling by expediting the present DPC's intention to review the sector and revise the subsidy formula. 4. annual increases in consumer prices for these products, at rates above inflation. 5. to develop direct targeting mechanisms for these staples with the intention of gradually phasing out all price subsidization in the long run. xiv. Social Services. Though the major social services (health and education) are characterized by large socio-economic externalities which authorities use to justify below-cost user fees, this cannot justify a zero-fee policy. Because the magnitude of expenditures is so large - about twice the level of CGC's interventions - even small percentages in cost recovery can be financially important. The incidence of these costs is particularly regressive for education, even more than for health. It is therefore recommended (a) that in the health sector the user-fee systems be further improved by refining the present system of user cards (Cartes d'indigent) to stratify recipients by income groups, and (b) that the possibility of partial cost recovery in higher education be studied, with direct targeting instruments used to address equity objectives. xv. PubLic utilities. Greater justification (and potential) exists for increasing cost-recovery, though may not mean free-market pricing or, in very specific cases, full economic cost recovery. In these cases, the prices may need to reflect the fact that public utilities tend to be natural monopolies. This Report recommends the four following options: 1. consider the gathering of a working group responsible for establishing guidelines to be followed by all public utilities in tariff fixing. 2. require that for all tariff proposals more explicit attention be given to analysis of social and economic spill-over, before decisions are made in exceptional cases to set tariffs at levels different from the technical cost calculations. 3. review by the Administration of the general policy of financing public utilities with the general objective of making the financing of new capacity more explicit (rather than covered by current tariffs). The long-run objective should be to move gradually from implicit financing to explicit capacity subsidies, and from government loans to floatation of bond issues by the utilities themselves. xvi. Manufactured Goods. Many specific improvements in price-regulation formulas and mechanisms have been considered in Tunisia, and some have been implemented in the period 1982-84; yet others can be recomended. First, the policy medium term objective should continue to be - vi - liberalization of prices and imports under administrative coverage. It is therefore necessary to identify the products for which icm0s!ic competition is sufficient to avoid price regulation and protection or for which unecessary domestic production is far too inefficient (level 2 and 3 of para. xii). It is therefore recommended that: 1. a review of the policies of competition, protection and pricing be reviewed in a comprehensive framework to isolate the few industrial sectors for which some support and then price regulation would be applied (infant industries). Since this is closely related to trade policy incentives, such a review should use sectoral studies on effective protection. Policy tools (subsidies, tariffs, tax incentives) to be used for support will have to be defined by an Industrial Policy Study. 2. a study to assist the above review, the degree of competitiveness in each industry, be assessed systematizing information on number of firms, concentration ratios and market structure in general. 3. a procedure of liberalization be rapidly implemented for products for which domestic industry is reasonably large and its efficiency close to world prices. xvii. The above recommendations have a medium and long-term perspective. But because liberalization cannot be immediate for evident reasons one should also consider some short-run amelioration of the existing price regimes which should be coupled with immediate limitation of the existing extent and thus, social costs attached. These recommendations are that: 1. annual activity reports on price regulation be produced (if possible going back a few years) providing systematically such information as product coverage of the different price regimes; characteristics of price request by branch plus some average indicators of production. 2. the process of reviewing files be made more explicit, as not all files can (or need) be reviewed in depth. Either the process should involve a scientifically random sample selection, or more systematic criteria should be specified to,identify files for review. 3. the profit margin basis of the auto-homologation formula be reconsidered to avoid the inducement to inflate productlon costs, and perhaps return to the homologation margin formula without returning to the homologation procedure. Another improvement will be to explicit the corrective factor for capacity utilization to be used in the price formula. 4. efficiency improvements for specific industries be introduced by greater use of import liberalization, even if it be temporary. Also it would be more effective if such a review could also be used to identify industries that are so inefficient that - vii - protection ought to be removed immediately (level 3 in para. xiii) that protection will be eventually removed immediately or gradually if there is infant potential (level 4 in para. xiii). These tasks will require a restructuration of DOC's resources, in particular a more efficient use of computer facilities to leave more time for tasks of verification and analysis. xviii. In conclusion, these recommendations constitute a rather complex action program, but implementation of the first steps should start immediately to be fairly advanced when the main strategy components of the VIIth Plan are decided. These first steps could include: - for the Directorate of Prices and Economic Control: to prepare detailed annual reports of its activities; to adjust the autohomologation price fixing formula; to choose the criteria to select firms to be controlled ex-post; and to rationalize its manpower capacities. - for the Caisse G6n6rale de Compensation (Stabilization Fund), to review its subsidy formula to intermediaries; to carry out a detailed analysis of the baking sector; to apply an annual price increase in cereal-based products, sugar and oil; and to prepare a plan to phase out the other items under fixed price regime, to be replaced by direct-targeting if justified. - for the Government, to set up four working groups: the first one will define the categories of goods and services to fall under the different price regimes and the procedures to liberalize the entire system; the second one will prepare policy guidelines to coordinate import liberalization; the third one will organize the monitoring of public utilities and public entities tarification procedures and the criteria for allocating budgetary subsidies; and the fourth one will study the user fee and cost recovery principles for all social sectors. J CHAPTER I - INTRODUCTrON 1.1 The mid-term review of the VIth Development Plan (1981-86) (see Volume I) confirmed the main conclusion of the 1983 Plan Review Report that it is unlikely that the current economic problems will be resolved by "extensive growth" based on macro-expansionary policies with increased investment stimulating economic growth. Instead, effective economic management will in the future mean much more emphasis on improving the efficiency of resource use, because the less favorable macro-economic envirorment projected for the eighties will require a focus on "intensive- growth" based on micro-efficiency improvements, structural adjustments and hence, supportive policies to facilitate optimal resource allocation and the greatest possible productivity of existing production resources. 1.2 The VIth Plan which initiated such a reorientation also underlined the need to review the pricing policy and to undertake sevezal reforms aimed at reducing any distortions unintentionally generated by administered prices.l/ Such a policy reorientation is altogether appropriate because a coherent pricing policy is the key element in a long-term development strategy aimed at increasing growth through efficiency improvement. But the legacy of an easier financial environment and extensive reliance on administrative mechanisms to regulate prices have meant that the new policy orientation of "intensive" growth has only begun. Both the conceptual discussion and the actual steps of implementation of such a new approach have been limited and tentative up to 1984. Thus, the three broad lines of price policy changes proposed in the VIth Plan have only begun 2/. These changes were: a) reduce price distortions for key agricultural goods and the burden of subsidy payments; b) rationalize industrial price regulation by changing from the system of homologation (price-fixed by the administration) to auto-homologation (price decided by enterprises, subject to ex-post administration control); and c) liberalize both domestic licensing and import restrictions to increase competitive forces. 1/ Republique Tunisienne, VIe Plan de Developpement Economique et Social, 1982-1986, Tome 1, pages 418-423. This is considerably elaborated in a pre-plan document (MinistXre du Plan et des Finances, Rapport de la Sous Commission des Priy, Sept. 1981) written by the working group in charge of reviewing price policy issues and preparing recommendations for the final document of the VIth Plan. This working group gathered representatives from the Administration and the private sector. 2/ As noted in the Rapport de la Sous-Commission, op cit, p.3 "L'intervention-de l'Administration dans la fixation des prix, est J substantielle. Cet etat de choses fait jouer un role secondaire aux forces du marche dans la determination du niveau des prix." The present report will use tiL. term "price-regulation" rather than the usual term "price-control" in conformance with the Tunisian price authority's distinction. "Fixation des Prix" refers to the actual first step of determining the numerical level for a price, while "contr6le des prix" refers to all of the detailed investigation of correct costs, technical norms, sanctions, etc. Here price regulation will mean both processes. 1.3 The purpose of this volume is to contribute to this policy reorientation and to contribute to the task of identifying concrete policy measures which on the one hand address the most urgent problems and on the other hand are feasible to implement in the context of the Tunisian socio- economic conditions. Though earlier reports of the Tunisian Administration and the World Bank 3/ have addressed the problems of price administration, the evolving nature of the policy discussion and the changes begun in the VIth Plan necessitate a review of the current situation. The present volume under- takes such a review focussing both on the broad issue of the effect of the price system and on a narrower assessment of recent changes. 1.4 In the period of the VIth Plan to date, implementation of the three major lines of price policy changes has been limited, and a major reversal might have occurred in early 1984. While producer prices of cereals have increased, plans to increase consumer prices of cereal-based products were rescinded subsequent to social disturbances. Consequently, an increased gap between producer and consumer prices had to be met by a huge increase in budgetary subsidies. The administrative change from homologation to autohomologation (para. 4.7) has taken place without difficulty, but the effects of this change may not be as unequivocally positive as had been hcped. Further liberalization of price regulation has not occurred as the inflationary surge of 1982 led to even stronger ad hoc price controls. Finally, liberalization of import restrictions and domestic investment licensing has been set back by the pressures of slowed expansion and growing balance of payment constraints. 1.5 Thus, while the intention of reduced government involvement in prices remains, the immediate situation is characterized by three major concerns of the administration vis-a-vis price regulation, which stand in the way of continued liberalization. These are: (i) to increase competitive forces and improve the cost effectiveness of industry both for export and on domestic markets without causing employment cutbacks; (ii) to restrain the inflationary pressures that could result from reducing price controls in the non-competitive environment of domestic industry; and (iii) to allow greater competition through imports without exacerbating the balance of payments. These legitimate concerns must be addressed in any discussion of pricing policy, for they define the crux of implementation problems. However, since prices are a pervasive element with multi-faceted effects throughout the 3/ The Administration reports are cited in para. 1.1. Principal Bank reports addressing these issues are: Price Controls and Subsidies in the Tunisian Economy, a working decument dated September 1981 and prepared for the Country Economic Memorandum, September 1981, No. 3399-TU; and Social Aspects of Development, 2950-TU, dated June 16, 1980. - 3 - economy, an adequate set of policy answers to these three concerns cannot be found easily. It is necessary to assess more closely just what the positive and negative effects of the current price system are. 1.6 An assessment of these effects, in the spirit of social cost-benefit analysis, is at the heart of this volume. However, the issue is too large and complex to permit a comprehensive analysis. Rather, the approach here is to combine quantitative and qualitative analysis and cover only the principal and most critical elements of the price system. Chapter II describes the price system, while Chapters III to V respectively assess pricing of key consumption goods, of manufactured goods and services and of public utilities and social services. 1.7 Assessing the effects of the price system is sufficiently complex to require some amount of conceptual analysis. Recent Bank reports did address the issues of price distortions in a concrete way, as for agricultural prices or import protection wedges; they have not addressed the broader issue of an economy's entire pricing policy and price regulation system. The issues include, but go beyond, the measurement of price distortion to encompass the entire scope of pricing policy: what is the appropriate mix of free and administered prices? what reasons theoret- ical and practical may justify the Administration for administering some prices? how effective are the techniques and how valid are the cost- formulas used? what are the consequences of administering prices? How justifiable is the actual degree of interventions? 1.8 Though quantitative modelling cannot be envisaged in the framework of this volume, our assessment must, nevertheless, be founded on solid conceptual grounds. Figure I-1 gives a schematic review of the approach taken here. First, it is useful to subdivide goods and services covered into three types; key staples (including some non-food goods); industrial products; and public utilities and social services. For each of these broad categories this volume describes the system (objectives, methods, coverage and distortions), assesses the positive and negative effects, and remarks on the problem of administrative effectiveness. The assessment of effects, though in principle based on the same concepts as social cost-benefit analysis for projects, could not be done with the same degree of quantitative precision or even of qualitative certainty. The analysis here is social cost-benefit analysis more in the underlying principles than in the specifics. This volume recognizes first that development objectives are multi-faceted and go far beyond simple economic growth maximization to include various equity and social considerations. Secondly, the approach recognizes and attempts to identify the existence of some other factors which may justify: a) setting prices at levels not equal to market prices at least temporarily; b) need to regulate non-competitive industries; c) positive externalities of infrastructural services; and d) dynamic productivity effects in industries with potential comparative advantage. Finally, the approach recognizes the practical problem of implementation; the existing system may not be optimal, but any attempt to change it, well-justified though it may be in the long run, is FIGURE I-1 SCHEMATIC APPROACH FOR AN ASSESSMENT OF PRICE SYSTEM TYPE OF GOOD OR SERVICE PUBLIC KEY INDUSTRIAL UTILITIES STAPLES PRODUCTS & SERVICES I. DESCRIPTION OF PRICE SYSTEM - Objectives of price control - Method of price fixing - Coverage of items - Price distortions Nominal protection Effective protection Domestic resource costs Deviation from marginal cost II. POSITIVE EFFECTS - Equity - Inflation control - Restraint of monopoly - Others III. NEGATIVE EFFECTS - Resource allocation distortions - Direct and indirect subsidies - Micro-efficiency disincentives IV. ADMINISTRATIVE EFFECTIVENESS - Ability to control prices - Alternative policies (targeting) likely to impose costs upon some portion of the economy.4/ Any such changes should, therefore, be based on an evaluation of its "costs" and "benefits". 1.9 In effect, it is likely that the complex interplay of the various effects of price regulation result in a "second-best" rather than an optimal use of resources. The difficulty in making policy judgments stems from this second-best situation. It is in the case of pricing policies particularly difficult to say what is an "improvement" in price regulation. Though broadly, liberalization of prices is more efficient, for particular products many qualifications may arise. To help in assessing whether liberalization of specific prices is desirable, a fuller analysis of its effects is needed. The potential effects likely to be found in such analysis are enumerated in Figure I-2.5/ 1.10 It is important to distinguish two degrees by which price regulation affects the economy; the degree by which administered prices diverge from market prices will affect resource allocation; and the degree of administrative intervention in prices generally will affect micro-efficiency of production. It is possible to measure the amount of distortion, especially for tradable goods, simply by the divergence from world prices i.e. nominal protection. It is more difficult but still possible to measure resource allocation losses, using indicators such as effective protection and domestic resource costs, and perhaps even general equilibrium modeling techniques. It is, however, far more difficult to measure some of the positive effects of price regulation, such as positive externalities of infrastructure services or dynamic comparative advantage gains for infant industries. The degree of administrative intervention is only partly measurable by such indicators as percentage of products covered by administered prices, for in practice the force of regulation and control varies over time and across products. It is even more difficult--if not impossible--to evaluate the microefficiency effects that administered pricing may have such as excessive costs, poor quality, rent-seeking activities. Nevertheless, while measuring the effects of an administered price system is by nature an imprecise task, the qualitative characteristics of these effects are certainly traceable and need to be investigated as thoroughly as possible to inform discussion of reforms in the price system. 4/ This practical problem is of course closely related to the essence of central theoretical principle of traditional welfare economics, the Pareto principle: any change which benefits some elements of the economy but imposes costs elsewhere, is not automatically a good change. Such a situation requires compensation and social cost-benefit analysis as done for project work. 5/ This list of potential effects is based on well-known theoretical analysis, as well as practical assessments of price regulation and control experiences in many countries, including that done for Tunisia and described in the Rapport de la Sous-Commission des Prix (ref. para. 1.2). -6- FIGURE I-2 POTENTIAL EFFECTS OF PRICE REGULATION Degree of Divergence of Degree of Administrative Administered Prices From Intervention in Price Market Prices Determination (Resource Allocation Effects) (Micro-Efficiency Effects and Others) Positive Effects (Benefits) - redistribution of income - control of non competitive (equity improvement) industries, i.e. restraint - externally benefits in on excess profits. utilities and infra- - availability of administrative structure. mechanism for ad hoc policy - support for infant controls of inflation. industries and benefits - availability of administrative of dynamic comparative mechanism for ad hoc (and advantage. limited) actions to improve quality, productivity, to assist i research and development, marketing, etc. Negative Effects (Costs) - long-runresource allocation - micro-level inefficiency in losses (i.e. benefits of. production, poor quality as alternative uses of result of "assured return". resources. - cost plus system creates - production disincentives incentive for excess in input, - budgetary costs of direct costs, and imports, and hence price supports. increase absolute price levels. - budgetary costs of indirect - rent-seeking activities stimulated support via operating to extract private benefits from and equipment knowledge of administrative proces .s subsidies to enterprises. CHAPTER II: GENERAL DESCRIPTION OF THE PRICE SYSTEM A. OVERVIEW OF PRICING POLICIES AND PROCEDURES 1. The Interplay of Import Control, Investment Licensing and Price Regulation 2.1 Prices of goods and services in the Tunisian economy are determined by a mixed system of market forces and administrative intervention. Though precise quantification of the relative importance of these two is not possible (both because clear-cut measurements of product coverage were unobtainable and because administrative intervention is a matter of degree), one can neverthe- less characterize the Tunisian system as more administered than free. Complete freedom of market pricing covers only one third oE the value of household consumption expenditures, and for industrial goods (intermediate and capital) only about twenty percent of products. 2.2 The extent of administrative intervention is probably even understated by such statistics as the system of price determination is inextricably related to domestic competition policy and to the external protection regime. That is, the "price system" should be more broadly defined as comprising three elements, depicted schematically in Figure II.1. First and most direct are the administrative procedures of domestic price determination and control centered in the Ministry of National Economy (MEN). Second are the actions of the Investment Promotion Agency ("Agence de Promotion des Investissements" or API) which accords to an enterprise the right to invest in a given branch of activity and acts as a "gate-keeper" for entry into production. Third is the entire set of external trade rules which directly or indirectly permit or restrict the quantity of imports and/or exports, and of course influence the domestic price by imposing protective duties and various taxes. The interplay of these three elements is elaborated later in this report (para. 4.53 ). In brief, the more policies on imports are restrictive, and the more licensing tend to limit new entrants into production, the less is the degree of competition in the domestic economy, and the greater the need for price regulation. This is not to say categorically that domestic entry-restriction policies and external protection policies are undesirable, though the mission does argue that they are at present excessive. Rather, the point is that limiting competition for whatever reason necessarily has the effect of creating non-competitive, monopolistic conditions, in which prices set freely would likely be well in excess of social marginal costs, and thus create the need for regulation. In other words, one set of interventions (restricting competition) seems to justify in principle another set of interventions (price regulation). 2.3 Though pricing policy cannot be independent of the other two policies which affect the degree of competition, the stated objectives and procedures of administered price regimes d3 not fully recognize this. In formal and informal statements, the Tunisian authorities indicated that other factors FIGURE II.1: SCHEMATIC OVERVIEW OF THE PRICING POLICY 3. IMPORT REGULATIONS affects Market Structure affects 2. DOMESTIC INVESTMENT (MEN, Central Bank & Degree of LICENSING (API) M Finances & Others Competition Requires Policy Goals 1. DOMESTIC PRICE - keep low prices REGULATION (MEN) for staple goods - assure reasonable return and stimulate growth - control inflation Phase I Phase II Phase III Determine Price Level Technical Verification Legal Control and Control - kev goods: fix - Verify accuracy of - Control of actual prices subsidize accounting data prices - Industrial aoods: - Verify technical and - Sanctions for cost-based price economic norms: illegal prices calculation - Verify reasonabless - Sanctions for mis- - Free goods: no of production & cost representing cost intervention requirements data N.BE The Tunisian administration makes an important distinction in terminology between price fixing in Phase I (fixation des prix) and price controls in Phases II and III (Contr6le des Prix). We maintain this distinction in the Report and use the English terms as follows: price-fixing or price determination = Phase I "fixation" price-control = Phases II and III "controle" price regulation = fixing plus control price system = the combined effects of import regulations, production licensing, and domestic price regulation. We avoid the use of the more usual English term "price-control", as the Tunisian terminology means by "controle" the ex post verification of cost data and control of legal infractions on prices and/or quality. For the most part this report deals not with the juridical ex Post issues, but with the manner in which allowable price levels are determined. such as degree of competition and supply shortages of imported and exported products are taken into account, but this is done only in an ad hoc fashion. For example, a product or branch of activity is considered to be competitive if there are three or more producers. What this implies for price regulation activities is vaguely stated as a situation requiring lesser attention. Certainly, laws and decrees concerning prices make no reference to any of these other elements. While the VIth Plan 6/ recognizes the relation of the three policies, there is no indication that they are coordinated or how this should be done in a systematic ex ante fashion. This is sometimes done ex post in practice. When a "situation" of high cost or poor quality domestic production is identified, import restrictions may be temporarily lifted as a competitive weapon to incite more efficient local production. Administratively, this is facilitated by the fact that both sets of policy measures are the responsibility of the General Directorate of Commerce (DGC - Direction Generale du Commerce) in MEN. But with these usually limited and short duration exceptions, the general policy approach of the administration is that restricting imports should be retained as a tool of infant-industry protection and reducing those restrictions should not be used as a tool for competitive stimulus. Instead, internal administrative action through the price regulation system is preferred as a way to "sensitize" producers and induce them to greater social responsibility in lowering costs and improving quality. 2. Objectives of Pricing Policies 2.4 The most recent statement on pricing policy objectives 7/ selects two principal objectives and four "constraints", which may be thought of as secondary objectives. These principal objectives are to: a) maintain the purchasing power of consumers especially the less-favored; b) accord producers in key sectors reasonable returns to induce investment, production and employment. Secondary objectives and/or constraints are to: c) promote exports; d) reduce inflationary pressures; e) maintain a balance of supply and demand on markets; f) minimize budgetary costs of subsidized prices. 6/ See Rapport de la Sous Commission des Prix, ref. para. 1.2. 7/ As Rapport de la Sous Commission des Prix, ref. para. 1.2. - 10 - 2.5 The price system and administrative regulation policies on competition and foreign trade have been in place for many years and go back well into the protectorate period. The general philosophical view that the state must intervene to regulate and guide the economy in an appropriate direction seems the fundamental basis for such a highly administered structure. This view is a legacy of the concept of "etatism" to be found in many former French oversea territories; and it is an approach to public economic management with which a large proportion of Tunisian civil servants are most familiar. Since independence, the system has developed in an ad hoc piecemeal way, and it is only recently, mainly for the VIth Plan preparation that efforts have been made to go back to basic principles and consider the purposes of the system and to reassess the administration set-up. 2.6 The legal framework of the price system contains little guidance on the philosophical or economic principles that underlie the policy objectives and their relative importance, and it is left to the practice and such ex post administrative studies to define these points more clearly. On the one hand this allows for greater flexibility of reaction to changed circumstances; for example in 1983, the increased emphasis on the fourth objective (to reduce inflationary pressures) superceded, at least temporarily, the second one "reasonable returns". On the other hand, the disadvantage of this is that it creates an ad hoc administrative character in the price and competition control systems with the risk of arbitrariness and an emphasis on short-run versus long-run aspects. These last aspects have probably been exacerbated in recent years by the apparent lapse, at least formally, of the National Committee on Prices (CNP, Comit6 National des Prix), an institution legally established by the fundamental 1970 Law, No. 70-26. Regular and formal activity of such a Committee might at least serve to make more open and transparent, and hence more fully coordinated, the various aspects of pricing policies. It may also serve to put more emphasis from well-perceived short-run benefits of price regulation to the hidden long-run costs of a too rigid price system. 3. The Basic Structure of Price Regimes 2.7 The basic structure of price regimes was regularized in Law No.70-26 of May 19th, 1970, which established the power of the Ministry of National Economy (MEN) to oversee price regulation according to three broad regimes (Figure II.2.). All goods and services are either subject to fixed-prices determined by the administration, or to being administratively approved in a cost-based system; or they are in a third group of free prices to be determined by sellers in the market with no intervention. There are a number of sub-groups in the fixed-price and cost-based categories, and one in particular, so called "controlled freedom," is relatively more free than other administered regimes, but for reasons described later it is best categorized in the administered regime. - 11 - FI ILL.2: BfRCIBL PRODU1 BY TYE OF PRICE WEGDE AND PRIET GP: 1984 I/ *FDED PRICES WDSr-EASCD ADMINIsrERED PRECES FlEE PRECES Pmduct General ltility Other Auto- Contrlled Group Cotisarion Tariffs Products Homalogation Homlogatiom Freedom Fund FOD -Cereal Products -Tea -Al.coholic -Qocolate - ages -Restaurant beverages in #staurant mils -Milk (powAered & -Coffee -Salt -Canned Goods & bars -Beef & Lamb mat(?) reconstituted) -Pepper -Margarine -Tomto -Fresh milk, butter, -Cookixg Oils -Beef & -Yeast Concentrate etc. -Sigar chicken at -Nbn-alcoholic -Fish -Beef? retail Beverages -Chidkas eggs, etc. -Beverages -Biscuits -Fruits & vegetables in hotels -Cheese -Rice, jams WDUSDG -acer -Bottled -Household -finteame repairs& -Rent & RELAME -Electri- gas (LPG) products of -Furniture& appliances -Charcoal city -Kerosene glass -Housewares & utensils -Toiletry products -Draperies upholstery, etc. -Wood & foDmica funiture -Woodwork & Carpentry I/ Price regime dewouination in this report is as follows (compared to official-denomination): - fixed price corresponds to taxation in Frerch. - hbmoLgation is the French denominatior, meaning certification - contrlled freedom corresponts to liberte controlAe - free prices correqponds to liberte totale - 12 - FIWE II.2 (contimed): RDEIPAL PRODLS BY TY1E OF PRI(E REGDIE AND PROXEr GROP: 1984 1/ FIE PRICES CDSr-BASD ADKNISrERED PRMCES FREE PIUCES Product Ceneral Utility Other Auto- Cn,trolled Group Coqpe-iation Tariffs Poducts Horvlogation Homologation Freedcm RERSONAL -Medical -Medical -Personal -Insecticides -Personal -Perfunms & CARE Care Care pzmducts -Disinfectants Care coametics -Ehamna- -Cleansug services ceuticals products (barber, (soap, public baths) dete7gents) 2RAIARr -PDst & -Gasoline -Tires & -Transport -Auto Schools -Pleasure tele#howe tubes equipment -Service boats -All transport -Bicycle and parts stations cables -Auto-rentals CWOrHING -Clothing & -Dry cleanixg -Leather accessories tailorirg, products -Fbotwear shoe repair -Footwear (sne?) (sane?) MSC. ool paper -School books -Radio & T.V. -Radios & TV isc. hoehold -Animal feed -Lime, cement, sets repairs -Toys, oror-s & fertilizer & bricks -School fees -Office supplies -Inter-regional -Iron & Steel private Iansport of for constnuc- institutions ceient, petroleum tion -Newspapers & pwducts Magazines -Most industrial goods: inter- mediate products, capital goods SOUECE: Various documents provided by %EN and Ministry of Plannirg. - 13 - Since 1970 there have been several laws, decrees and ministerial orders elaborating the procedures, defining coverage of each regime, and establishing numerical values for margins of profit. In broad terms however, the system has not been subjected to any major reforms and has remained in -lace in much the same form (though not necessarily with the same objectives) as envisaged in 1970. 2.8 The principal administrative responsibilities for most of the pricing policy implementation are situated in MEN and in particular DGC. In many cases the Government is eventually involved as final arbiter, especially for items subject to fixed prices. For the major items covered by budgetary subsidies the procedures for price determination tends to start at the political rather than the administrative level. In contrast for public utilities the procedure usually starts in the producing or servicing agencies.8/ For administered cost-based pricing, the procedure starts with the enterprise which either submits cost data and requests DPC to determine new prices (homologation), or calculates new prices and submits justifying cost data to DPC (automatically in the case of autohomologation, upon request for controlled freedom). For the formulation and major changes of basic pricing policies such as the 1982 reallocation of many goods from the "'homologation" to the "autohomologation" and "free" categories, other ministries besides MEN are involved (in particular Plan, Finances); Government and National Assembly decisions may be the final step in all fundamental policy shifts. 2.9 Within DGC, it is mainly DPC, a relatively small unit with only five professionals, that plays the central role of administering the price system. The number of total staff involved is, however, larger, as DPC relies on the support provided by experts in other units of DGC as well as approximately 150 investigating field agents throughout the country affiliated with various units in MEN and/or other Ministries. It can also call upon technical expertise either within MEN (in particular Direction Generale de l'Industrie, DGI) or within other parts of the Administration and the public sector in general. Nevertheless, DPC must be considered as the principal unit responsible for application of price regimes. The DPC computes the necessary payments of subsidies required by the fixed price regime for key consumption staples (though not the subsidies for utilities) and administers them through the General Stabilization Fund (CCC - Caisse Generale de Compensation). It also receives and verifies all the cost data and accounting information submitted by producers under the cost-based regime. It further determines in consultation within DGC what special cases or questionable cases need further technical investigation bv jther MEN directorates, and finally determines which price adjustments requested by enterprise..s are approved, which ones rejected and how much may be allowed instead. All in all, while DPC and DGC are by no means the sole or final locus of pricing decisions, they play a decidedly central role in the implementation of the price system. 8/ The Ministry of Agriculture, especially the Cereal Office is involved in the pricing of the large and important consumer staple items (cereals and bread, milk, sugar, olive oil, meat). - - 14 - B. SPECIFIC PROCEDURES IN DOMESTIC PRICE REGULATION 1. Present Coverage and Definitions 2.10 The system of price regulation as practiced in Tunisia at present is not precisely defined in any one set of documents but is based on a combination of de jare elements (laws and decrees), administrative decisions by case (ministerial-level committee decisions), and technical level interpretations of legal procedures. This combination of elements will be considered in each of the different price regimes grouped into the three broad categories and six sub-categories shown in Fig. II.2. This lack of legal precision in the system is not necessarily a fault to be corrected. Rather it is a typical characteristic of any administered price system to be imprecise, and no amount of legal or administrative tightening is likely to reduce this imprecision. There are of course narrower and more specific administrative and procedural ameliorations that can be suggested, and these will be addressed in the appropriate context in other parts of this volume. It is first useful to clarify the three-phase nature of the procedure as depicted in Fig II.1. 2.11 The basic legal definitions of each price regime are stated in Law No. 70-26, Article 2 as follows:9/ FIXED-PRICE: "The fixing of a single price, minimum or maximum, applicable throughout the territory of the republic or differentiated by region"l10 HOMOLOGATION: "Prior fixing of prices on the basis of accounting information from enterprises." AUTO-HOMOLOGATION: "Fixing of prices by the enterprise itself, applying to its production cost by product (prix de revient) a mark-up.", CONTROLLED-FREEDOM: "Fixing of prices by the enterprise itself subject to deposition of the prices at the Ministry of National Economy (MEN) prior to their being put into practice." 91 The translation from the French is not an official one. The source is the Journal Officiel, Loi No.70-26, du 19 mai 1970. See Figure II.2 for details. 101 Regional price differentiation is little practiced, partly because the country's small size and a reasonably adequate transport system makes economic price differentials minimal. No attempts are made to regulate North-South price difference for wheat and grains because the difficulties in controlling parallel markets are immense. The only regional regulations formally are transport cost cross-subsidization for petroleum and cement, although that is falling in abeyance. - 15 - FREE-PRICE: Determination of prices by the enterprise itself in complete freedom. The same Law stated that subsequent decrees would elaborate the administrative and technical procedures, coverage of products, definitions of costs, and numecical norms such as applicable marks-ups. Thus, only such subsequent decrees as well as the actual practice clarify the distinction among regimes and permits the functional taxonomy used in Figure 11.2. In practice, the fixed price regime is distinctly different from the other three administered regimes, in that price levels or (more usually) changes therein - are decided upon essentially at a political level, and cost factors are brought into play to determine the consequent amounts of necessary subsidy payments to be made. In the other three administered regimes, prices are calculated on the basis of cost information, and no explicit financial subsidy transfers are implied or effectuated. These three regimes are variations of what can best be described as a cost-plus or cost-based system of administered pricing. The controlled-freedom regime is, despite the label, closer to the cost-based system than to the free price regime, an important 1.iint in evaluating the degree of recent liberalization. 2.12. Key consumption goods under the fixed-price regime covered under subsidies from CGC include consumer staples and some industrial and agricultural inputs. These products are considered to be of such economic or socio-political importance that ceiling prices are determined more at a political than a technical level of the administration, so as to meet the basic objective of a price as low as possible. Once a price is determined, cost calculations are made by DPC to estimate the necessary per unit subsidy to support the price level. Then, an estimate is made of quantities involved. The resulting total subsidy may be considered unacceptably high given fiscal conditions, in which case the decision process goes through another iteration. Such an iteration was apparently what occurred in the period 1982-1983 and lay behind the attempt in late 1983 to increase prices of staples in order to reduce CGC's huge deficit. 2.13. Utility tariffs are also fixed but at least in the cases of electricity and water (see Chapter V for details), the sequence of administrative decision-making tends to be reversed. First, technical operating level calculation of cost is made and passed on for a political decision, which reflects both economic and social objecti-s. Any financial, gap between the cost and price levels result in subsidy transfers, though not through CGC, but usually through central government budgets. 2.14. Other fixed-price goods are differentiated only by the fact that they are not automatically covered by subsidies; they are considered key products also but of secondary importance. It remains somewhat unclear what cost calculations lie behind pricing determination, to what extent it is systematic or whether it simply consists of ad hoc reactions to shortages or other problems. Sporadic shortages have occurred, but price regulation here may not be nearly as distortive as the lack of precision in the procedure suggests, for widespread and recurrent problems of shortages for the products in this category are not commonplace. Of course, pricing may be erroneous in the downward direction and prices that are too low result in operating losses for - 16 - the producers, which may or may not be covered by subsidies. Indeed, for many of these products, the tendency is to keep prices low (as these products are considered key goods) When they are produced by public enterprises this may eventually mean operating subsidies, or at least result in temporary deficits by these enterprises (as was the case for cement plants in recent years; this is a good example of the inappropriate emphasis on short-term advantages-low cement prices--versus long-term costs--public enterprise financial squeeze-, para. 2.6. 2.15. "Homologati"n" and "Auto-homologation" are differentiated in two respects. First the latter permits the enterprise to determine its price according to a cost-plus formula, and DPC only verifies the accuracy of submitted cost data. Secondly the formulas and mark-up procedures differ somewhat (para. 4.1), though they both remain cost-plus systems. For "Controlled Freedom" both the law and actual procedures are somewhat vague if not actually inconsistent. The basic Law' (No 70-26) states only that a notification of proposed prices is to be deposed at MEN. But subsequent decrees 11/ require details on these prices, specify the cost-basis for price calculation !or both cortrolled-freedom and homologation the same way, and further require that these be justified by appropriate documents. A slightly greater degree of liberality is clearly accorded to controlled freedom as only fifteen days is allowed the administration to reverse price changes, while for autohomologation and homologation the time period is 45 days. But the importance of this difference is mitigated by the power of the administration to review cases at any time after the elapsed period for all three regimes. In the final analysis however, since this regime has become almost empty, the lack of clarity and distinction from the other two administered regimes is almost a moot point. One important conclusion can be made: the freeing up of the price system in 1982 with the shifting of products out of the administered regimes to the free-price regime, wes offset by the transfer of products from the slightly more liberal regime of "controlled freedom" to the slightly less liberal homologation regimes. 2. Evaluating Price Liberalization 2.16 The applicability of different regimes had not changed a great deal since the 1970 Law, until January 1982 when Decree No 82-134 and an Administrative Order from MEN re-grouped the products and re-established the mark-up margins for autohomologation. In Annex III, Table 1 lists items in the pre-1982 list which were transferred to other regimes; the major changes were as follows: Ci) a shifting of several items from fixed-price to more "liberal" regimes: lamb meat (but not beef), fresh milk (but not reconstituted milk), dairy products, and rice were put in 11/ Decree No 70-543, Article 6 and Decree No. 70-544, Article 7; it is not clear whether they mean cost details, or just price details by product. - 17 - the free-price regime; radio and television sets, newspapers and magazines to autohomologation. (ii) a shifting of items from the administered to free-price regimes: fresh fruits and vegetables, fish, poultry and eggs, toys, perfumes, cosmetics, toiletries, leather goods, footwear, certain paper products, woodworks and carpentry. (iii) a shifting of most industrial goods from homologation to auto-homologation. (iv) a backward shifting of some items from the controlled-freedom to either homologation or auto-homologation regimes; this results in the fact (Table II.3) that controlled freedom now covers a small proportion of products. 2.17 These changes reflect the change in policy orientation, already noted in para. 2.5, bringing onto the stage an alternative view, namely that less government control is generally desirable, and in particular greater (though not complete) freedom for market determination of prices needs to be sought.12/ However, the actual moves towards liberalization in practice have not been nearly as large as those implied in the newly stated policy and philosophical views. The only major de lure administrative change that has occurred is the relatively modest liberalization encompassed in Decrees No 82-134 and 82-135 of January 27, 1982, which led respectively to an increase in the number of products completely free of any administrative regulations (at least as far as domestic pricing is concerned) and an almost full substitution of the auto-homologation system for that of homologation and controlled freedom. As Table II.3 shows, for consumer goods and services, this has indeed increased the percentage of consumption covered by the free price regime, but only from 25.2 percent in 1981 to 33.6 percent in 1983.13/ 2.18. The decline in coverage of the fixed-price and homologation systems is not as much of a real liberalization process as it might seem for two reasons. First, upon closer analysis, auto-hcmologation is not an obvious improvement upon homologation except possibly in the fact that it may ease the administrative task (para. 4.7). Secondly, there was an opposite movement as the controlled-freedom regime, which had covered nearly twenty percent of 12/ Rapport de la Sous Commission des Prix, ref. para. 1.2. To quote: "Cette intervention a fauss6 quelque peu la signification des prix en tant qu'indicateurs de la rarete et du coat reel des produits et en tant qu'instruments d'allocation optimale des resources." (This intervention has distorted somewhat the meaning of prices as indicators of scarcity and opportunity cost of products, and as instruments of optimal resource allocation). 13/ The figures are merely indicative of the coverage, as only consumer goods are covered. Besides, threre is a technical problem: how to quantify the fact that different regimes apply at the production and distribution stages for the same product. - 18 - Table I1.3: RELATIVE COVERAGE OF CONSUMPTION EXPENDITURES BY TYPE OF PRICE REGIME 1981 AND 1983 (in percentage) 1981 1983 Fixed Prices 48.2 34.5 Administrative Approval (26.6) (31.9) Homologation 8.1 4.9 Auto-homologatior- 0.0 25.1 Controlled Freedom 18.5 1.9 Free Prices 25.2 33.6 Consumption Expenditures 100.0 100.0 Source: Minist&re du Plan, Institut d'Economie Quantitative. Ali Bach Hamba, Analyse de l'Evolution des Prix a la Consommation en 1983, 27 Fev.,1984 consumption products was in most cases substituted by auto-homologat-ion, a somewhat less free system. For intermediate products, although no precise data are a-nilable, DPC suggests that prices for about twenty percent of industr al products are free. This plus the 33 percent noted earlier for consumer goods leads to a rough but reasonable approximation that only about one quarter of all prices are free. To put this in perspective, one may note that in Yugoslavia, an explicitl.y more socialist-oriented economy (though not a centrally planned one), at the apogee of its control regime circa 1965, as much as 30 percent of products were liberalized, and since the reforms of 1965 in that country, this figure has increased to 50 percent and at times nearly 70 percent. Hungary, an even more explicitly socialist economy, has approximately one third of prices free. Clearly, despite the modest liberalization since 1982, prices in Tunisia remain highly controlled and administered. 2.19 Two other recent developments in price regulation deserve a brief mention here: the inflation controls of 1983 (para. 4.48), and the planned attempt to increase prices of staple goods (Annex I). The 1981 and 1982 inflation acceleration was turned around in 1983, coinciding with the change to auto-homologation, but the mission considers that in fact auto-homologation incites excessive production costs by its very nature as a cost plus pricing regime, and it is more likely cbat the - 19 - 1983 reduction of inflation was due to a tough ad hoc policy which was administratively and politically super-imposed on the de jure pricing regulation. The other major development, an attempt to increase prices of some staples under the fixed-priced regime, did not succeed. This decision of minimizing budgetary costs of price supports by doubling the prices of cereal-based products was quickly rescinded after the social disturbances of January 1984. The objective now would be to increase prices gradually over a longer span of time, as started in July 1984. 2.20 Perhaps the most important implication of these recent developments has been that it might make even more difficult to put into practice the stated policy objective of liberalizing administrative controls. However, as discussed in Chapter III, it would be a mistake to generalize to the broader issues of price regulation in general the specific problems of changing the fixed prices of staples; the latter issue does not confront the issue of liberalizing the degree of regulation as such, but that of bringing actual prices closer to opportunity costs. The events of January 1984 may, paradoxically, lead to a useful shift of administrative energy away from the admittedly important but not-necessarily predominant issue of staple fixed prices, to the less visible but more deeply insiduous distortions and problems of administered prices in other consumer and industrial products. 3. The Administrative Burden 2.21 The change to greater coverage of the auto-homologation regime was intended in part as a way of reducing the administrative burden. While it is not clear whether the administrative task has or has not been simplified by the changes since 1982, it is quite clear that the task is at present a very large one and the resources devoted to it not commensurate with that burden. While DPC does have the support of other units in the Ministry, its miniscule personnel of five professionals and four support staff are largely responsible for the management of all the information, calculation and verification of cost-data of prices and the logistical co-ordination of follow-up control by other personnel in MEN's units. Even if the responsibility extended only to the purely logistical management of the files, the task would be large for such a small unit; the number of products covered is several thousand. In 1983 the number of files received by DPC requesting price adjustments under the cost-based regime alone was over 2,000, of which over 500 were not accepted "as is" and were reviewed in depth. But the responsibilities go beyond mere data management to include substantive and expert analysis of the reasonableness of technical, economic and accounting information, the determination of benchmark norms, and the responsibility of controlling loopholes or even fraudulent activity by enterprises. 2.22 Consequently, many administrative difficulties are in evidence; an obvious one identified by the mission being the lack of systematic filing of the current as well as historical information. This problem precludes easy access to specific items of price regulation information; like for example what the average price increase was in different years, - 20 - in different sectors; what was requested and what was granted, and so on. Another shortcoming is the lack of precise information on the activities of price regulation. Several problems deserve early attention and rectification. There does not appear to be a regular accounting of what the percentage coverage is for each regime, neither by number of products nor, which would be more difficult to get, by value of transaction.14/ There are estimates for consumption (Table II-3), but there are some uncertainties as to the treat a product for which production is subject to one regime, while for distribution it is subject to another (usually auto-homologation). Further, for the production of industrial goods (which include intermediate and capital goods) the only information available on coverage is a rough undocumented estimate that about 80 percent is under auto-homologation, compared to almost zero before 1982. 2.23 ' Administrative difficulties have been only marginally reduced by the startup of a computerized system, because it is a limited one and requiring time to be fully functional. The planned level of hardware allocation (two or three terminals, no micro-computers) is not enough to handle even for lesser range of price-regulation activities than the current one. Thus, resources ought to be devoted to the activities of price regulation in some combination of more staff and more computer facilities, so as to permit better data management of the huge information base now being processed. However, one should put such suggestion into a broader context. First, overall policy review should decide how much of the economy should be subject to price regulation; and second, an appropriate allocation of administrative resources should be made to bring about the most efficient appplication of the price - regulation procedures. However, even with a substantial reduction in coverage, it is likely that some increase in resources devoted to price-regulation admin.ctration would be required. 14/ Detailed listing provided to the mission (Table 1, Annex III) seems incomplete and apparently not updated for it was inconsistent with the text of the 1982 Decree. These inconsistencies in the information merit clarification. For example, for meat products, the 1982 Decree excludes meat at the production level from its former coverage,Junder fixed-price regime, and includes it only at the distribution level along with poultry. It is shown under the free-price regime in official reports discussing product coverage. But it is not part of the list of free-price products in the 1982 Decree. In fact CGC's accounts show meat continued to benefit from a substantial subsidy (para. 3.15). A similar inconsistency occurs for footwear products, the 1982 decree listing these as free price, other documents and statements indicating they are under auto-homologation. - 21 - CHAPTER III -THE FIXED-PRICE REGIME: KEY CONSUMPTION GOODS 3.1 ThLe large financial burden of budgetary subsidies through the Stabilization Fund (CGC) to maintain low prices for staples has been analyzed in depth by various official documents and earlier Bank reports. Both have reached the same basic policy conclusion which is still valid viz: policy measures must be taken to reduce considerably the size of CGC expenditures. However, while the basic problem has been recognized, a number of underlying issues remain to be considered, because they have been affected by the recent changes in the price system. The issues stated here as a set of working hypothesis, are the following ones: (i) As large as CGC subsidies are, they should be put in perspective relative to other implicit or explicit subzidies in the economy and should not be the sole focus for budgetary savings. (ii) For the main CGC intervention (cereal-based products) recent price changes at the product level have at least largely reduced the distortion effects on the production side, while equity effects, though not as strong as they might be, are nevertheless positive. (iii) The subsidies per unit may be too high as there probably exists "excess" payments, which can be reduced to generate budgetary savings. (iv) Among CGC minor interventions, one can identify those that are least justified by social and economic objectives and could be removed. (v) Additional policy efforts can be made to devise alternative measures for achieving equity objectives, at reduced costs, for example, via direct-targeting. (vi) It is necessary to review the fundamental policy of CGC and clarify the policy of a phased reduction of price subsidies for staples with the aim of replacing these with more direct equity instruments in the long run. Each of these issues is addressed in turn below using the analysis of key staple prices presented in Annex I. First, a general remark should be made. The discussion here is in the spirit of the principles outlined in Chapter 1, i.e. that both allocation efficiency and equity are legitimate polUcy objectives, and that in practice policy changes have to be guided by the notion of the "second-best." In this situation, "second-best" means two things. In the short-run existing price distortions cannot simply be eliminated to achieve the "first-best" or optimal solution as this will be harmful to those presently benefitting from the distortions. Implementation requires phasing out across-the-board subsidies. In the long run, it is justifiable to address equity objectives, but the tool should direct subsidies to avoid the distorting effects of price subsidies. It must, however, be recognized that price support entail a large opportunity cost in - 22 - the form of alternative uses of budgetary funds to promote targeted investments for example (para. 5.6). Therefore, subsidies are not the ideal long-term instruments to use for equity objectives. Fiscal and employment promotion policies appear to supply more adequate instruments (see Volume I for details). 1. Stabilization Fund's Subsidies in Perspective 3.2 Table III-1 shows CGC's a financial expenditures since 1970. Initially set up as a price stabilization fund rather than a subsidy fund to compensate for fixed prices, CGC's objectives began to change its nature in the mid-70's. First, its volume of operations increased dramatically though in an irregular pattern. Secondly, expenditures on price stabilization (support of export prices, petroleum refining, etc.) dwindled away,15/ while subsidies for fixed (ceiling) prices of staples, first introduced for cereals and oils in 1975, became'the predominant items. Today, food subsidies account for 80 percent of the total, with another 8-10 percent for animal feedstocks. 3.3 Though CGC's operational deficit is much lower than expenditures, this is not a meaningful figure as CGC revenues are made of various earmarked taxes and are not "income" or "fees for use" arising from the inherent cperations of CGC. Therefore, it is more appropriate to talk if total expenditures (although it could be argued that these taxes which provide CGC revenues would not exist otherwise). As Table III-l shows, CGC appears large relative to total subsidy payments of the Central Budget if only current subsidies are considered (about half of the total), but far less so if capital and financial contributions are included (less than 30 percent).16/ 3.4 Policy decisions to reduce CGC's budgetary burden cannot be determined in isolation and should be weighed against other budgetary charges as to their costs and benefits. The greater visibility of CGC should be not cause for greater emphasis upon it as a source of fiscal savings, and in this context, some reasonable degree of subsidy for staple goods may be justified by equity objectives. Present CGC expenditures (TD 260 million) is, however, far too high and should be reduced in particular in view of the financial squeeze on the economy projected for the late eighties (See Volume I for details). This could be achieved by the following steps in the medium term: first selecting a small number of staples for price support; secondly, reducing the per unit subsidies by removing "excess" payments as well as by gradual price increases; third, eliminating gradually other staples; and fourth, introducing direct targeting alternatives where social and administrative circumstances permit 151 Though in practice such support continues implicitly and explicitly in other budgetary items outside of CGC; for example, subsidies to energy consumption are compensated by taxes on oil exports. 161 As shown in Volume I of this report public enterprises will receive about TD280 million in current subsidies in 1984, an increase of over 150 million since 1981 compared to the increase of about 100 million for CGC. Direct and indirect contributions to capital of public enterprises at least add an additional TD 175 million. - 23 - Table III-1 - APFUmnE M MEU1UES OF SBILUATImN FEW) (CGC), 1970-1984 ( !LEM YEARS) (TD dtosand: &Embed) 1970 1973 1975 1979 1981 1982 1983 1984 (esimte) 0 0 20,0O0 15,OOD 90,000 116,800 116,700 162,8000 oils 0 0 15,300 17,500 12,200 10,200 15,200 27,500 Oaher Foods 30 600 2,600 2,30D A2,200 22,200 30,900 40,200 Fertilizers 100 1,200 5,500 4,100 13,800 15,800 14,900 14,Q00 Ni.cileazs 1,170 6,700 15,800 20,oo0 9,00o 3,300 4,000 6,100 ibtal itted 1,300 8,500 59,200 58,900 157,000 168,300 182,300 257,800 Earhi Receipts n.a. La. 41,00O 61,00D 106,600 121,000 150,000 153,000 _- A m It- Estimated Isgtay 'Subsidied' 1/ Low(Curzet) - 332,000 327,000 548,00D Ea (t) - - - - - 625,000 645,000 913,000 1/ Th values of estimated subsidies simi in Table III-I are take fm Volume I (ux on Public Finwce). The SW' figure c l uxds to the "ciur=t expedituzs learo social seuity tran era; the hig figure to Mital catcibutians, irludizg iveste fuxi SX=es: OC Docuntots ard nissit n estiate; for the year 1981 onmwni subsidies to su1wr axe givet in diffe
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Tunisia - Country economic memorandum on a midterm review of the Sixth Development Plan (1982-86) (Vol. 2 of 2) : Pricing policy issues in Tunisia
Voir le document original
Le texte intégral est hébergé par l’organisation qui le publie. lawenc.com indexe les métadonnées et renvoie vers la source officielle.
Retour à la vue par articleTexte intégral
Informations clés
Organisation
Groupe de la Banque mondiale
Type de document
Pre-2003 Economic or Sector Report
Pays
Tunisie
Source
Banque mondiale