EVER SINCE its establishment, the Cyprus Republic offered protection to suppliers of goods. It was easy to slip into this practice as the economy’s main output was agricultural products and policy-makers protected this sector through subsidies and minimum prices.
But as the economy grew the practice of protecting suppliers was extended to other sectors in order to help local production. There were high import duties on manufactured goods such as clothes, shoes, furniture etc in order to protect local manufacturers as well as import quotas and, for some products, import bans to safeguard big investments made by local businesses; there were also import licences granted by the government to select businesses, which constituted state-regulated monopoly.
Manufacturing eventually lost its export markets because it could not compete with other countries while lower-priced imports took over the local market. The benefits of protectionism were short-lived even though some of its elements remained in place until we joined the EU in 2004. The Price Commission, which supposedly protected the consumer by setting ceiling prices on essential goods, may have been scrapped but its practices are still resorted to, when possible, by government policy-makers.
This was evident in the report released this week about the high prices of drugs in Cyprus, which are the second most expensive in the EU. And the reason for this is the high profit margin guaranteed to pharmacies, by the state when prices are calculated. Once the manufacturer and wholesaler take their profit, pharmacies add a staggering 37 per cent on the price, a scandalously excessive profit margin guaranteed by legislation. How many other businesses are guaranteed such a high profit margin?
This was how the old Price Commission operated. It set ceiling prices only after it incorporated a healthy profit margin for producers and retailers in the price and then claimed it was protecting the consumer. The only thing it was doing was ensuring there was no competition, by fixing prices in a way that guaranteed healthy margins to suppliers, with no obvious benefit to consumers. The Commission’s practice continues to this day with regard to the prices of drugs and the only beneficiaries are the pharmacies – the suppliers.
The Pharmaceutical Services report noted that Cyprus had the fifth highest wholesale drug prices, but climbed to second position on retail prices, once the pharmacy profit was added. Commenting on the report, Health Minister Stavros Malas said that part of the problem was the large number of pharmacies – 468 – the second-highest ratio of pharmacies to customers in the EU. In short, in order to keep the excessive number of pharmacies in business, people have to pay through the nose for medicines.
If the legislated profit margin was reduced to 25 or 20 per cent, a number of pharmacies would be forced to close down, but consumers would be paying significantly less for drugs. But the authorities would rather consumers paid the second highest prices in the EU for drugs so that the suppliers would be protected. The old principle of ‘protect the suppliers and to hell with the consumers’ is still alive in Cyprus eight years after it joined the EU. Officialdom and the political system are not keen on competition as it diminishes their control and power of dispensing favours like offering protection to interest groups.
Nothing illustrates this tendency better than the government’s decision to impose extortionate fines of shops that violate the sales law and advertise price cuts, outside the government-designated periods. In effect it wants to protect the owners of small shops (tough regulation was the demand of this interest group) by depriving consumers of the benefit of price competition among shops all year round. The politicians believe they can win more votes by supporting organised interest groups than by protecting the disorganised mass of consumers. This is also the reason why our Commission for the Protection of Competition is so embarrassingly ineffective – the authorities want it to be toothless.
We need to break with the attitudes of past which placed the interests of the suppliers above those of the consumer. It is high time the politicians left the age of protectionism and put the interests of the consumer first. Instead of guaranteeing suppliers big profits they should be ensuring competitive prices for the rest of the people who can no longer afford to pay rip-off prices, to keep uneconomical enterprises in business. We have suffered enough from this antiquated practice.