Of Rice and Art
by Stella Luz A. Quimbo
September 26, 2018

At the moment, inflation dictates our state of mind. Policymakers are debating what might have caused rising prices. Is inflation a result of external factors or domestic policies, particularly, the TRAIN law?  More important, what steps can be taken to arrest further price increases?

Meanwhile, consumers are helpless. They must simply absorb the price increases. Their budgets don’t increase unless their take-home pay increases. While TRAIN reduced the income-tax rates for salaried workers, it did not increase the take-home pay of minimum-wage earners, simply because they were already tax-exempt. The vast majority of workers in the Philippines—about 72 percent—are minimum-wage earners.

Without proportional increases in take-home pay, the effect of inflation on a typical household is less “nominal,” rather, more “real.” Total expenditure (nominal) will perhaps not change much, and the larger impact will be on quantities consumed (real).

Economists use a measure called “price elasticity of demand” to assess the responsiveness of demand to changes in price. It is the percentage reduction in quantities consumed divided by the percentage increase in the price of a good. My own back-of-the-envelope estimates of the price elasticity of rice using data from the 2015 Family Income and Expenditure Survey suggest that for the poor, a 20-percent increase in the price of rice also means a 20- percent reduction in quantities of rice consumed. So, ceteris paribus, if one were consuming one cup of rice prior to the price increase, then consumption goes down by one-fifth cup after a price increase of, say, P40 to P48 per kilo.

These are the real effects of inflation: belts are tightened, plates are less than full. Hunger, in turn, can have profound long-term effects on poverty, creating a vicious cycle. Studies have shown that schooling outcomes are not optimized when children go to school with an empty stomach. Hence, breakfast programs in school are popular poverty reduction interventions in developing countries.

A 2008 paper written by Hyun Son of the Asian Development Bank described Philippine inflation as largely a food inflation problem: 62 percent of total inflation can be explained by the rise of food prices. This figure is higher at 75 percent for the poor, who allocate almost 60 percent of their expenditure on food. Based on her estimates, it appears a 20-percent increase in food prices will result in an additional 4.6 million poor Filipinos. If there are 26 million poor Filipinos, an additional 4.6 million is substantial. This impact on distribution is another “real” effect of inflation. If real incomes are compared against the poverty line, there are more poor Filipino people than we think.

In contrast, the wealthy are not bothered by the increase in the price of rice. After all, rice constitutes a small share of their total spending. Perhaps a greater concern is the rising price of art. A recent article published in the Philippine Daily Inquirer, “Are astronomical auction prices for real?” (E. Caruncho, August 19, 2018) discusses rising prices in the art market. The article quotes Richie Lerma, director of Salcedo Auctions: “There’s no mistake that because … affluence is growing in the Philippines, there is growth in the prices and interest in art.” Lerma’s concern is not whether the price of art is high, but rather, whether it is real or not. The article describes a phenomenon called “shill” bidding, where a fake bidder who, in coordination with a prospective buyer, puts up fake competition, thereby inflating the price of an artwork. Presumably, both “shiller” and buyer have the collective interest of inflating the value of the art piece because both have an extensive collection of the artist. Worse, the buyer and seller might be one and the same entity.

What is the role of the Philippine Competition Commission in all these concerns? To the extent that prices in any market are inflated due to anti-competitive conduct, PCC is mandated to intervene. Under the Philippine Competition Act, cartelistic behavior—competitors agreeing to fix prices or rig bids—is prohibited, meaning there is no possible justification for such conduct. The PCC has the power to investigate potential cartels and penalize offenders with a fine of up to P100 million. The criminal liability ranges from two to seven years of imprisonment.

Whether in the market for rice or art, PCC has jurisdiction over cartels. You may ask whether PCC has taken concrete steps to address these concerns. Unfortunately, it is PCC’s policy to neither confirm nor deny investigations, so as not to hinder the ability to gather evidence.

Ultimately, the PCC is committed to protecting consumer welfare. What is clear is that its effectiveness in tracking down cartels will have an immediate and lasting impact on Filipino consumers.

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Commissioner Stella Luz A. Quimbo is an academician who served as a professor and the department chair of the University of the Philippines School of Economics prior to her appointment in the Philippine Competition Commission. She was also Prince Claus professorial chair holder at Erasmus University of Rotterdam in the Netherlands from 2011 to 2013. Commissioner Quimbo has an extensive research portfolio in the field of health economics, industrial organization, microeconomics, education, poverty, and public policy and regulation. 

(Originally published on Business Mirror’s Competition Matters column on September 26, 2018 here.)