Uleac public policies to tackle the rising cost of living part 3

1

Public Policies to Tackle the Rising Cost of Living

Alban THOMASToulouse School of Economics, INRA and IDEI

Beirut, May 31, 2012

2


Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012

Background

Economic situation is deteriorating:• Increasing and more volatile commodity prices• Dependency upon imported energy sources• Increasing housing and energy shares in household

budget

Role of public policies:• Limit cost of living increases, protect consumer

welfare• Maintain local firms’ profitability• With a sustainable public deficit

First, examine household expenditures and price increases• To determine policy targets (which goods)• and which population categories

3



Item 2003 2004 2005 2006 2007

Food 3.5 3.5 3.8 8.0 11.1

Tobacco 1.8 -1.8 2.3 1.2 0.2

Textiles 7.4 1.5 6.3 5.7 -4.2

Energy & water 2.3 4.9 0.8 1.7 3.8

Durable goods 4.6 7.9 1.1 3.2 4.7

Other manufactured goods 10.7 4.3 2.2 2.3 5.2

Transport & telecommunication 0.4 0.2 2.2 2.3 5.2

Rental housing 0.2 0.1 0.0 0.0 0.0

Education 5.7 3.1 1.7 1.1 2.7

Health 3.7 1.0 -0.6 -0.8 3.3

Other services 2.9 1.2 0.5 1.1 6.3

Total 3.4 2.8 2.1 3.2 5.0

Consumer price changes (%)

Source: Economic Accounts of Lebanon, 1997-2007

4



Item Average expenditureper HH (LBP 1000’s)

Budget share(%)

Food & tobacco 6 490.8 27.10

Clothing & footwear 1 431.6 5.97

Housing 3 620.2 15.11

Equipment & household services 1 540.6 6.43

Health 1 857.9 7.75

Transport & communications 3 221.3 13.45

Education 2 596.8 10.84

Leisure 1 147.2 4.79

Personal care, other expenses 2 042.5 8.53

Total 23 948.9 100.00

Household expenditures and budget shares, 1997

Source: CAS, Household Living Conditions 1997, n° 13.

5



Industry 2003 2004 2005 2006 2007

Agro-food 16.6 10.2 4.1 5.1 16.5

Textiles, leather & clothing -5.3 -2.5 -5.1 1.5 1.8

Non-metal ores & products 4.8 6.4 9.5 5.8 11.6

Metals, machinery & equipment 8.6 11.1 4.0 5.6 14.7

Wood, rubber & chemicals 8.0 10.6 9.9 4.0 12.5

Furniture -2.2 4.0 5.6 1.7 7.3

Other industries 3.5 9.4 2.4 1.0 5.0

Total 9.8 11.1 8.7 5.4 11.6

Industrial imported input price changes (%)

Source: Economic Accounts of Lebanon, 1997-2007

6



This presentation:

1. Can we minimize imported inflation by giving up pegging to US$?

2. What public policies to control rising food prices?

3. How can Lebanon minimize in the short run the impactof oil price increases on energy prices?

4. What are effective policies from other countries to control rising housing costs?

5. Conclusion

7



1. Imported Inflation and Public Policies

In small importing economies, imported inflation depends on:• Share of imported goods and production inputs• Competition in international markets• Global resource scarcity or tensions on commodity markets• Exchange rates, tariffs, and transaction costs

Given trade patterns, would it be worth replacing USD with a basket of currencies for pegging to the Lebanese Pound?• Depends on long-term changes in trade patterns• Instability of the ratio US$ / €• Other considerations (remittances, gasoline/diesel/fuel)• Biofuel perspective: USD or Euro?

8



2007 2008 2009 2010 2011

Consumer Price Index 100 105.5 109.1 114.1 117.6Real GDP growth 7.5% 9.3% 8.5% 7.0% 4.5% (National Accounts)Real GDP growth 7.5% 9.3% 8.5% 7.0% 1.5%(IMF)Exports/Imports 23.8% 21.6% 21.5% 23.7% 21.2%

Source: Ministry of Economy and Trade and IMF.

Statistics on Inflation and Growth in Lebanon

9



2000 2011

Import value to Lebanon, by product

10



Source: Economic Research Unit, Trade Information Center and Lebanese customs.

11



20112000

Import value to Lebanon, by country

12



13



2. Food Prices and Public Policies

Policies to control rising food prices in the medium run?

Examples of Egypt, India, the Philippines: • Procurement prices for farmers and processors in agro-

food chain• Subsidized consumer prices on “vital” goods• Strong impact on govt. budget, also due to poorly

targeted policies

Tax policies also have indirect effects through changes in available income (after tax)

14



Prefer direct income transfers to price controls and subsidies• Provided targeting is adequate• Account for implementation and management costs of

policy

FAO: • Reduce tariffs to encourage food imports• Discourage / restrict food exports to increase domestic

food supply• Promote pro-competitiveness policies in local markets• Open market operations through public stocks to stabilize

prices (Asia)

15



16



Food price pass-through in Lebanon:A 1 percent increase in world food prices translates into a 0.3 percent increase in the prices of domestic foodstuff.

Food Item Net Imports Import Share Cons. Share (% of consumption)

Grains 87% 39% 32%Oils 38% 7% 8%Meat 56% 38% 49%Sugar 100% 16% 11%Food 70% Total 100% Total 100%

Source: Elena Ianchovichina, Josef Loening and Christina Wood, 2012. How Vulnerable Are Arab Countries to Global Food Price Shocks? World Bank Policy Research Working Paper 6018

17



3. Energy Prices and Public Policies

How to minimize the impact of oil increases on energy prices in the short run?

Consider demand-side management (more efficient use of energy)

Coupled with social tariff of electricity

In the longer run, supply-side policy (restructure energy sector in Lebanon)

Example: conversion to natural gas for power generation (allowing for long-term contracts)

18



Electricity rationing outside Beirut: 8-12 hours/day

Energy and Water Minister Jebran Bassil in 2010: reasonable hourly electricity rate by private generator owners should not exceed a ceiling of LL350 ($0.23) for 5 Amperes

19



Electricité du Liban (EDL)Public monopoly (protected by Law 462)Average fee 37$/month/household in 2004Slow switch from oil to natural gas?

Private (illegal) operatorsSupplying 61%-85% Lebanese populationAverage generator fee 19$/month/household2011: Minimum fee for 5 A: 100 $ / month

Windplant projectsGovt. objective: 60-100 MW/h in 2013Awa Akkar Project (Albert Khoury):30 windmills for 60 MWh (60,000 housings)Investment cost: 100 million $US

20



4. Housing Cost and Public Policies

What are the effective policies in other countries to control rising housing prices?

Most policies are dealing with a long-term issue: Growing gap between demand for housing and supply

Either demand-side management or supply-side policies

Long experience of OECD countries in designing housing policies: to what effect?

21



Housing Cost and Public Policies

Statistics for the Lebanese Housing Sector

2007 2008 2009 2010 2011Construction permits 10,358 13,727 15,438 17,922 18,347Surface (1000 m2) 9,038 16,067 14,343 17,625 16,465Number of sales 67,041 81,709 83,622 94,202 82,984Sales value (million $) 4,198 6,481 6,955 9,479 8,841Nb. Buildings 246,791 267,358 273,417 292,196 306,213Change prev. Year - 8.3% 2.3% 6.9% 4.8%

Source: Ministry of Economy and Trade.

22



23



Housing markets and structural policies in OECD markets

Dan Andrews, Aida Caldera Sánchez, Åsa Johansson, OECD Economics Department Working Paper 836, 2009

Policies influence housing supply:• land-use and planning (e.g., conversion of land)• provision of infrastructure and public services• social housing and rental regulation (eviction, rent control)• tax policy in the building sector• enhance competition in construction industry

And demand for housing:• Financial market deregulation for access to credit• relaxation of lending standards• tax exemptions on mortgage payments• preferential housing taxation and rent allowances

24



OECD countries: housing supply is negatively correlated to

population density delay to obtain land use regulationa building permit

25



Rent control indicator, OECD countries (2009)

26



House prices tend to increase more in rigid supply environments

Housing policies (land-use and building regulations) and competition in construction industry matter in housing supply

responsiveness Financial market deregulation has eased access to credit and

raised demand for housing

Mortgage cost reliefs tend to be capitalised into house prices, leading to price increases

Housing should be taxed in the same way as other investment and consumption goods

Housing policies: main findings in OECD countries

27



Rent allowances • Affect demand for rental housing and households’

housing opportunities• May end up being capitalised into rents• Are likely to be less harmful for mobility than direct

provision of social housing

Rent regulation• Greater security of tenure may enhance demand for renting• Strict rent regulation hinders mobility• Seems to be associated with lower housing supply• No clear evidence that rent control leads to lower rents

28



5. Conclusion

Policies can be• short-term (demand-side management)• long-term (structural adaptation)• budget-neutral or not (sustainability?)

Lessons from subsidy policies• Non neutral policies are not sustainable• Efficient tax policies are politically difficult to accept• Critical to have alternative ways of

consuming/producing/living to promote with tax policies

Distinguish between policy objective and policy effectiveness

Given the objective, identify the most efficient policies

29



Thank you for your attention

[email protected]

Business

Uleac public policies to tackle the rising cost of living part 3