A Prices and Incomes Policy

March 11th, 2016 → 9:37 am @

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On the occasion of the exodus from the Memorandum and the impending submission of claims for pay increases and requests for the re-establishment of the system of automatic price adjustment of salary and wages, I thought it would be useful to present and analyze our experience so far on these subjects and the wider issue of a prices and incomes policy, which we tried to follow in the past. A prudent policy on these matters is required in order to secure uninterrupted growth of the economy and at the same time a more equitable distribution of income, two basic ingredients of a modern economic and social policy.

During various periods of time, the economy faced destabilization tendencies, which were manifested in increasing inflation, widening of public finance deficit and the deficit of external current account. As a result of these developments, there was a recess in productive investment, slowing down of the rate of growth of production and productivity as well as increased unemployment. Thus, no wonder how we ended up in the huge public deficit and the very high public debt since the beginning of the new century. Things could have been definitely better if, among other things, a healthy prices and incomes policy had been adopted, under which the prices would have not followed the ups and downs of the market but only the unavoidable increases of the cost of production and the wages and salaries the increase of productivity and not the power of trade unions.

It was before the invasion that we invited in Cyprus Aubrey Jones, the Chairman of the Council of Salaries, Prices and Incomes of the UK, for consultations. Prior to this there had been several attempts for the establishment of a similar council in Cyprus as well. A Ministerial Committee appointed a technical Sub-Committee to work out the terms of reference and functions of the proposed Council before the Employers’ and Workers’ Organizations were invited to exchange views and take final decisions. The Sub-Committee suggested, among other things, the strengthening and coordination of the Services that were involved in the two legs of the subject-matter, the Market and Prices Inspection Services of the Ministry of Commerce and Industry and the Industrial Relations Services of the Ministry of Labour and Social Insurance. At the same time it elaborated the general criteria for a correct prices and incomes policy: The increase of salaries, wages and other incomes should follow the increase of productivity, whereas prices should not increase unless there was an unavoidable increase of other elements of cost. In case of a decrease of the cost of these elements, prices should also decrease.

The above arrangements were utilized in order to face the new destabilization tendencies that appeared after the reactivation of the economy following the calamities of the invasion. The Economic Consultative Committee appointed in 1979 a new Sub-Committee with members representatives of Ministries, Employers’ and Employees’ Organizations, which tried in numerous, long meetings to formulate a mutually acceptable prices and incomes policy. Though such a policy was not achieved this time as well, the lengthy discussions that took place helped the sides to realize the dangers from the submission of irrational requests for pay increases as well as the unjustified increases of prices. The efforts were not made in vain at the end. During the coming years there was a considerable restrain both on the height of the submitted requests for pay increases, which in general were within the limits of overall productivity and the price increases, which followed more or less the increases of the other elements of cost.

In parallel, the mechanisms for ensuring in practice a correct and just prices and incomes policy were strengthened. It was in this framework that our belief in the institution of free negotiations among social partners and the mechanisms for solving existing differences in accordance with the Code of Industrial Relations was re-assured, as well as to the need for exerting every effort to increase productivity, the need for combating monopolistic situations in the market of goods and services, as well as strengthening the mechanisms to follow up developments in these areas. It was on our initiative in this respect that the Government started assisting financially the newly established Pancyprian Association of Consumers.

At various points of time the prices and incomes policy followed was criticized. For instance, the practice of paying the Automatic Price Adjustment was considered by the employers as inflationary since it ‘threw oil on the fire of increasing prices’. On the other hand, the employees’ side expressed the view that Automatic Price Adjustment was just a compensation for the loss of purchasing power and was given long after the event. If this method was not in existence, the claims at the renewal of collective agreements would have been much larger. The Council of Ministers under the late President Spyros Kyprianou appointed in 1987 an Investigation Committee in accordance with the Law on Labour Disputes (Conciliation, Mediation and Arbitration) in order to go through all aspects of Automatic Price Adjustment. Chairman of this Committee was appointed the future President of the Republic late Tassos Papadopoulos, whereas the Members were the late Andreas Patsalides, Minister of Finance, Markos Spanos, ex-Minister of Labour, George Vassiliou, future President of the Republic and myself. In its Report the Committee, having underlined the stabilizing role of APA in maintaining conditions of industrial peace, proceeded to suggest the beginning of ‘a dialogue between the social partners with a view to achieving an agreement on the form, the content, the way ADA should be calculated and paid’. And it concludes: ‘As a final conclusion, the Committee suggests the commencement of a dialogue among the social partners with a view to develop, adopt and apply an integrated incomes policy, which will inevitably include ADA’.

There were no concrete developments in this regard in the last few decades. On the contrary the efforts to develop and follow a healthy prices and incomes policy have been abandoned. Prices have been left altogether to the market forces, whereas wages, salaries and other incomes are been checked for many years now by the existence of so many unemployed, the shrinkage of economic activity and certain arbitrary Government decisions because of the recession. However, what will happen when, hopefully, the reactivation of the economy starts? In conclusion, I think there is a need to re-examine the subject of prices and incomes with a view to improving existing practices and undertake collective action before it is too late.

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