Is The Price Right? Yes and no

What was I saying yesterday? The year has barely started and the recurring theme of prices, their alleged excessiveness and their control is already being aired. As every year. And as ever, the discussion is littered with anecdotal evidence that can be cited to support an argument of excessive prices. My personal favourite remains the one about the cost of a packet of paracetamol. Five euros at a supermarket, lamented a tourist letter-writer. An example of rip-off Mallorca. Yes, it was a rip-off, but more importantly the supermarket had no right to be selling the drug; the example was the right symptom but the wrong diagnosis.

For all the talk of high prices, the Balearics' consumer price index is one of the lowest among the regions of Spain. The most recent data related to price increases, those for November, show that the Balearics' increase was in the lower range. Statistical information, though, does not give the whole picture, certainly not when anecdotes can be dragged out to contradict it. For the most part, the debate is biased towards individual experiences of price, be it for a meal, a coffee, this or that product which are then used as a basis for a call for someone to do something; this something often being the demand for price control.

Price regulation does exist to an extent. In the case of tobacco, for example, it is not only prices that are subject to control; so also is the distribution chain. It is an example of price regulation that might be said to work. It doesn't create a shortage of supply or any obvious black market, two disadvantages of price control in the form of a price cap. Generally, as with the control of all medication through chemists alone, the market mechanism functions to the benefit of the consumer, eliminating any need for a more liberalised market.

Could a price-control approach be applied more widely? To the bar and restaurant sector, for instance? It's hard to see how. Unlike the sale of tobacco through the licensed tobacconists, bars and restaurants are too diverse. Even items such as a coffee are far from being homogeneous. There are too many types of coffee, too many types of bar in too many different locations with too many different circumstances.

Price controls can bring with them certain downsides. One is a loss of quality, assuming the cap is set too low (and set too high would make a nonsense of the attempt at control). Another is the sheer complexity and cost of enforcement. Yet another is that controls run counter to the principle of the free market which, by and large, Mallorca and Spain abide by. And the free-market element has an historical political factor. Current-day market liberalism is the culmination of dismantling any vestiges of what once existed under Franco - that of price control and centralised, statist regulation of most economic activity.

The market dictates, which is how it should be. That a coffee or a plate of steak and chips might seem expensive (or cheap) is the consequence. When President Zapatero, quizzed about the price of a coffee on Spanish television, gave his reply of 80 centimos, he also offered the caveat of "it depends". And it does depend. Depends on the market and on the bar or restaurant owner being allowed to fix his own prices. If he gets them wrong, that's his problem. No one else's.

It is not for government to intervene where it has no right to intervene, and one thing that the local government can do little about is the in-built disadvantage of Mallorca in terms of its isolation and its limited resources, land most obviously. Nevertheless, it is here that government should be more involved.

The costs of this isolation cannot be underestimated. The director of the small to medium-sized businesses organisation (PIMEM) has said that transport alone adds some 30% to the cost of production in Mallorca. And transport cost applies both to businesses importing as well as exporting. For the local producers, they also have to factor in the cost of land.

The vice-president of the local chamber of commerce has called for an end to the speculative acquisition of industrial and commercial land that has pushed the average cost per metre to buy a plot and establish a factory to roughly six times as much as it would be in, for example, Aragon on the mainland or over a third more than in somewhere even more isolated, the Canaries.

A further pressure on cost comes from what PIMEM's director has described as the "minimal installations for goods transportation at competitive prices and the lack of competition between shipping companies". This, combined with other factors, goes a long way to explaining why there is a lack of competitiveness in Mallorca, which has seen its industrial base decline by nearly 30% since 2005 (far greater a decline than in any other part of Spain). It also goes towards explaining why certain prices in Mallorca, because of the island's geographical competitive disadvantage, are what they are.


Any comments to andrew@thealcudiaguide.com please.