WHY ENFORCE ANTI-TRUST LAWS WHEN PRICE FIXING IS

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002347

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/20/2016
TAGS: ECON EFIN PGOV SOCI HO
SUBJECT: WHY ENFORCE ANTI-TRUST LAWS WHEN PRICE FIXING IS
POLITICALLY EXPEDIENT?


Classified By: Ambassador Charles Ford for reasons 1.4 (b) and (d)


1. (U) Summary. Over the past year the Honduran press has
reported frequently on increasing prices of basic goods,
including corn flour, sugar, rice, meat, eggs, and even
cement. Rallied by local leftist political parties and an
active press campaign, the Honduran people have clamored for
government intervention to reduce prices. Market distortions,
such as monopolies and oligopolies of key products, make
resolving price disputes fractious at best. The Honduran
political class prefers to make &gentlemen,s agreements8
with producers ) brokered by the Honduran Council of Private
Enterprises (COHEP) - to postpone or reduce price increases.
The Competition Commission (the anti-trust body created by
the Competition Law) has only recently come into effect and
has yet to pronounce on any case. Meanwhile, the press has
presented a new consumer protection law as a means of
legitimizing government price fixing, although the Ministry
of Commerce and Industry (SIC) says that no such provision is
included in the law. End summary.


2. (U) Over the past twelve months, retail prices of certain
basic goods -- such as corn flour, sugar, rice, meat (beef,
pork and poultry) and eggs -- in Honduras have tended to
increase, generally between 15 to 20 percent. Aside from
subsistence farmers, the producers or distributors of these
products tend to be monopolies or oligopolies that can and do
exercise pricing power and even collusive pricing. (Comment.
Of those industries, corn flour, meat and eggs do have some
justification for increased prices due to the rising
international price of corn. Honduras only produces 60
percent of the corn necessary to meet domestic demand. The
rest is imported, principally from the U.S. End comment.)


3. (U) SIC sees the current public protests over rising
prices as political rather than economic. Director of the
Production and Consumption office of SIC, Reniery Rivas, told
Econoff that SIC does not consider Honduras to be a free
market economy &de facto.8 The free market only exists on
paper. To meet market access requirements for CAFTA, the GOH
had to pass anti-trust legislation that provided for a
&competition commission,8 regulating the various monopolies
and oligopolies operating in Honduras. After significant U.S.
and other donor countries pressured for four months, the GOH
formed the commission, but due to local business interests,
pressure, it has not yet fully staffed or funded the
commission. Domestic monopolies and oligopolies still act
with impunity, colluding on prices and supply (though foreign
monopolies, such as in the recent case of cement, are
sometimes singled out for public attacks).


4. (U) SIC has concluded that wholesale prices have not
generally increased across all goods. Their latest wholesale
price report for basic household goods shows increases of one
to two Lempiras (under 10 percent) in corn flour and sugar,
but no other significant increases. Of other products, cement
was to increase by seven Lempiras, but the GOH intervened,
obtaining from the cement producers a graduated price
adjustment over a period of six months. Central bank figures
suggest that inflation across the economy is approximately
5.8 percent, though one GOH official admits that level has
been artificially suppressed by an estimated 1.8 percent by
GOH price freezes on fuels, in place since April 2006.


5. (U) SIC also has administrative control over BANASUPRO, a
government-owned supermarket, and appears to use those prices
as a reference price for retail sales. When BANASUPRO entered
the small southern town of Perspire, its competition had to
reduce their price of eggs from 2.20 Lempiras per egg to
1.70-1.80 Lempiras per egg, since BANASUPRO charged 1.60
lempiras. (Comment. Although SIC claims that BANASUPRO is
self-sustaining, it most likely does not obtain profits at a
level that would sustain and grow a private business. The
wholesale price for eggs at the time of entry was 1.50
Lempiras per egg. Thus, while the entry of competition into
this market clearly reduced windfall profits by egg suppliers
there -- a net positive, it is not clear that the L 1.60
price is a truly market based price, as it could contain
hidden government subsidies for the supermarket. End
comment.)


6. (SBU) If prices have not really increased, then why all
the drama? SIC sees the problem as two-fold. First, the
monopolies and oligopolies feed impending price hike
information to the Honduran press, which makes increased
prices a fait accompli for the small store owners and the
general public. The producers then raise prices less than
they initially announced, sardonically claiming that they
found savings for the public. Meanwhile, the store owners and

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the middlemen speculate on the price, causing prices to trend
upwards more than they necessarily should have before the
official announcement from the producers. Rivas said that
speculation has been worse in the past three months because
his office had been providing a copy of their price reports
directly to COHEP, which he alleges has been actively
working with distributors and retailers to speculate on
future prices. He continued that every time COHEP president
Mario Canahuati speaks publicly about possible rising
commodity prices, prices inevitably go up. (Comment. This is
not necessarily faulty logic. The Honduran economy is small
enough that one individual could affect prices if he is seen
as a reputable source of information. As one of the key
members of the business community, Canahuati,s word can
represent the general sentiment of the producers.
Nevertheless, Post has no corroborating information
indicating that Canahuati is personally involved in the
alleged speculation. End comment.)


7. (SBU) Second, the Union Democratica (UD) political party
and fringe-leftist social group Bloque Popular (BP) work with
the Committee for the Defense of the Honduran Consumer
(CODECO ) essentially an Honduran activist version of
Consumer Reports) to create public unrest and often protests.
This then resonates in the national newspapers, creating a
sense of political necessity to act. SIC told Econoff that
CODECO receives most of its funding from UD and BP,
effectively giving them control over the organization. SIC
plans to prohibit either businesses or political parties from
funding CODECO through the new consumer protection law.


8. (C) The current price hike conflict has largely been
resolved through government-producer negotiations mediated by
COHEP president Mario Canahuati. The &gentlemen,s
agreement8 provides for prices to remain stable through the
winter holiday season and afterwards gradually increase.
Rivas told Econoff that he does not believe Canahuati to be
an honest broker and is simply perpetuating the status quo.
Specifically, he said that Canahuati has strong ties to
Gilberto Goldstein, the owner of the largest of four corn
flour mills in Honduras, among other oligopolists.


9. (U) Rivas admitted that the way these sorts of problems
should be resolved is through the competition commission,
however, pressure from the monopolists and oligopolists has
hamstrung the commission,s budget. Caving in to vocal but
fundamentally unfounded social pressure, the government felt
it could only resort to fixing prices by negotiating with the
business community. Rivas confirmed Honduran press reports
quoting President of the National Assembly Roberto Micheletti
assessing that social pressure have risen so high that the
National Assembly is attempting to modify the currently
debated new consumer protection law to legitimize price
fixing with the business community. (Comment: In Post,s
view, this would be a serious setback for market
liberalization. End comment.)


10. (C) Comment. That the GOH has yet again cornered itself
into negotiating with the monopolies and oligopolies shows
that the legislative requirements of CAFTA on their own will
not affect a change on the ground in Honduras. The current
price fixing ) and possible legislative legitimization of
price fixing - is yet another symptom of the endemic
corruption and unwillingness to liberalize that has
characterized the Honduran political system and economy for
the past century. The GOH is not going to bite the hand that
feeds it. This again underscores why the competition
commission must be successful in becoming the only arbiter of
anti-trust, market access, and price disputes. Post continues
to work with the G-16 donor community to pressure the GOH to
fund and adequately staff the competition commission. End
comment.
FORD