Sugar Crisis – Shouldn’t we be thinking free market?
On October 29th, in Supreme Court, during a suo motto notice on sugar prices, Federal Govt. and mill owners agreed to sell sugar at a price fixed by the Lahore High Court. This has averted a standoff for now. However this seems to be an ad hoc arrangement on the pricing and is unlikely to address the shortage issue. There remain issues that need to be debated for they are not only linked with the current sugar crisis but go way beyond the sugar crisis to our overall economy. Unfortunately, the whole sugar debate has been argued in the gambit of superficial of greed and oppression and the real reasons for these events are a little deeper than what appear on the surface.
Pakistan’s economy has always been a variant of a socialist economy. The state has been sitting on the most lucrative economic opportunities directly (i.e. through nationalization) and indirectly. This is the reason of a whole range of economic issues we face and by devising a price formula, a problem created by the state’s intervention is being fixed by the same.
The food industries in general and sugar industry in particular are the most heavily regulated industries in Pakistan. The government has been controlling prices through imposition of import/export quotas and fixing prices. For sugar, the aim in the last decade was to protect a noncompetitive dying sugar industry. In real economic sense, the issue is not the higher price now but the price that people paid in the past to support a noncompetitive industry. If an industry is competitive no more, it better die down rather than being supported at the expense of consumers and taxpayers. To fix our economic mess, we need to consider this not only in the case of sugar but a whole range of other industries. Successive governments, in vain, have been trying for years to protect the textile industry. Same is for sports good industry and IT industry. And for this protectionism, a consumer in Pakistan is paying on average $1000-$3000 more for an average car of the same built and make and of poorer quality than does one in India. When the competitive advantage is lost, the smart societies plan a smooth transition of resources to the sectors which are still competitive. For us, protectionism remains our first big folly that has led to the present disaster.
Second folly is price control itself. Assume that some 25 miles from Lahore in Amritsar, the sugar is sold at India Rupees 32 (Appox. PKR 60). Sugar has a very large distribution network, involving dealers and sub-dealers in thousands across the country. When the government fixes a price at mill that is significantly below the regional price and enforces mills (the only entity where government can practically manage the price) to sell sugar to dealers at PKR 36 assuming that it will be sold at the retail at PKR 40, it leads to nothing but hoarding or smuggling to Amritsar or Afghanistan. Distributors can simply wait till the shortage forces the government to allow the import of the sugar at a higher than PKR 40 price thus allowing them to sell their stock at a higher price. Even if 10% of the distributors indulge in this, what you get in market is shortage of the commodity. One can argue that this act on the part of distributors is cruel but it does not change the ground reality and the public policy needs to be formulated on rationality and not the utopia.
Price fixing, at the best, partially solves problem in the short-term while making it emerge more severely in the future. Last year, we were dealing with shortage of wheat which we decided to fix with fixing the price of wheat. That has led to the lower production of sugarcane and a sugar crisis. Now, the rice crisis is on the horizon. This cannot go like this. Someone needs to take a bold step of deregulating the food market completely. Government’s intervention in the market has made the market inefficient and has led to rampant corruption on the part of bureaucratic bodies like TCP and PASSCO. It is time that the government leaves the market to its own and let the prices and supply and demand settle based on market dynamics. Government’s role in food supplies should, at the best, be to have buffer stock of food for security needs and to deal with famine like situations.
The process will be painful initially. This is a pain that has to be suffered, for if delayed, these long queues for food items will descent us into a chaos similar to that of former communist bloc. You suffer a bit now or you suffer a lot later is the choice we have. The short-term solutions, like paying to poor and philanthropy, will somewhat ease the pain on an inevitable path. In the longer run, we need to focus on increasing the purchasing power of our masses, for in a globalized economy, we will be crushed if we do not increase our spending power. We as a nation have very little time to be agents of change or else we will become its victims.
Pakistan’s economy has always been a variant of a socialist economy. The state has been sitting on the most lucrative economic opportunities directly (i.e. through nationalization) and indirectly. This is the reason of a whole range of economic issues we face and by devising a price formula, a problem created by the state’s intervention is being fixed by the same.
The food industries in general and sugar industry in particular are the most heavily regulated industries in Pakistan. The government has been controlling prices through imposition of import/export quotas and fixing prices. For sugar, the aim in the last decade was to protect a noncompetitive dying sugar industry. In real economic sense, the issue is not the higher price now but the price that people paid in the past to support a noncompetitive industry. If an industry is competitive no more, it better die down rather than being supported at the expense of consumers and taxpayers. To fix our economic mess, we need to consider this not only in the case of sugar but a whole range of other industries. Successive governments, in vain, have been trying for years to protect the textile industry. Same is for sports good industry and IT industry. And for this protectionism, a consumer in Pakistan is paying on average $1000-$3000 more for an average car of the same built and make and of poorer quality than does one in India. When the competitive advantage is lost, the smart societies plan a smooth transition of resources to the sectors which are still competitive. For us, protectionism remains our first big folly that has led to the present disaster.
Second folly is price control itself. Assume that some 25 miles from Lahore in Amritsar, the sugar is sold at India Rupees 32 (Appox. PKR 60). Sugar has a very large distribution network, involving dealers and sub-dealers in thousands across the country. When the government fixes a price at mill that is significantly below the regional price and enforces mills (the only entity where government can practically manage the price) to sell sugar to dealers at PKR 36 assuming that it will be sold at the retail at PKR 40, it leads to nothing but hoarding or smuggling to Amritsar or Afghanistan. Distributors can simply wait till the shortage forces the government to allow the import of the sugar at a higher than PKR 40 price thus allowing them to sell their stock at a higher price. Even if 10% of the distributors indulge in this, what you get in market is shortage of the commodity. One can argue that this act on the part of distributors is cruel but it does not change the ground reality and the public policy needs to be formulated on rationality and not the utopia.
Price fixing, at the best, partially solves problem in the short-term while making it emerge more severely in the future. Last year, we were dealing with shortage of wheat which we decided to fix with fixing the price of wheat. That has led to the lower production of sugarcane and a sugar crisis. Now, the rice crisis is on the horizon. This cannot go like this. Someone needs to take a bold step of deregulating the food market completely. Government’s intervention in the market has made the market inefficient and has led to rampant corruption on the part of bureaucratic bodies like TCP and PASSCO. It is time that the government leaves the market to its own and let the prices and supply and demand settle based on market dynamics. Government’s role in food supplies should, at the best, be to have buffer stock of food for security needs and to deal with famine like situations.
The process will be painful initially. This is a pain that has to be suffered, for if delayed, these long queues for food items will descent us into a chaos similar to that of former communist bloc. You suffer a bit now or you suffer a lot later is the choice we have. The short-term solutions, like paying to poor and philanthropy, will somewhat ease the pain on an inevitable path. In the longer run, we need to focus on increasing the purchasing power of our masses, for in a globalized economy, we will be crushed if we do not increase our spending power. We as a nation have very little time to be agents of change or else we will become its victims.
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