Implications for
Liberty and Welfare
Ali Salman
Supported by
The author wishes to thank all team members who worked tirelessly and
enthusiastically on gathering and expressing valuable information on the sensitive
subject of price controls. The author also acknowledges the support of
Friedrich-Naumann-Stiftung für die Freiheit for providing financial assistance to
conduct this research. The information presented here would not have been possible
without inputs from various stakeholders from the industry, government and civil
society. Despite all the assistance received, the author personally assumes the
responsibility of any omissions.
Economic Freedom Network Pakistan
House 397, Street 64,
I-8/3, Islamabad - Pakistan
Tel:
+92-51-486 06 13
Fax: +92-51-831 60 24
Cell: +92-300-520 74 47
E-mail: [email protected]
Url:
www.efn.net.pk
Development Pool (member of Economic Freedom Network Pakistan)
Apt. 2, Plot 7, Commercial Area,
Tech Society, Lahore - 54590
Tel:
+92-42-529 36 22, 611 73 63
Fax: +92-42-529 36 71
E-mail: [email protected],
[email protected]
Url:
www.developmentpool.org
supported by
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P.O.Box 1733, Islamabad - 44000
Pakistan
Tel:
+92-51-227 88 96, 282 08 96
Fax: +92-51-227 99 15
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Url:
www.southasia.fnst.org
Research Team
Ali Salman, Lead Author
Khalil A. Arbi, Member
Shammas Jalil, Member
Saad Cheema, Member
Arslan Asghar, Member
“Liberal social policy means helping people
in need and making provision for potential
situations of need. It does not mean equalizing
social differences. Its aim is to avoid predicaments
that would undermine individual liberty and the
ability to assume responsibility for oneself and for
others. Both direct aid by individual subsidies as
well as collective provision against risks which
individual persons cannot cope with on their own
must follow this and no other aim”.1
1
http://www.freedomgatepakistan.org/freedom.php?page_id=29
iii
Table of Contents
Preface
1
1. Introduction
3
2. Government Intervention in Price Setting
7
Rationale for Government intervention
8
Market Failure
8
Lack of Competition
9
Types of government intervention
9
Drawbacks of government intervention
11
Price control in Pakistan
12
Price control in China
13
Price control in India
13
Price control in USA
14
4. Context of Crises
15
Sugar
15
Flour (Atta)
20
Poultry
21
v
Price Controls: Implications for Liberty and Welfare
5. Price Determination Mechanisms and Role of the State
Sugar
27
27
Explaining Sugar Supply Line and Intervention
of Government
28
Flour (Atta)
31
The Mechanics of Sasti Roti Scheme
32
Supply Line of Sasti Roti scheme
33
Poultry
36
6. Government and Price Stabilization:
39
Subsidies: The case of flour
40
Price Control: The case of sugar
43
In sync with open market: The case of poultry
45
7. Price Controls: 10 Myths and Facts
47
8. Are liberals heartless? Liberal Options for the Poor
55
Direct personal aid instead of supply-side
subsidies or market manipulation
56
Invest in Agriculture, not in Subsidies or Price Controls
56
Design well targeted food support programs
57
Don’t punish hoarders: Push them to form Exchange
57
Use arithmetic intelligently
57
Price Stabilization through Subsidies should be
compensated with taxes
58
Embrace the market fully; avoid patch work
58
Complete overhaul does not have to be overnight
58
vi
Price Report
Table of Figures
Figure 1: Sugar Supply Line and Role of Government
30
Figure 2: Price Setting in Flour and Role of Government
35
Figure 3: Price Determination in Poultry: A typical Day
38
Figure 4: Government and Price Setting: A Continuum
40
List of Tables
Table 1: Sugar Production and Stocks – The Punjab
16
Table 2: Average Retail Prices of Sugar – The Punjab
17
Table 3: Average Retail Prices of Wheat Flour (20kg bag)
– The Punjab
23
Table 4: Average Rates of Poultry
25
vii
Acronyms
CPI
CCP
SPI
TCP
PSMA
Consumer Price Index
Competition Commission of Pakistan
Sensitive Price Index
Trading Corporation of Pakistan
Pakistan Sugar Mills Association
viii
Abstract
The Pakistani state intervenes in the market by fixing prices of an
increasing number of commodities ostensibly for welfare of larger public.
In some cases, the fixing of prices is pronounced and carried out with a
political vengeance, whereas in some cases the fixing of prices is done
quietly through administrative measures. More over, fixing of prices is
also done through collusion between the representatives of the state and
the market forces. In each scenario, liberal choices of the market are
compromised. The state uses the tax payers’ money and allocates it
politically for announced goals of welfare. However this is often achieved
at the cost of economic freedom, which essentially demands freedom of
choice for both suppliers and the consumers. This state intervention
distorts the incentive structure, increases budget deficits and crowds out
capital allocation for public goods such as education, health and
infrastructure.
ix
Price Controls: Implications for Liberty and Welfare
With the above backdrop, this economic policy research is theoretically
based on the ideas of efficiency, exchange and economic surplus as
contained in the classical economics framework. Basing on the
secondary data from government sources, media reports and interviews
with experts as well as policy makers, the study explores implications of
state-enforced prices for the liberty and welfare- of both producers and
consumers. This study draws generalized lessons for public policy in the
case of commodity pricing by focusing on three specific commodities:
flour, poultry and sugar. It also examines the effectiveness of price
announcement by analyzing the gaps between market prices and
officially announced prices. In the end, this report helps the advocates
of economic freedom in this country by providing them relevant data,
deep insights and cogent arguments to support the case of greater
freedom for even greater welfare.
x
Preface
The opposite of good is well intended. Subsidies are among the topics
when this German proverb becomes true. As this study shows clearly and
intelligibly to every reader the most likely well intended introduction of
subsidies for atta (flour) led to manifold negative effects. The same goes
for the fixing the prices for sugar where citizens, i.e. consumers, pay in
multiple ways more:
•
•
•
a higher price than the real market price
subsidies by their tax contribution
lack of investment in the right places
1
Price Controls: Implications for Liberty and Welfare
•
•
•
•
increased corruption
strengthening of black-market economy
smuggle to other countries
time for queuing up at Utility Stores, etc
Additionally, more than half a century ago the Nobel Prize laureate
Friedrich A. von Hayek has proven already that by fixing prices the
market lacks crucial indicators. It becomes dysfunctional and often more
interference is demanded which aggravates the situation. Thus, it is
astonishing that still wrong conclusions are drawn, inadequate measures
undertaken, and billions of Rupees wasted on monthly basis though
positive examples are obvious just next door: be it the poultry as shown
in this study or the liberalization of telecommunication in a previous one.
On behalf of the Friedrich-Naumann-Stiftung für die Freiheit (FNF), the
German Government funded non-profit foundation for freedom, I am
grateful to Ali Salman and his research team of Development Pool to
have undertaken the task of exemplifying the problems of price control
scientifically. Furthermore, it is the merit of Economic Freedom Network
Pakistan (EFN) to address these problems in its publication series. EFN
thus has a further sharp machete in its hands to free the jungle of
regulations and restrictions and path the way towards a free market in
favor of Pakistan’s citizens, consumers, businessmen alike.
Olaf Kellerhoff
Resident Representative FNF
2
November 2009
Islamabad
Introduction
Global recession has placed free market proponents in a defending
position and has compelled, unfortunately, even free market practicing
regimes to allow government intervention to save public and institutions
from market failure. Pakistan did not suffer a great deal from global
recession but rising double digit inflation, and in particular food inflation,
over last few years has eroded purchasing power of a vast number of
people. The inflation has badly hurt both producers and consumers,
while various organs of the state have demonstrated various methods to
arrest this problem. Fast rising inflation poses serious threat to health of
economy and in particular food inflation disproportionately hurts the
most vulnerable segments of the society.
3
Price Controls: Implications for Liberty and Welfare
Under an unexpectedly rising inflation, price stabilization becomes a
major and urgent challenge for a popularly elected government. There
are various methods of price stabilization but this report chooses three
of them – subsidies, open market operations, and price ceilings. It also
presents a case where no direct intervention is made to contrast with
situations where such interventions have become a norm. The report
picks three food items, which constitute essential part of millions of
kitchens every day. For subsidies, it discusses the flour pricing with
particular reference to ‘Sasti Roti’ scheme. For open market operations
and price ceiling, the report discusses the case of sugar. For presenting
the case of free market, the report discusses poultry market.
In each of the food items, the central inquiry is this: what is the process
of price determination and what role does the state plays in this process?
This leads to another cross cutting supplementary question: what are
implications for each price stabilization measure for consumers,
producers and macro-economic balances? Wherever data is available,
benefits for consumers and producers have been quantified to get an
estimate for benefit-cost ratio, where cost is generally assumed as
government expenditures to stabilize prices.
It may be noted that the emphasis of the research is on the pricedetermination process in terms of mechanics and role of stakeholders
and therefore issues regarding various factors, such as inputs, which
have bearing on the prices, do not surface significantly. This distinction
is by design, as a discussion on the role of inputs ultimately drifts the
discussion to efficiency issues, whereas the thrust of this report is more
on the role of the state in price fixing. The underlying subtle assumption
is, as free markets believers would like to say, remove the state from the
market, and everything falls in place.
After the introduction, this report is structured as follows. Second section
gives a brief overview of theory of government intervention. Third section
presents a historical analysis of developments especially with regards to
4
Introduction
the sugar and flour crises in Pakistan. Forth section presents a situation
analysis with respect to price setting process in each of three
commodities. Fifth section compares various stabilization measures with
respect to their implications for consumers, producers and macroeconomic balances. Sixth section presents policy options focusing on
the price stabilization as well as liberal options to provide support for
the vulnerable segments. In the seventh section, an advocacy toolkit is
presented to help liberal friends argue their case with simple and
effective arguments when it comes to price control measures in the garb
of welfare.
The primary objective of this report is to present readers a snapshot view
of what goes wrong when the state intervenes in price determination
based on historical facts and convincing arithmetic. It also aims at
arming the liberal friends with arguments to fight their case and advance
the message of personal freedom and rule of law. Advocating the case
of open markets in the midst of market failures is a daunting, but then
all the more important task. Borrowing from Friedrich Naumann: The
idea of liberalism has to be recreated. In the course of time it has lost
so much of its clarity and attraction that it first has to rise like a new
dawn in front of the people.
A.S.
November 2009
Lahore
5
Government
Intervention in
Price Setting
Government Intervention is a phenomenon which means state or
government institution intervenes in the market functions through
different measures like taxation, policies, rules and regulations, price
fixation of different commodities apparently for the sake of the large
public interest. This section answers these questions:
•
What are the rationales for government to fix prices of
commodities?
7
Price Controls: Implications for Liberty and Welfare
•
•
What are the effects of the role of the state in the price fixation?
How Pakistani government is intervening in the market and what
are some international practices?
Rationale for Government intervention
Government intervene in the market for many reasons, more importantly,
in case of market failure2, equitable and efficient distribution of
resources3 and to control monopolies.
Market Failure
Market failure rises due to imperfect competition, externalities and when
the public goods prices are charged higher by producer or supplier. In
the case of market failure government interfere to support market and
market forces to reestablish market failure. Market failure usually takes
place when there is a huge gap between supply and demand of the
commodity. This gap can be artificial. For example in case of hoarding
it is an artificial shortage in the supply of the commodity, due to shortage
free market equilibrium point changes and results in higher prices or low
quantity in the market. On the demand side demand raises due to
misinformation. Usually this happens with inelastic4 goods because
people have to buy those goods at every price, so unequal distribution
of scare resources takes place. The disturbance of price mechanism
provides grounds to government and public sector to interfere in the
market
http://cbdd.wsu.edu/kewlcontent/cdoutput/TR503/page7.htm
http://tutor2u.net/economics/revision-notes/as-marketfailure-governmentintervention-2.html
4
Inelastic goods: goods whose demand does not decrease significantly even if price
rises significantly due to their necessary nature.
2
3
8
Government Intervention in Price Setting
Lack of Competition
In perfect competition market forces compete with each other and
equilibrium takes place where all the forces of the market are equally
satisfied. Another main reason for government intervention in the market
is to control monopoly and cartel. Perfect competition always provides
best allocation of the resources and also helps market forces to get best
value of their investment and profit. So each economy tries to establish
a perfect competition market. In monopoly market system limited the
choices of the consumers and tries to get extra profit from market.
Government always interferes in the market to break cartels and
discourage monopoly by allocation special loans and making special
policy to attract domestic and foreign investor to invest in the respective
industry, which limits the abuse of market power and improve overall
economic efficiency.
So we can conclude that three basic rationales for government
intervention in the market are equitable allocation of resources, to
improve market and economic efficiency and to promote competition
in the market.
Types of government intervention
Government intervenes in the free market through different measures.
Few examples are new rules and regulation, policies, Fiscal policy and
direct imposition of prices etc.
Rules and Regulation
Government makes new laws and regulation to run market forces
according to its political and social interests. For example, new
legislation made to provide facilities to investor in energy sectors. A few
years ago, the Pakistani government provided facilitation to the telecom
sector to welcome foreign investment in the sector. In the same manner
government makes different policies to create competition in the market.
Special budget is allocated for the investor in the form of loan.
9
Price Controls: Implications for Liberty and Welfare
Government revises tax laws on timely basis to have a control on the
market and also provide subsidies to encourage investor for investment
which brings competition in the market.
Fiscal Policy
Another measure from government to intervene in the market is Fiscal
policy. Government forces to change market equilibrium of different
commodities by imposing new taxes, providing subsidy or revision in the
tax rate.
Price fixation
Price fixation is another instrument used by government to run the market
affairs. Most of the economist opposed the use of price fixation, as price
fixing distort the allocation of resources. Price ceiling discourages
producer and supplier which creates shortage of the commodity and
price flooring creates surplus in the market.
Categories of government intervention
Government intervention can also be categories in two types, Behavioral
and structural.5
Behavioral intervention
Behavioral intervention relates to control and monitor the behavior of
the firm or industry. For example, setting price ceiling and price floor
changes the behavior of the supplier and demander.
Structural intervention
Structural intervention relates to changes the structure of the market like
providing facilities to investor so that competition in the market can be
raise.
5
http://cbdd.wsu.edu/kewlcontent/cdoutput/TR503/page7.htm
10
Government Intervention in Price Setting
Filling the information gap
Another way of market intervention by government is to provide
information to market forces and limit the information gap between
them. This measure does not affect the price directly but it affects the
behavior of the producers and consumers which result in change of
demand and supply in the long run. Example of this type of intervention
is warning statement on the packet of cigarette.
Drawbacks of government intervention6&7
Government intervention effects market and market forces in different
ways. Generally it depends upon the situation of the market, commodity,
and type and methodology of intervention. While the government
intervention by lowering the price of a commodity may bring temporary
relief for some customers, its overall and long term effect for the
economy is not positive.
Some negative aspects of government intervention are:
•
•
The price fixing process by the government is not very efficient,
as government can not monitor this on daily basis and not even
on a large scale.
Implementing of the policy is very inefficient. Due to lack of
powers and authority of the government people, policy become
inefficient in use and does not provide required results. Also
corruption rises in the market and makes the system more
inefficient.8
http://university-essays.tripod.com/government_intervention_market_system.htl
http://www.econlib.org/library/Enc/PriceControls.html
8
http://www.financialexpress.com/news/india-is-the-only-nation-to-adopt-costbasedprice-control-system/175543/
6
7
11
Price Controls: Implications for Liberty and Welfare
•
•
•
•
“Sustained reduction in prices by the regulator forced almost all
players to exit production resulting in the Government with no
choice but to depend on expensive imports.”
Another disadvantage is that price control ignores the value
added and quality of the product. Imposition of price
discourages producers to value adding, which limits the
economic efficiency.
Price ceiling restrict producers to produce more, as their profit
decreases so they transfer their resources to produce other things
which act as a multiplier effect on the shortage of products in
the market.
Price flooring limits the liberty of consumer which result in
decrease in the demand and this encourages producers to
produce more, so surplus creates in the market.
Price control in Pakistan
In Pakistan government interfere and takes different measures to set
prices of different commodities specially the prices of edible.
Government communicates prices of different food items and tries to
impose these prices through different authorities like market price control
committee and price magistrate. The prices government publishes in the
market set by market forces on daily basis and government ensures the
availability of food items on the provided rates. In the recent years
government directly intervene in setting ceiling to prices of sugar, flour
and roti. The reason for this price ceiling is that recently flour and sugar
crisis hits Pakistani masses badly and for the sake of public interest
government has claimed to intervene in the free market by fixing prices
of these commodities.
12
Government Intervention in Price Setting
Price control in China9
In China, the national development and reforms commission is the
responsible authority regarding market prices. Two sub departments,
department of price and department of price supervision regulates and
monitor the prices of the commodities in the country.
Last year, during the price hike, especially in the food prices government
banned the price increases in few commodities, and government bound
traders and entrepreneurs to inform and to get approval of any price
increase ten days ahead of the planned increase. Government also starts
crack down against hoarding and profiteering. Through their strict
controlling measure, government controls the prices and takes corrective
measure for social justice and interest.
Price Control in India10
In India, price is checked more closely on wholesale level because at
that level prices can be monitored in the case of large number of
commodities. Last time, India used price ceiling law in 1970s.11 To
control price hike Indian government banned exports of the commodities
and also reduced duty on the imports so that price hike can be controlled
with the help of increase in supply. Indian government does not fix prices
of commodities.
National Development and reform Commission, People’s republic of China,
http://en.ndrc.gov.cn/
10
http://timesofindia.indiatimes.com/biz/india-business/Its-official-Food-prices-bitingbuyers/articleshow/5201288.cms
11
BBC News, April 4, 2008, http://news.bbc.co.uk/2/hi/7330045.stm
9
13
Price Controls: Implications for Liberty and Welfare
Price Control in USA12
In the USA, government does not put any price fixation except few
commodities. Government fixes the price of gasoline, wages of unskilled
worker and rent in few cities. However the government does intervene
in the input prices of several agriculture commodities through huge
subsidies.
12
http://www.econlib.org/library/Enc/PriceControls.html
14
Context of Crises
Sugar
Sugar cane is one of the country’s main cash crops, with the sugar
industry being the second largest agro- based industry in the country.
The debate over government intervention in market forces to set prices
has been triggered once again in the wake of the recent sugar shortage
in the markets. The advocates of government intervention say that the
essential commodity which was available at Rs. 27 per kg was not
available in the market even at Rs. 40.13 quoted Punjab Chief Minister
13
The News, Nov 13, 2009
15
Price Controls: Implications for Liberty and Welfare
Shahbaz Sharif as saying that it was the duty of the government to ensure
ample supply of such essentials to the people and the government has
to fix the sugar price to achieve this goal.
Table 1: Sugar Production and Stocks – The Punjab
(Hundred Metric Tons)
Year
Production
during
the season
Sold in Open
Market
Balance with
Sugar Mills
2002–03
22517
22058
11952
2003–04
24232
23351
12833
2004–05
21120
12990
20963
2005–06
16065
12132
24896
2006–07
22732
19959
27669
2007–08
29220
20350
36539
Source: PUNJAB DEVELOPMENT STATICTICS 2009,
Bureau of Statistics, Govt. of the Punjab, Lahore
However, the advocates of free market economy term any such move
by the government an infringement upon one of the fundamental rights
of the people and allege that the government move is aimed at either
victimizing political opponents or favoring the dear ones. According to
them, setting prices was not a government prerogative and market forces
should be allowed to determine the price and any such manufactured
stability would be detrimental for the particular industry in the long run.
16
Context of Crises
Table 2: Average Retail Prices of Sugar – The Punjab
Year/Month
Sugar (Rs./kg)
2003–04
2004–05
2005–06
2006–07
2007–08
19.25
23.27
33.86
34.17
29.22
2007–08
July
August
September
October
November
December
January
February
March
April
May
June
July
29.38
30.35
30.53
30.56
30.56
30.41
28.57
27.00
26.99
26.58
28.63
31.06
2008–09
30.50
31.63
33.27
37.14
37.21
35.89
August
September
October
November
December
Source: PUNJAB DEVELOPMENT STATICTICS 2009,
Bureau of Statistics, Govt. of the Punjab, Lahore
17
Price Controls: Implications for Liberty and Welfare
Sugar Crisis: Back ground
The sugar crisis began in Pakistan firstly in 2004. “The origins of this
crisis lie in 2003–04, when sugar cane growers produced 53 million
tonnes of cane from which four million tonnes of sugar was produced.
With the addition of 0.5 million tonnes of carry-over stock from the
previous season and against an annual domestic demand of 3.5 million
tonnes, there was a surplus of about 0.8 million tonnes.”14
Every year it got worse and worse with a rise in the price of sugar for
consumers. In November 2005, price was Rs. 23/kg, while the
international price was $225/ton (equivalent to Rs. 13.5/kg).
Consumers in Pakistan were paying 70% more to local producers at that
time.15 But later in February 2006, prices in international market doubled
and reached at the level of $468/ton (Rs. 30/kg), thus bringing local
prices in parity with international prices.
The problem arose with the bumper crop of 2003–04, when production
of sugar cane was 53 million ton and subsequently production of the
sugar also rises, which resulted in the surplus of sugar in the market and
a reduction in the price of sugar. Now the millers faced a financial crisis
and asked for bail out from the government. They refused to pay farmers
for the crop and disappointed farmers reduced their production next
year by 11%, resulting in the rise of sugarcane prices and also a fall in
the production of sugar by 20% subsequent year. Up till now market was
working freely and government was only helping millers by purchasing
excess amount of sugar from them. And when the production of sugar
cane and sugar decreased government allowed duty free import of the
raw sugar to overcome the supply of the sugar. Government also
ordered TCP to maintain the sufficient reserve of the sugar so that
Naween A. Mangi, What’s Really Behind the Sugar Crisis, The Dawn, Feb 20,
2006.
15
Steps Urged to avert sugar crisis, The Dawn, Feb 23, 2006 http://www.dawn.com
Feb 23, 2006 nat42.htm.
14
18
Context of Crises
holders cannot exploit the situation and sugar can be released from TCP
stocks in case of shortage.
In year 2008 price of sugar remained Rs. 30–35/kg. Mills produced
sufficient amount of the sugar in the year to meet the consumption of
the market. TCP issued tenders to purchase 200,000 tones of the sugar,
but was only able to purchase 46,000 Ton. Millers exported the surplus
of the sugar to international market in order to pay growers. Estimated
consumption was 600,000 ton but due to export of the sugar it created
shortage in the domestic market and crisis again developed in the
country. According to Pakistan Sugar Mill Association (PSMA), in 2008,
demand of the sugar in the domestic market was 4.3 million ton and
production was 4.7 million ton.16
In 2009, the crisis began before starting of Ramadan. In August market
faced the shortage of the sugar. Government immediately interfered in
the market and asked mills to increase the supply of the sugar. Punjab
government also started raiding to control the “hoarding”17of the sugar,
while the millers contacted the federal governments and the High Court
against this action of Punjab Government. After meeting with PSMA, the
federal Minister of Industries and Production had set the price of sugar
Rs. 49/kg ex-mill price, which led to the price of the sugar rise to Rs.
52/kg for the retailers. This decision was considered as a totally political
decision in the favor of mills and stockists. Against this decision Punjab
High Court and Supreme Court come in to action and fixed the price of
the sugar Rs. 40/- for the details on the base of a report by CCP which
depicts that average cost of the sugar is Rs. 39.60/kg (including Tax Rs.
4.91/kg).18
Another Sugar crisis Lurking, Sher Baz Khan, The Dawn, July 3, 2008.
We caution that we do not endorse the use of the word ‘hoarding’ as it implies
moral evaluation instead of a universally applicable economic theory or business
practice. What is hoarding for one, may be a saving for another.
18
Iftikhar A. Khan: Mirza commission criticizes fixing of sugar price,
The News, Oct 20, 2009.
16
17
19
Price Controls: Implications for Liberty and Welfare
Subsequently, the Supreme Court, ordered that only 30% of current
sugar stock may be sold to retailers for onward sale to household users
at Rs. 40/kg, whereas remaining 70% was allocated for the commercial
users of sugar like bakeries and confectionaries at Rs. 70/kg. TCP
continued to supply sugar to the utility stores for sale at Rs.38/kg. But
overall situation of the market is that sugar is not available to masses
even in the black market. Sugar is available on the utility store for the
limited time and in the black market sugar is available ranging from Rs.
55–60/kg. Another development is that sugar is being smuggled to India
and Afghanistan where prices are higher then Pakistan. TCP doesn’t have
enough reserves that it can brought sugar to market in order to increase
the supply of sugar in the market.
Media also created hype in the market about shortage of sugar which
psychologically threatened masses of the situation. This thing creates an
extra demand of the sugar and millers and holders of the sugar exploit
the situation. CCP, Prime Minister and some other government officials’
blames the Supreme Court and the Punjab government for this crisis
who set prices of sugar and threatened millers by raids and unwarranted
authoritative measures.
Flour (atta)
Since 1987/88 Pakistan has been a net importer of wheat, except for a
break from this trend between 2000/01 and 2003/0419. As part of
commodity liberalization policies, wheat price in recent years has
gradually moved closer to the border parity price, exceeding it for the
first time in 2002.
CMER WORKING PAPER No. 06–44, Prospects of Wheat and Sugar Trade between
India and Pakistan: A Simple Welfare Analysis, Centre for management and Economic
research, LUMS.
19
20
Context of Crises
Since year 2006, flour crisis has risen in the country without any clues
of its causes and creators. The flour prices were all time high in the
country since 2006 without any sight of a relief. Two different
governments tried their best to solve the flour crisis but it got worse and
worse by each passing day. The flour was available at Rs. 200 per 20
kg bag during Ramadan (September 2009) is now being sold at Rs. 560
per 20 kg bag – a 180% hike in just two months.
In last three years, Pakistan has produced the ‘bumper’ crops of wheat
and even government officials also announced about the export of the
excess amount of wheat in the international market. On the other hand
Punjab government had set support price of the wheat Rs. 950/40kg.
and claimed to purchase all the wheat from farmers. Punjab government
provided wheat to flour mills on subsidized rate to bring down the price
of the flour to end customers. Another initiative taken by Punjab
government was to start Sasti Roti Scheme.
Another factor of the flour crisis was export and smuggling of flour to
Afghanistan. Higher prices in the Afghanistan urged millers and dealers
to export flour to Afghanistan which created shortage in the domestic
market. Punjab government banned the shipment of the flour to other
provinces in order to stop smuggling and shortage in the domestic
market. Government provided wheat to other provinces at subsidized
rate to ensure the food security.
Poultry
With the investment of over Rs. 150 billion, the poultry sector is one of
the fastest growing sectors in Pakistan20. The products of poultry include
eggs and meat which are perishable products. Poultry production is
made at two levels, commercial and rural (domestic). Out of total poultry
Expert Advisory Cell; Ministry of Industries and Production Islamabad (2004): Digest
of Industrial Sectors in Pakistan, p 328.
20
21
Price Controls: Implications for Liberty and Welfare
production only 10.75% is concentrated in rural areas21. The
development in the commercial poultry production is the result of the
concentrated efforts by both the private sector as well as the
Government. It is believed that about 1.5 million professionals are
engaged in poultry business and about 0.75 million tones of poultry
meat is produced every year22. Commercial poultry farming has bridged
the gap between supply and demand of animal protein. It also keeps a
check on prices of mutton and beef.
Ibid. p 332.
Khalique Arshad, Chairman Pakistan Poultry Association Punjab: a joint press
conference at Lahore Press Club, Aug 05, 2009.
21
22
22
Context of Crises
Table 3: Average Retail Prices of Wheat Flour
(20 kg bag) – The Punjab
Year/Month
Wheat Flour (20 kg bag)
2003–04
209.33
2004–05
238.90
2005–06
254.84
2006–07
258.50
2007–08
312.98
2007–08
July
278.38
August
281.14
September
295.77
October
297.50
November
301.40
December
302.60
January
314.62
February
298.70
March
296.30
April
334.42
May
337.50
June
377.50
2008–09
July
389.04
August
387.50
September
387.50
October
422.50
November
422.50
December
422.50
Source: PUNJAB DEVELOPMENT STATICTICS 2009,
Bureau of Statistics, Govt. of the Punjab, Lahore
23
Price Controls: Implications for Liberty and Welfare
Poultry sector can be contrasted with both wheat and sugar on various
accounts. First, it does not fall under essential items of common kitchens
and it is not thus monitored in CPI and SPI. Unlike wheat and sugar,
which can be stored for a long time, poultry meat is a perishable item
and poultry production itself follows a much shorter life cycle.
Nevertheless, poultry has become an important substitute for red meat
both due to its abundance and preference for white meat. In weddings
of all classes, a ‘chicken’ item is a common menu item, which pushes
the demand, and the price, especially in the winters.
The average selling prices of poultry products (eggs and broilers) have
increased manifold since 1991 except in 1998–99 when there was a
slight decline in the market prices of broilers due to over supply. It is due
to the increase of input cost of production of these products and the
demand size. The increase in feeds prices is the major factors behind
this other than labor, electricity, transport and poultry diseases. In just
five years from 2004 to 2009, the prices of eggs and broiler meat has
doubled. The eggs prices have rose to above Rs. 80/dozen and meat
prices to Rs. 150/kg.
Recently the federal government has allowed import of maize for
utilization poultry feed and vaccines at zero duty aimed at reducing input
costs in poultry production which will help in decreasing poultry prices
in the country. According to sources at the Ministry of Livestock, in order
to reduce input costs in poultry production, poultry vaccines, feed items
and other inputs used in poultry feed have been zero rated. In order to
reduce the poultry prices in the country, the federal government has
decided to give Sales Tax exemption on un-cooked poultry meat to
encourage establishment of value chain industry. To facilitate
establishment of value chain industry, government has allowed import
of poultry meat processing machinery/equipment, poultry equipment’s
(incubators, brooders, evaporation cooling pads, cooling system, grain
storage for poultry), at zero per cent custom duty. This will increase the
shelf life of poultry meat, limiting middle man exploitation of farmers
and consumers and assist in stabilizing the chicken prices to some extent.
24
Context of Crises
Moreover, comparatively low prices of live chicken than mutton
prompted more consumers’ preference and demand. The increased
input costs like feed has also led to an overall increase in cost of
production of chicken attributing to increased prices.
Various diseases cause heavy losses sometime to this industry. The birds
die in huge numbers whenever a disease outbreaks. This causes a gap
in the supply side which sometimes becomes a factor of increase in
poultry product prices. In order to check these losses and stabilizing the
chicken and eggs prices the federal government has allowed import of
maize for utilization poultry feed and vaccines at zero duty aimed at
reducing input costs in poultry production. The average commercial
broiler’s farm rates for the last eight years are shown in the following
table.23
Table 4: Average Rates of Poultry
23
Years
Average rates
Production (000 Tons)
2001/02
Rs. 40.48
405
2002/03
Rs. 42.32
380
2003/04
Rs. 46.10
502
2004/05
Rs. 65.14
N.A.
2005/06
Rs. 62.69
N.A.
2006/07
Rs. 62.17
554
2007/08
Rs. 59.27
601
2008/09
Rs. 72.21
651
http://ppapakistan.com.
25
Price Determination
Mechanisms and
Role of the State
Sugar
Federal government or provincial governments do not offer any sort of
subsidy to end consumers of sugar. The government does intervene in
sugar industry through setting a minimum support price for sugarcane
and secondly it plays its role in setting refined sugar price in the market.
As the commodity is considered as to be staple food and an essential
part of daily dietary intake, the government tries to provide sugar at an
affordable price level of Rs. 38/kg at state owned Utility Stores as well
as special make shift markets, called itwar bazaar (Sunday Market).
27
Price Controls: Implications for Liberty and Welfare
There are more than 6,000 utility stores in the country distributing
40,111 tons of sugar each month sourced through TCP24 which is about
10% of the total demand of the country. Due to controlled price at USC
(Utility Stores Corporation) there is always rush like situation on USC to
buy sugar at subsidized rate. The difference of market price to USC sugar
price ranges between 2 to 20 rupees per kg. Thus, the net benefits
delivered to general public only through utility stores varies between 80
million to 802 million per month.
Apart from Utility Store channel the GOP is striving to implement the Rs.
40/kg price decided by Supreme Court of Pakistan. According to a court
statement by the Secretary Finance, the retail customers need around
11,400 metric tons every day. It is difficult to assume that this entire
quantity would indeed be supplied at control rates. GOP is struggling
to fulfill court order in its letter and spirit. Government of Punjab has
started an organized effort to assure provision of sugar at Rs. 40/kg. It
has started to register whole sugar supply chain after mills and at the
same time it is also confiscating stock from millers and big dealers in
order to ascertain a reliable supply. The Trading Corporation of Pakistan
has also been advised to import immediately 500,000 tons of sugar.
Despite all efforts from federal government and from provincial
government the current crisis of sugar seems to be worsening further.
Explaining Sugar Supply Line and Intervention of Government
The intervention of government in sugar industry starts from setting a
sugarcane price in which government primarily attempts to safeguard
the interests of growers. The price set by government is often overlooked
by mill owners. However government tries to assure the implementation
of support price through its cane commissioners across the country.
Once sugar has been prepared it is stored in godowns in mills’ premises.
24
The News, Nov 14, 2009.
28
Price Determination Mechanisms and Role of the State
Government of Pakistan lacks sufficient storage capacity. Sugar is
dispatched or sold to big dealers and TCP at some agreed ex-mill price.
The ex-mill price is set through consultation with government represented
by Ministry of Food and Agriculture and Ministry of Industries and
Production. According to an official from cane commissioner office
Lahore, the current arrangements after order from apex court states that
the miller will be bound to sell 30% sugar stock at an ex-mill price of Rs.
36/kg and the rest 70% stock will be on jurisdiction of the miller.
According to these arrangements the margin of big dealers is set to be
Rs. 1.5 to 2/kg, margin of wholesaler will be Rs. 1/kg and the margins
for retailers will range from Rs. 0.5–1/kg.
According to market sources the retailers have refused to work on these
margins and everyone is charging a different price. To overcome this
issue the Government of Punjab has taken decision to register some
selected shopkeepers and provide them subsidized sugar direct from
mills. For this purposes the DCO offices have been advised to register
the shopkeepers and make recurrent spontaneous visits to these shops
and ascertain that these shops are selling sugar at the desired rate.
Terming the involvement of PSMA in price setting process as a collusive
behavior, the Competition Commission of Pakistan, in its inquiry report
issued on 21st October 2009 has termed this process against the
Competition law of the country and has recommended initiating action
against PSMA and its members.25
Following diagram shows the entire process of price determination in
the case of sugar.
25
Shaista Bani and Umair Javed: Inquiry Report, Competition Commission of Pakistan.
29
30
Sugarcane
price setting
Growers
Price of cane
Rs. 95/40kg
Dealer’s rate
Rs. 37–38/kg
Utility stores
Wholesalers
Utility Store rate is
Rs. 38/kg for
end consumers
Dealers & TCP
Govt. intervention
Ex-Mill rate through
Govt. consultation
Sugar mills
manufacturing &
stocking
Ex Mill Price 30%
on Rs. 36
70% on 40–42
Figure 1: Sugar Supply Line and Role of Government
End consumer
Govt. iintervention: Sugar price
control and court order
implementation
End consumer
Retailers
Market rate for
end consumer
is Rs. 40/kg
Price Controls: Implications for Liberty and Welfare
Price Determination Mechanisms and Role of the State
Flour (atta)
In history we find numerous examples of GOP intervention in the market
forces and introduction of a support price for various products. Among
such examples wheat is major commodity for which Government of
Pakistan had set a very attractive support price of Rs. 950/40kg in
September 2008.26 Surprisingly the support price was 52% more than
the open market price. Numerous justifications can be presented to this
huge price elevation but the fact is artificial price setting of a commodity
in any case will never get realized into actual cash proceeds.
In order to provide cheap flour and roti for poor peoples, currently,
Punjab government is providing Rs. 15 billion for wheat and flour
subsidy. Government is providing subsidized wheat to flour mills and
then that flour is distributed to registered tandoors27(local clay made
ovens) to provide sasti roti. Government also distributes subsidized flour
bags through Friday and Sunday bazars, and through special sale points.
Punjab government launched a Sasti Roti (Cheap Bread) scheme in May
2008. This scheme has been introduced to apparently increase the
purchasing power of poor people who can not buy bread at market
price. Last year the government of Punjab has allocated Rs. 20 billion
for subsidy of various food items. Out of this Rs. 20 billion almost 10
billion was spent on Sasti Roti and Ramadan Packages for poor. In
Ramadan Rs. 7.6 billion was given on the name of subsidy in just one
month whereas Rs. 3 billion was released to Sasti Roti scheme in year
2009–10.
To handle the Sasti Roti scheme the Government of Punjab has involved
its full administrative machinery to make this scheme successful. The
DCOs of all districts are directly responsible for the execution of this
The Nation, 30 September 2008 http://www.nation.com.pk/pakistan-newsnewspaper-daily-english-online/Politics/30-Sep-2008/Wheat-support-price-Rs950.
27
A cylindrical oven made of clay, heated to a high heat through gas or wood and is
locally used for baking bread.
26
31
Price Controls: Implications for Liberty and Welfare
scheme. Following departments/institutions are directly and indirectly
involved for the proper functioning of this scheme.
•
•
•
•
•
•
•
the Provincial Food Department (procurement and supply)
the Revenue Department (revenue collection and disbursement)
the Agricultural Marketing Department (channelizing the supply)
the Agricultural Storage Department (procurement and supply)
the District Commissioner Office (monitoring and controlling)
the local Members of Parliament (MPA or his/her representative
for approval of the tandoor)
local town nazims (coordination and verification of tandoors)
The Mechanics of Sasti Roti Scheme
Sasti Roti scheme is meant to deliver a 100 gram roti (bread) at an
affordable price of Rs. 2/kg. Initially this scheme was introduced to
provide sasti roti at all tandoors situated in Lahore area but soon the
scheme got popularity and government has widened it to whole Punjab.
From its advent till date the scheme has faced many changes. As this
scheme was meant to provide leverage to poor people but with the time
it has been observed that many profiteers are gaining unfair advantage
from the scheme. This has led government to change its strategy to
further assure that only poor people can get the utmost benefits. It was
decided to select only those hotels or tandoors which are situated in
poor localities. A scrutiny procedure was defined in which any person
having tandoor in poor locality can apply to participate in the scheme.
According to the officials from DCO office Lahore they have received
more than 7,000 applications at the outset and after scrutiny now there
are almost 3,700 tandoors in Lahore area which have been issued
official “Pass Book” to participate in this scheme.
The issuance of “Pass Book” is considered as major success from a poor
tandoor person as government has created very tough conditions for it.
Before a person gets “Pass Book” he must made several visits to
government officials, office of town nazims and also to the office of
32
Price Determination Mechanisms and Role of the State
representatives of local MPA. The approval from town nazims and MPA
has made the whole issue politicized.
The surveyors have been informed that after getting “Pass Book” the
tandoor person then gives estimate of his daily demand of flour. This
demand is subject to verification by many persons from above
mentioned government offices and from local MPA. This verification
process is made lengthy and cumbersome. When every visiting person
agrees on a single figure then the person is allowed to get his demanded
subsidized flour from designated flour mills.
When the scheme was launched it was decided to provide cash
disbursement to flour mills where the door tandoor person gets flour. As
things got worst and people started cheating then government has
changed its strategy to provide subsidized flour to the flour mill instead
of cash. This shift in policy and tight scrutiny process of tandoor persons
made this scheme efficient.
Supply Line of Sasti Roti scheme
Punjab Food Department (PFD) keeps total wheat reserves of the
province. It releases the wheat to flour mills according to their predefined
regional quotas. The flour mills have two sorts of mechanisms for wheat
procurement from Punjab Food department; one is subsidized
procurement which currently costs Rs. 410/40kg and second is market
procurement which costs Rs. 975/40kg. After processing the wheat the
flour mills have then two types of delivery channels. One is direct sale
to the market dealers which has average rate of about Rs. 560/20kg
and the other is subsidized sale to registered tandoor owners at Rs.
250/20kg. The subsidy amount is settled against subsidized wheat
procured. The subsidized channel is duly monitored by town nazims and
the DCOs of the concerned districts.
The tandoors are made certain that they sell 100 gram roti at Rs. 2. Any
tandoor not complying the conditions is immediately excluded from the
33
Price Controls: Implications for Liberty and Welfare
list. We have been informed that this Sasti Roti scheme has boosted the
businesses of many tandoor owners as the provision of subsidized roti
has raised the sales of other subsidiary food items available at the
tandoor. As a result many tandoor owners have gone for expansion and
started installing mechanical tandoors. Mechanical tandoors prepare in
a very less time huge number of breads. Government of Punjab is now
trying to spread mechanical tandoors all over the province as concerned
economies of scale make the processing of roti further cheaper.
The diagram below elaborates the supply line of Sasti Roti scheme.
34
Wheat at Punjab
Food D.
Market rate Rs.
975/40kg
Subsidized wheat
at Rs. 410/40kg
Flour
Mills
Subsidized flour
Market
Town DCOs
35
Min Rs.
535–650 max
Rs. 560 per
20 kg Sack
Consumers
Registered
Tandors
Rs. 250/40kg
for 20kg sack
Figure 2: Price Setting in Flour and Role of Government
Rs. 2/roti
Consumers
Price Determination Mechanisms and Role of the State
Price Controls: Implications for Liberty and Welfare
Poultry
Since there is little intervention from the government, poultry prices are
set by the principles of free market economy. There is no single
regulatory authority, private or public, to set poultry prices. The prices
are announced in the market on a daily basis. Feed expense is 70% of
the total cost of production and hence is the main factor behind the
increase and decrease of the chicken meat and eggs. The feed mills
owners have no check of government in fixing the rates of their different
qualities of feeds. Here again the government has little intervention. The
Pakistan Poultry Association (PPA), an autonomous body, only plays a
liaison role between mill owners and commercial producers of broiler.
Demand and supply formula is applied in the price fixing of these
products on daily basis. The market forces (commercial meat and eggs
producers, market traders, Pakistan poultry associations) are free in their
analysis of demand and supply situation in the country and in the price
fixing of the poultry products. However a representative of live stock
department of provincial government is member of a committee of four
including other representatives from market traders, broiler production
wing of controlled houses and a member from Pakistan poultry
association.
Variation in the prices of poultry products is the result of varying factors
involve in each stage from the availability of Grand Parent Chicks (GP)
to the reach of poultry products in the market, eggs and meat.
•
•
•
Grand Parent Chicks, being pure hybrid are imported from
abroad.
Day old chicks are taken as the result of hatching eggs from
parent stocks of these Grand Parent chicks.
Broiler (for meat) day old chicks and Layer (for eggs) day old
chicks are sold to farmers on daily basis.
36
Price Determination Mechanisms and Role of the State
•
Farming of these day old chicks under different conditions (feed,
labor, transportation) and environments (type of farm houses,
disease control are related with production of finished available
poultry products on daily basis. Hence they affect the daily
prices.
The daily rates quoted in the price list issued by Market Committee of
Agriculture Department are communicated by Pakistan Poultry
Association (PPA), North Zone in Punjab. The committee comprises four
persons each one from live stock department, market trader association,
broiler production wing of controlled houses and a member from PPA.
Trend for sale on daily basis in the open markets is taken from all zones.
Then district wise analyses are made. Demand note from poultry farmer
for booking of their stocks for sale is taken into consideration. After
reaching to the consensus considering all these factors, the rate is
announced for next day sale and is communicated to all market
committees and DCOs to have check over it. This mechanism shows
that government role is very minimal in the fixing of prices of poultry
products in the country. In other words the government does not set the
prices, nor does it control the demand and supply.
The entire process of price determination is shown in the following
diagram.
37
04:00 p.m.
38
04:00 p.m.
7
07:00 a.m (next day)
Government market
committee’s notified
price list is provided to all
shopkeepers through
transporter/broker
2
Poultry farmers inform
broker/transporter
about total tentative
production available
Shopkeepers/Retailers
place order to
broker/transporter
1
05:00 p.m.
6
Midnight
Transporters pick the
production from farmers
and deliver early morning
Broker/Transporter
inform market trader
3
Figure 3: Price Determination in Poultry: A typical Day
09:00p.m.
5
09:00–10:00 p.m.
Finalization of the
tentative booked
orders by the farmer
Committee members
communicate about supply
and demand on
phone/fax and determine
a price and conveys to
government officials
4
Price Controls: Implications for Liberty and Welfare
Government and
Price Stabilization:
Analysis of current
Policy Options
In this study, three food commodities have been discussed with respect
to the role of government in price stabilization. It is now obvious that the
each of these commodities-flour, sugar and poultry- tread a different
path when it comes to the role of the government in price fixing. In the
case of flour, government has given price subsidies to the flour mills,
which have supplied subsidized flour to the registered tandoors and later
to retailers and the utility stores. In the case of sugar, no direct subsidy
is provided to sugar mills on selling sugar, but the government and later
the Supreme Court introduced a price ceiling. In the case of poultry, the
role of government is more symbolic; the rates are still issued by the
39
Price Controls: Implications for Liberty and Welfare
government, but only after they have been decided through market
committees on the basis of information about supply and demand.
Figure 4: Government and Price Setting: A Continuum
We can therefore observe a continuum of the government role in price
setting for the singular goal of price stabilization – from a substantive
action of subsidies in the case of flour to an administrative role of price
ceiling for sugar and then to a symbolic role of the government in the
case of poultry. If we consider these three strategies of the government
role as three alternative options, it may be instructive to divulge into
implications for each of three options. We argue that each policy option
has different implications with respect to consumer welfare, producer
welfare and macro-economic balances.
Subsidies: The case of flour
Considering the provision of subsidized flour as a case study, we can
discuss the implications of subsidies for consumer welfare, producer
welfare and macro-economic balances. For consumer and producer
welfare, we base our analysis on a rapid survey conducted last year in
which about 20 tandoors in low to middle income areas of Lahore were
surveyed in the month of Ramadan28. The survey results conform to an
28
Some twenty tandoors were surveyed in localities such as Model Town, Sabzazar,
Mughal Pura, Gari Shahu, Taj Bagh, Jallo More, Harbanspura, Sing Pura and Faisal
Town and other different areas of Lahore. This was conducted in 2008 by a group of
students under the supervision of one of the authors. These students were: Mubashir
Sabir, Safeena Khizer, Ali Asad, Anam Khan, Mustafa Shah and Haris Rasheed.
40
Government and Price Stabilization: Analysis of current Policy Options
Key Assumptions of Survey
Equilibrium Price: Rs. 4/roti
Open Market Price of a 20kg bag of flour: Rs. 420
Controlled Rate of a 20kg bag of flour: Rs. 250
Equilibrium Quantity: Rs. 2 million only
(for sampled tandoors only)
Buyer’s Reservation Price: Rs. 5
(maximum price
which a buyer may pay)
Seller’s Reservation Price: Rs. 2
Results of Survey
“Consumer Surplus increases, producers surplus
decreases, total economic surplus decreases”
Before Price Subsidy under open market rates
Consumer Surplus: Rs. 1 million
Producer surplus: Rs. 3 million
Total Economic Surplus: Rs. 4 million
After Price subsidy under controlled rates
Consumer Surplus: Rs. 2.175 million
Producer surplus: Rs. 375,000
Total Economic Surplus: 2. 55 million
Loss in Economic Surplus: 1.45 million
established economic theory: subsidies might bring gain for consumers,
their overall impact on economic development, here measured in terms
of economic surplus, is negative. In the sampled tandoors, sasti roti has
caused Rs. 1.45 million loss in the economic surplus in just one month.
For proper execution of the scheme five provincial departments are
directly engaged in it. Although on this scheme the direct money paid in
terms of subsidy in one year is Rs. 3 Billion but if cost of this
41
Price Controls: Implications for Liberty and Welfare
administrative machinery is reckoned with this amount then the total
expenditures incurred on this scheme stand far higher as compared to
the claimed subsidy amount. Involvement of five administrative
departments means more problems for tandoor persons and more
avenues for corruption.
Macro-economic balances:
Present Government of Punjab has come under fire of opposition for
bankrupting the kitty by its huge spending on subsidies. In the provincial
budget 2008–09, total 13 billion rupees were allocated for food
subsidies (8% of development budget), which increased to Rs. 20 billion
in the Fiscal Year (FS) 2009–10, out of which Rs. 8 billion were allocated
exclusively for Sasti Roti scheme.
Another study by one of the authors has placed Punjab after Sindh and
NWFP in terms of economic freedom.29 The current trend of spending
without regard for economic recession seems to support the finding of
the earlier study. Greater the size of a government, lesser is the level of
economic freedom available, and has a ‘crowding out’ effect on the
private sector investment.
An earlier study by the World Bank has shown that untargeted subsidies
are the worst policy to ensure consumer welfare, in comparison with
well-targeted programs like food coupons. The study proves that that
the benefit-cost-ratio of a targeted food coupon system is more than 40
times the benefit-cost-ratio of untargeted price subsidies.30
The allocation for agriculture in the Punjab budget has always been
inadequate. Out of Rs.175 billion annual 2009–10 development plan
Salman, Ali / Khalil A. Arbi, 2008. Economic Freedom in Pakistan: Sub-national
Index 2009, published by Friedrich-Naumann-Stiftung für die Freiheit, Islamabad.
30
Mateus, Abel, 1984. Targeting Food Subsidies for the Needy: The use of CostBenefit Analysis and Institutional Design. World Bank Staff Working Paper # 617.
29
42
Government and Price Stabilization: Analysis of current Policy Options
(ADP), only Rs.3.2 billion are allocated to agriculture.31 This is quite
interesting to note that only 1.8 per cent of the overall development
outlay has been made for a sector, which forms 22 per cent of the
provincial GDP, provides around 45 per cent of employment.
Government has preferred to spend as much as Rs. 20 billion for direct
consumption against expanding the developmental base of the sector.
The allocation of government to development side of the sector is very
small if overall miserable situation of the sector is taken into account.
The sector is mired by many issues like, price hike in fertilizer, poor seed
quality for various products, poor agricultural marketing system,
declining yield in many major crops, water shortage, electricity shortage
and land degradation. The country is in perennial deficit of fertilizer since
many years. Had even half of this subsidy amount been spent of setting
up fertilizer factories or installing power generation or on R&D of better
seeds and yields, the rural poverty could have started dropping on
sustained scale in next few years. But, the government seems interested
in handing out fish to people rather than teaching them how to catch
one. The government has taken all steps that bring immediate political
mileage and ignored all long-term development possibilities.
Price Control: The case of sugar
The case of sugar price control in Pakistan aptly describes all inherent
problems with such non-discriminatory price stabilization measures. The
government has jeopardized the functioning of a free market both by its
actions and inactions. Later the involvement of higher judiciary in a
market phenomenon has only helped in aggravating the sugar crisis. It
has become obvious now that consumers have suffered badly not
despite, but due to, price controls. Long queues of customers waiting
for their turn in front of utility stores present a testimony. Due to an
uncertainty led shortage, the price of sugar, if available, has risen
31
Ahmad Fraz Khan, The Dawn Economic & Business Review, June 22–28, 2009.
43
Price Controls: Implications for Liberty and Welfare
sharply, and it is selling at around Rs. 60, almost 50% more than the
official price.
The sugar mills are reluctant to start crushing, which is badly affecting
the interests of the poor farmers. The wholesalers have suffered huge
losses due to price differentials. The retailers are reluctant to sell the
sugar at a profitable price due to fear of adverse action by a price
magistrate. Finally, the consumers are left with little or no sugar in their
kitchens. Paradoxically, this has happened despite surplus stock of sugar
in the country, as neatly documented in a recent article.32 Accordingly,
the available stock of sugar in the year 2009 is around 4.4 million tons
against the total demand of around 3.7 million tons. Thus there are
adequate supplies of sugar to meet the effective demand.
Apparently, the sugar mills have netted handsome profits due to this
situation. Although government puts the figure of profits earned by the
sugar mills during third quarter of year 2009 around 25 billion rupees,
an independent assessment considers these profit to be in the vicinity of
Rs. 170 billion. Traders, wholesalers and retailers have received the
harshest possible treatment by media and policymakers alike by being
classified as hoarders, full stop. However, the wholesalers have also
suffered huge losses due to price differentials. When the dust of current
sugar crisis is settled one needs to closely look at the overall surplus
made by producers and traders, as currently no mill or dealer is willing
to share any data.
Price controls do not bring any relief for macro-economic balance. A
study by the World Bank33 argues that:
Control food prices as an anti-inflationary measure does not
seem to be appropriate because it introduces large distortions
Niaz, Shafi M. 2009. Addressing the chronic sugar crisis. The Dawn, Economic and
Business Review: Nov 2, 2009.
33
Ibid.
32
44
Government and Price Stabilization: Analysis of current Policy Options
in relative prices and disincentives to production. Besides, it is
only a temporary measure: the increase in expenditures would
be translated in a larger and larger budget deficit that would
cause inflationary pressure, before a new round of price
increase.
In our view, government intervention by abject price control has resulted
into non-availability of sugar in the market despite surplus quantities.
This would certainly push the price further upwards. That the price
controls are bad, seen from either public policy or economics angle,
should now be a given. However, when price controls are subject to be
implemented through a weak and corrupt administration, it is only
nightmare. As these lines are being written, a remarkable piece of policy
with respect to sugar has come up. The government will now sell sugar
during fixed hours! This will almost certainly create unfortunate scenes
of stampede thus putting people’s lives to risk. Thus, a bad policy backed
with a weak administration, backed up by even poorer designs will now
lead a sugar surplus nation into a sugar-rioting community. This is not
just bad economics; it is also bad, and bloody, politics.
In sync with open market:
The case of poultry
It has established in the foregoing analysis that the government does not
intervene in the price setting process of poultry meat substantially, it
rather sits on the back seat and trusts the market forces to arrive at a
realistic price. Consequently, despite of price surge, owing to high
demand and at times shortage in supply due to diseases, the poultry
meat remains available. As no government money is involved, there is
no implication for macro-economic balances. Obviously, as noted
above there are fundamental differences between poultry products and
wheat or even rice. The wheat is a highly inelastic good, whereas poultry
is relatively elastic. If one day, poultry meat is found to be extra ordinary
expensive, people will less of it, thus its demand will shrink, which will
give the signals to producer to bring down the price. On the other hand,
45
Price Controls: Implications for Liberty and Welfare
despite of a doubling of wheat price in just two months, its demand will
not be reduced as its substitutes are not culturally acceptable and it is
the main staple food for Pakistanis. For low income households, wheat
flour consumes as much as 24% of their budget.
A deeper look at how price determination actually works in the case of
poultry meat, reveals that the poultry market operates like an efficient
stock exchange, in which information about various stocks is readily
available and communicated and it also influences the daily price levels
of ‘underlying assets’. Using the modern communication tools like
mobile phone and fax machines, the demand and supply positions of
different market players is converged into the broker, who usually owns
the transport business. As the product itself is perishable, the market
cannot take too long to take a position or to sustain a position, and
hence it clears rather quickly and the equilibrium is achieved.
Key Findings of Report
1. In the case of subsidies for sasti roti, a survey reveals that
there is a net economic loss, when both consumers’ gains
and producers’ losses are accounted for.
2. Government of Punjab has allocated Rs. 3.2 billion for
agriculture development in FY 2009–10 whereas for food
subsidies, it has allocated Rs. 20 billion, which increases to
Rs. 32 billion when food support program is also considered.
3. In the case of price controls in the sugar, government direct
intervention has created uncertainty, which has led to supply
halts leading to price escalation.
4. The sugar supplied through utility stores reaches to about
10% of total consumption levels in the country.
5. The poultry meat market operates like an efficient stock
exchange, in which information about various stocks is readily
available and communicated to all stakeholders in real time
thus influencing the daily price levels of ‘underlying assets’.
46
Price Controls:
10 Myths and Facts
An Advocacy Toolkit for Liberal Friends
Advocates of free markets, not that they are many out there, usually have
to face questions and criticism from various quarters. In the times of
alleged market failures and global recessions, it is a daunting exercise
to confront these questions as they are often couched in concerns for
welfare, economic justice and populism. When it comes to food items,
the price controls become even more favorite for politicians, policy
makers and community workers. We present a few commonly held myths
and their corresponding facts, which may help in understanding how
markets work. It may be noted that the myths have been derived from
popular media debates, public statements by elected officials and during
general discussions while facts are grounded on history and proven laws
of economics.
47
Price Controls: Implications for Liberty and Welfare
Myth 1: Price Controls offer protection against
Inflation.
Poor people need protection against rising inflation and price controls
on basic items like roti and sugar provide them a cushion while
maintaining their purchasing power.
Fact:
Each subsidy carries forward a hidden inflation, as the price
control only artificially brings the price down; it does not actually
decrease the price. Thus as soon as these subsidies are lifted, the
price hikes are usually more sharp and bring even greater burden
for the purchasing power than a normal increase in the price.
Myth 2: Economic ‘injustices’ can be undone by courts.
Flour mills and sugar mills owners exploit the poor consumers in
connivance with the government therefore some higher body like
Supreme Court must intervene to ensure ‘justice’.
Fact:
When ever government intervenes through administering control
for example by the price magistrates, the retailers simply stop
supplying the commodity. When the court intervenes through its
own formulations of resource allocation, the market does respond
by further increasing the distortions. For example, when the
Supreme Court announced that 70% of sugar be supplied to
industrial consumers at ‘free market price’ and 30% to retail
customers at ‘controlled price’, the millers allocated more than
70% to the industrial and commercial sector in the natural search
for more profits.
48
Price Controls: 10 Myths and Facts
Myth 3: Direct provisioning and production by the
government is the final solution.
Government should directly control production and distribution of
these food items by investing in production facilities and distribution
channels.
Fact:
Centralized production and government controlled distribution
systems have been tried extensively in Pakistan and badly failed
during 1970s. Bureaucrats who assume control of State Owned
Enterprises work without any incentives and are not trained in
business. Therefore any attempt of direct production and
distribution by the government is bound to fail due to both
structural and historical reasons. The announcement of
mechanical ‘Roti Plants’ by present Punjab Government and its
seizure of sugar stocks is in fact a reverse step.
Myth 4: Price controls are popular.
Price controls bring popularity and a democratic government needs
votes to stay in power to serve the masses.
Fact:
Price control can bring temporary popularity as long as they are
effective and in place. The implementation of price controls laws
need honest and efficient administrative machinery, which is simply
absent in Pakistan. Therefore each announcement of price control
meeting with failure actually brings bad repute to the political
government as bureaucrats do not assume any risk of failure. Price
control in the hand of a weak and corrupt administration
ultimately proves unpopular and damage the reputation of
political governments.
49
Price Controls: Implications for Liberty and Welfare
Myth 5: Traders are hoarders and must be dealt with
severe punishment.
The real problem lies with traders – who act like hoarders – and resist
smooth supply to consumers. The government must curb hoarding by
inspections and stringent price magistracy system.
Fact:
Traders are business people, who invest in certain commodities,
assume risk of loss, keep a profit and then provide the goods to
retailers or direct consumers. In fact, hoarding is hard to define
as each businessman has the right to store some raw material and
back up stocks for smooth functioning of the business, particularly
in an uncertain environment. The government manhandling
creates uncertainty in the market and forces the traders to stock
more than the usual requirement of the business thus creating
supply disruptions and artificial shortages.
Myth 6: Price control bears no costs.
Price control is the most cost effective method to protect vulnerable
segments of population.
Fact:
Price control may sound inexpensive as it all needs is a
government notification and using its administrative muscle to
ensure implementation. However, price control drives private
producers out of the market as they lose incentive to get profits.
This leads to an overall reduction in the supplies, which further
increases the price levels thus setting off a vicious circle. Thus price
controls ultimately invite government to compensate for reduced
supplies through imports which disturbs the accounts and trade
balance. Thus while price control may seem cheap in the short
run, it proves to be expensive in the long run.
50
Price Controls: 10 Myths and Facts
Myth 7: Price control effectively helps the poor people.
As price controls are introduced to protect the vulnerable from price
surges or market anomalies, poor people benefit the most, as they
constitute the majority in a developing country.
Fact:
Price control does not distinguish the consumers on the basis of
their income levels- they are untargeted subsidies. Rich or poor,
you pay the same Rs. 2 for buying a Sasti Roti (cheap bread) from
one of the registered tandoors (traditional earth oven). There is
no way to guarantee that only the poor, or in fact, mostly the poor,
would take advantage of price control. Often, the poor resides in
rural areas, as in the case of Pakistan, who does not enjoy an
equivalent access to the market. Thus the urban consumers, who
are more vocal, tend to take more benefit of price control because
of greater access.
Myth 8: Government. Government. Government.
All crises are direct result of government failure to act efficiently and
transparently. If government officials and elected representatives
are vigilant and honest, no one can do anything wrong.
Fact:
The influence of government on markets, supply and demand is
fast vanishing as evident from a shift from direct provision to
enabling regulations. Government intervention and presence is a
cause of problem in the first place and solution should not be
expected from the problem itself. We know for instance, that food
inspectors ‘seek rent’ for granting favors to selected market players
like flour mills and yet we insist on sending more inspectors and
magistrates. It only increases the chances of collusion and
corruption.
51
Price Controls: Implications for Liberty and Welfare
Myth 9: Political elite spends their own money
for the poor.
Political leaders and government officials spend money to protect poor
people from the vagaries of market.
Fact:
Political leaders and government officials get their salaries and all
other expenses from the tax payers’ money and in Pakistan everyone
pays taxes, if not direct than indirect. The money which administration
claims to spend on the poor people welfare is not their own money;
it belongs to the people and people have the first right on this money.
In fact, the political leaders spend people’s money to perpetuate
themselves into power.
Myth 10: Replace people and things will fall in place.
The best strategy to deal with such crisis is to bring ‘honest’ people at
the helm of affairs. Once the leaders are honest, they will ensure
everything works out well for the people.
Fact:
Good people cannot fight with bad laws and path to hell is paved
with noble intentions. One should argue for reforms in the system
instead of searching for noble people. In markets, the best strategy
is to allow free market come full circle by ensuring level playing field
to all players. It would mean that the government should gradually
withdraw subsidies both for producers and consumers. For example,
if domestically produced sugar is not enough to meet local demand
and the Trading Corporation of Pakistan cannot place import order
due to any reason, the private sector, if it were allowed, could have
imported sugar much earlier and eased off supplies in the local
market. Similarly, if Atta is expensive, then the farmers should be paid
competitive price so that they grow more wheat in the next season
and thereby bringing the price of the flour down by increased supply.
52
Are liberals
heartless?
Liberal Options
for the Poor
Economists agree that there is a trade off between economic growth and
welfare spending. It is true that if subsidies are withdrawn totally, a large
number of people would suffer. This is particularly true in the case of
food commodities, which has a direct bearing on the nourishment and
hence the level of productivity of a nation. Therefore budget allocation
for provision of appropriate and sufficient food to all segments of the
society should be seen as an investment rather than as consumption
expenditure.34 Thus we argue that liberals or proponents of free market
Mateus, Abel, 1984. Targeting Food Subsidies for the Needy: The use of CostBenefit Analysis and Institutional Design. World Bank Staff Working Paper # 617.
34
53
Price Controls: Implications for Liberty and Welfare
are certainly not against instituting support mechanisms for the poor,
and especially when it comes to food provisioning. The bone of
contention is not on the goal but on the methodology. We present
various liberals options in this section to achieve the objective of welfare
of the poor without distorting the price indicators along with some
general advice for the ‘reformers’.
Direct personal aid instead of supply-side subsidies or
market manipulation
“Liberal social policy supports persons in need directly and individually
and not by manipulating market mechanisms or prices and thus
concealing real costs. Market manipulation and supply-side subsidies
inevitably produce distortion and undesired side effects and also
necessitate an abundance of rules and regulations. Direct personal
subsidies, on the other hand, do not interfere with anybody's right to selfdetermination (except that of the tax-payers who provide the funds),
supply help where there is genuine need and, by leaving market forces
intact, ensure that the resources needed for social measures are fully
available.”35
Invest in Agriculture, not in Subsidies or Price Controls
The best strategy is to redirect untargeted expenditure to investment in
agriculture. It will not only raise the living standards of the rural people,
where most of the poor live but will also provide incentives for farmers
to enhance their cultivation thus bringing more supplies to the market.
It may be noted that in FY 2009–10, the Punjab government allocated
Rs. 3 billion for agriculture investment where as Rs. 20 billion for
subsidies. This is the major fault line of economic planners and political
leaders.
35
http://www.freedomgatepakistan.org/freedom.php?page_id=29
54
Are liberals heartless? Liberal Options for the Poor
Design well targeted food support programs
We have shown that targeted food support programs through coupons,
or stamps, are at least 40 times more in terms of benefit-cost ration than
untargeted price control or subsidies. Thus a well-designed food stamp
program can deliver the goal of welfare far more effectively than an
untargeted subsidy. Various developing countries have successfully
implemented such schemes with a very low leakage level. In our case,
a successful coupon system exists in form of Education Vouchers
Scheme36, which has been successful in reaching out to the intended
beneficiaries.
Don’t punish hoarders: Push them to form Exchange
As the example of poultry market reveals, if the so called hoarding is
channeled into formal financial markets, the ‘hoarders’ can well be our
traders of ‘futures’. If wheat trading and sugar trading is allowed through
commodity exchanges, such as the one working in the case of cotton
already, lot of risks can be hedged. Businessmen should be rewarded
for a good insight about future and should be punished for a bad stock
pick!
Use arithmetic intelligently
Why the Punjab government, and other provincial governments, decided
to spend all subsidy money for the flour in the month of Ramadan? If an
overall subsidy is deemed necessary, then spread the subsidy money over
the usage of flour in one year instead of one month, albeit offering lesser
subsidy per unit so that general prices can be kept low. During Ramadan,
the government ensured supply of flour at Rs. 200 per 20 kg bag, but
now just within two months, it has crossed Rs. 560 per 20 kg bag.
For a detailed analysis, please see, Salman Ali, 2009. Liberate to Learn: A Study of
the Education Voucher Scheme in Lahore. Alternate Solutions Institute, Lahore.
36
55
Price Controls: Implications for Liberty and Welfare
Price Stabilization through Subsidies should be
compensated with taxes
If subsidies are considered the only option for stabilization of prices
during the time when the general prices fare above the trend, then they
should be designed in a way that taxes ought to be introduced when the
general prices fare below the trend. Thus in the medium to long run, the
budgetary impact of price stabilization measures should be nil.
Embrace the market fully; avoid patch work
A major stumbling block in success of our policy reforms is the halfhearted nature of reformists. When confronted with challenges and
opposition to a reform, reformers always duck instead of pushing the
reforms further. If we accept that market forces allocate the resources
more efficiently, then remove crutches from every process. For instance,
if farmers are being paid a competitive price for their crop, then withdraw
subsidies on inputs like fertilizers.
Complete overhaul does not have to be overnight
When reforms are being implemented, the reformers are usually in rush
for the fear of a prolonged resistance from the electorate. Thus reforms,
especially in price structures, must never be rushed. Complete adoption
of market should not be done overnight; rather gradually over various
phases. Reformers must push their agenda slowly but surely.
56
Are liberals heartless? Liberal Options for the Poor
List of Persons Interviewed
Name
Dr. Saqib Ali
Noorani
Dr. Farooq Zafar
Ahmed
Dr. Mustafa Kamal
Dr. Serwat
Maj(rtd) Javaid
Hussain Bokhari
Shahid Cheema
Designation
Contact No.
Area Manager
0300-8433954
Area Sales
Manager
0300-8448727
Director
0300-8450403
Dy. District Officer
0300-4250936
(Livestock)
Zonal Secretary
0423-6151845
North Zone
Asst. Director
0344-6336162
Agri Marketing
Sajid Abdullah
Director
042-35714688
Munir Ahmed
Secretary
0300-4076165
Madam Kulsoom
DCO Office
N/A
Mahmood
Officer for Tandoor
0300-4616867
registration
Organization Name
Hi-tech Poultry
Breeders
Hi-tech Poultry
Breeders
Big Birds Group
of Poultry
Pakistan Poultry
Association
Agri Marketing
Department
Sunny Flour Mills
Pakistan flour
Mills Association
City District
Government Lahore
City District
Government Lahore
Nafees Ahmed
0300-9409421
DFC Lahore 1
Zikria
N/A
DFC Lahore 2
Ch. Ameer
Hussain
Computer
Operator
Asst. Account
Officer
Khwaja Zia
Group Manager
Haroon
Siffat Hussain
Sherazi
Punjab Statisical
Department
Punjab Statisical
042-99212550
Department
042-35714074Abdullah Sugar
5
Mills Limited
Cane Commissioner
042-99210294
Lahore
042-99212544
57
T
he Economic Freedom Network Pakistan (EFN) is an informal network
of economic experts and entrepreneurs working together to contribute
towards economic freedom – which they consider to be central to
successful reform. The aims of the network include: Promoting open and free
markets, stronger property rights for the less powerful and poor members of
society; deregulation and privatization in the interests of job creation. EFN
Pakistan exists to promote human development and economic growth. To
influence the public policy advisors and political decision-makers; to broaden
the debate on the merits of free markets and limited governments, the EFN
Pakistan provides a platform for political dialogue, public education and
academic exchange.
[email protected]
www.efn.net.pk