Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
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.
supported by
Friedrich-Naumann-Stiftung für die Freiheit
P.O.Box 1733, Islamabad - 44000
Pakistan
Tel: +92-51-227 88 96, 282 08 96
Fax: +92-51-227 99 15
E-mail: pakistan@fnst.org
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
4. Context of Crises 15
Sugar 15
Flour (Atta) 20
Poultry 21
v
Price Controls: Implications for Liberty and Welfare
vi
Price Report
Table of Figures
List of Tables
vii
Acronyms
viii
Abstract
ix
Price Controls: Implications for Liberty and 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:
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.
2
Introduction
3
Price Controls: Implications for Liberty and Welfare
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.
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 macro-
economic 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.
A.S.
November 2009
Lahore
5
Government
Intervention in
Price Setting
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?
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
2
http://cbdd.wsu.edu/kewlcontent/cdoutput/TR503/page7.htm
3
http://tutor2u.net/economics/revision-notes/as-marketfailure-government-
intervention-2.html
4
Inelastic goods: goods whose demand does not decrease significantly even if price
rises significantly due to their necessary nature.
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.
9
Price Controls: Implications for Liberty and Welfare
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.
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
6
http://university-essays.tripod.com/government_intervention_market_system.htl
7
http://www.econlib.org/library/Enc/PriceControls.html
8
http://www.financialexpress.com/news/india-is-the-only-nation-to-adopt-costbased-
price-control-system/175543/
11
Price Controls: Implications for Liberty and Welfare
12
Government Intervention in Price Setting
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.
9
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-biting-
buyers/articleshow/5201288.cms
11
BBC News, April 4, 2008, http://news.bbc.co.uk/2/hi/7330045.stm
13
Price Controls: Implications for Liberty and Welfare
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.
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
17
Price Controls: Implications for Liberty and Welfare
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
14
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.
18
Context of Crises
holders cannot exploit the situation and sugar can be released from TCP
stocks in case of shortage.
16
Another Sugar crisis Lurking, Sher Baz Khan, The Dawn, July 3, 2008.
17
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.
19
Price Controls: Implications for Liberty and Welfare
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.
19
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.
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
20
Expert Advisory Cell; Ministry of Industries and Production Islamabad (2004): Digest
of Industrial Sectors in Pakistan, p 328.
21
Price Controls: Implications for Liberty and Welfare
21
Ibid. p 332.
22
Khalique Arshad, Chairman Pakistan Poultry Association Punjab: a joint press
conference at Lahore Press Club, Aug 05, 2009.
22
Context of Crises
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.
24
Context of Crises
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
23
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.
24
The News, Nov 14, 2009.
28
Price Determination Mechanisms and Role of the State
25
Shaista Bani and Umair Javed: Inquiry Report, Competition Commission of Pakistan.
29
Figure 1: Sugar Supply Line and Role of Government
30
Utility stores End consumer
Price Controls: Implications for Liberty and Welfare
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.
26
The Nation, 30 September 2008 http://www.nation.com.pk/pakistan-news-
newspaper-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.
31
Price Controls: Implications for Liberty and Welfare
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.
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
Figure 2: Price Setting in Flour and Role of Government
35
Market Consumers
Min Rs.
535650 max
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.
36
Price Determination Mechanisms and Role of the State
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.
37
Figure 3: Price Determination in Poultry: A typical Day
38
2 04:00 p.m.
Government market
Price Controls: Implications for Liberty and Welfare
committees notified
price list is provided to all Transporters pick the Finalization of the
shopkeepers through production from farmers tentative booked
transporter/broker and deliver early morning orders by the farmer
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
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
Results of Survey
“Consumer Surplus increases, producers surplus
decreases, total economic surplus decreases”
41
Price Controls: Implications for Liberty and Welfare
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
29
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 Cost-
Benefit Analysis and Institutional Design. World Bank Staff Working Paper # 617.
42
Government and Price Stabilization: Analysis of current Policy Options
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.
32
Niaz, Shafi M. 2009. Addressing the chronic sugar crisis. The Dawn, Economic and
Business Review: Nov 2, 2009.
33
Ibid.
44
Government and Price Stabilization: Analysis of current Policy Options
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.
46
Price Controls:
10 Myths and Facts
47
Price Controls: Implications for Liberty and Welfare
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.
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
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.
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
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.
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
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.
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
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.
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
34
Mateus, Abel, 1984. Targeting Food Subsidies for the Needy: The use of Cost-
Benefit Analysis and Institutional Design. World Bank Staff Working Paper # 617.
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’.
35
http://www.freedomgatepakistan.org/freedom.php?page_id=29
54
Are liberals heartless? Liberal Options for the Poor
36
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.
55
Price Controls: Implications for Liberty and Welfare
56
Are liberals heartless? Liberal Options for the Poor
Pakistan flour
Munir Ahmed Secretary 0300-4076165
Mills Association
City District
Madam Kulsoom DCO Office N/A
Government Lahore
Officer for Tandoor City District
Mahmood 0300-4616867
registration Government Lahore
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.
info@efn.net.pk
www.efn.net.pk