THE HIGH COST OF LOW PRICE!! Must read!!

[Silent Spectator]

THE HIGH COST OF LOW PRICE
By Najaf Yawar Khan

[This article first appeared in Dawn http://dawn.com on November 18, 2009. The author is Director and Chairman of the Management Studies Department at GC University Lahore.]

AS we continue to pay a high cost for the low price of sugar, two academics from a leading business school have come up with a cry for the public good, invoking near-ancient memories of a potato famine and starvation which were due, in part, to government negligence.

The media already has its fair share of doom merchants. Add academic soothsayers to the mix and you may be forgiven for believing that nothing but the most desperate measures can work.

This is not yet so. In any situation, there could be arguments for government intervention in the economy. But for every famine that could have been prevented, there are dozens which were precipitated by government action. It is in trying times that we need to hold firm to our beliefs. The journey downhill always starts with the abrogation of principles.

All initial reviews for the year 2008-09 indicate a surge in demand for sugar and a drastic drop in global supply. For entrepreneurs who had invested in the sector, it was a chance to hit the goldmine — the right to sell to the highest bidder, barring any anti-competitive measures. When there is a danger of death, be it through disease or famine, a political intervention may be warranted. But this was no epidemic, nor was sugar the only commodity whose price has skyrocketed in recent years. Petrol, wheat, rice, cement, iron, gold — the list goes on. Some have already experienced a correction. Others will follow. In the case of sugar, there was nothing approaching a do-or-die situation. Every time the wind picks up, we cannot issue a hurricane alert.

Look at another parallel: the ‘nationalisation’ of British banks. On closer scrutiny, it looks more like a tangent. The banks were not ‘nationalised’ against their will. Instead, it was the banks themselves that requested the lender of the last resort to come to the rescue.

The government’s intervention was aimed at helping specific businesses which had sought help. Barclays and HSBC, for instance, rejected the government bailout offer.

We are now living with the price fixed by the courts two months ago and the governments’ botched attempt to simultaneously enforce and work around the decision. The total cost of this intervention is yet to be calculated. Estimates vary but the economic costs of the fixed price, whether businesses pay through lost profits or the government picks up the tab via the public pocket, is somewhere between Rs40bn and Rs70bn. This excludes the effect on standing crops and future sowings. Moreover, the small-time shopkeeper now has to choose between fulfilling his customers’ needs and getting arrested. With all the increased business uncertainty in the country, it does not take a genius to predict which direction prices will take.

And hence the argument that it is extremely important to assure businesses that the government plays by the rules, even if it loses sometimes. But somehow another vision, that of hung, drawn and quartered (albeit in its figurative sense), holds greater attraction for those who hold power. Government functionaries were fairly prompt in arresting employees of large retail chains that have invested millions of dollars and generate hundreds if not thousands of jobs. Psychologically, so many are still fighting the East India Company. If under these circumstances businesses flaunt a recent report by the Competition Commission of Pakistan (CCP), it is a sign of trust in at least one arm of the state.

While the CCP started operations two years ago with typical bureaucratic high-handedness, putting hefty penalties on players whose tax obligations were already high, it has demonstrated maturity with its report on sugar. The report not only performs the assigned task and calculates the cost, it also explains the variables that could drive costs up or down. And the recipe is no surprise: free the industry of distortions created by interest groups, develop procurement standards based on value — the sucrose content — and install a payment mechanism that removes, not creates, uncertainties for growers. Any agency that has to ensure compliance is already a dreaded beast in the mind of the investor. It is duty-bound to reassure entrepreneurs, and has done so in this case, that it will not dig up special clauses every now and then.

The report does not ‘worship the free market’ (it may have been better if it did). It stutters where it proposes a ‘safety net’ mechanism, taxing the sugar industry in kind (a rather inefficient method) and looking for a mechanism that would keep an army of civil servants on the public payroll in the name of providing sugar to the poor. It also talks of a ‘strategic stock’, an intervention acceptable to the extent that it does not physically threaten businesses. That said, only an optimist or a direct beneficiary would believe in the government’s ability to manage this stock for the greater good.

However, if at all political judgment calls for a subsidy, let it be handled by something like the Benazir Income Support Programme without creating customised distortions across individual industries.

Nobody can stop the courts or the government to dispatch SHOs at will, much as no government or court can stop by decree what follows. Need we recall what happened when 35 employees of National Power were arrested by the government in 1998? Not only did investors pull out, they left the industry capital-dry for the decade that followed. Find a Pakistani who has not experienced the ‘power famine’. By trying to ensure an essential commodity at an affordable price, the government assured ‘no commodity’ at whatever price. These are points to ponder in the ongoing debate on sugar. [Courtesy Dawn]

Regards