Originally published as 'Will price controls on sugar work?' on dawn.com on September 07, 2009.
The Lahore High Court ordered the Punjab government Thursday to keep retail sugar price at Rs40 a kilo — Rs7 less than its current level — across the province.
It also directed the government to procure the sweetener from mills at Rs36 a kilo instead of Rs45, the ex-factory price fixed by the federal government for the entire country less than a couple of weeks ago, to ensure that its retail price did not exceed in Punjab beyond the court-fixed level.
The millers refused to accept the order because it meant a loss of Rs9 a kilo to them. They intend to appeal. Stockists and dealers too got worried because they had purchased the product at the federally fixed rate and stood to suffer huge financial losses if the court order was implemented.
The Punjab government pledged to implement the order and deployed on Friday revenue and police officials at the mills to seize stocks and prevent the millers from removing the same. But its food minister told a TV channel that it would take a couple of days to enforce the court order. He seems to be buying some time for the dealers and retailers to exhaust their existing stocks before the court-fixed rate is enforced.
But sugar had already begun disappearing from the retail markets at many places in Punjab by that time as retailers did not want to risk arrests and penalties on charges of flouting the court orders.
In less than two weeks the consumers were once again facing shortages and running from one place to another to purchase the sweetener for their use during Ramazan and on eidul fitr.
Sugar has been at the centre stage of what millers call as politics for almost a month. Initially it was the federal government that asked provinces to take action against stockists and mills for allegedly hoarding the product to make windfall in view of its rising global prices due to worldwide shortages.
The government soon realised its folly as administrative actions caused the sweetener to disappear from the market. After talks with the government,the millers agreed to lower their maximum prices to up to Rs49.50 a kilo inclusive of sales tax. The federal government thought it to be good bargain as imported sugar would cost consumers around Rs65 a kilo.
In the meanwhile, the Punjab government continued its crackdown against the mills to force them reduce their price to Rs45. The millers refused to oblige and the provincial government deployed its officials at their warehouses and seized their stocks. The matter was resolved after the prime minister waived 50 per cent sales tax on sugar and re-fixed the millers' price at Rs45.
The market was functioning quite smoothly and the product was available for Rs47 s kilo in spite of reports that some millers were delaying the release of their stocks when the court decision came in to topple the market upside down once more.
Price controls have always been very popular with governments worldwide including Pakistan because of their mass appeal. The possibility of political fallout of higher prices makes governments to frequently institute controls to regulate prices, particularly in times of soaring price inflation and shortages.
Before 1990s when Pakistan began to pursue free market policies, governments usually tried to control the general level of prices, regulating the prices of a whole range of commodities and products. But the trend changed after the country embarked upon the path of economic deregulation and liberalisation with successive governments selectively imposing price control on specific food and drug items.
Some times producers and suppliers are forced to lower their maximum prices to certain level called price ceiling. On other occasions, governments intervene in the market through state agencies like the Trading Corporation of Pakistan to remove the supply and demand imbalances for keeping prices down, though at a heavy cost. In a few cases governments subsidise the producers' cost of production to prevent prices from rising above the “desired” levels, although not all consumers consider the official determination of that price level as fair to them.
Price controls are meant to prevent prices from exceeding a certain maximum level. The idea is always to protect the segments of population that cannot meet price increases.
But do they work and produce the intended results?
“Price controls never work,” insists Shahid Kardar, a leading economic expert. “It is a supply and demand issue. Do you think that a shopkeeper will sell you a product for Rs10 if another customer is ready to pay Rs12 for it?” he asks.
Experts argue that price controls fail to protect most consumers. At the same time, these hurt others.
The negative implications -- temporary and long-term, direct and indirect -- of institution of price controls far exceed its benefits to the consumers, contends an economist.
“The artificial pricing mechanism never succeeds. It always results in shortages due to sudden increase in demand owing to panic buying as we recently saw in case of sugar and wheat flour in Punjab,” he says.
Official controls also discourage production of quality goods and encourage cuts in output. “Price controls offer incentives for hoarding, blackmarketing, production cuts, etc, forcing many consumers to pay for a product or an item a lot more than what they would have to pay if price controls were not in place,” he argues.
The official controls on drugs have invariably resulted in disappearance of cheap life-saving medicines from the market. The list of negative ramifications of price controls is long.
“It encourages smuggling if the global prices are higher than domestic prices of a product and if your borders are porous,” says a Karachi-based analyst. Price controls could not work effectively in countries like Pakistan unless governments have proper tools to enforce them -- like sealing the borders, he says.
Take the example of wheat which crossed borders into Afghanistan in huge quantities when the government tried to keep down the prices lower than the commodity's global prices a couple of years ago.
“That forced the government to import wheat -- in spite of a good domestic crop which was initially surplus to our consumption requirements -- at a much higher price to cover the shortages created by smuggling,” the analyst says.
More importantly, the prices rise more rapidly once the controls are lifted, triggering high price inflation. “As soon as the official controls are removed the hidden inflation surfaces suddenly. The rapid inflation is always bad for the economy as well as consumers, whom the official price controls intend to protect, than a slower and steady rise in prices,” the economist argues. In addition to the economic costs of price controls, there is also an administrative cost to such an action. We have recently seen almost the entire bureaucracy in Punjab involved in the management of 'sasta' atta (cheap wheat flour) in the province. Yet the administration was unable to ward off long queues of consumers scrambling to purchase an extra bag of cheap atta. Shortages, albeit temporary, also emerged in the normal supply chain and people who did not want to avail of the opportunity to purchase subsidised flour were forced to pay extra amount to get it or do without it for days.
Economic experts, however, acknowledge that price controls do provide some kind of relief, though only temporarily, to the poorer people battered by soaring prices.
“But the economic and administrative cost of this short-term measure is so high that prudent governments would not tread this path,” the analyst says.
The best way to help the poorest of the poor is to directly support their incomes through targeted cash subsidy, argues Kardar.
“It should be left for the recipients of the cash to decide what do they want to do with it. They should be able to decide whether they want to buy flour or sugar or something else,” he contends.
The Lahore High Court ordered the Punjab government Thursday to keep retail sugar price at Rs40 a kilo — Rs7 less than its current level — across the province.
It also directed the government to procure the sweetener from mills at Rs36 a kilo instead of Rs45, the ex-factory price fixed by the federal government for the entire country less than a couple of weeks ago, to ensure that its retail price did not exceed in Punjab beyond the court-fixed level.
The millers refused to accept the order because it meant a loss of Rs9 a kilo to them. They intend to appeal. Stockists and dealers too got worried because they had purchased the product at the federally fixed rate and stood to suffer huge financial losses if the court order was implemented.
The Punjab government pledged to implement the order and deployed on Friday revenue and police officials at the mills to seize stocks and prevent the millers from removing the same. But its food minister told a TV channel that it would take a couple of days to enforce the court order. He seems to be buying some time for the dealers and retailers to exhaust their existing stocks before the court-fixed rate is enforced.
But sugar had already begun disappearing from the retail markets at many places in Punjab by that time as retailers did not want to risk arrests and penalties on charges of flouting the court orders.
In less than two weeks the consumers were once again facing shortages and running from one place to another to purchase the sweetener for their use during Ramazan and on eidul fitr.
Sugar has been at the centre stage of what millers call as politics for almost a month. Initially it was the federal government that asked provinces to take action against stockists and mills for allegedly hoarding the product to make windfall in view of its rising global prices due to worldwide shortages.
The government soon realised its folly as administrative actions caused the sweetener to disappear from the market. After talks with the government,the millers agreed to lower their maximum prices to up to Rs49.50 a kilo inclusive of sales tax. The federal government thought it to be good bargain as imported sugar would cost consumers around Rs65 a kilo.
In the meanwhile, the Punjab government continued its crackdown against the mills to force them reduce their price to Rs45. The millers refused to oblige and the provincial government deployed its officials at their warehouses and seized their stocks. The matter was resolved after the prime minister waived 50 per cent sales tax on sugar and re-fixed the millers' price at Rs45.
The market was functioning quite smoothly and the product was available for Rs47 s kilo in spite of reports that some millers were delaying the release of their stocks when the court decision came in to topple the market upside down once more.
Price controls have always been very popular with governments worldwide including Pakistan because of their mass appeal. The possibility of political fallout of higher prices makes governments to frequently institute controls to regulate prices, particularly in times of soaring price inflation and shortages.
Before 1990s when Pakistan began to pursue free market policies, governments usually tried to control the general level of prices, regulating the prices of a whole range of commodities and products. But the trend changed after the country embarked upon the path of economic deregulation and liberalisation with successive governments selectively imposing price control on specific food and drug items.
Some times producers and suppliers are forced to lower their maximum prices to certain level called price ceiling. On other occasions, governments intervene in the market through state agencies like the Trading Corporation of Pakistan to remove the supply and demand imbalances for keeping prices down, though at a heavy cost. In a few cases governments subsidise the producers' cost of production to prevent prices from rising above the “desired” levels, although not all consumers consider the official determination of that price level as fair to them.
Price controls are meant to prevent prices from exceeding a certain maximum level. The idea is always to protect the segments of population that cannot meet price increases.
But do they work and produce the intended results?
“Price controls never work,” insists Shahid Kardar, a leading economic expert. “It is a supply and demand issue. Do you think that a shopkeeper will sell you a product for Rs10 if another customer is ready to pay Rs12 for it?” he asks.
Experts argue that price controls fail to protect most consumers. At the same time, these hurt others.
The negative implications -- temporary and long-term, direct and indirect -- of institution of price controls far exceed its benefits to the consumers, contends an economist.
“The artificial pricing mechanism never succeeds. It always results in shortages due to sudden increase in demand owing to panic buying as we recently saw in case of sugar and wheat flour in Punjab,” he says.
Official controls also discourage production of quality goods and encourage cuts in output. “Price controls offer incentives for hoarding, blackmarketing, production cuts, etc, forcing many consumers to pay for a product or an item a lot more than what they would have to pay if price controls were not in place,” he argues.
The official controls on drugs have invariably resulted in disappearance of cheap life-saving medicines from the market. The list of negative ramifications of price controls is long.
“It encourages smuggling if the global prices are higher than domestic prices of a product and if your borders are porous,” says a Karachi-based analyst. Price controls could not work effectively
Take the example of wheat which crossed borders into Afghanistan in huge quantities when the government tried to keep down the prices lower than the commodity's global prices a couple of years ago.
“That forced the government to import wheat -- in spite of a good domestic crop which was initially surplus to our consumption requirements -- at a much higher price to cover the shortages created by smuggling,” the analyst says.
More importantly, the prices rise more rapidly once the controls are lifted, triggering high price inflation. “As soon as the official controls are removed the hidden inflation surfaces suddenly. The rapid inflation is always bad for the economy as well as consumers, whom the official price controls intend to protect, than a slower and steady rise in prices,” the economist argues. In addition to the economic costs of price controls, there is also an administrative cost to such an action. We have recently seen almost the entire bureaucracy in Punjab involved in the management of 'sasta' atta (cheap wheat flour) in the province. Yet the administration was unable to ward off long queues of consumers scrambling to purchase an extra bag of cheap atta. Shortages, albeit temporary, also emerged in the normal supply chain and people who did not want to avail of the opportunity to purchase subsidised flour were forced to pay extra amount to get it or do without it for days.
Economic experts, however, acknowledge that price controls do provide some kind of relief, though only temporarily, to the poorer people battered by soaring prices.
“But the economic and administrative cost of this short-term measure is so high that prudent governments would not tread this path,” the analyst says.
No comments:
Post a Comment