What Pakistan can learn from the economics Nobel laureate

15 Oct 2014

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Pakistan must break free of the control of State monopolies and private oligopolies. Enter Professor Jean Tirole. —Photo by AP
Pakistan must break free of the control of State monopolies and private oligopolies. Enter Professor Jean Tirole. —Photo by AP

From food items to consumer products, Pakistanis pay significantly higher prices than others in the region.

Being left at the mercy of oligopolies, which have controlled markets since Pakistan’s creation in 1947, the consumers have been forced to pay higher prices for, at times, inferior quality goods.

Another newly minted Nobel laureate’s efforts may help Pakistanis break free of the tyrannical control of State monopolies and private oligopolies.

Professor Jean Tirole of France has received the 2014 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his work on market power and regulation. His research has shown how firms gain market power and set prices at the detriment of consumers. His work is as relevant to privatisation-happy Pakistan as it is to developed economies.

Several historians have argued that the Muslim elite in British India wanted to carve out a market where they would limit competition to a select few, resulting in a mutually benefitting oligopoly. The term ‘20 families’ refers to the cartel that has controlled markets and prices since Pakistan’s inception, prompting Pakistan’s poet laureate, Habib Jalib to write his famous poem, ‘Bees Gharanay’.

In the past six decades, many more families have expanded the size of the cartel. Still the outcome is the same: a small group of very influential agro-industrial powerhouses and the industrial/commercial/real estate units of Pakistan’s armed forces control the markets.

Banks, sugar and steel mills, defence production, agriculture, livestock, imports, exports, and smuggled goods from Afghanistan and China are all in the hands of a small group of very powerful entities, who collude to set prices and create barriers to market entry.

Compared to neighbouring India, Pakistanis pay significantly higher prices for goods and services than Indians do.

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Consumer prices in Pakistan are 11.6 per cent higher than in India. Restaurants are 40 per cent more expensive in Pakistan than in India. Whereas groceries on average are 2.2 per cent more expensive, still certain items, such as milk, are significantly more expensive (26 per cent) than in India. White rice, for instance, is 61 per cent more expensive in Pakistan than in India. On the other hand, apples are 43 per cent cheaper in Pakistan. Put simply, the local purchasing power of Pakistanis is 48 per cent lower than that of Indians.

Since few Pakistanis have travelled to India, they are largely ignorant of these facts. Even lifesaving medicines in India, on average, are much cheaper than they are in Pakistan. On an earlier visit to India, we rented cars with drivers for sightseeing. On our return, we tried to do the same in Pakistan only to realise that it would cost us three time more.

The Big Mac with big price inflation

In Pakistan, even the burgers cost more; in fact 74 per cent more than what they cost in India (notwithstanding restrictions on the sale and consumption of beef in India). Since 1986, the Economist magazine has tracked the price of McDonald’s burgers across countries to determine purchasing power parity for identical basket of goods. The McDonald’s burger, being a standardised product across the globe, serves as a proxy for the basket of goods. In July 2014, Pakistanis, on average paid US$3.04 for a burger that was 74 per cent more expensive than a similar patty sandwiched in a bun in India.

So, what gives?

 Source: The Economist magazine (http://www.economist.com/content/big-mac-index)
Source: The Economist magazine (http://www.economist.com/content/big-mac-index)

Enter Professor Jean Tirole, world’s leading authority on market power and regulation. The Royal Swedish Academy of Sciences called Professor Tirole “one of the most influential economists of our time.” His research, documented in the 11 books and 200 articles, focuses on regulating large entities that may take undue advantage of their position or control over the market. He studied the post privatisation of state monopolies in various industries such as railways, telecommunications, and healthcare. Using game and contract theory, Professor Tirole found that privatised state monopolies did not necessarily return anticipated benefits.

He found two reasons for less than desirable outcomes of privatisation. First, the resulting private entities ended up becoming oligopolies (a small group of large firms) that colluded to set prices, quantity, and quality of goods and services. The other issue related to the lack of information available to the regulatory authority about cost structures and production function of individual firms without which the regulator could not prevent excessive profiting.

Pakistan’s economy is a regulator’s nightmare. Powerful entities have woven an intricate web of state subsidies that manipulate the competitive marketplace, which facilitate a few to benefit from the structured costs and guaranteed prices by the State. The rest are forcibly excluded from competing or having the same benefits. The result is an innovation deprived agro-industrial landscape where commerce and consumers struggle to survive.

My reductionist summary does not do justice to Professor Tirole’s intricate and comprehensive research on the subject. The Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences spent over 50 pages to summarise his contributions to the state of practice and the theory of market power and regulation. The purpose of highlighting these facts here is to illustrate their relevance to Pakistan.

If left unchecked, Pakistan will continue to struggle to survive with borrowed funds from the lenders of last resort. Its leaders will boast not of productivity gains or market efficiencies, but how much more debt they have secured for the nation. This hardly qualifies as progress.

Also read: Pakistan to get $1.1bn from IMF in December: Dar

To survive and succeed, Pakistan has to govern the markets better. The collapsed State and society may not be resuscitated if markets are not effectively regulated.

If Pakistan’s governments need help to change the course, they may want to reach out to the good professor in Toulouse.