THE PTI government’s measures to tackle the recent spurt in sugar, wheat and vegetable prices have thrown up within regulatory bodies a vital underlying issue of how the prices of products and services should be determined to protect the consumers.

In setting market prices, official competition analysts observe that the most important factor is the relationship between the market price and the cost of a product or service being offered by a dominant entity or group in a given market.

In a policy note, the Competition Commission of Pakistan (CCP) has urged the Securities and Exchange Commission of Pakistan (SECP) to immediately reinstate the requirement of cost audits as per existing laws, particularly in sectors specified by it.

The commission has stressed that an SECP cost audit and its creditable data will help relevant official agencies to make policy interventions in a fair, transparent and independent manner. It would facilitate government agencies to make informed decisions while extending subsidies, support prices and price controls.

To elaborate the point made by CCP, one may point out that the PTI government has just announced a Rs50 billion package for the agricultural sector that earmarks a Rs37bn subsidy for farmers for the purchase of fertiliser.

Fertiliser, cement, sugar, oil and wheat flour are the prioritised sectors which the CCP has recommended for SECP’s immediate cost audit. Similarly, there is an official move to fix the support price for the cotton crop as growers are shifting to other crops where returns are better.

In these days of lockdown, it would be interesting to look into the justification of two leading car assemblers raising prices of their vehicles despite plant closure, zero production and no sales for the past over two months

In the case of farming, there is a crash in prices if a crop is in surplus of the domestic demand whereas prices surge in the case of a shortage. Industrial capacity utilisation is however promptly adjusted to varying domestic and international demand, by higher or lower utilisation of installed capacity as per the requirements of the business environment.

But in some cases, the prices are manipulated by the presence of a few errant dominant players in certain market segments. A lot of government funds are blocked in ensuring the supply of essential items of mass consumption at affordable prices to urban dwellers. Expense on subsidy is also a burden on the national exchequer.

The commission says any limitation placed on a cost audit may promote anti-competition practices that in their very essence can be detrimental to the public interest. The policy note points out that any information given by any undertaking pertaining to the cost of expenses incurred to be creditable cannot be guaranteed without a third party without any vested interest carrying out an independent cost audit.

Though administrative measures may bring temporary remedies, they are no substitutes for addressing systemic failures. The removal of CCP’s executive chairperson and its two members have been followed by the resignation of commission’s board chairman Khalid Mirza. The prime minister’s advisor on institutional reforms Dr Ishrat Husain has advised the government to remove the stumbling blocks in the smooth functioning of the commission.

The federal Cabinet has directed the auditor general of Pakistan to club 127 litigation cases pending in the courts against the CCP decisions including those involving unrealised recoveries of fines amounting to Rs27bn. However, competition laws need to be amended to minimise litigations.

Systemic failures should not be confused with individual and institutional failures. Policy changes suggested by the competitive agency should be decided by the relevant authorities on merit and should not be ignored as happened in the past to its certain recommendations. In this context, the CCP’s policy note to SECP assumes special importance.

Price is considered as the end product of all economic activities propelled by a variety of domestic and international factors. Consumers’ interests can only be fully protected when a corresponding remedial action is promptly taken when they are adversely affected by any notable development.

The international prices of such items as oil fluctuate wildly determined solely by supply and demand, virtually delinked from their cost of production. Cartels such as in the oil industry divide the market among its members. They fix the quantity of goods to be produced. They fix prices. This is how profits are shared by various enterprises. They try to bar entry of new entrants, often successfully, into the market. And the free market takes a big hit.

Then, in the case of large scale capital-intensive industries employing the latest technologies, it needs to be observed how the benefits of productivity improvements are shared with their consumers. In niche markets, some big firms find room to raise prices to compensate for the reduced demand for their goods. Consumer’s interest takes a back seat.

In these days of lockdown, it would be interesting to look into the justification of two leading car assemblers raising prices of their vehicles despite plant closure, zero production and no sales for the past over two months. The question is: what prompted them to do so?

Apart from protecting domestic consumers against unethical trade practices by a segment of the market, the commission can also play a vital role in making the domestic economy globally competitive.

Considerable global evidence has surfaced in independent quality research that when trade liberalisation leads to efficiency, it has a one-off impact. It does not necessarily lead to sustained increases in the rate of productivity growth. If trade liberalisation is associated with greater volatility, there is a possibility that may lead to slower growth in productivity. That is what possibly is happening in Pakistan.

Some studies also show that trade liberalisation may negatively impact developing countries by changing the prices of goods they consume and produce. That calls for corresponding remedial measures. Ensuring price stability and providing essential items at affordable prices to consumers is a systemic problem that needs policy focus.

Published in Dawn, The Business and Finance Weekly, May 25th , 2020