Currently, one can notice a lot of divergent views in the ongoing national discourse on the causes, solutions and mode of subduing stubborn, baffling, high inflation. The official policy, considered inadequate, and the alleged market rigging, are both blamed for the surge in prices of foodstuff.
As it is a source of serious concern for Prime Minister Imran Khan, a major focus of the next year’s budget would be to control inflation.
However, to quote an observer of market trends, prices are unlikely to stabilise before the end of this calendar year or till such time production and supplies, disrupted by Covid-19, return to pre-virus domestic and global levels.
Like all its predecessors, critics say the incumbent government is providing subsidies or importing essential food items at rising global prices to improve supplies and weaken the alleged cartels. The current uptick in international prices of soya and palm oils was just brought to the notice of the National Price Monitoring Committee (NPMC) meeting held on May 24.
Prices are unlikely to stabilise before the end of this calendar year or till such time production and supplies, disrupted by Covid-19, return to pre-virus domestic and global levels
It is argued that the government has stopped short of venturing into legal issues to make ‘collusion financially untenable.’ Stay orders granted by courts to those accused of collusion by the Competition Commission of Pakistan continue to frustrate efforts to curb anti-competitive practices.
One can get a peep into actual official thinking from a news report about a recent meeting of Finance Minister Shaukat Tarin with trade bodies. He is stated to have supported a proposal of the Pakistan Business Council to restore exemptions of inter-corporate dividends in order to promote the formation of groups, development of scale and deepening of capital market through wider shareholding.
Mr Tarin is also expected to announce measures in the next budget to curtail the middlemen’s domination over the primary commodity market with a potential to improve the growers’ return by 30-40 per cent. How this will affect consumer prices is not clear.
The free market lobby argues that current prices are set primarily by market demand and supply and not as much by the fluctuating output costs while the production scale is adjusted to higher or lower levels in a changing demand environment. The production, cost and market price levels are determined by recurring boom and bust cycles. Over time, the production cost definitely does come into effective play but not in the day-to-day business transactions, says a leading entrepreneur.
The cement, sugar and poultry industry are particularly under the spotlight for allegedly operating as a cartel. The NPMC meeting chaired by Mr Tarin noted that the increase in chicken prices was driven by a widening supply and demand gap. The representatives of the provincial governments reported that poultry farmers have suffered losses over the last few months due to Covid-19-related supply disruptions and poultry disease which, in turn, fueled poultry prices. The Competition Commission of Pakistan has issued notices to 19 poultry feed companies for ‘prima facie’ collusive activities.
As it would appear from what is stated above, inflation is a complex problem that has to be properly diagnosed; the major contributing factors need to be clearly identified, and on that basis, innovative solutions may be evolved and implemented vigorously.
Some independent scholars and economists believe that the PTI government needs to focus on its own flawed fiscal and monetary policies to fight inflation. “It is mainly the adoption of market-based exchange rate mechanism which has proved disastrous for inflation as the rupee slid sharply against the dollar,” says Moazam Mahmood, the lead author of a study titled ‘Growth, Jobs, Welfare and Macro Policy in Pakistan 2020’ conducted by the Lahore School of Economics. He notes that “the heavy depreciation of the rupee in turn fed into the energy prices in the country.”
The international discourse on anti-trust moves indicates that the market rigging is more deep-seated than usually acknowledged. The idea of ‘monopsony power’ articulated long ago by eminent economist Joan Robinson of Cambridge University has now echoed in US Supreme Court and the US Congress. The conservative Supreme Court Justice Brett Kavanaugh cited ‘monopsony’ in the 2019 ruling against Apple; the US House Democrats recently concluded that Amazon deploys monopsony power and that its local warehouses tend to depress wages. A competitive market was not the normal state of affairs — it was a rare ‘special case’, wrote Ms Robinson in her 1933 book The Economics of Imperfect Competition.
A Pakistani analyst poses a pertinent question: Why have corporate profits risen by record amounts in 2019-2020 — the same years in which workers’ incomes have fallen when adjusted for inflation?
Similarly, Lynn Forester de Rothschild, a self-made progressive multimillionaire strongly committed to egalitarian causes in an interview with The New York Times asked: “ Why is Jeff Bezos the richest man in the world? He has tens of thousands of employees on public assistance.” In the 1960s, the ratio of CEO pay to average worker pay was 25 to one in the US. Today it is 320 to one.
In the case of a monopoly, a single seller imposes his prices on many buyers. In a monopsony, there is only one buyer of a good and many sellers. Ms Robinson’s theoretical works demonstrated that the single buyer could dictate his price, no matter how many sellers might be competing for his purchases.
She maintained that workers were chronically underpaid even by the standards of fairness devised by the high priests of the free markets. In Pakistan also minimum wages prescribed by the government are not honoured by all industrial and business establishments.
The teeming millions want an end to the erosion of their incomes by inflation and decent jobs with fair wages. They want essential consumer goods, quality health and educational facilities, besides reasonable housing, at affordable prices.
Published in Dawn, The Business and Finance Weekly, May 31st, 2021