IN Pakistan economic liberalism has been behind all economic decisions except in the case of agricultural production.In manufacturing, we have embraced post-quota world and in services - banking, telecom, insurance, wholesale trade etc. In recent years, the economic growth has been propelled by the services, where the free market forces have been allowed to work relatively independently.

When the price of any commodity rises, the profit margins of producers rise and in an open economy, it attracts new producers. The entry of new producers increases supply which ultimately brings down the prices and the profit margins. Thus market reaches the classical equilibrium point.

Obviously, this does not work as neatly in the real world. Making ‘market failure’ as an excuse, the government intervenes. Apparently, this state intervention leads to a worse failure, because of ‘rent seekers’.

The bureaucrats are not simply trained or well-informed for making business decisions and they just give leeway to cronies. Thus mafias and cartels emerge, which monopolise sources of production, and concentration of wealth results. The economic liberalism demands for removal of entry and exit barriers from trade and argues that given a fair chance, the market is a far more efficient and just mechanism of resource allocation.

The removal of trade restrictions in the wheat market - both internal and external - is more beneficial for all sections of the economy in the long run. Some one has famously quipped, ‘in the long run, all of us are dead’. However, in the case of wheat market -unlike capital intensive development - the policy lag would be fairly short. The reason is simple: the farmers, once getting the right price signal, would cultivate more wheat, and a decision by the farmers to switch their cultivation would normally take six months to a year. Thus long before all of us are dead, we will be able to produce more wheat, which will offset the demand and thus prices would come down.

One should expect to have a similar response in Pakistan to an increase in prices, provided the market is allowed to work. If the price of land rises, the owner of the land is likely to become wealthier. If the price of a product rises, the producer is likely to benefit. The opponents of freeing up prices in the wheat sector agree but they genuinely question the effect on the wheat buyers - the rise of inflation and the effect on the low income household budget, a large chunk of which comprises food.

In 2006, Pakistan Institute of Development Economics (PIDE), run by the government, published a joint study on wheat pricing policy conducted by a team drawn from the World Bank and Pakistan Agriculture Price Commission (Paul Dorosh and Abdul Salam 2006). This study concluded that, “analysis of price multipliers indicates that increases in wheat procurement prices (one means of promoting domestic procurement) have relatively small effects on overall price levels.

It also concluded that the market forces play a dominant role in price determination and that policies that promote the private sector wheat trade can both increase price stability and reduces fiscal costs. Conclusively, the study held that “fluctuations in production, rather than market manipulation, are plausible explanations for price increases in recent years.”

The current wheat crisis is driven by a production shortfall, as concluded in the PIDE study. When wheat is imported to offset the production shortfall, we end up supporting a wheat grower some where in Australia or the United States. Would not it be better to pay our own grower an international price? Giving the price signal is the only way to enhance the production and hence stabilise the price.

The acuteness of production shortfall in coming crop can be gauged from the simple fact that the usage of main input – phosphate - was 50 per cent less than the previous year, according to some market reports. If growers of wheat are given appropriate price signals, who would even think about reducing wheat cultivation. The government intervention in purchasing and storage through Pakistan Agricultural Supply and Storage Corporation (Pasco) has also taken a new turn.

The farmers would not like to be coerced by government functionaries and they instead tie knot with the private investor - the buyers and middleman - who promises them to pay more than the government’s procurement price. If one visits an average village in Punjab and talks to a wheat grower, he will tell him that he does not care about the official support price. The market effectively controls the price movements but the state continues to give the impression of control.

As a matter of fact, when the government takes matters like fixing a quota for flour mills in its own hands, the whole issue of nepotism and rent seeking surfaces. How can one trust our government officials to be well-informed, transparent and fair while determining the quota for thousands of flour mills?

Instead one should admit that the flour processing market is a near perfect market in the sense that no single player - or a cartel - is in a position to influence the market. If we can trust the ‘invisible hand’ for a moment, it is highly likely to create a win-win scenario.

Opponents of free market in the wheat market argue that the benefit of a higher price would be largely taken by landlords and small to medium wheat growers would not benefit much.

To determine the credibility of such a statement, we must know the composition of ownership of agriculture farms. The Pakistan Agriculture Census 2000 reports that the wheat is grown on 75 per cent of privately-owned farms, 94 per cent of Pakistan’s wheat cultivated area is owned by farms of less than 25 acres in size, which suggests that the wheat production - just like the SME phenomenon in the manufacturing - is largely characterised by small to medium farm owners. In fact only 10 per cent of farms are equal or less than one acre, which can only be used for consumption of wheat, not tradable.

In Punjab, the main feeding source for Pakistan, the large landholdings except for parts in the south have already disappeared.

A great majority of a price hike - to be fair, trade freedom - would belong to the rural poor and lower middle class. An estimate of the wheat tradable surplus and its implications for our fiscal policy, provided market prices prevail, are shown in the table below:

Wheat tradable surplus (Table)

The free market principle should come full circle. Once the agriculture market is free of state intervention - either through state subsidised inputs or by support price - agriculture income should be taxed. If a tax rate of 10 per cent - like Ushr - is levied, then it is likely to generate tax revenues close to Rs11.7 billion. If need be, it is this wheat generated income, which should be utilised to provide wheat-flour to the poor - whether urban or rural in a market-friendly way.

Even for this, one argues that privately managed utility stores are a much better option than food coupons or cash grants, which are most likely to be misused. Studies have shown time and again how cash grants have been always misused and the food coupons issued in late nineties also proved ineffective.

Advocating free market principle in the agriculture market with the backdrop of raging poverty, endless queues for atta, is dismal and against egalitarian principles. However, which patient likes to be injected or operated as it is always painful? But who amongst us would not forego that temporary pain, which is critical for long-term well-being of the patient. Economic liberalism proposes a bitter pill as panacea to the illnesses of our economy, which must be swallowed - the sooner, the better.