Capitalism without competition and with unbridled monopolies and cartels can lead to accumulation of economic power in fewer hands. A developing country emerging from feudal stranglehold and tribal dominance cannot afford to exchange that for a capitalist system without the essential restraints on its possible abuses.
The unfettered right of the capitalists not only to invest in their own country and expand the production facilities but also in other countries has to go hand in hand with real competition to enable the consumers get the best products and at fair prices.
If, instead, cartels and monopolies prevail, the situation is harmful to the consumers, and in the longer run to the democratic order.
Of course, capitalists invest money to make profit, but when that becomes profiteering, and the system is vitiated by hoarding and price manipulation, or artificial shortages, then it is not free market, but the exact opposite of that.
The current hoarding of wheat and flour (Atta) and subsequent raising in its prices up to Rs16 per kg is an example of gross misuse of free market facilities and upon the misery of low-income groups who have many mouths to feed.
The issue of cartels came to the fore some times ago because of the price-fixing indulged in by the Cement Manufacturers Association and now because of the high prices of automobiles which are not acceptable to the people and the high premium on popular brands like the Toyota and Suzuki.
But after raising hopes in the people, and giving assurances on the floor of the National Assembly that the automobile companies would be asked to reduce prices, Industries Minister Liaquat Jatoi now says it is not easy to take action against the powerful clout of cartels and monopolies in the manufacturing sector because of their huge tax contribution and providing jobs to millions of people.
Pakistan, he adds, is a small market and the government cannot take any risk of discouraging investors by creating troubles for them.
Replying to questions in regard to the pressure brought on the government by these groups, Mr Jatoi defended the government’s inaction by saying that the automobile sector alone employed a million people. The fact, according to auto-markets, is that it employees half a million people. Millions more are employed in the cement and textile sectors which cannot be shut.
Nobody wants these industries to be shut. In fact, the automobile industry is expanding rather fast. But when the buyer finds that he has to deposit money with automobile companies six months or more in advance or pay a heavy premium to buy the cars from the auto showrooms, he is bound to be intrigued and becomes resentful, more so when he compares automobile prices in Pakistan with those in India.
Some people presume the middlemen or auto showrooms make far more money that the automakers. The customers want such anomalies to be probed and remedied.
Nobody wants these industries to be shut. They are very essential industries. And involved with the automakers are the foreign companies like Toyota, Honda and Suzuki of Japan, Hyundai of South Korea and Fiat of Italy, with more companies coming in with their origin is China and Britain. The minister himself had raised hopes for price reduction earlier, and now he says that action cannot be taken against powerful monopolies or cartels because of the revenue factor and employment they provide.
Now he has taken the plea that it is a free market and enforcing any coercive measure would be seen as inconsistency in policy, and send bad signals all over the world.
What matters finally is the recommendations of the task force set up by Prime Minister Zafarullah Jamali. Mr Jatoi says the report would be submitted to the prime minister and a detailed presentation would be made. But he is silent on the question that whether it would be formally taken up by the federal cabinet.
It has been argued that in a free market import of such cars should be allowed at moderate rates of duty or second-hand cars permitted from abroad. The automobile industry is strongly opposed to the import of second-hand cars which may come in large numbers.
A recent study conducted by the automakers in Pakistan about prices of cars in India and Pakistan showed that after adjusting the heavy devaluation of the Pakistan rupee (Rs47 for a dollar in India against over Rs57 for a dollar in Pakistan and the higher cumulative taxation in Pakistan, the prices of cars in India and Pakistan are almost the same.
If the villain of the piece is the higher taxation on autos in Pakistan, the people want the taxes to be reduced in view of the gross inadequacy of public transportation.
The European Union and the International Monetary Fund have objected to the high tariff protection given to the auto industry in Pakistan. Reporting that, Commerce Minister Humayun Akhtar had said that he would hold a meeting with the automakers and chalk out plans for the next five to seven years to meet the challenges emerging from scrapping of the tariff protection.
The government, he said, would reduce tariff protection in a manner it did not cause any setback to the industry.
The Karachi Chamber of Commerce and Industry had earlier come up with a demand for a 20 per cent cut in car prices. The task force set up by the prime minister was earlier reported to be in favour of 35 per cent tax cut and later of a 50 per cent tax cut. The 15 per cent sales tax on cars is also a hefty levy. But if pressed to slash the import duties, the government may seek a waiver from the WTO for a few years.
Earlier Mr Jatoi had said the auto-assemblers had been directed to deliver cars within two months or pay a mark-up on the purchase price deposited with them by the consumers. But that did not come to pass either. Anyway, the interest rates are currently very low and the depositors will gain very little by that.
Meanwhile, the cars for which there is a heavy demand are being produced in larger numbers, particularly Toyota, Suzuki and Honda. The Indus Motors, producing 450 cars per month, has opted for the second-shift producing 850 cars a month.
The fact is that major carmakers have been making small profits until recently and paying small dividends to their shareholders. The Indus Motors until recently paid a 15 per cent dividend and recently came up with an interim dividend of 50 per cent because of its larger production.
The high prices of cars are the result of heavy devaluation of the rupee, high taxes and the ubiquitous corruption in the country.
The situation as it is if the auto-assemblers do not want to reduce their profits and the government does not want to reduce its taxes. And ours is a high-profit economy from top to bottom.
Popular dissatisfaction with high car prices would not have been so acute if there was an adequate, clean and efficient public transportation system. We keep hearing about the revival of the Karachi Circular Railways for ages and also the Mass Transit project but with little visible on the ground.
Adding to the problems of the auto-assemblers is the small input of components from the Pakistani vendors. India has a far larger vendor industry and its components are used in the cars assembled there and make them cheaper than Pakistan’s.
The senior managing director of Toyota Motors from Japan, Yoshi Inaba, said last week that the automobile industry in Pakistan was still in infancy. Pakistan’s economy was growing and the demand for cars was increasing, and he wanted the government to do nothing to affect its investor-friendly policies.
Not only car prices in Pakistan are high but also the cost of running the cars because of the constant increase in the prices of petrol and other oils.
Nobody wants the government to shut the major industries, but when there is a popular demand for price reduction of any item, the minimum the government could do is to undertake a thorough cost study and come to the right conclusions. And certainly taxation should not throttle the auto industry.
But relief to the auto buyers has now come from Chinese cars. A four-seater Chinese car comes at a cost of Rs185,000. It can run 30km a litre at a maximum speed of 70km.
And the Habib Group of Companies is coming up with the 170cc Sitara City cars with an ex-factory price of Rs95,000 excluding sales tax and other government levies which will raise its cost to Rs115,000. It is a hundred per cent Pakistan-made vehicle with no foreign participation. It will go about 25km a litre.
So we have to see how the little cars beat the big ones in a baffled market.