The futility of the inflation blame game

KARACHI: It is that time of the year again: the silly season when politicians gather around and talk about the rise in commodity prices and pretend to care about the crippling burden of inflation on the average Pakistani. Unfortunately not one member of the august deliberative body that is the Senate of Pakistan seems to have been able to diagnose the real problem when it comes to food price inflation.

Because the problem is neither hoarding by traders nor the incompetence of the Utility Stores Corporation in sugar acquisition, as Senator Ishaq Dar seems to think. The problem is that the government feels it can control prices of politically sensitive commodities but has no plans to deal with the consequences of its own actions when the market refuses to obey Islamabad’s orders. Everything else is a symptom that flows from this central disease.

In trying to establish prices that are not economically justifiable, the government creates space for all sorts of illicit activity to flourish. For instance, when it forces sugar to be sold at artificially low prices, the commodity is bought up mostly by traders and hoarded until the eventual price rise materialises.

The hoarders would not have been able to take advantage of this arbitrage opportunity had sugar prices remained at their economically sustainable levels.

And the Trading Corporation of Pakistan cannot possibly be expected to buy sugar at low prices: the only time they are ever awarded the mandate to purchase is when prices are high, both locally and internationally. They do not have the storage capacity to buy at low prices and keep sugar in stock until a shortage arises. Neither do they have the authorisation to carry out such a series of transactions.

Government-administered pricing never benefits consumers, only those with enough cash to buy out entire stocks of sugar and enough storage to wait until the market forces the government to yield once again. So who exactly is to blame? The hoarders who simply act on an opportunity that presents itself or the government that creates the opportunity in the first place? Have we not yet learnt that commanding the market to lower prices almost always fails?

There are several failures in the market and it would be entirely appropriate for the government to step in and correct them. But the current administration – and indeed, most that preceded it – seems to be unable to understand the market forces at play when it comes to agricultural commodity pricing. When the government sets prices for any item, it depresses investment in that sector and leads to low productivity which in turn is reflected in higher prices.

The government can try ordering those prices to go down, as the Lahore High Court recently did, but this is doomed to failure as has been demonstrated by the fact that sugar prices are nowhere near the court-mandated Rs45 per kilogramme anywhere in the country. It would be nice if, for a change, the government decided to let the markets take their course.

Published in The Express Tribune, September 2^nd, 2010.