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June 28, 2019

Sugar is forever


June 28, 2019

Pakistan is an economy where cartels rule the roost. These cartels collude to set prices by supplying the market short. As the price goes up, the businesses make windfall gains at the expense of consumers.

This contrived supply-induced price increase has been going on for years without let or hindrance. Easily, the most powerful of these cartels are the sugar mills – the temple of Mammon where every government worships as a matter of course.

One of the fundamental weaknesses of laissez-faire economics, which provides the intellectual basis of a market economy like Pakistan, is that it postulates perfect competition – a situation in which firms can’t raise prices by manipulating the output – as the dominant form of market. In reality, perfect competition is an exception, and as a rule markets are characterized by imperfect competition. In such a market, enterprises have two courses open to them. They may confront one another and play a zero-sum game mainly through price wars. Alternately, they may regard discretion as the better part of valour and instead of fighting play ball with each other. Such collusive behaviour breeds cartelization.

The members of a cartel maintain their separate identities and financial independence but pursue common policies, thus exercising monopoly power. The collusion may take several forms ranging from price fixation through allocation of sale quotas to dividing up markets, whereby one or a few firms supply exclusively in a particular territory. Logically, the price charged by a cartel is higher than the competitive price; otherwise cartelization isn’t worth the effort. This makes cartels anti-consumer. They may also breed inefficiency as firm have little incentive to lower prices by adopting cost-saving technologies or techniques. Adam Smith hit the nail on the head when he observed: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Because of their collusive behavior and its adverse impact on consumers, cartels are generally outlawed. So instead of striking a formal collusive agreement, the firms in a cartel take to tacit collusion. Hence, one of the challenges for the government in a market economy is to put in place an effective competition or anti-trust regime to check cartelization.

On the flip side, cartels are typically subject to the prisoners’ dilemma. While cooperation is in the interest of the members, each of them has an incentive to cheat. Hence, one of the most serious challenges for a cartel is to make members adhere to the agreement. This can be done by demonstrating the capability to penalize the renegade members. But more than the fear of punishment, successful working of a cartel over the years keeps it going.

To curb anti-competitive practices in Pakistan, the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 was promulgated. The law held the field until it was upgraded into the Competition Ordinance, 2007, which was replaced with the Competition Act, 2010. The statute, inter alia, prohibits cartels. Section 4 of the Act states that undertakings or associations are prohibited from entering into any agreement or making any decision with regard to the production, supply, distribution, acquisition or control of goods or the provision of services, which have the object or effect of preventing, restricting, reducing, or distorting competition within the relevant market.

So the regulatory framework to promote competition is in place but it has not been effective in curbing anti-competitive practices, particularly cartelization. Interestingly, the year 2010 in which the Competition Act was enacted also saw Pakistan’s worst sugar crisis in recent years when all of a sudden sugar became a scarce commodity and at the end of the year its price had shot up to Rs120 per kilogram. As the sugar price went through the roof, the federal (PPP) and Punjab (PML-N) governments blamed each other for the crisis.

After textiles, sugar is the country’s largest ago-based industry comprising about 90 sugar mills. In Pakistan, sugar is produced almost entirely from sugarcane; a very small quantity is also produced from beet. Sugarcane production went up from 63.9 million tonnes (MT) in 2007-08 to 83.3 MT in 2017-18. Sugar output increased from 4.7 MT to 6.6 MT during this period. The area under cultivation for sugarcane increased from 1.24 million hectares (MH) to 1.34 MT.

Why should the increase in the output of sugarcane and sugar be cause for concern? One, a kharif crop, sugarcane competes with cotton for cultivation – that is to say, farmers can grow either sugarcane or cotton on their scarce land. Every year, the government fixes the support price for sugarcane, which is normally higher than the price the growers would get under competitive market conditions. The greater the sugar output, the more benefit the growers drive. This means the subsidy is calculated to benefiting the big growers, who are politically very influential. The support price induces farmers to grow more sugar at the expense of cotton.

Not surprisingly, the area under cultivation for cotton has gone down from 3.05 MH to 2.70 MH during last one decade. Now, cotton provides the basis of Pakistan’s largest industry and the lynchpin of exports – textiles. Therefore, if the area under cultivation for cotton is shrinking, there should be concern.

In 2017-18, the average sugar consumption in Pakistan was 5.1 million MT – 1.5 MT less than its production. Given such a substantial gap between sugar demand and supply, Pakistan should not face sugar shortage. But from time to time, all of a sudden the market runs out of sugar and new stocks become available only after the commodity’s price has ratcheted up. Very recently, the budgetary proposals for the new financial year (FY2020) provided for revision of GST on sugar from 8 percent to 17 percent. But the suppliers bid up the commodity’s price as soon as the budget was announced. Even the prime minister’s adviser on commerce and minister of state for revenue had to admit before a National Assembly committee that the sugar price increase was contrived.

The surplus sugar – the difference between domestic production and consumption – should be exported. The only problem is that due to distortions in the sugar supply chain, domestic sugar prices are much higher than international prices. For example, in 2017-18 the average world sugar price was $376 per MT, while that in Pakistan was $499 per MT. Sugar can’t be exported until a heft subsidy worth billions of rupees is provided to millers to sell their surplus stock in international market. Hence, it’s Pakistani taxpayers who face a triple whammy. First, they subsidize higher sugarcane and sugar output, then they buy sugar at a higher price, and finally they subsidize sugar exports.

Political and economic powers go hand in hand. Nothing bears this proposition out like the sugar industry of Pakistan. Top leaders of all the major political parties – the PTI, PML-N, PPP and PML-Q – have stakes in the sugar industry. Sugar provides arguably the strongest bond among politicians. That’s the reason governments come and go but the interests of the sugar industry are always protected.

This article may be closed with a real-life example: Elbert H Gary was chairman of the board of the United States Steel Corporation in the first decade of the 20th century. He would hold regular social events, known as Gary dinners, to which top executives of steel manufacturing companies were invited. At the dinners, the manufacturers would share with each other information about their level of output and expenditure and under Gary’s leadership would decide on the price. The US government challenged the legality of the Gary dinners in the Supreme Court, which ruled that they amounted to price fixing.

In Pakistan as well, there is a Gary for the sugar industry in every government. It is not much difficult to conjecture who the present-day Gary is. No, we don’t need to fly in a chartered aircraft to make a correct guess.

The writer is an Islamabad-based columnist.

Email: [email protected]

Twitter: @hussainhzaidi

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