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June 13, 2021

Toothless watchdogs & fanged cartels

LAHORE: We need to differentiate between growth achieved by an enterprise by increasing the prices or by selling more products at the same price through productivity increase.

Productivity is the major issue in Pakistan. Budget documents always ignore this aspect of our economy. Productivity is a measure of economic performance that indicates how efficiently the inputs are converted into an output. We are low in productivity in power production, in its utilisation by our industry and the general output of our workers in different industries. We mostly observe cost-push inflation in our country.

The prices do move up if the input costs increase. In these situations the most efficient producers have an upper hand. If the demand is low they edge out competitors by keeping their prices a shade lower than the costs of the competitors. If the demand is high they go with the market rates and make more profit than their inefficient colleagues in that trade.

It is unfortunate that the culture of inefficiency continues to flourish in Pakistan because the state comes in with subsidies to bail out the inefficient or the industry associations form cartels to ensure the minimum rates of items they produce is high enough to ensure the survival of the most inefficient. In both cases the efficient producers have a field day as they earn much higher profits than their inefficient counterparts. They encourage cartels as well as demand for subsidies as it increases their wealth. Whenever the state withdraws subsidies the inefficient cave in while the efficient enjoy the monopoly.

The same thing happens if a cartel is broken or smashed by the antitrust authorities. However both these things rarely happen because the system helps both productive and low productive enterprises. The efficient producers are accumulating wealth both by maintaining cartelised prices and by increasing their productivity.

The difference is that the efficient companies go on gaining strength. They build up reserves and regularly invest in technology to increase the productivity gap with the inefficient enterprises. Since the inefficient ones barely survive on subsidies or cartelised prices they lack the capital to go for technology upgrades. We have seen in recent decades that some business houses have expanded their businesses from their core business of textiles to cement, sugar, power, dairy, banking, real estate and shopping malls. These enterprises are the largest exporters and enjoy lion's share in the domestic markets.

The lethargic producers are slowly dying. There is a limit of inefficiency that a market can absorb. We saw over 100 spinning mills closed over a period of seven years because even the subsidies could not cover their inefficiencies.

At the same time we saw around 50 affluent textile families doubling their capacities. Because of continued government subsidies they are operating both their low-tech plants and highly efficient units simultaneously. They have substantially increased their footprint in the domestic market by opening hundreds of retail outlets.

At the same time they were extremely careful while investing in other fields. Their cement plants are state of art units producing the commodity at globally competitive rates. The few sugar mills they operate are much more efficient than the majority of sugar plants operated by political families. They have established state of art dairy farms; the shopping malls that they own are the best in the country and are a crowd puller.

In the power sector they succeeded in establishing plants on the buyback guarantees of the state at a hefty profit on investment. They operate the most efficient banks in the country. The way things are moving the day is not far when most of the wealth would be concentrated among maximum 30-50 conglomerates that know the advantage of efficient operations.

There is no harm if these conglomerates operate ethically. They have become so strong they can easily deny entry to the new entrepreneurs in their fields. In textiles they were caught off guard when small apparel exporters slowly established themselves in the global markets and are competing with them in this value-added sector. But the investment in cement and sugar sectors has been restricted. Absence of effective anti monopoly policies has encouraged them.

The Competition Commission of Pakistan (CCP) seems helpless in removing the elitist culture in Pakistani economy. Most of its decisions have not been given the stamp of approval by the superior courts. The cases of appeal against CCP decisions have been pending in the superior courts for almost a decade. The human resource in CCP must have lost the enthusiasm to address antitrust behaviour.