by Dr. Khalil Ahmad
Generally, there are perennial complaints of dearness and high prices of various items by the opposition and people at large and with the advent of Ramazan every year, this hue and cry intensifies. Media has its own part to play in this drama. Obvious enough, this issue of high prices plays a very crucial role in the politics of elections in Pakistan. It seems that political parties, both ruling and opposition, put forward such slogans as if they will freeze prices and make promises that they will bring prices back to the level of such and such date.
This is one side of the coin. The other side is the measures the government takes to fix or control the prices of various items. Prices of important items of daily use are fixed, price-control and price-checking committees are formed, magistrates are appointed and a number of shopkeepers and vendors are fined and imprisoned.
It seems the government wins but unfortunately only for a very short period. The losers are always the consumers because instead of lowering prices, as a result of administrative measures, prices rise higher and higher. Every time and every year in Ramazan especially, the same events repeat. But, no one learns!
This Ramazan, too, is witnessing the same happenings. Before the month of Ramazan started, there were news of rising prices; media started its campaign, opposition parties jumped in to earn the favour of the masses by denouncing the failure of the government to control prices, and the government also declared to take strict action against the profiteers to maintain the prices (already higher!).
As the first step, it announced a subsidy of Rs650 million to reduce the prices of 38 essential items. Price-control committees and magistrates were assigned the task of checking prices and taking to task sellers violating prices fixed by the administration. But all these measures have failed, and prices are maintaining their level. And, sure the cost of these administrative measures and subsidy will ultimately be passed on to consumers in the form of, once again, rising prices and rising taxes.
Not only administrative but judicial measures also play havoc with the mechanism of pricing. Recently, the Lahore High Court ordered mutton dealers to sell A-plus quality at Rs220 per kg till Eid-ul-Fitr and later settle the issue of price fixation by holding meetings with the DCO Lahore and other authorities concerned. The demand of the mutton dealers was to fix mutton prices at Rs250 to Rs260 per kg. They submitted that they purchased A-quality mutton from the slaughterhouse at Rs210 to Rs215, and could not sell it at Rs190 per kg. Whereas presently the retail rate of mutton is Rs250 to Rs270 per kg.
Taking the facts at their face value, if slaughter house sells the mutton to retailers at Rs210 to Rs215, how can they sell it at Rs220.
Whether the transportation charges, shop rent, utility charges, etc, average to an amount of Rs10 or 5 with no profit in sight? Of course the government will respond to this with the promise of subsidies. Wow! Who will be paying the cost of this subsidy? Certainly, the poor consumers!
This dilemma of price-fixing and price controlling by resorting to administrative and judicial measures and then the reaction of the market forces in the form of still higher prices is inextricably linked with our educational system. What is taught in colleges and universities is not to be practiced in real life. The most glaring example is the law of demand and supply which tells that in the face of rising demand for an item, its price will rise. This explains most of the cases of rising prices of various items except where other forces intrude, mainly such as rent seeking. For example, in Ramazan the demand for dates increases, naturally its price will also increase. When the month of Ramazan is past, no one notes whether the price of dates has decreased with the decrease in its demand. Be it clear: this process is subject only to market forces, if there are extra-market forces, their intervention will distort this process. The case of oil prices is the best example of such intervention; if the market forces were in force, the trend of international market must have lowered oil prices in Pakistan also.
Another common and forgotten example is how the government’s successful controlling of roti (loaf) prices resulted in its lowered weight and quality. One can still buy roti for Rs2, but is it worth it!
In a nutshell, administrative and legal measures to fix or control prices ultimately force consumers to pay the price. Here are some of the consequences: First, such measures are in their nature short-term and ad-hoc and can not last for long.
Second, such measures go against the laws of economics and instead of benefiting the consumers, harm their interests. Economics also tells that the demand for essential items is not elastic; it means their prices will not lower as compared to the prices of other items.
Third, as the prices are an indicator for both producers (what to produce and at what cost?) and consumers (what to buy and at what price?), the distorted prices (fixed or controlled by extra-market forces) send out wrong signals and mislead producers as well as consumers. This distortion of real market knowledge results in misallocation of resources in society.
Fourth, such measures go against the interests of producers and traders also. Fifth, such measures, be they successful or unsuccessful, promote corruption, black-marketing and dishonesty.
Sixth, such measures block the lowering of prices as a result of the play of market forces which sometimes we happen to witness and ignorantly ascribe to the government. Not long ago, there was good crop of Chana (gram) and as a result of increased supply, prices of Chana and Daal (cereal) decreased.
Seventh, such measures are always political in intent and ultimately accrue benefits to the ruling elite and their allies. As a rule, they are never paying to the consumers. The sugar and cement price crises are fresh in our memory!
Eighth and last, and it is the most important, is that such measures never let the consumers be responsible citizens. They never let them learn to earn and spend responsibly. They never let them learn what to buy and at what price and what not to buy at what price. They never let them learn their rights. They never let the consumers mature. They never let them learn their own strength, the force and power of the consumer; that, how consumers reward and punish the producers and traders; that is, it is only consumers who make someone wealthy and turn someone wealthy into a pauper. They never let the consumers learn how to shop responsibly. They never let the consumers act and behave freely in the market. They never let the consumers learn to live within their own limits. They never let the consumers learn how to react to the market and control it.
In fact, this is the price a consumer is trapped in to pay in the long term. He always remains ignorant and never comes to know what is in his interest and what is not in his interest. These administrative and judicial measures only put him at the mercy of the market. They make him the poor consumer, not the Consumer King! Because they never let him realise that it is the consumer himself who can alone fix and control prices! They never let him know where to shop to buy happiness.
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Dr. Khalil Ahmad is the founder and Executive Director of the Alternate Solutions Institute, Pakistan's first free market think-tank.
This article appeared in The News International on October 30, 2006.
