Pakistan should refrain from picking economy 'winners'
https://arab.news/zqb5h
The role of the government was envisaged by the founder of Pakistan to primarily protect people’s freedoms to live by their own individual ideas and goals, through a system of rules applied equally to all citizens. It is also true that progressive democracies try to refrain from deciding for the people their personal choices or picking winners in commerce. While the Pakistani state has made its presence felt in many more aspects of life than should ideally be the case, it can be argued that these interventions are in keeping with cultural norms, and therefore not detrimental to society.
On the other hand, frequent state interventions in the economy have clearly proven harmful. They have neither ensured the optimal allocation of resources nor placed the country on a growth trajectory that has greatly enhanced general wellbeing. Not only have tax and trade policies shielded less efficient incumbents from competition by innovative new entrants, but in addition subsidies to less sophisticated industries have hindered the development of more complex ones. The fixing of support prices for certain agriculture commodities have had the perverse effect of incentivizing suboptimal usage of land holdings and sluggish improvement in yields.
In line with its reform agenda, the present government has sought to restructure the economy to create a more competitive environment. It can take credit for proactively pursuing a decade-long case to win a landmark high court ruling, which has empowered the Competition Commission of Pakistan (CCP) to act against anticompetitive practices.
The previous government had maintained an overvalued exchange rate that subsidized imports, and in order to protect certain preferred domestic players from the resultant cheap imports, a maze of regulatory duties and increasing tariffs were instituted. In contrast, the present government has allowed the rupee exchange rate to be determined by the market and has allowed it to depreciate, which has made imports more expensive than earlier. To partially offset the inflationary impact and, more importantly, in order to lessen the effective protection rates on products, regulatory duties are also gradually being withdrawn and tariffs reduced.
It would be unfortunate if farmers who are successfully growing competitive crops are persuaded by support prices to divert land and resources to cotton instead.
Javed Hassan
Effectively the government has until now tried to boost industrial activity and export performance by encouraging industry participants to focus on seeking new markets, innovation and improving productivity, rather than price distortions and rent-seeking through tariff protection or subsidies. It is therefore disquieting to see that the Economic Coordination Committee (ECC) is considering fixing an intervention price for cotton - ostensibly to reverse the declining acreage of cotton cultivation. The finance minister has reportedly indicated that ‘price control regime on agricultural commodities needs to be reinstated to improve agricultural output’.
Commenting on its pivotal role in an economy, the economist Milton Friedman had observed, “Prices perform three functions in organizing economic activity: first, they transmit information; second, they provide incentives to adopt methods of production that are least costly and thereby use available resources for the most highly valued purpose; third, they determine who gets how much of the product - the distribution of income. These three functions are closely interrelated.”
Price controls that prevent markets from signalling the conditions of demand or supply interferes with the transmission of accurate information and therefore efficient allocation of resources.
Pakistan has been fixing wheat and sugarcane prices for many decades now, but still the yields in these cash crops remain significantly below the world average and are not enough for the country to achieve self-sufficiency. Given the lack of success of price support mechanisms, it is unclear if desired objectives can be attained by fixing the prices of cotton rather than looking at other determinants that influence yield and overall production volumes. Supporting prices not only carries the risk of placing an additional fiscal burden on the government, but it is not certain that it will improve yield or provide cheaper cotton to textile manufacturers. On the contrary, it is likely to increase input costs for value added cotton textile manufacturers and diminish their competitiveness in the global market.
The success of maize and rice producers in Pakistan has practically demonstrated the efficacy of markets operating autonomously in enabling more optimal allocation of resources than under a price control regime. Cultivators of these cash crops have relied entirely on market prices with little or no provision of subsidy from the government, and yet in both, yields and output have profitably increased over the last decade through use of better seed varieties and improving farming techniques. It would be unfortunate if farmers who are successfully growing competitive crops are persuaded by support prices to divert land and resources to cotton instead.
The government should eschew measures that distort market prices. Instead of trying to ‘pick winners’, the government can look to assist farmers and businesses to innovate, apply new technologies, and improve skills that allow winners serving domestic and international markets to emerge, while letting others that cannot compete ebb away.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
