Price rationalization - I

Prices determine the level of affordability for consumers, and work as an incentive for producers. Market imperfections deter goods, commodities and services from reaching true price signals. Given these imperfections, governments need to intervene in markets so that those prices are reached or achieved that successfully keep a healthy balance between affordability and incentivisation.

Government intervention- especially in developing countries like Pakistan, where markets are traditionally weak due to very inefficient institutional setup and lack of safeguards against various interest groups influencing prices to their advantage should be both in terms of reducing market imperfections, on the back of lowering information asymmetries and transaction costs through better governance efforts, and also through initiating an active price rationalization effort like creation of a price commission (PC).

Hence, Pakistan needs both, and in the real, monetary/financial, and external sectors of the economy. A broader focus on all these sectors is essential, since prices of goods and services on one hand, and prices of labour on the other, both require correction/rationalization to reach a healthy level of equity and efficiency for the economic agents. Moreover, in addition to economy, this rationalization will also help strengthen the level of democracy in the country by better empowering people economically.

In the real sector, agriculture markets need better institutional support through improved governance and incentives. The high level of food inflation of 20-plus percentage points which indicates the need for a price correction through improving market dynamics and active government intervention, but a deeper analysis also highlights that price distortion in favour of retailers, wholesalers and middlemen needs rationalization, especially because the actual producer of agricultural products, the farmer, receives the lowest prices.

The agricultural market, left on its own or with little government intervention, is neither allowing the agricultural sector to grow nor is it reducing income inequalities; producing negative consequences for rural poverty and unemployment levels, not to mention the increase in rural-urban migration that this price irrationality is causing. On a wider scale, increase in income inequality on the back of wrong price signals that the agricultural markets have been producing has weakened the independent thinking and overall capacities to exercise the rural vote properly.

Wages or price of labour in the real sector, especially in the agricultural sector also need rationalization. Market imperfections have meant that while one group of people - retailers, wholesalers and middlemen - is able to influence prices in its favour by keeping them artificially high, the rest of the economic agents, rural labour and farmers in general, find it increasingly difficult to match wages and earnings with these prices for consumption and production purposes. This situation requires serious interference by government, for which a price commission in the agricultural sector should be set up.

The Price Commission for Agricultural Sector (PCAS) should analyse the price determination mechanism for agricultural markets for identifying procedural/technical level loopholes, in an overall effort to augment the whole process. At the same time, it should look at the institutional frameworks for facilitating and monitoring markets. Here, the governance and incentive structures need to be revisited for bringing efficiency in price determination, and in understanding requirements for subsidy interventions, both in terms of subsidy estimation and its proper targeting.

PCAS should focus on both the agricultural markets, and the associated labour markets. It should look to address price distortions at each level - from determination of prices on-farm, to price of taking produce to wholesale market, and determination therein, to ultimately pricing in retail markets, and in factories/mills as agricultural intermediate goods, and the pricing of production from these factories/mills. For example, wheat and flour should be properly priced, and adequate subsidy intervention- one that procures equitably and determines the level of subsidy efficiently - in the shape of an appropriate procurement policy introduced by the government.

Parallel to it, the process of determination of wages for each segment of work should be undertaken. Moreover, PCAS should also look into the prices of inputs in crop production, and the wage levels determination for the labour involved in the agricultural production, ensuring formulation of a strategy to bring parity over the short- and medium-term in the gender wage-gap in the agricultural labour sector. This is because price rationality of reward for labour is currently heavily tilted in favour of the male workers, although productivity of women for most of the involved work is quite similar.

At the same time, it is not enough to determine these wage levels, and therefore, rather a sound institutional - governance and incentive - strategy needs to be placed which ensures that the determined wages reach workers in full and in a timely manner. The banking sector will need to be involved more in this direction as well by PCAS to ensure that price of labour is drawn by labour in an efficient manner, with least transaction costs faced by them in doing so.

The Commission may be formed as an independent authority at the level of each province, and is given needed legal power by each province so that provincial agricultural-related departments cooperate with it appropriately. At the same time, to reduce information asymmetry in the agricultural market, PCAS should look at the performance of agricultural research institutes and Pakistan Bureau of Statistics (PBS), and envisage an appropriate strategy to bring much-needed improvements in this direction. Moreover, to check the presence of cartels and overall anti-competitive market practices, PCAS should work actively with the Competition Commission of Pakistan (CCP), and with multilateral/bilateral development partners working to bring about such improvements.

It should also see the extent of presence of financial sector in relation to the ways in which they impact price determination of produce and labour in the agricultural sector. It should suggest a strategy in bringing improvements here, and also should increase involvement of climate change and disaster management-related authorities in reducing potential price-related shocks from aspects dealt with by these authorities.

The commission would be required to examine the functionality of the Office of Price Administration and Civilian Supplies (OPACS), the US that works as an independent agency. Specifically, the Commission should learn from the much appreciated work and thought process of the great American political economist and academician, John Kenneth Galbraith, who successfully served in OPACS in the capacity of both assistant, and department administrator. Later on, he also produced important work in this direction, for instance, his book 'The theory of price control'. Both his thought process and the Emergency Price Controls Act (1942) of the US under which OPACS was established could be important learning sources for PC.

(To be continued)

(The writer holds a PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund. He tweets@omerjaved7)