In the following months, especially in the month of Ramazan, our main topic of discussion will be inflation and resultant price hike. As expected there will be political uproar at various forums. As usual this subject will then be analyzed in relation to fundamentals of economic policy such as budget deficit, increase in currency in circulation, macroeconomic stability, discount rate, USD parity, etc. This is a correct approach to any macroeconomic analysis. Nonetheless, these discussions, analyses and solutions are expected to remain limited to the corridors of powers or media channels however the common man will continue to suffer on account of increase in the prices of basic commodities for which the aforesaid micro economic factors may have very limited contribution. In the following paragraphs this writer will like to describe certain 'structural issues' particular to Pakistan, which heavily contribute towards 'price hike' especially in food items. These aberrations disturb the fundamentals of economics policy framework that results in inappropriate or immature conclusions.
It is expected, based on experience that even the best policy measures would not be able to resolve the primary flaws and structural defects in our economic transactions, at least for locally produced food items, unless we understand the demand and supply chains and their manner of operation of economic transactions in this vital sphere of common men's economy. For the sake of clarity, the discussion in this article has been limited to food items including fruits, vegetables, meat/poultry/beef only. It is a fact that this issue is not limited to food items only. These aberrations exist in almost all sectors of economy, however this primary discussion may lead to a larger debate and corrections.
Supply and demand chains in Pakistani food/agriculture produce markets
Pakistan is a country of over 200 million people. By the grace of God, except for few limited items, bulk of the food and necessary edible supplies are domestically produced.
Procurement and supply of all the food items except a few are unregulated. This means that producers are allowed to sell their products in the market at any price they can derive. There exists anarchic administrative concept of 'market committees' however that administrative mechanism exists in books only. In short, all such products in Pakistan are available on totally 'market based' system. In this writer's view this is the only mechanism possible in the present time.
Since the bulk of the items of daily use are locally produced therefore there is a direct linkage between the 'Rural Economy' being the producer and the 'Urban Economy' which is the user. It is an undeniable fact that over 60 percent of the population of the country which is over 130 million lives in urban centers. They are 'buyers' of the agricultural produce. This creates a larger demand bulge.
Pakistan's real economic cycle especially in relation to food/agriculture products can only be properly and appropriately analyzed if there is complete knowledge and understanding of supply chain, value addition and profit margins at various stages. In this author's view both, rural and urban parts of economy are suffering in the present system as rural population being the producer are not getting right (appropriate) prices of their produce, whereas the consumers, being unban population, are paying the prices which are many times higher than the prices received by the producers. There are huge aberrations in the form of very high margin for the traders (middlemen) without any documentation and incidence for tax.
The aforesaid hypothesis will be easier to understand if we take any one item of daily use. Let us take an example of one fruit of daily use being 'banana'. Banana is produced in areas near Karachi and consumption is mostly in Karachi which is the largest metropolis with a population of over 22 million. Banana is produced in areas around Karachi within a radius of less than 100 to 150 miles. The prices paid to the producer are, as per an empirical estimate, not more than 15 to 20 percent of the price at which the said item is available in markets in Karachi. The difference of 80 to 85 percent is the 'cost of value addition' and the 'profits earned' by the middle men. The crux of discussion in this article is therefore:
(i) Is that 80 to 85 percent addition (or whatever it is) is justifiable in any economic sense? Furthermore, within that percentage there has to be some benchmark for cost of value addition such as wastage, transportation etc. and the undesired profit earned at various trade levels?
(ii) Is the middle men and the transaction undertaken is in any manner part of documented economy or liable to any taxation or accountability to public at large for super flows profit in any sense? and
(iii) Does any macroeconomic analysis or discussion provide any solution unless the aforesaid two questions are answered in an economy (Pakistan's) where almost whole of the food/agriculture product are produced domestically?
The author's candid answer is in the negative. Furthermore in this author's analysis this is the widest gap or the missing link in our economic analysis. We will be living in academic ivory tower of economic analysis if we consider that any fruitful and constructive deliberation or attempt for change can be made unless concerted efforts are made to find answers to aforesaid questions/aberrations. This does not mean in any way that the fundamental macroeconomic propositions, theories and principles are not applicable in Pakistan. All these principles and canons are equally applicable in our economy however these aberrations disturb all rational equations and solutions.
The role of traders
There is no doubt that traders add value to products. Commerce is essential element for existence of human civilization. However in our country especially in the food and allied sector, which are primarily agriculture produce 'negative' (unproductive)role of such traders, their manner of operation, and in many cases, their mode of financing which is close to extortion is being constantly ignored intentionally or otherwise for ulterior motives or lack of knowledge. This is a dilemma of Pakistan's economic structure. The author in his earlier article has stated that in general terms 'Economy of Pakistan is Run by 'Arthi-Mafias'. The primary question that has emerged over the time due to lack of real economic understanding of ground realities about Pakistan's food and essential items trade is whether as a country Pakistan has been able to determine and decide the role of middle man and socio-political power such groups have acquired over the years. Are we not the hostages to a system where everybody, except a few, is suffering? Is there any logical reason for this price hike and unnecessary disequilibrium in earning levels and income distribution?
Size and magnitude
The general perception about the size of food/agriculture produce economy and the margin earned by the middle men is much below the generally conceived level. That segment of economy is huge in size and is affecting a large part of population in extremely adverse manner. The end result can be exemplified by a usual experience which we all face on a day-to-day basis. In Pakistan, a university professor cannot afford to buy a 200 yards house whereas his meat seller (butcher) which he (the Professor) visits very non-frequently, due to lack of resources, has unlimited unaccounted for and untaxed means for buying houses and shops at any inflated price as demanded. As stated above, no exact estimate of that part of economy can be made however using the same principle of 80 to 85 percent addition over the product's original price there can be an easy calculation of quantum only in the trade of one fruit say 'banana' which is sold in the metropolis of Karachi. The amount will be in billions only in one product only.
Negative effect on agricultural economy
Since the prices paid to actual producers are much lower than the market price the real sufferer is the producer or the agriculture economy. This is one of the primary reasons that there has been no 'Real Investment' by the growers/producers in agriculture sector.
(To be continued)
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