The rationale for market liberalisation


LAHORE: South Asia has the largest concentration of poor and undernourished people in the world, so food security – especially in basic staples such as wheat, rice and corn -must assume a greater importance on the agendas of all the governments of the Subcontinent.
South Asia witnesses a sharp upturn in inflation, ranging from 50 to 100 percent in the prices of basic staple products owing to persistent food price inflation in 2007-08 in global markets. The unprecedented price spikes drew considerable attention from the governments of Pakistan, India and Bangladesh.
Analysts believe that South Asian countries need a greater degree of self-sufficiency and reliance on trade to achieve food security. Recent research conducted by the International Food Policy Research Institute (IFPRI) states that due to their common colonial heritage, Pakistan, India, Bangladesh, Nepal and Sri Lanka face related issues in their food policies and food security problems.
The study indicated that in India and Pakistan, government intervention in domestic foodgrains markets continues to be very large and fraught with serious inefficiencies. It points out, for example, that the marketing cost of private sector is only around 70 percent of the cost of the Food Corporation of India. Similarly, the “incidental” charges for Pakistan’s Agricultural Storage and Supplies Corporations (PASSCO) were 15 to 27 percent higher than for private traders in 2000-03.
Research indicates that in India and Pakistan, government policies that regulate commodity movement across states also result in a lack of spatial integration.
The findings for India showed that large-scale gains in efficiency arose with the removal of zoning restrictions because then private trade could occur between neighboring states driven by arbitrage possibilities rather than their deficit-surplus status. This is in contrast to the practice of government agencies, which traded directly between surplus and deficit states over long distances.
It points out that the removal of zoning laws combined with external trade liberalisation allowed some deficit states to source their food from international markets rather than from surplus states within the country, because of differences in the international and domestic transport costs. It underlines that in Pakistan, the real prices of commodities remained more stable than the prices of commodities that involved government intervention.
It highlights that in net importing countries such as Bangladesh, Nepal and Sri Lanka (and, until recently, Pakistan), trade liberalisation will increase import competition, which will lower domestic prices.
The research find out that in agricultural markets, especially food markets, traders have relatively more market power than either farmers or consumers.
This works in two ways: Traders have oligopsony – that is, the market position of many sellers with few buyers – in their transactions with farmers while having the position of oligopoly – many buyers with few sellers – in their transactions with consumers. This strong position allows them to be price fixers and not price takers in both transactions. The large margins for traders are often touted as the justification for government intervention in agricultural markets.
Quoting the example of the Sri Lankan case studies, the study suggests that losses to paddy producers from trade liberalisation can certainly be minimised if the oligopsony power of traders can be restrained and border reforms implemented. It states that in Bangladesh, absence of large-scale government intervention in the output market is a major cause for the increase in competition in trading services. The number of rice traders increased twelvefold in approximately 30 years – from 4,000 in the 1960s to more than 48,000 in the 1990s. This rise in competition between traders has ensured that farmers are able to (1) avoid distress selling, (2) hold a fairly high proportion of on-farm stocks and (3) sell their produce near the farm rather than in distant markets, thereby avoiding transportation costs, research highlights.
The study suggests that as food-surplus countries, India and Pakistan must undertake further measures to correct market imperfections. It is time to restrict the government control over private participation in trade and maintain orderly conditions in the foodgrains markets. Promoting competition, devoid of policy-induced distortions, will help improve resource allocation by farmers, as well as allow consumers to benefit from competitive prices of food. Researchers believe that in a competitive environment, the private sector can also impact on other spheres with a direct bearing on agriculture and food security, such as in agricultural extension services, value addition in agriculture, and the development of infrastructure.