Price spiral: When will this nightmare end?

Several factors contributed to the price spiral during the BNP led four-party alliance (FPA) reign -- of which the rise of an importers' syndicate allegedly with Hawa Bhaban's patronage was most talked about. There were other reasons -- the rise in value of the dollar, from Tk. 53.96 a dollar in Fiscal Year (FY) 2000 2001 to over Tk. 70.00 when the FPA government relinquished power; the increase in export of vegetables and other agricultural products, from $ 18.00 million in 2000 2001 to $ 82.00 million in 2004 2005, without a corresponding increase in production; stagnation/slower growth and set- back in food grains production, etc.

Bangladesh Economic Survey, 2006, a publication of the Ministry of Finance, reveals that food grains import reached an all time high in 2004 -2005, to 3.37 million tons since the birth of Bangladesh in 1971. The all-pervasive corruption, and toll collection by the party goons as well as officials of various government departments including the law enforcers, shortage of and rising cost of seeds, fertilizer, electricity and diesel oil, as well as transportation cost, also aggravated the price situation.

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Matching demand with adequate supply is the key to ensure price stability. The liberal import regime pursued in the 1990s helped the country in meeting the supply shortages. Even in the face of dwindling foreign exchange reserves the AL government allowed free import and did not impose any ban. Competition among importers kept the prices low. Khaleda Zia's government, from the very beginning of its rule made accumulation of foreign exchange the corner-stone of its macro-economic policy, and on several occasions import restrictions of one kind or another were imposed to build up reserves. Many small importers went out of business, and a group of large importers-cum-processors-packers emerged. Forming oligopolistic cartels they monopolised trade in every item of daily necessity -- edible oil, sugar, milk powder, etc. -- and pushed the prices sky high.

In an oligopoly a few large firms dominate the market. Unlike perfect competition or monopoly there is no single theory of oligopoly. The behaviour of oligopolistic firms is determined by the reaction and behaviour of their rivals, and the assumptions they make about those reactions. There are several theories. Augustin Cournot assumed that each firm sets its output and price assuming that its rival does not react at all. In this scenario, each firm will leap-frog past the other, lowering price and increasing output to gain a larger market share. The result is, however, a market in which prices are higher and output lower they would be in a perfectly competitive environment.

A second theory is that of Bertrand competition, in which intense price competition drives firms to the perfectly competitive outcome. The third theory is that firms recognise their interdependence, and one among them leads in price setting with others following. In the fourth case all firms attempt to act as leader. The fifth one assumes that their rivals will follow their prices down, but not follow if prices rise. In the sixth case the firms collude, and the outcome is as if a monopoly exists in the market, a scenario we are passing through.

Such a market situation, at the peril of buyers and consumers, can prevail for long only when the government patronises business syndicates. It was alleged that Hawa Bhaban, the BNP chairperson's Banani office, promoted "cronyism" and protected these collusive oligopolies. As the caretaker government is not in a position to initiate policy changes it would not be possible for it to mend the scenario. The onus to create a competitive market environment once again will fall on the shoulders of the next government.

Most items of our daily necessities -- rice, wheat, edible oil, pulses, vegetables, salt, etc. -- are produced in the country. In agriculture, crop cycles are short. Further, with policy support, fiscal incentives and technological innovations it is possible to raise farm output and productivity quickly. During AL rule, in the aftermath of 1998 devastating flood, the apprehension was ripe that the country would experience serious food shortages, and donor agencies predicted that impending famine may claim as many as 200,000 lives. The government immediately drew a plan to raise production and productivity in the agricultural sector. The ministries of finance, commerce, agriculture, industry, and food and disaster management ensured adequate and timely supply of agricultural credits and inputs to the farmers throughout the country. Further, duty free import of food grains and agricultural machinery was allowed. As a result not only a disaster was averted, but the country achieved food autarky soon after.

The next elected government should draw a programme, similar to the one drawn after the 1998 flood, for helping the farmers to augment supplies of agricultural produce, fish and meat. The farmers' response would be quick if they get financial and technological support, along with supplies of inputs and credits in time. First, for facilitating credit disbursement, Krishi Bank branches should be established in each and every union of the country. Second, the agricultural subsidy should be paid directly to the farmers. The FPA government spent Tk. 1200.00 core a year as agricultural subsidy, but as the amount was paid to input suppliers the farmers were hardly benefited. In fact, they had to purchase seeds, fertiliser and diesel oil at exorbitant prices due to supply shortages. It is possible to develop procedures linking agricultural production, use of inputs and credits and subsidy payment direct to the farmers through the banking system. Third, inputs such as fertiliser, seeds, diesel oil should be made available in abundance in village bazaars, like salt and rice, at non-subsidised prices. Fourth, massive programmes to educate the farmers on improved methods of agricultural production, and use of the right inputs and equipment should be undertaken to raise farm productivity.

Fifth, the "subsistence agriculture" should be transformed into "commercial agriculture" through the spread of "contract" growing, particularly for export of vegetables, flowers, etc. "Export Subsidy" should be disbursed to growers directly. Export expansion without corresponding increase in farm output should not be allowed. Sixth, the private sector should be encouraged to invest more in agriculture, and the ceiling on landholding may be relaxed for commercial production of seeds, vegetables, flowers, etc. Seventh, use of agricultural implements and equipment should be encouraged. This list is indicative, not exhaustive.

In an article captioned "Continuing price spiral: How to tame it" appeared in The Daily Star on May 22, I inferred that "The prices have not gone up in a day and there is no quick fix either. There are, however, measures which may give results quickly. Of them, freeing retail and wholesale markets as well as movement of goods by land and water across the country from illegal collection of tolls by party cadres, organised goons and members of governmental agencies would reduce the prices by a few percentage points." Raising the efficiency at sea and land ports, and reducing cost of doing business while dealing with custom authorities would also help.

Since the early 1990s, with increased private sector participation, there has been acceleration in the GDP growth. However, in the process, distributive justice has taken a back seat. About 50 percent of the 140 million citizens of the country are languishing in abject poverty, at less than a dollar income per day. The income inequality between the rich and the poor has increased manifold. The income of the top 5 percent of the population compared to the bottom 5 percent is 84 times higher now, compared to less than 20 times in 1990.

Bangladesh was indexed as the most corrupt country under the sun by the Berlin based Transparency International for five consecutive years since 2001. However, it's ranking, but not the corruption scenario, has slightly improved last year. Its political system has become a handy tool for personal aggrandisement and enrichment. Profit motive has taken over as the guiding principle for the ruling elite. As the poor and disadvantaged were further marginalised in the society, the country witnessed unprecedented rise in religious fundamentalism and terrorism. The pro-rich, hands-off, laissez-faire approach the government of Khaleda Zia pursued in the country's economic management was at the root of most of these malaises, including the price spiral.

The next government should not only take measures to augment supplies of essential commodities but should also intervene judiciously to protect ordinary citizens' interests, in preference to narrow business interests of a few, combat corruption and bring accountability and transparency in its own dealings. Only then it would be possible to bring down prices within the ordinary citizens' reach. The price situation might go from bad to worse if the policies remain in place after election in January 2007. The people might expect a fairer deal only with a change of guard in the prime minister's office.

Ghulam Rahman is a freelance contributor to The Daily Star.