Miseries of price hikes
IN reply to my email inquiry about how price hikes are affecting his life and living, a reader of my column -- a former Vice-Chancellor and now a professor wrote:
"Dear Prof. Dewan: Thank you for the email. Actually, it is surprising how we are surviving. I have a small family of five -- including a maid-servant. At the end of the month, I get Tk. 50,000. My wife is a teacher, whose paycheck is about Tk.15,000. My son, who had been working for Siemens until recently, lost his job along with most other engineers of the company. My youngest daughter is a student at Holy Cross College. We have a car and a driver that cost on average Tk. 20,000 to 25,000/per month. With just Tk. 7000/month salary, it is hard to describe how the driver manages his family of three.
The prices of things are increasing daily, violating all market regulations, and there is no relief in sight. People like us are afraid to go grocery shopping because of the uncertainty of price hikes. People like us are helpless and see no future to look to. I hope you got some idea of what you asked for."
The above narrative of the hardships of an upper income citizen is nothing compared to the 90% or more Bangladeshis whose gross household income is much less than Tk. 65,000/month. Some might suggest that the professor would be somewhat better off without the driver and the maid. But such arguments ignore the fact that the professor is providing employment to two people who are supporting two or more family members of their own.
In such a market condition, it is imperative that the authority correctly identifies the sources of the price hikes, and then take remedial measures.
A few days ago, food minister Abdur Razzaque blamed escalating food prices on widespread extortion. Breaking a common taboo, he left no soupcon of doubt that extortion had become a way of transporting goods; people involved in the crime have social and political clout; and that law enforcers have essentially failed in combating extortions or taking strong steps to counteract the menace.
On August 19, Parliament's Commerce Committee chairman Abdul Jalil claimed: "Extortion is a constant process. It has always been there. It's very difficult to break the market syndicate. We cannot always implement what we want."
More recently, finance minister Abdul Muhith accused the media of hyping concerns over price hikes because he had found that consumers were content with the price situation. On the same day, at Jatiya Press Club, commerce minister Faruk Khan also found a role of the media in price increase of commodities in the domestic market.
Has anyone ever heard of such a claim of causality running from media to price increases? This was the claim during BNP's rule nearly three years ago, when an accountant was the country's finance minister.
Just because people aren't protesting on the streets doesn't mean that price instabilities aren't imposing unbearable hardships on "non-ministers" and "non-politicians."
The media's role is to track market conditions and price discrepancies of commodities from all locations of the country and publish them for all concerned, including the government. That way, imbalances in supply and demand are mediated to restore a properly functioning market.
In a market economy prices depend on demand for and supply of goods. Demand of a good is a function of consumer income, prices of other goods (substitutes and complements), population (that is, number of consumers), consumers' expectations and taste and usefulness of the good. Supply of the same good is a function of technology of production, cost of resources, number of suppliers, prices of other goods, and suppliers' expectations.
If one cannot identify the demand and supply factors from the above list of factors, attributable to the price hikes of specific goods, then non-economic factors such as price gouging syndicates or extortion may be in play, but not the media for sure. That means the country is experiencing market failure -- free market conditions are violated -- and negative externalities are ruling the market process. In that case, only law enforcement and rule of law can restore a smoothly functioning market (see my article on "Market failure and price spirals," March 25, 2007).
Consumers have no control over supply but can exercise control over demand. However, effectively doing so means reducing demand countrywide. The reduction in demand must be significant and long-lasting, at least until prices take a nose-dive. Alternatively, consumers can practice some austerity -- buy only the amount needed for a day, and stick to shops that are consumer-friendly.
What I'm recommending above is a kind of buyers' boycott of the edibles. There are copious examples of such boycotts in the West in recent times. There are also journal articles on buyers' boycott to combat price hikes. The problem is organising and coordinating such a boycott countrywide to produce the desired outcome.
What to produce and how much; for whom to produce; and what price to charge are the decisions of the private sector embodied in the paradigm of laissez-faire economics. Business communities must comprehend this archetype and restore market discipline by rooting out all non-market forces and frictions to their own long-term benefits.
Dr. Abdullah A. Dewan, founder of politiconomy.com, is a Professor of Economics at Eastern Michigan University.
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