Sugar and the economic impacts of cartelization on Pakistan
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Before 1945, most of the world thought cartels brought widespread benefits. Backed by US economic might, after 1945 antitrust ideas spread across the world so that now Adam Smith’s devastating verdict of them as “conspiracies against the public” has become the prevailing interpretation.
Business historians have shown, however, that this consensus about cartels as conspiracy is historically the exception to the rule, a product of a post-1945 constellation of ideas and events. Cartels are not necessarily the opposite of liberalism and competition, but a variation of them. For better or for worse, they shaped economic and business history since the late 19th century. From the company perspective, joining, managing, or combating cartels was a major entrepreneurial act. Finally, business historians have shown the varied effects and services provided by cartels (quality standards, technology transfers, or risk management) that extend beyond the conspiratorial motivation to raise prices.
Cartels dominate the Pakistan market, whether it is of sugar millers, flour millers, cement manufacturers or the wheat traders. The members of a cartel maintain their separate identities and financial independence but pursue common policies, thus exercising monopoly power.
The collusion may take several forms ranging from price fixation through allocation of sale quotas to dividing up markets, whereby one or a few firms supply exclusively in a particular territory. Logically, the price charged by a cartel is higher than the competitive price; otherwise cartelization isn’t worth the effort.
Cartels are generally outlawed because of their collusive behavior and its adverse impact on consumers, so instead of striking a formal collusive agreement, the firms in a cartel take to tacit collusion. Hence, one of the challenges for the government in a market economy is to put in place effective competition or an anti-trust regime to check cartelization.
Pakistan’s agro-based industry comprises about 90 percent sugar mills. Sugar is produced almost entirely from sugarcane. According to provincial government reports, sugarcane production went up from 63.9 million tons (MT) in 2007-08 to 83.3 MT in 2017-18. Sugar output increased from 4.7 MT to 6.6 MT during this period, and the area under cultivation for sugarcane increased from 1.24 million hectares to 1.34 million hectares.
Every year, the government fixes the support price for sugarcane which is normally higher than the price the growers would get under competitive market conditions. The greater the sugar output, the more benefit the growers derive. This means the subsidy is calculated to benefit the big growers, who are politically very influential. The support price induces farmers to grow more sugar at the expense of cotton.
Hina Ayra
According to the FBR, the average sugar consumption in Pakistan was 5.1 million MT – 1.5 MT less than its production in 2017-18. Given such a substantial gap between sugar demand and supply, Pakistan should not be facing a sugar shortage. But from time to time, all of a sudden the market runs out of sugar and new stocks become available only after the commodity’s price has been ratcheted up. Recently, budgetary proposals for the new financial year (FY2020) provided for revision of GST on sugar from 8 percent to 17 percent.
Why should the increase in the output of sugarcane and sugar be cause for concern? One, a kharif crop, sugarcane competes with cotton for cultivation – that is to say, farmers can grow either sugarcane or cotton on their scarce land. Every year, the government fixes the support price for sugarcane which is normally higher than the price the growers would get under competitive market conditions. The greater the sugar output, the more benefit the growers derive. This means the subsidy is calculated to benefit the big growers, who are politically very influential. The support price induces farmers to grow more sugar at the expense of cotton. Not surprisingly, the area under cultivation for cotton has gone down from 3.05 MH to 2.70 MH during the last decade.
This recent sugar crisis has not happened for the first time. In October 2009, the CCP conducted an inquiry and also raided the offices of the Pakistan Sugar Mills Association (PSMA), where it impounded proofs of cartelization.
To curb anti-competitive practices in Pakistan, the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 was promulgated. The law held the field until it was upgraded into the Competition Ordinance 2007, which was replaced with the Competition Act, 2010. The statute, inter alia, prohibits cartels.
On the matter of nationalizing the sugar mills of Pakistan, former federal secretary for commerce, Younas Dagha said: “Nationalization of sugar mills is insufficient, government should fix sugar retail price as it fixes the sugarcane price based on data of higher efficiency.”
If we talk about way outs, the government should immediately deregulate the sugar crop and open setting up more sugar mills by adding more stakeholders to put an end to the ongoing monopoly and cartelization. The government must pave way to establish mini sugar mills on the pattern of many other states.
Moreover, jaggery must be open to export, and the crushing of sugarcane for jaggery should be incentivized so small farmers are not forced to sell standing crops to millers.
– Hina Ayra is an economist, business consultant and a writer.
Twitter: @HinaAyra
