A Schumpeterian solution to sugar

June 22, 2012

RECORDER REPORT

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Free mobility of factors of production including labour and capital is one of the main characteristics of a free market economy. Violation of this cardinal principle would always lead to less than optimal use of country's resources and slower economic growth. Seen from this perspective, continued insistence of sugar industry in Punjab to uphold the ban on new sugar mills hardly makes much economic sense. In a bid to change the status quo, the Competition Commission of Pakistan (CCP) has asked the provincial government to lift the ban, which was in force since December 2006, in order to allow a fair competition in the sector. In a policy note sent to the chief secretary and the secretary, industries, Punjab, the CCP has argued that it was mandated to foster free competition in all spheres of commercial and economic activities and consumers stood to gain from greater competition, which must be allowed by dismantling barriers on entry into a business. Further, an entrepreneur in a free market economy must be allowed to decide whether the opportunity to set up any business enterprise, including a sugar mill, is worth availing. "This will encourage manufacturers and service providers to be more efficient, to better respond to the needs of consumers, to innovate, to initiate and to venture, and consumers will benefit from better prices, quality goods, and more choices," the note added. The object of erecting barriers to entry was to exclude new entrants from a market or sector of industry. These prospective entrants might bring with them efficiencies that could reduce costs related to production by introducing new technology or through better research and development. Capacity expansion restraint in the industrial sector might indirectly support anti-competitive practices such as production curtailment and quota allocation and eventually manipulation of prices by the incumbent undertakings. The CCP also rejected the plea of the Punjab government that the ban was meant to protect the production of cotton from the encroachment of sugarcane crop. Commenting on the CCP's note, Chairman of All Pakistan Sugar Mills Association, Javed Kayani, reiterated that ground realities were different and any addition to the existing capacity would only create chaos. The existing sugar mills have a capacity to produce five million tonnes of sugar but only 3.1 million tonnes has been produced currently due to non-availability of sugarcane. A "cane war" was already going on in the province with the result that mills were getting sugarcane at prices much higher than the support price announced by the government. According to Kayani, price of sugar will go up if more sugar mills are established. The tussle between the CCP and Sugar Mills Association about the ban on setting up of new sugar mills in Punjab has been going on for a while and the arguments of the two parties to preserve the existing order or force a change in the status quo are very much familiar by now. However, it needs to be recognised that while CCP has very strong arguments to back up its stance, Sugar Mills Association has flimsy excuses and stands on a weak ground to defend its case. This is particularly so because Pakistan, like most other countries, has chosen to manage its business activities according to principles of a free market economy. Once we adopt this model, its main features and practices have to be followed whether a certain industry or a group of business houses likes it or not. Of course, this model has also certain weaknesses but its merits far outweigh its shortcomings. For instance, free mobility of factors of production would help in continuous restructuring of the economy by incentivising the flow of its productive resources towards enterprises where they are best suited. This will help the economy to be much more efficient and competitive in the world markets. Let's take a leaf from Joseph Schumpeter, one of the greatest economists. Insofar as the role of entrepreneurship is concerned, his relationship with the ideas of other economists were quite complex in his most important contributions to economic analysis - the theory of business cycles and developments. "Following neither [Leon] Walras nor [John Maynard] Keynes, Schumpeter starts in The Theory of Economic Development with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state. The stationary state is, according to Schumpeter, described by Warasian equilibrium. The hero of his story, though, is, in fine Austrian fashion, the entrepreneur. The entrepreneur disturbs this equilibrium and in the case of economic development, which proceeds in cyclic fashion along several time scales." We don't want to repeat the justifications already advanced by the CCP to lift the ban but can only add that though its arguments would appear to be based on a kind of textbook approach, their validity cannot be denied. Sugar mills in Punjab, on the other hand, need not worry if their arguments to preserve their turf are taken into consideration. In a situation where there is already so much excess capacity and profits are low due to "cane war", hardly any entrepreneur would like to sink his huge investment in a relatively unprofitable venture with the result that existing sugar mills would continue to hold sway without being blamed for closing the door on new entrants. However, the argument that price of sugar will go up if more sugar mills are established is not at all comprehensible. In all fairness, monopolistic practices or formation of cartels need to be discouraged boldly and firmly for benefit of economy and the consumers. Already, people are fed up with exemptions of certain classes and sectors from the tax net. They would feel more frustrated if certain categories of business houses are allowed to enjoy the status of holy of holies through some other measures continuously.