Food inflation: first, un-learn habits

“Government will be announcing various measures to reduce prices of basic food items for the common man in Cabinet on Tuesday.” This statement was put out by the Prime Minister’s Twitter handle eight months ago on 09-February. Unfortunately, it sounds awfully similar to one announced last Saturday, and on many other occasions, in between.

That food price inflation has proven to be the Achilles’ heel during PTI’s two-year rule has been acknowledged on many occasions by members of the federal cabinet, including the PM. It may also be admitted that the government has been “seen making an effort”. From imposing price control in provinces, banning exports, commissioning inquiries, imposing caps on private storage, subsides through USC, import quotas through TCP, among many other mis-steps – all exercises in futility to counter what may have been (in large part) inevitable.

So where did things go wrong? Currency depreciation of 35 percent since PTI took over reigns in August 2018 means sooner or later prices had to converge with international levels. Despite populist posturing, both the government and the opposition appreciate this; consider that little hue and cry is raised when prices of pulses and lentils increase by an even greater rate than that of sugar.

Consider also that the government is little bothered by increase in global palm oil, soybean, maize, or tea prices – aware that it has limited means to influence prices of commodities that are largely imported. In fact, both the government and producers have benefited from improvement in global rice prices over the past two years, as the country has been able to increase it exports volume and fetch better prices.

So why does an increase in domestic rice prices never inspire ‘brilliant’ thoughts about banning its export? Afterall, Pakistan exports nearly half of its total rice output, unlike sugar or wheat where share of exports is much lower. By the same corollary, why does a ban on sugar or wheat export fail to bring prices under control? Why do hoarders love to stock up on wheat and sugar, but never on rice, pulses, or tea - despite greater vigilance and monitoring of former by both the administration and the media?

Of course, there are many explanations, and prices of each commodity reflect a confluence of various forces at work. But two factors stand out.

First, markets work, even when the basic human instinct to intervene for “course correction” suggests to the contrary. Prices of perishables such as broiler chicken, eggs, tomatoes, onions, and fruits routinely fix themselves in- and off-season, despite significant supply chain disruptions and absence of storage infrastructure.

And markets self-adjust, even when cost-push is irreversible. Consider how prices of consumer goods such as bread, cooked beef and daal, cooking oil, or tea (prepared) have not increased by the same quantum as those of their raw materials. Also consider how after facing one-third currency depreciation, your local restaurant switched from imported tabasco, cheese, and mustard to domestic brands.

Two, path dependence. Because faced with the bureaucratic landmine, no politician ever musters the courage to do things differently. 86 years after ‘The Sugarcane Control Act’ was enforced by the British Raj, the government still believes in notifying the crushing season, fixing the cane price, and demarcate mill area. Similarly, wheat import quotas are still allocated by the Trading Corporation of Pakistan, even when the institution is starved off cash and must charge a ‘commission’, only to contribute to a further price increase.

In recent months, those in echelons of power have finally begun to grumble about the size of government, and how it needs to be cut down if the fiscal structure is to become sustainable. For that to happen, the government – any government - needs to first un-learn its past habits and deliver better by taking responsibility for less. Letting private sector economic agents to foresee a surplus/shortfall in supply, and then make timely import/export decisions accordingly may help in just doing that.

All prices – whether controlled or otherwise – eventually stabilize. In the next 6-8 months, that is exactly what may happen to both wheat and sugar, once the impact of fertilizer and other agri-subsidies announced this fiscal trickles down (by next harvest season). At that time, the government will claim victory. Before that happens, let’s not allow the current ‘crisis’ to turn into another wasted opportunity to reform the way government does things.