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Free-market predators Tanim Ahmed traces the roots of increases in prices of essential commodities and argues why a consumer-friendly market is impossible without elimination of the ‘syndicates’ The oil crisis of 1973, when oil prices increased in exponential proportions, was not so much due to shortage of oil supply as it was due to the decision of the major oil exporters, Arab states, to increase the prices. It was not that oil reserves had suddenly sunk through the floor or that its demand had shot through the ceiling. In strictly economic terms, a handful of oil exporters were in collusion, which led to dramatic increases in global oil prices. The entire western world was affected and the sudden price hike resulted in a long-term recession ending decades of economic boom. It was also the first time that the United States faced an oil shortage since the Second World War. The Arab states had succeeded in their intent to use oil as a weapon against those not friendly to their cause. It is perhaps a classic example of collusive oligopoly.    The situation in the current-day Dhaka markets is similar except that the collusion does not concern one item but several — mostly such essential food items as rice, wheat, potatoes, lentils, edible oil, onions and milk powder. According to a report in Amar Desh on May 11, prices of essential food items have increased 25 per cent on an average in the past four months. A report in New Age on the same day says prices rose between five and 50 per cent during the same period — most of it under the military-backed interim government of Fakhruddin Ahmed that assumed office after the proclamation of a state of emergency on January 11. According to the government’s own statistics, inflation increased from just under six per cent in January this year to almost 7.5 per cent by March. While the government appears to be in denial suggesting that inflation is not really out of control and quite below the danger level, experts fear that it might, in fact, have crossed the double-digit mark driven by the soaring food prices.    Collusive behaviour is not an unnatural phenomenon in a market with non-existent or unimplemented safeguards for the consumers, especially in the case where the market is overly dependent on imported items requiring large sums of money to begin with. When a few individuals realise that they are the only ones capable of importing such essential commodities as sugar or edible oil bulk, and there the government cannot really do much about it firstly due to their influence on the political establishment and secondly because the legal provisions are not sufficient to prevent them from colluding and fixing the prices by themselves, they will do so. In fact, from a strictly commercial point of view, it would be foolish not to cream off a captive market.        Our very own mafia    This group has come to be known, and often referred to in the media, as the syndicate. Despite the fact that academics, researchers and even politicians have acknowledged such collusion, its existence is denied upfront, both by government officials and businesspeople, in a manner that can be likened to that regarding the mafia. For the longest time, the existence of the mafia, or rather Cosa Nostra, was denied by insiders as well as government officials till misconceptions and myths were laid to rest by, what came to be known as, the Maxi Trial in a court in Sicily over a hundred years after its existence was officially reported. As for the syndicate, it has proved to be invincible and even immune to a state of emergency, which has not been able to curb its potential for collusion and thereby manipulation of the prices.    The tenure of the BNP-Jamaat alliance government saw two changes of commerce ministers, each given the sack for the same reason, while the last one had utterly failed in his pledge to rein in the prices of essentials. The invincibility of the syndicate was perhaps never felt with such force as it was on July 25, 2006 at a monthly luncheon meeting of the American Chamber of Commerce in Bangladesh. The third commerce minister of the last government, Hafiz Uddin Ahmed, squarely put the responsibility of controlling the prices of essentials on other ministries and went so far as to suggest that the government should set up another ministry for the task. ‘The Consumer Protection Act is being scrutinised now and I have urged the food ministry to make anti-hoarding laws for checking unscrupulous traders’ syndicates and hoarders,’ he said. He also suggested that the finance and food ministries were better equipped to tackle the matter.    It was just three months after Hafiz had taken up his new portfolio on April 26 with the pledge to reduce prices of essentials within a month. Barely a week earlier, at a meeting with businesspeople at his office, he assumed a dramatically different tone and harped on a different note, although, even then, it was obvious that his success in bringing down the prices of essentials was at the mercy of the businesspeople. On July 19, Hafiz announced to the press — following the meeting — that the intelligence agencies had identified the members of the syndicate ‘who were involved in manipulating prices through hoarding and other means’. But he only ‘hoped’ that the relevant ministry would take necessary action.    His comments about the meeting betrayed his helplessness and utter inability to hold sway over the businessmen. ‘They have given us assurance that they will not make any windfall profit by making the people hostage,’ said Hafiz about the traders present at the meeting. With hindsight it appears that the minister did his best to divert attention from the syndicates citing a marked difference of prices between wholesalers and retailers, and the producers and wholesalers that he suggested added to the woes of the people.    M Saifur Rahman, then the minister for finance and planning, and perhaps the most influential cabinet member of the BNP-led government, when approached with the possibility of reducing import tariffs on essential food items, told the press, it never paid off. He said the prices would decrease for a short while but resume their rising trend soon after. Instead, he suggested, the syndicates that manipulated the prices were the main reason behind the price hike and had to be dealt with decisively.    But government officials deny their existence quite categorically despite overwhelming circumstantial facts that testify exactly the opposite. The commerce secretary was quoted in January as saying they are ‘yet to receive any conclusive evidence on the existence of syndicates’. He went further to substantiate his claim asking, ‘When the prices went up everyone was blaming syndicates. But now that they are going down how come everybody is quiet? If there was a syndicate why are the prices coming down?’ He did partially admit to their existence since former ministers had claimed that syndicates exist.    But the rebuff of a prominent businessman, quoted in New Age’s weekend supplement Xtra on January 12, smacks of the classic mafia disclaimer. ‘I read about this regularly in newspapers but I have never seen one or been a part of it,’ says Mostafa Kamal, chairman of the Meghna Group, one of the leading importers of edible oil, powdered milk and sugar. ‘How, where and when are questions people who accuse us of syndication should answer,’ he said. It is alleged that the Meghna Group is among the leading syndicate members in the country.    Emdad Hossain, programme officer of the Consumers’ Association of Bangladesh, echoed the general apprehension. ‘I have attended meetings at the commerce ministry where powerful and well-known businessmen have directly threatened government officials with cutting out supply if they did not accept their chosen prices,’ he told Xtra.    According to the Daily Star of May 18, a report of the Centre for Policy Dialogue, a research organisation, based on records of the National Board of Revenue, found that a strong cartel accounted for a substantial share of the imports. The report says the top five importers have accounted for importing 96 per cent raw sugar, 46 per cent refined sugar, 67 per cent crude soybean oil, 60 per cent crude palm oil, 49 per cent wheat, 37 per cent rice, 31 per cent lentil, and 31 per cent onion of national imports till March of this fiscal year. While the report did not mention any names, a number of reports in other newspapers have done so.    For instance, according to a report of Amar Desh of May 11, the TK Group, the Meghna Group and the City Group account for 65 per cent of edible oil imports. The next three — the SA Group, the MEB Group and the Marine Group — account for another 25 per cent of the imports. Quoting sources, the report says traders of Dhaka and Chittagong are the major importers of lentils, ginger, garlic and other essentials that come from India. It goes on to mention the names of Shathi Enterprise, Seven Star and Banijjya Bhandar from Dhaka, Rumpa Enterprise of Bogura, Pahari Enterprise, AB Trading and Akhter Impex of Chittagong as significant market players.        …and there are the middlemen    But the syndicates, for all their collusion, manipulation and public denial, are not entirely responsible for the price hike. There are other related factors some of which are compelling, even more than syndication. To begin with, production costs have risen and so have the prices. But it gives an impression that the farmers are linked to the market and thereby benefit from the price rises at the consumer end. That is hardly the case. They are paid the bare minimum below which the farmers cannot afford to cultivate crops the next year. And prices at their end have increased only marginally over the years. The real value addition (pun intended) to agricultural produce begins with the middlemen who buy from farmers. Along the supply chain there are warehouses, wholesalers, retailers and micro-retailers often with several more layers of middlemen sandwiched among them. Reports in the media indicate that prices, especially those of vegetables, appreciate by up to 500 per cent between the farmer and the end-consumer.    Besides the layers of middlemen are the unforeseen and unaccounted for ‘transaction’ costs commonly known as extortion, both by those who enforce the law and those who break it. However, the current situation — under the state of emergency — regarding extortion is yet to be determined. The police forces are said to be undergoing a cleansing process with reasonably honest and sincere officials at the helm.    The increase in the price of fuel, especially diesel, has also contributed to the price hike of essentials. But the proportion of essentials’ price hike far outweighs that of the increase of diesel prices, which also strengthens the case for collusive behaviour among the suppliers. Added to it is a common complaint that trucks are not allowed to carry loads beyond a certain limit, a regulation that was not previously enforced, and hence increased the grounds for rent seeking by the law enforcers.    There is also the solid ground that prices in the international markets have increased. But it is often noted that prices in the local market at the retailer level increase as soon as international prices go up which only indicates that the retailer in Kalabagan has become integrated with the global market — a symptom of globalisation. But the same retailer, time and again, manages to sever that intimate link with the global market when the prices depreciate. That is mostly when the wholesalers blame either retailers for charging extra or the importers for not reducing their prices. The retailers only have their wholesalers to blame and they do it religiously if only to be able to say something to the irritated and at times rather angry customers.    Stockpiling and hoarding are also said to be among the major causes of price hike. Although the government, the current regime as well as the previous elected ones, has carried out anti-hoarding drives from time to time, few offenders, if any at all, have been meaningfully prosecuted. The government has also taken up several other initiatives to keep critics at bay. That is perhaps the main reason why measures have mostly been reactionary rather than pre-emptive.        Band-aid measures    Be it open market sales of rice and wheat, be it bulk import and sales through the Trading Corporation of Bangladesh, establishment of markets monitored by law enforcement agencies, the measures have come only after considerable hue and cry among the public and the media. Moreover, with unfailing regularity, initial media reports warning of rising prices have been met with dismissals from the incumbents claiming that the entire matter to be merely media hype. Consequently, government measures have been reactionary and thus stopgap to temporarily quell the crisis. A sincere intent to relieve the public of their sufferings would surely call for better-coordinated, well-concerted measures coupled with policy directions.    The measures are merely rudimentary forms of market interventions, and that too half-hearted. The Trading Corporation of Bangladesh, the trading arm of the government, which was rendered dysfunctional, as the government gradually and increasingly embraced the principles of the free market, has become toothless when it comes to influencing the market. While it could be one of the means to make a meaningful market intervention, reactivating the corporation is not the only answer to controlling the prices, especially given the presence of the powerful syndicates.    The one indication that the government has given at the last budget session in parliament and also recently with the introduction of the new import policy, is that it encourages imports. Saifur Rahman proposed to reduce the import tariffs of such household essentials as turmeric, garlic and onion drastically. The current regime with its new and overly liberal import policy, wrongly citing stipulations of the World Trade Organisation, reduced the number of banned import items from 131 to just 25. Both instances, if anything, encourage imports and offers little protection or encouragement for the domestic producers. Conversely, successive governments have not initiated any notable efforts to encourage production of food items where there is a shortfall. On the other hand, liberalisation has hardly improved people’s lives. Rising prices and stagnant salaries mean that their real income is decreasing fast.    Open market sales or bulk imports through the trading corporation have not yielded the kind of effect that one would expect in the market. The basic tenet of economics that, in a perfect market, supply and demand would together decide the value of a certain product, which is the almighty equilibrium point, does not appear to hold true in Bangladesh’s market.    The current rice production, according to the report in Amar Desh previously mentioned, is 265 lakh tonnes against a demand of about 245 lakh tonnes. Yet, rice prices hardly seem to have the effect it should have had were the market allowed to function on its own. In fact, the prices continue to rise despite the recent boro harvest when they are generally expected to come down. As Muzaffer Ahmad, a noted economist, points out, the prices of commodities are almost uniform across the capital, which only implies that a group of people are fixing the prices and that they have enough clout in the market to be able to decide what the prices should be.    Given the scenario in Bangladesh, any measure to control prices, barring one that addresses the syndicates, is bound to be band-aid-like — a bit of eyewash. That is perhaps the first area where the government should focus in its bid to reduce the prices of essential items.        A bit of history… enter competition law    Free market does not necessary mean primacy of the market or a predatory market. The free market, as it seems to be and have been the one of the choices for subsequent governments, including the current one, may be allowed to function on its own but the government, at the same time, must also regulate it for the interest of the citizens. It must be noted, however, that countries that have attained economic prosperity and achieved admirable levels of human development in terms of their education, health and income have all resorted to a governed economy for decades before gradually opening their doors to international trade, quite unlike Bangladesh. Malaysia, South Korea, Japan and even India are imitable examples in this regard.    However, as far as a free market is concerned, there must be safeguards to regulate the market’s behaviour to ensure the public welfare, for that must be the ultimate aim of any government. As regards to prices then, the situation apparently calls for a law that bans any cartel, or collusion, with the aim to fix prices of a certain product or restrain normal trade and commerce. As it turns out, such laws have been in existence for at least two thousand years.    Roman emperors and medieval monarchs used tariffs to similar ends —to stabilise prices or support local production. There were also laws against monopolies that could potentially bring about scarcity in the market, cream it off and make secret deals at the cost of the consumers. The concept of competition, however, was only a recent development. With the advent of political economy, the different terms used to address this particular area included ‘restrictive practices’, ‘law of monopolies’ and ‘restraint of trade’.    Apparently the earliest surviving instance of what may be called a competition law was enacted in the Roman republic around 50BC. To protect the corn trade, ‘heavy fines were imposed on anyone directly, deliberately and insidiously stopping supply ships’. Diocletian, the Roman emperor between 284 and 305BC, set a death penalty for anyone violating a tariff system — meaning buying up, concealing or contriving the scarcity of everyday goods.    The Sherman Antitrust Act passed in 1890 in the United States, which can apparently be traced back to the Constitution of Zeno of 483AD, states in section one, ‘Every contract, combination in the form of trust or otherwise, in restraint of trade or commerce...is declared illegal’. Section two reads, ‘Every person who shall monopolise, or combine or conspire with any other person or persons, to monopolise any part of the trade or commerce...shall be deemed guilty of a felony...’    The European Union’s competition policy, agreed upon at the Treaty of Rome, states in article 81 under restrictive practices and abuse of dominant market power, ‘The following shall be prohibited...:(a)directly or indirectly fix purchase or selling prices...:(b)limit or control production...(c)share markets or sources of supply...’.    Quite evidently, both the laws aim to increase benefits to society by ensuring open competition in the markets and prevent barriers to competition.    Among other means to ensure stable prices of essentials, the government could take the approach of a governed economy and encourage domestic production of essential food items with substantial incentives aimed at substituting imported items. There is no reason why turmeric, garlic and onion should have to be imported from abroad. The move should be coupled with increasing tariffs on those items that the government provides incentives for till such time that domestic production gains momentum and becomes reasonably sufficient to cover domestic demand.    There could also be initiatives to bring farmers and growers with direct contact of the market, gradually eliminating the several layers of middlemen and hoarders and thus eliminating much of the value addition. Alternatively, and as an immediate measure, the government could also encourage smaller importers to begin trading, thus preventing the syndicates from practising their abusive influence over the market. But, as it appears, syndicates are principal roadblocks to reducing prices.    As such, the consumer protection act that Hafiz Uddin Ahmed had referred to would be called for. A consumer protection act will typically ban cartels, prevent abusive behaviour of certain quarters. In the United States, considered the ideal free market, the government also oversees mergers and acquisitions or large corporations to ensure that antitrust laws are not violated. While allowing the market to function on its own, the US government ensures through regulations that it does not behave in a predatory manner, which the current commerce adviser, a former bureaucrat, Mirza Azizul Islam, does not agree with.    He was quoted in New Age on May 28 as saying the government had nothing to do in a free market economy and thus there was nothing to do about the rising prices. Although he mentioned the consumer protection act earlier, soon after he had assumed office, there has not been any mention of it recently. It must be ensured that the draft act besides stipulating standards and setting penalties for adulteration must also address competition laws, without which the market would remain predatory as it is. Not only is his claim that governments cannot intervene in a market economy untrue because governments often do so but also there are quarters that would disagree about the incumbent’s preference and suggest that a governed economy would be much more suitable. Some of them would also argue that the government can and must intervene in the market, however ‘free’ or ‘open’ it might be.    However, mere enactment of the law would not suffice by itself. Subsequently a strict implementation would also be in order. A case in point is the government’s failure to implement the minimum wage at garment factories in almost a year, although factory owners, workers and the government together agreed to an allegedly low minimum wage in September last year. Strict implementation of such laws and regulations would mean confronting considerably large groups of traders that are perhaps among the very quarters wherefrom incumbents, including the current one, draw their support either in spirit or in cash.