January 15, 2008 ☼ dictatorship ☼ Economy ☼ Foreign Affairs ☼ globalisation ☼ inflation ☼ Musharraf ☼ Pakistan
This is an archived blog post from The Acorn.
Since yesterday, Pakistani paramilitary forces have been assigned new duties (via Chapati Mystery). Troops from the Pakistan Rangers—generally used for various internal security duties—and the Frontier Constabulary are guarding wheat warehouses and flour mills. That’s because the government has identified hoarding and smuggling as the reason behind Pakistan’s worsening wheat supply crisis. Not only has the price of wheat flour risen—the supply shortage has led to long queues and public anger. The food crisis (and the parallel power supply crisis) is adding one more dimension to Pakistan’s growing instability.
Now, world prices of foodgrains have risen in the last several months due to a variety of reasons: from increased demand in emerging economies to poor harvests to the effect of US biofuel subsidies. But Pakistan is a wheat producing country and shouldn’t have had to face an acute shortage. So how did it get to this stage?
The proximate story of this crisis started in early last year, with the government announcing a very rosy estimate for the 2007 wheat harvest. Exports were permitted as forecasts, and early harvests, suggested domestic production would outstrip domestic demand. But when prices continued to rise, the government decided to import wheat instead. But this was insufficient to prevent the crisis from reaching this stage. So what is the government to do but point fingers at the usual suspects and deploy troops?
Let’s look at the inside story. In theory, the Pakistani government purchases wheat grains from farmers at the “support” price. In practice, it didn’t do so effectively. One complaint was that the government purchasers delayed their purchases, allowing traders and middlemen to buy it from worried farmers at a discount. They may even have cornered the supply of gunny bags preventing farmers from selling directly to the government. This racket invariably involved collusion between the feudal landowners and government officials: during the 2006 sugar crisis, Pakistan’s National Accountability Bureau named Chaudhry Shujaat Hussain, Asif Ali Zardari, Nawaz Sharif and Humayun Akhtar, among others, as the leading culprits.
The effective result this was that bumper harvest or not, the government’s warehouses were not as filled up as they should have been. The bouyant world price for wheat and Pakistan’s weak border controls meant that those who had purchased the grain could export it illegally.
By end November 2007, queues started forming outside stores selling wheat flour. The government decided to import wheat from the international market, but prices had risen by this time. It had to subsidise these imports in order to keep the prices low enough: but as expected in such situations, traders and sellers found ways to divert the subsidised wheat into the open market, where it would sell at a higher (“market”) price. The government now hopes that paramilitary troops will curb this behaviour. Flour millers too have been seen as profiteering from the episode. [Related articles in Business Recorder and Khaleej Times]
Clearly, the principal beneficiaries from the wheat crisis are the usual suspects—the politically connected big farmers and traders. Some analysts have speculated that the proceeds of this crisis will fund the coming election campaign. All the same, the crisis highlights the simple fact that for all the accolades former prime minister Shaukat Aziz received for managing the economy, the Musharraf regime has failed to ensure that markets are free and competitive. Pro-business it might have been, pro-market it was not.
Will importing wheat solve the problem? Not unless it is accompanied by a policy that seeks to reduce the difference between the official price and the market price. Senior Pakistani officials have complained about having to subsidise wheat—prompting commentators like Ayesha Siddiqa to ask why they should complain about this at a time when the Pakistani army is lavishing money on new gear and a spanking new headquarters.
The issue of ‘sharing’ the subsidy load among the four provinces is politically fraught, as intra-provincial divides have sharpened. Given that wheat prices are likely to remain high over the next few years, the food subsidy burden can weigh down Pakistan’s budget. Yet, doing nothing is hardly an option: for a hungry population is an angry population. And anger is one commodity that the Pakistan is not short of.
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