February 4, 2016 Print

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When governments control or influence the price of basic goods, the destructive effects ripple through the rest of the economy. In Pakistan, sugar production is subsidized and regulated to such an extent that its price per kilogram at home, Rs50, is higher than the international price, Rs45. This effectively bars export markets for Pakistani sugar producers, points out Ali Salman, founder and executive director of Pakistan-based Atlas Network partner Policy Research Institute of Market Economy (PRIME), in a commentary for the Express Tribune, a partner publication of the International New York Times.

Government regulations mandate that sugar mills buy all the sugar cane in their designated production zones, but subsidies based on weight provide a strong incentive for the mills to wait until sugar cane has dried before purchasing it — leading to a less expensive commodity. The weight-based subsidies also give sugar cane farmers less of a reason to improve the sucrose yield of their crops.

“As witnessed in the past years, too much intervention by the government in the sugar value chain is a major impediment to growth of the industry,” Salman concludes. “If sugarcane and sugar are both bought and sold in open market, growers will be incentivised to produce better crops and mill owners will not be reluctant to pay a better price. Since cane recovery will improve, sugar production cost may actually go down, making it more feasible for export and local consumption. Hence, the government should exit the entire value chain to ensure welfare of growers, consumers and producers of sugar.”

As executive director of PRIME, Salman works to bring sound economic reasoning and prudence to all aspects of the Pakistani economy. In a 2009 paper, he wrote about the many distortionary effects that all forms of government price controls have.

“[Price controls drive] private producers out of the market as they lose incentive to get profits,” Salman wrote. “This leads to an overall reduction in the supplies, which further increases the price levels thus setting off a vicious circle. Thus price controls ultimately invite government to compensate for reduced supplies through imports which disturbs the accounts and trade balance. Thus while price control may seem cheap in the short run, it proves to be expensive in the long run.”