In its endeavour to attract both local and foreign investment, Pakistan consistently positions itself as a market economy driven by demand and supply forces. However, the fundamental characteristic of a true market economy — well-functioning markets free from imperfections — is notably missing, particularly in the agriculture sector.

Rather than addressing market distortions and failures induced by oligopolies, exploitation by cartels, information asymmetry and regulatory inefficiencies, Punjab government’s recent price control measures aimed at curbing food inflation have further exacerbated the issue.

This has been particularly evident following the enactment of the Punjab Price Control of Essential Commodities Act, passed in June 2024, which is an expanded version of the Price Control and Prevention of Profiteering and Hoarding Act 1977 — an archaic legislation when Pakistan was overshadowed by philosophies of nationalisation and a controlled economy.

Last week, the Punjab government banned the inter-provincial movement of broiler chicken to curb rising chicken meat prices, and the Poultry Traders Association filed a petition in the Lahore High Court challenging the imposed ban.

Government policies that keep prices of a particular crop too low may push farmers towards leaving their land unplanted

The association usually argues that without decreasing poultry feed prices, a reduction in chicken meat prices is not possible. However, any government’s attempt to lower poultry feed prices, either through the connivance of the poultry feed mills or any other administrative measure that contradicts free market principles, could negatively impact maize prices — the primary ingredient in poultry feed — which would ultimately affect farmers the most.

Similarly, in early July, through a notification, the district-specific wheat prices were capped between Rs2,800 and Rs3,050 per 40kg, while wheat was being traded at around Rs3,200–3,400 per 40kg in various grain markets.

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The new prices, which are lower than the farmers’ production cost, contradict all the principles of a free market economy. This marked the second consecutive setback to wheat farmers, following the Punjab government’s refusal to procure wheat earlier this year at the announced support price of Rs3,900 per 40kg. It is worth noting that a large number of farmers still hold substantial wheat stocks.

Following the notification, the market prices of paddy and maize — Pakistan’s second and fourth largest crop — also experienced a downward trend. This decline was driven by the shattered confidence of buyers (processors and stockists), who feared that the government might extend price controls to these crops, under the same act.

Our policymakers need to understand that the various segments of the agricultural value chains are interconnected and interdependent; manipulating one segment can disrupt the entire value chain.

Farmers, who are on the production side and have no control over produce prices, often bear the brunt of these disruptions. Therefore, they are justified in questioning the government’s efforts to curb inflation by asking: at whose expense and at what cost are these measures being implemented?

Over the past 50 years, several countries have transitioned from controlled economies to market-oriented economies, allowing market forces to drive economic growth. Their lesson learnt is that interference with the natural functioning of the agricultural market ultimately leads to suboptimal outcomes and inefficiencies, such as shortages or surpluses.

In contrast, the Punjab government, through its new Act, which designates nearly all agricultural and livestock produce as essential commodities, is effectively pushing the country back by 50 years.

There is a peculiar dichotomy: while the government is promoting corporate farming and strives to attract local and foreign investment in the agriculture sector, it is simultaneously undermining the principles of a market economy.

Many countries worldwide strive to balance market efficiency with the general well-being of their citizens. They make essential food items affordable through government subsidies and assistance programmes, avoiding price control measures that cause market distortion.

The chief minister of Punjab has repeatedly stated that the government will not tolerate price hikes in essential commodities. However, their approach — transitioning away from a market-driven agriculture system — could do major damage to the sector’s growth and competitiveness for many years to come, potentially leading to a decrease in the sector’s productivity and exports.

Such a flawed approach to keep inflation in check echoes another ill-conceived policy of the Nawaz Sharif regime (2013-2017) aimed at artificially capping the dollar exchange rate at Rs100 to curb inflation and keep petroleum and electricity prices low. This policy led to a sharp increase in imports while exports declined.

As a result, Pakistan’s exports-to-GDP ratio (exports of goods and services as a percentage of GDP) dropped from 12.2 per cent in 2013 to 8.2pc in 2017. According to the World Bank, this was the lowest ever since 1972. This decline led to an enormous trade deficit for the next consecutive years, resulting in a huge accumulation of external debt.

Beyond that, farmers grow less if prices of a particular crop are kept too low or if the government sends distorted market signals. Owing to minimal fixed operational costs, land owners have the flexibility to leave their land fallow (unplanted) — a practice commonly recommended by soil scientists to maintain soil health — rather than incurring a financial loss by growing crops. In fact, current government policies are pushing the farmers towards that direction.

In conclusion, to sustainably reduce food inflation, Pakistan needs to lower the cost of production. Therefore, the government should prioritise policies and strategies that enhance crop yields and agricultural productivity. This approach will also boost the competitiveness of Pakistan’s agri-food products in international markets, leading to higher exports.

Additionally, the current agricultural marketing system, which contributes to market distortions, needs restructuring to minimise the number of intermediaries. The multiple intermediaries jack up prices several times due to their low daily sales volume, particularly in the fruit and vegetable sector. Would the chief minister of Punjab rise to this challenge?

Khalid Wattoo is a farmer and a development professional, and Rahema Hasan is a political economist and graduate of the London School of Economics and Political Science

Published in Dawn, The Business and Finance Weekly, August 5th, 2024