A state owned entity rarely makes profit. When it does, it is often at the cost of entrepreneurs, private sector and traders. A recent example from Pakistan, the world’s sixth most populous nation, shows that how the government, ostensibly in the name of welfare, not only profiteered at the loss of wheat farmers, but, possibly, has also created food insecurity for its citizens.
In Pakistan, the central and provincial governments play an active role in the procurement of agriculture commodities at the state-announced support prices. The federal government administered Pakistan Agriculture Storage and Services Corporation (PASSCO) not only buys from the farmers but is also the only authorized entity to import most commodities through another state body, Trade Corporation of Pakistan (TCP).
The planners have always defended active presence of the state in commodity markets. A key rationale provided is price stabilization. The second defense is always food security and strategic reserves. The following story shows the undoing of these follies.
In May of this year, following its usual practice, PASSCO issued a stern warning to the farmers of wheat, the staple diet for Pakistanis: Sell your surplus wheat to us; and do not hold it to expect high prices. PASSCO also clearly signaled to cause the prices to fall by achieving its procurement target and thus drying the open market.
Wheat farmers, 90% of whom are small growers, followed the line blindly and sold their wheat to the state juggernaut.
In couple of months following their procurement, PASSCO made windfall gains by selling the same wheat, including carry-over stocks, at much higher, prevalent market prices. In fact, it publicly claimed to post a net profit of Rs. 421 million, highest in five years, and earned additional income tax for the government!
The story does not end here. Following PASSCO profits, news started spreading that Pakistan is set to become a net wheat importer this year due to delayed planting. This should be interpreted as a natural response of growers to the intervention: also known as crowding out.
With its public stance and public financed operations, PASSCO effectively deprived both farmers and traders from their right to sell and hold surplus quantity, and assume risk, to make more money in the future. Indeed premium profits come by holding, not by instant selling. Incidentally, premium profits also drive up investments.
The key message is plain: PASSCO made profits at the cost of prosperity of farmers and traders. Ironically, with the tax income the government has received, it will now claim to dole out welfare to same individuals whose wealth it has stolen.
PASSCO distorted the market in many ways. Not only it intervened through an artificial price; it also disturbed normal market operations. With its leveraged capacity created by the state, PASSCO created a noise in the information spread via markets. It dissuaded farmers to invest and grow more wheat in future which led to reduced supplies. Result is already out: Pakistan will become a net importer of wheat scrambling for food security for world’s sixth most populous nation.
With PASSCO itself creating an arbitrage on the basis of price fluctuation, it has undone its own fundamental rationale of price stabilization. When PASSCO became active, it took away incentives from farmers and traders to invest more in future, and it has also undone its other key mandate: food security.
What is the solution? Dissolve the PASSCO or privatize it. The new government has conditioned privatization with profitability of state owned enterprises, another worth exploring folly. With high profits made now, PASSCO has actually qualified for its dissolution and privatisation! It must be dissolved and privatised at the earliest to unleash prosperity for small and poor farmers; move towards greater food security; and to stop tax payers’ money going waste.
Author is the Founder and Executive Director of Policy Research Institute of Market Economy (PRIME), a free market think tank based in Islamabad, a partner of the Atlas Network. He can be contacted at ali@primeinstitute.org. Ali is also an alumnus of the Atlas Leadership Academy from where he did his Think Tank MBA.
