Why state run markets are not the best solutions
Saturday, 8 September 2007
Enayet Rasul
ONE remembers the command economy of the Soviet era. Everything, under it, was produced by the state and marketed or distributed by the state. It worked for a while for the wretched millions of the Russians who knew nothing but grinding poverty in relation to basics of survival for centuries. But the vaunted economic system of the Soviet days collapsed only about 70 years after its coming into existence. Even decades before its coming down that economic system was clearly not found to be satisfying the greatest number of the consumers in the former Soviet Union. Consumers in too large number were getting more and more disillusioned by the state's system of delivering goods and services to them at dictated prices and dictated everything. They were becoming fed up with the quotas, rationed goods, lack of choice and other ills of a state operated marketing system.
The planned economy made consumption decisions for the individuals with the consumers having little or no say in the matter. For example, the state would produce millions of shoes all of the same colour and pattern and distribute them through state run shops throughout the length and breadth of the Soviet empire. Every consumer could purchase a limited number of these shoes by showing coupons. He or she would not be allowed to buy any more in number than the predetermined ones. They would again enjoy no choice in terms of colour, design and other changing attributes that consumers everywhere prefer while buying. While buying loaves of bread or cuts of meats in the state run shops, they would need to conform to the quota system that meant no consumer could buy more than a specified amount at one go. Thus, it was no wonder that consumers' resentments built up and this marketing system failed to make the consumers happy in the long run. It collapsed and gave way to the market economy or production, supply, prices and variety getting determined essentially by the forces of demand and supply interacting in the market.
The market economy is now the ascendant force worldwide and there is ample merit in the system. Countries round the world have overwhelmingly accepted the market economy mechanism as best for the individual and the state. In the market economy, production is carried out by not by a central body but by a large number of private producers in line with their assessment of demand or the likelihood of changing demand. The producers also produce in different shapes, colours and variety to cater to consumers' different preferences or choices. The keen competition between the producers while marketing their products lead to price cutting by them leading to fall in prices or stabilisation of prices. From the competition, prices are bidded down to their lowest bearable or affordable levels by the producers and distributors in order to expand market shares. Consumers get the benefit of this price competition through lower and rational prices and from their ability to choose the product of their liking among many and also in the unrestricted quantities. Thus, the free market or market economy is the reigning economic philosophy throughout the world.
Bangladesh also has been practicing free market or market economy for more than two decades and has benefited from the same. The state should mainly engage in developmental activities and running essential services to facilitate production and supply of goods by the private sector. But once again, the government is getting persuaded to play a role in the marketing of essential commodities. According to reports, the Bangladesh Rifles (BDR) would operate 80 kitchen markets in Dhaka city to keep prices of various kitchen items stable during the month of Ramadan. Thus, an alternative marketing system of essential foods is being set up to put pressure on the traditional market operators of these goods. The reasoning is that the lower prices in the BDR operated markets would create a rush of consumers to them and the traditional market operators, if they want to maintain the level of their expected sales, would feel sufficiently obliged to sell at reasonable or lower prices also only to survive in the competition with the BDR run shops.
This move is apparently a well calculated one designed to satisfy the consumers . But can it work comprehensively by meeting well the needs of the greatest number of consumers ? For instance, 80 kitchen markets for a city of over 10 million roughly means 8 kitchen markets for every one million people. Clearly, the number of markets is inadequate compared to the need. Most of the consumers, specially the non-affluent ones, are in the habit of looking for markets to buy essential products close to their homes. They would not like to travel a distance of even several kilometers to a BDR run facility. Even after reaching a BDR managed shop after expending a considerable amount in travel fare, they would not find the price differential so much of an attraction.
For example, a person of the lower middle class category, if he has to go as far as three or four kilometers to reach a fair price market to buy a 5 kg can of soybean oil, he may find the exercise a complete waste. Soybean at a fair price shop sells for Taka 73 per kg and he would be required to buy a 5 kg can for Taka 365 or a saving of Taka 7 per kg. It looks impressive apparently but when he has to count that the saving of about Taka 35 he makes on one can of soybean oil would be largely offset by his two way travel in a rickshaw costing about Taka 30 or 40, then he would find it more sensible to buy the can of soybean oil from his neighbourhood shop. At least, that way he would be saving on time if nothing else. Besides, in the neighbourhood shop, he can buy the brand of oil he likes. He has no choice but to buy the solo brand of oil on offer at the fair price shop. Another huge disadvantage for the small buyers or ones in the grass roots of existence is that they cannot buy cooking oil in bulk. They buy in amounts like 100 grams or 200 grams at a time. The fair price shops would not be meeting their demands in so small amounts. Thus, the fair price shops in terms of price advantage, choice and quantity may not be found convenient or beneficial by the greater number of consumers. They would, thus, keep on going to the traditional markets to meet their needs and, in that case, the government operated market outlets would be hardly creating the sort of impact as has been calculated.
Thus, there can be no substitute to the traditional marketing system. The high price of essentials in the traditional markets does not provide the rationale for supplanting them. Only the factors which are holding up the efficient operations of these markets are to be attended. It was identified long ago that a small group of importers are currently engaged in the import of essential consumer products. Measures may be taken to involve more people in the import for better competition. There can be no difficulty on the part of the government to engage in continuous dialogue with the importers so that they feel encouraged to sell their products at reasonable prices taking into account various government extended facilities such as reduced interest on loans for importers of essentials and withdrawl of import tariffs.
Over the medium and long terms, government policies should aim to facilitate the reentry of small scale importers of essentials in the import businesses. The growing number small importers will healthy create competition and lower prices.
Besides, government will have to very seriously address the issue of raising local production of many kitchen items. The import dependence on these products and their rising import prices, have been the main reasons for the relentless rise in the prices of these mainly food items in local markets. Increasing their production in the country can be a powerful tool to enhance their supplies locally for causing a decrease in their prices. Furthermore, government should be prepared to maintain steady subsidies to growers of these products to enable their cheap marketing.
ONE remembers the command economy of the Soviet era. Everything, under it, was produced by the state and marketed or distributed by the state. It worked for a while for the wretched millions of the Russians who knew nothing but grinding poverty in relation to basics of survival for centuries. But the vaunted economic system of the Soviet days collapsed only about 70 years after its coming into existence. Even decades before its coming down that economic system was clearly not found to be satisfying the greatest number of the consumers in the former Soviet Union. Consumers in too large number were getting more and more disillusioned by the state's system of delivering goods and services to them at dictated prices and dictated everything. They were becoming fed up with the quotas, rationed goods, lack of choice and other ills of a state operated marketing system.
The planned economy made consumption decisions for the individuals with the consumers having little or no say in the matter. For example, the state would produce millions of shoes all of the same colour and pattern and distribute them through state run shops throughout the length and breadth of the Soviet empire. Every consumer could purchase a limited number of these shoes by showing coupons. He or she would not be allowed to buy any more in number than the predetermined ones. They would again enjoy no choice in terms of colour, design and other changing attributes that consumers everywhere prefer while buying. While buying loaves of bread or cuts of meats in the state run shops, they would need to conform to the quota system that meant no consumer could buy more than a specified amount at one go. Thus, it was no wonder that consumers' resentments built up and this marketing system failed to make the consumers happy in the long run. It collapsed and gave way to the market economy or production, supply, prices and variety getting determined essentially by the forces of demand and supply interacting in the market.
The market economy is now the ascendant force worldwide and there is ample merit in the system. Countries round the world have overwhelmingly accepted the market economy mechanism as best for the individual and the state. In the market economy, production is carried out by not by a central body but by a large number of private producers in line with their assessment of demand or the likelihood of changing demand. The producers also produce in different shapes, colours and variety to cater to consumers' different preferences or choices. The keen competition between the producers while marketing their products lead to price cutting by them leading to fall in prices or stabilisation of prices. From the competition, prices are bidded down to their lowest bearable or affordable levels by the producers and distributors in order to expand market shares. Consumers get the benefit of this price competition through lower and rational prices and from their ability to choose the product of their liking among many and also in the unrestricted quantities. Thus, the free market or market economy is the reigning economic philosophy throughout the world.
Bangladesh also has been practicing free market or market economy for more than two decades and has benefited from the same. The state should mainly engage in developmental activities and running essential services to facilitate production and supply of goods by the private sector. But once again, the government is getting persuaded to play a role in the marketing of essential commodities. According to reports, the Bangladesh Rifles (BDR) would operate 80 kitchen markets in Dhaka city to keep prices of various kitchen items stable during the month of Ramadan. Thus, an alternative marketing system of essential foods is being set up to put pressure on the traditional market operators of these goods. The reasoning is that the lower prices in the BDR operated markets would create a rush of consumers to them and the traditional market operators, if they want to maintain the level of their expected sales, would feel sufficiently obliged to sell at reasonable or lower prices also only to survive in the competition with the BDR run shops.
This move is apparently a well calculated one designed to satisfy the consumers . But can it work comprehensively by meeting well the needs of the greatest number of consumers ? For instance, 80 kitchen markets for a city of over 10 million roughly means 8 kitchen markets for every one million people. Clearly, the number of markets is inadequate compared to the need. Most of the consumers, specially the non-affluent ones, are in the habit of looking for markets to buy essential products close to their homes. They would not like to travel a distance of even several kilometers to a BDR run facility. Even after reaching a BDR managed shop after expending a considerable amount in travel fare, they would not find the price differential so much of an attraction.
For example, a person of the lower middle class category, if he has to go as far as three or four kilometers to reach a fair price market to buy a 5 kg can of soybean oil, he may find the exercise a complete waste. Soybean at a fair price shop sells for Taka 73 per kg and he would be required to buy a 5 kg can for Taka 365 or a saving of Taka 7 per kg. It looks impressive apparently but when he has to count that the saving of about Taka 35 he makes on one can of soybean oil would be largely offset by his two way travel in a rickshaw costing about Taka 30 or 40, then he would find it more sensible to buy the can of soybean oil from his neighbourhood shop. At least, that way he would be saving on time if nothing else. Besides, in the neighbourhood shop, he can buy the brand of oil he likes. He has no choice but to buy the solo brand of oil on offer at the fair price shop. Another huge disadvantage for the small buyers or ones in the grass roots of existence is that they cannot buy cooking oil in bulk. They buy in amounts like 100 grams or 200 grams at a time. The fair price shops would not be meeting their demands in so small amounts. Thus, the fair price shops in terms of price advantage, choice and quantity may not be found convenient or beneficial by the greater number of consumers. They would, thus, keep on going to the traditional markets to meet their needs and, in that case, the government operated market outlets would be hardly creating the sort of impact as has been calculated.
Thus, there can be no substitute to the traditional marketing system. The high price of essentials in the traditional markets does not provide the rationale for supplanting them. Only the factors which are holding up the efficient operations of these markets are to be attended. It was identified long ago that a small group of importers are currently engaged in the import of essential consumer products. Measures may be taken to involve more people in the import for better competition. There can be no difficulty on the part of the government to engage in continuous dialogue with the importers so that they feel encouraged to sell their products at reasonable prices taking into account various government extended facilities such as reduced interest on loans for importers of essentials and withdrawl of import tariffs.
Over the medium and long terms, government policies should aim to facilitate the reentry of small scale importers of essentials in the import businesses. The growing number small importers will healthy create competition and lower prices.
Besides, government will have to very seriously address the issue of raising local production of many kitchen items. The import dependence on these products and their rising import prices, have been the main reasons for the relentless rise in the prices of these mainly food items in local markets. Increasing their production in the country can be a powerful tool to enhance their supplies locally for causing a decrease in their prices. Furthermore, government should be prepared to maintain steady subsidies to growers of these products to enable their cheap marketing.