As prices soared beyond the reach of ordinary consumers, the conversation surrounding 'syndicates' and their role in price gouging retook centre stage in the national discourse. Many traders were caught hoarding soybean oil supplies in their inventories in the hopes of selling them at a higher price by orchestrating a shortage in the market. Some other reports blamed extortions in the supply chain for the soaring prices.
Be that as it may, it seems as though 'syndicates' are being used as a blanket term to refer to any forces responsible for price gouging and there seems to be an unfortunate lack of clarity and informed discourse regarding this issue.
The Business Standard spoke to veteran macroeconomist, Dr Kazi Iqbal, Senior Research Fellow at the Bangladesh Institute of Development Studies, to seek much-needed clarity in the discourse regarding syndicates and their power in the markets.
In a recent article, you questioned the role of syndicates in setting market prices. Would you elaborate on that?
I tried to make two major points there. First, individual rational decisions of the market players can be misconstrued as coordinated ones and this might resemble a "syndicate" at play. Second, if there is such market power, it should be exercised all the time, not only during a time of crisis. This also lends support to the fact that such market power may not exist to the extent people think they do. Now I will briefly elaborate on these two issues.
Hoarding can be an outcome of individual and uncoordinated decisions of the traders. It does not require a "syndicate" to cut back supplies to the market. When prices are expected to rise, it is quite rational for traders to hold the stocks of commodities and sell them later when the prices are actually higher. This shortage of supply escalates prices. Moreover, consumers also tend to purchase more now because they fear higher prices in future and this also pushes prices further up. Hence prices rise without any coordination. We have observed this kind of behaviour in the time of global supply shocks such as in 2007-08 and in recent times.
We do come across such complaints of collusion more when we observe higher volatility in global prices and high price expectations. Hoarding makes sense only in a time of crisis when everybody expects higher prices in future. Hence this seemingly coordinated hoarding becomes an issue in every food crisis, be it global or local.
You also mentioned that firms that enjoy these market powers are typically importers of products like soybean, LNG etc. Why is that the case? And what role do hoarders play in exacerbating the already deteriorating inflationary landscape?
If you study the supply chain of imported goods such as soybean, you will find that it looks like a pyramid. Only a few players – large importers and traders - are at the top and the number of players gradually increases as we go down the stream. Whereas in the case of domestically produced commodities such as potatoes, there are numerous growers at the top and a large number of local players operate one tier below such as small traders, wholesalers, arotders, etc. That is, each segment of the supply chain is very competitive in the case of potatoes, unlike soybean.
Importing soybeans involves vast amounts of financial capital and only large firms can afford to do so. Large firms can also drive the smaller firms from the import market by offering lower prices with the help of their economies of scale. So, the point is that the upstream of the supply chain of certain imported goods is not competitive and this allows them to enjoy some market power.
In Bangladesh, extortion is prevalent in the product supply chain and is often cited as a major reason for price hikes. These extorting entities are also referred to as syndicates sometimes. Would you agree with the role of extortion in price hikes? What can be done to address this issue?
Absolutely. It is common knowledge that such extortion exists and it contributes to the price escalation. There are interesting studies on such issues. In Indonesia, surveyors accompanied the truck drivers on 304 trips and observed over 6,000 illegal payments made to a wide range of groups including police and weight station attendants.
We also need to conduct similar studies to understand the magnitude and nature of the problem. News reporters can conduct such studies with the help of professionals.
This kind of petty corruption is very hard to wipe out as it is very hard to monitor. The government can appoint inspectors. But then there is the question of monitoring the monitors. We also know that centralised corruption is less bad than decentralised corruption – that is - bribing at one point versus bribing at many points. The extortion on Indonesian highways is an example of the latter. Understanding the market structure of bribes can help reduce corruption.
This is a complex problem to solve for a developing country like Bangladesh. Generally, it is argued that such petty corruption will go away as the economy grows.
Foreign countries usually have antitrust laws, anti-competitive laws as well as class action lawsuits protecting the rights of civilians and consumers. How can Bangladesh level the playing field to ensure more competition in the markets and increase consumer surplus?
This is the right way to go. We need to strengthen the institutions that are responsible for ensuring competition in the markets. The government needs to strengthen these institutions by hiring lawyers, economists and business experts who understand the behaviour of markets and relevant laws well. You will be astonished to know the number of economics PhDs and the number of high-quality journal articles published on these issues in developed countries every year. I am sure this is the case for the field of law too.
The point is that as our economy is getting bigger, the markets are getting complicated and we need specialised people to handle such delicate problems. To begin with, we need to set a few examples of lawsuits of antitrust cases.
We still tend to manage prices using law enforcement agencies with brute force. This will further exacerbate the problems as the businessmen will shut down their businesses fearing harassment. We have seen this before.
Interest rates often play a crucial role in taming inflation. Bangladesh has fixed the interest rate band between 6% to 9%. How does this affect our ability to control inflation?
We need a deeper understanding of when the market works better than the interventions. Suppose there are two types of projects – high risk and low risk. Now the bankers calculate that if the interest rates offered to the high-risk projects are below 9, the lending becomes too risky for them to offer loans. In such a case, the high-risk projects will not be funded. Note that high-risk projects generally involve high returns.
By setting a ceiling, we are actually allowing only low-risk, low-return projects to be implemented. Moreover, new entrepreneurs, who don't have any credit history, will also be left out as they are risky borrowers. This has implications for technological innovations, entrepreneurial development and long-term economic growth. This band for interest rates is actually counterproductive and beats the main purpose of ensuring higher growth through lower interest rates.
Regarding its impacts on inflation, as we know Bangladesh Bank has revised the key policy rate upward and this will put further pressure on the ceiling of the band. The ability to control inflation through higher interest rates will be limited when there is a cap.