Co-authored with FARRIA NAEEM
There is widespread belief among Bangladeshi media, civil society and think tanks that collusion exists in the supply chain of many essential commodities, and many blamed this for the price hike in the first half of 2008. Keeping prices low is a high priority for the government. It is therefore important to measure the presence of market collusion through empirical evidence and design appropriate policy responses to mitigate its impact on prices in order for the government to continue to meet its election promise.
Bangladesh is a net importer of major food items. In the absence of market influences and duties, domestic and international prices are expected to be similar. The convergence may not be exact due to transportation and taxation costs but price should follow similar trends as movements of international commodity prices do not of domestic and international markets do not often vary.
We examine and compare the co-mol prices of four essential food items (coarse rice, flour (atta), salt and soybean oil) over time to look for signs of market influences.
The co-relationship between domestic and international prices of the four essential food items is statistically significant with changes in domestic and international prices often corresponding with each other. However, this analysis does not capture recent changes in market structure and any distortions arising from it.
The divergence in the price of rice between the domestic and international market (Kolkata, India) coincides with the 2007 aman (rice) crop damage and India’s rice export bans imposed since January 2008 (Chart-1).
The increasing difference in domestic flour prices observed between January 2007 and June 2008 corresponds to the wheat export ban by India in February 2007(Chart-2).
In recent months, there has been reason to suspect that the market structure of domestic salt and soybean oil industries have behaved in a non-competitive manner. Despite natural factors conducive for salt production and protection enjoyed by the salt industry (around 73 percent in 2008-2009), prices in the domestic market have been rising since June 2008 (Chart-3). Similarly the increasing difference between domestic and international soybean oil prices since July 2008 cannot be attributed to any significant change in either crop outlook or international trading environment (Chart-4).
With this evidence of market influences in salt and soybean oil, policy measures to increase competition by removing barriers to entry in these industries will help reduce market power of existing suppliers and their ability to collude and affect prices.
The Finance Minister’s statement of “We’ll try to enter new people in the syndicate so that the illegal syndicate cannot play with prices” hit the crux of the matter.
Coercive “anti-hoarding drives” do not work and often worsen the problem, as the caretaker government found out in 2007. The domestic prices of rice and flour seem to mainly hinge on domestic crop outlook as well as the international trading environment. Therefore policy measures to remove supply side constraints in the agriculture sector are essential for keeping the prices of these items at a tolerable level.