Are cartels good for Pakistan?

Are cartels good for Pakistan?
Published: 23 December 2004

When Pakistani Daily Times interviewed Prime Minister Shaukat Aziz in October, the following question was put to him: The government has opened up business and liberalized the environment. But, regulatory controls remain weak and hence we see monopolistic practices and cartels in major industries from cement to automobiles. What do you plan to do about this?

His answer: The Monopoly Control Authority looks at these. There may be industry associations but in cement for example, everyone is scrambling to produce as much as they can. I’m not aware of any situation to which you alluded. What we have tried to achieve is a market mechanism. If somebody tries to distort it then the government will take serious action.

Here’s how wrong Prime Minister Aziz is: A cartel is an arrangement between otherwise competing producers to act in collusion with the goal of raising prices and collective profits. A cartel attempts to create monopoly-type conditions in what should be a competitive industry, with participants restraining the amount they produce in order to keep supply down and thus prices high at the expense of consumers.

Cement: The cement association is less of a trade group and more of an unnamed cartel. All members are assigned capacity utilization and none can increase their capacity without prior permission. Prices are set by the cartel and everyone shares profits amicably, except when a dissatisfied member threatens to leave the cartel. If his market share is big enough to lead to noticeable price cutting which will inevitably lead to a price war and hurt profits all across the industry, the keepers of the cartel spring into action. This is what happened last week. Lucky Cement, which has a 10 percent market share threatened to leave the cartel if its recently added 20 percent capacity utilization, was not recognized by the association. Cement stocks tumbled at the share market and the cartel leapt to the rescue, settling the matter overnight with a promise to the company. The threat of a price war was averted and the cartel restored. The cement cartel coordinates closely on production, sales and price, often keeping prices artificially high and refusing to pass on to consumers the benefit of lowered government taxes. Obviously, the cement cartel denies that its trade group, but for intents and purposes, the Pakistan Cement Manufacturers Association functions as a cartel. But then most cartels don’t exactly have explicit, written agreements. They function more on the basis of nods and winks, or in some cases like the local cement industry, through open meetings and discussions.

The way forward: Daily Times spent weeks pursuing Dr Safdar Mahmood, the chairman of the MCA in Islamabad for an interview. All we wanted to know was how many decisions the MCA had taken in the last two, three or five years. After several brush-offs, Dr Mahmood’s office finally refused an interview.  The fact is that the MCA is an entirely defunct organization with no research, surveillance or monitoring in place and not a single recorded action to its name. The ministry of finance under which the MCA falls, has not intervened to evaluate the performance of the regulatory body or take action against its lethargy. Neither does the ministry have any plans in the works to restructure the institution or improve its working to make it an effective regulator of industrial cartels.

So what needs to be done? To start with, the MCA needs to be massively restructured. It needs to be stripped bare of civil servants who would be hard pressed to so much as define the word cartel. Then it needs to be infused with professionals in the form of chartered accountants, chartered financial analysts and the like. Also, the MCA needs to be given the mandate to act. It should be given the power to impose hefty penalties and fines when its decisions are not implemented.

Finally, perhaps PM Aziz needs to answer the following questions: He says the MCA looks at these issues. What were the last five decisions the MCA has to its credit that were effectively implemented? Which cartel has it ever broken? He says he not aware of any cartel-like situations. How is it that practices that run rife in major industries have eluded his attention when they are common knowledge in business circles? He says if anyone tries to distort the market mechanism established by the government, it will take serious action. When was the last time action was taken on market manipulation by any major industry?