Price in­crease has not helped farm­ers

The Pak Banker - - Editorial5 - Tian Li

The in­crease in the prices of agri­cul­tural prod­ucts this year is one of the great­est con­cerns of the peo­ple and the govern­ment now. Rel­e­vant min­istries have an­nounced a se­ries of poli­cies to pre­vent the prices from ris­ing fur­ther. Ris­ing hous­ing prices are still a big con­cern for the peo­ple, but since farm prod­ucts are daily ne­ces­si­ties, the in­crease in their prices has made life very dif­fi­cult for them.

Nev­er­the­less, peo­ple seem to avoid ques­tions re­lated to their liveli­hood be­cause they think an in­crease in the prices of farm prod­ucts will help farm­ers, which is a sen­si­tive is­sue. Dur­ing the days of planned econ­omy, the loss of farm­ers' in­ter­ests be­cause of the de­mar­ca­tion be­tween ur­ban and ru­ral ar­eas had had a great im­pact on peo­ple. Later, one of the real aims of mar­ket econ­omy was to elim­i­nate the prob­lem by mak­ing pri­mary in­dus­tries sub­si­dize other in­dus­tries and pay the farm­ers their due.

That's why peo­ple be­lieve the in­crease in prices of farm prod­ucts is one of the re­sults of mar­ke­ti­za­tion that has ben­e­fited farm­ers. But have higher prices of farm prod­ucts re­ally ben­e­fited the farm­ers?

Take the in­crease in veg­etable prices in the first half of this year for ex­am­ple. Though nat­u­ral dis­as­ters such as droughts and spring frost did not cause the prices of farm prod­ucts in the largest whole­sale mar­kets to in­crease dras­ti­cally - in fact, prices of some prod­ucts did not in­crease at all - veg­eta­bles have be­come dearer by as much as 20 per­cent com­pared to that of last year. This means only a small part (or even none) of the ex­tra money that ur­ban res­i­dents have paid to buy farm prod­ucts has been trans­ferred to the farm­ers. The ex­tra cost ac­tu­ally has gone to mid­dle­men.

This has given rise to two ques­tions: Does mar­ke­ti­za­tion aim to trans­fer the ex­tra prof­its earned from con­sumers to mid­dle­men? Can the ex­tra profit made by mid­dle­men in­di­rectly help the over­all econ­omy?

The an­swer to the first ques­tion is ob­vi­ously "no". In fact, it con­tra­dicts the orig­i­nal in­ten­tion. When money from ur­ban con­sumers is trans­ferred to the wrong group, in­ter­ven­tion in the mar­ket can pro­duce op­po­site re­sult.

But the haz­ard is greater than that. If the process of trans­fer­ring the ex­tra money from con­sumers to a tar­geted group (in this case the wrong group) cre­ates neg­a­tive util­ity, it will harm the en­tire econ­omy, which is the an­swer to the sec­ond ques­tion.

As is well known, one of the most im­por­tant in­di­ca­tors of eco­nomic devel­op­ment is value in­cre­ment, be­cause value has al­ways been the pos­i­tive func­tion of ef­fi­ciency. There­fore, we can say that as long as an ac­tion im­proves the over­all ef­fi­ciency of the eco­nomic so­ci­ety, it will help in­crease eco­nomic value and vice versa.

Mid­dle­men are sup­posed to im­prove the ef­fi­ciency of com­mod­ity trans­ac­tion. But if sub­stan­tial so­cial util­i­ties are trans­ferred to this group to an ex­tent that far ex­ceeds the mo­ti­va­tion level it de­serves, it will cre­ate a se­ries of neg­a­tive util­i­ties that will be trans­ferred to other groups. The most di­rect demon­stra­tion of the ul­tra-mo­ti­va­tion would be the flow of a huge amount of so­cial re­sources into an area that will not di­rectly im­prove out­put ef­fi­ciency, ex­cept per­haps in­creased pro­duc­tion.

More­over, it would di­rectly lead to a dou­ble de­cline in the ef­fi­ciency of re­source al­lo­ca­tion and pro­duc­tion. The con­se­quences of such a de­cline in­clude not only a drop in macroe­co­nomic value, but also in­di­rect harm to the in­ter­est of farm­ers, which is con­trary to the orig­i­nal goal of pro­tect­ing their in­ter­ests.

There­fore, if the prob­lem of the op­er­a­tional mech­a­nism of the mar­ket, es­pe­cially whole­sale mar­ket for farm prod­ucts, is not solved, it will be im­pos­si­ble to pro­tect farm­ers' in­ter­ests by merely depend­ing on an in­crease in the prices of agri­cul­tural prod­ucts. But from a more pro­found per­spec­tive, even if such a mech­a­nism is nearly per­fect, en­cour­ag­ing prices to rise will not solve the fun­da­men­tal prob­lem of farm­ers.

In­stead, it will have neg­a­tive in­flu­ence on the en­tire econ­omy. On one hand, the im­mod­er­ate in­crease in the prices of farm prod­ucts has cre­ated chaos. These ab­nor­mal phe­nom­ena will, in turn, hurt farm­ers' in­ter­ests. On the other, if the pro­duc­tion ef­fi­ciency in farms is lower than the na­tional eco­nomic av­er­age, re­sources will en­ter the agri­cul­tural sec­tor be­cause of the rel­a­tively high price of farm prod­ucts, which would even­tu­ally cre­ate neg­a­tive util­ity for the over­all econ­omy.

In such a case, it would be bet­ter to leave the mar­ket to de­cide the prices in­stead of rais­ing farm prod­ucts' prices to pro­tect the in­ter­ests of farm­ers. Ac­tu­ally, such a mech­a­nism will be more ben­e­fi­cial to farm­ers in the long run. If the govern­ment has no op­tion but to in­ter­vene, it should grant sub­si­dies to farm­ers for two rea­sons. First, fi­nan­cial sub­sidy will not send wrong sig­nals to the mar­ket on price.

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