Vol. 5 Num 990 Wed. March 14, 2007  

Market jitters

I love what's going on -- every bit of it. Bangladesh is certainly the most exciting place in the world right now. Not a day goes by without producing a (vicarious) thrill or two in the form of demolition of illegal constructions, confiscation of relief tin or nabbing of a well-placed crook or two. Great stuff!

Unfortunately, however, the market doesn't find all this very humorous. I sometimes truly wonder about the nature of market morality. There surely must be some way to inculcate a deep sense of high moral principles into the "invisible hand" -- provided, of course, that you are able to find it. And that may prove elusive. As Joe Stiglitz points out: you don't see the invisible hand largely because it isn't there in the first place!

So why should we worry? Markets dislike uncertainty and risk, just like human beings. Unlike ourselves, however, it can usually do something about it by reacting up.

It is relatively easy to spook the market, and I believe that is exactly what seems to be happening right now. Let me take this opportunity to do a quick review of Bangladesh Markets 101 for the benefit of those who never took this course:

First, there is the question of supply. You of course know that if supplies are interrupted or reduced, prices will rise. Supply means supply to the market for sale. It doesn't include, for example, stuff sitting in godowns or warehouses (which it may well be perfectly entitled to do) awaiting a future disposal decision.

So if you are worried about prices rising please take a look at supply-chains, i.e. from farmer to market, or importer to retailer, and watch out for weak links or even a chicken-neck. The last refers to a narrow link in the chain involving relatively few players -- a tell-tale sign of potential trouble.

Second, there is the question of demand. This relates to how much money people are willing to spend in the market place (and does not reflect your psychological or physiological need!) If demand goes up prices will rise.

What are the chances that, all of a sudden, there will be a huge urge on the part of the population to binge on say edible oil, vegetables, or onions? Or for that matter, have we witnessed a sudden increase in (real) incomes? As far as I know, wages have not gone up, while bribe-related earnings are likely to have slumped. So, if anything, demand is down, not up.

Transactions costs -- a popular phrase these days -- refers essentially to all costs that are entailed between the supply point and the retail point (e.g. from the port to Agora). This includes handling, transport, storage costs, official and unofficial fees, commissions, interest rates, and so on. Have any of these components been misbehaving? It shouldn't take an astrophysicist to figure that out.

Speculation and hoarding: Ah, this is the really sexy bit -- much beloved of the media and politicians! Who better than the hoarder/aratdar/jotdar to hang rising prices on? If memory serves me right, this "hang the hoarder" refrain has been heard often-times, albeit with varying degrees of intensity, ever since I can remember!

Age and pedigree, however, are no guarantees of truth. As we contemplate bringing in new laws to curb hoarding we should pause for a moment and recollect that not too long ago (possibly in the 1990s) there used to be a anti-hoarding law for rice.

Years of painstaking research and policy advocacy finally convinced policy makers that rice markets were highly competitive, and that hoarding was often just a bad name for stocks that are essential to smooth out seasonal market supplies and prices.

And further, if prices do not fluctuate seasonally, there would be no incentive for traders to stock, speculate, or engage in trade. The alternative would be for the state to engage in trading -- a very bad (and inefficient) idea indeed!


This is even more alluring a suggestion, the idea being that a few big traders are able to control a critical supply point (strangle-hold over the chicken-neck) and prevent all others from independent access to (imported) supplies, thereby hiking up prices at will. For the past year or more, we have heard how such syndicates have been up and about, doing their dirty deed with impunity as we common folk suffered.

Now, theoretically, such a scenario is plausible. However, how likely is it? Not very, and here are some reasons:
* No one has come up with any proof, and all that we have to go by is speculation and dark hints. Not even a single decent anecdote has been presented by our highly efficient media.
* It is not easy to collude. For Bengalis, collusion (or collective action) is even more difficult, and the problem compounds itself with the number of parties involved (for this reason I do not believe in conspiracy theories!).
* For a syndicate to work, it would have to erect strong entry barriers, i.e. prevent other traders from entering the business. It is difficult to see how this can succeed. Are there entry barriers created by the government through awarding of licenses, or permission to import, to a few selected traders? No, that cannot be correct -- can someone please check that out?

As we contemplate bringing in new laws to handle an old problem, we should bear in mind that anti-hoarding laws never worked, and merely degenerated into a tool for rent extraction (read bribery). There are two things that need to be done: (a) proper analysis of market conditions, e.g. answer the question of the existence of syndicates with data and evidence, and (b) calming those markets.

I noted earlier that markets aren't pleased with all these shenanigans. You need to show greater respect to the market, and for that your rewards would be great too. The market needs calming, and this can only be done through strong signaling.

Please stop talking about hoarders and black-marketers and recognize the vital role of traders' stocks in smoothing markets, for a start. Action against all kinds of wrong-doing is welcome, but let us recognize that there are no short-cuts to achieving efficient, well-performing markets. And this can only be achieved through superior market institutions in which information, and grades and standards play a crucial role.

That's it from Markets 101. We will discuss 102 next semester.

K.A.S. Murshid, economist, researcher, and columnist, is Research Director, Bangladesh Institute of Development Studies (BIDS).