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The primary sector strikes back

The soaring prices of cereal crops have bludgeoned the poor and people with fixed income more than any other group. Poverty reduction programs were disarrayed in developing countries. Some economies were brought to the brink, with poverty, hunger and despondency parading at every corner. The fall-out at times became simply impossible.
A few decades ago, the primary sector was treated as the scullery maid of economy. The smaller it was reduced to in terms of its contribution to GDP and employment generation the more developed the economy was supposed to be.
Terms of trade, vis a vis secondary and tertiary sectors, were drastically tilted against primary sector, which comprised minerals and natural resources along with farm produce, forest, fisheries and livestock As a result, agricultural goods and mineral produce, including fossil fuels, were dirt cheap compared to processed goods and services.
People engaged in the primary sector were not well remunerated compared to those in the secondary and tertiary sectors. Maybe they were bound to conventional thinking and conventional way of life. They were satisfied with what-ever they got in the bargain with their counterparts in other two sectors.
Economic agents belonging to
secondary and tertiary sectors relished fruits of their bargain, and expected that the drill would continue perpetually. This was a universal phenomenon and Bangladesh was no exception.
In this connection, I fondly remember world famous Didar cooperative's Yasin, a Magsaysay award winner. He used to say: "Sir, you are lucky that the farmers do not seriously calculate the cost benefit of rice production in their plots, they do it as a matter of traditional occupation and they arc content with whatever they receive in return. Had they carried out the cost benefit calculus, they might not have opted for rice cultivation. The present price of rice is kept artificially low and the farmers are exploited by the city people. Maybe this will not continue for ever."
Yasin was one of the most ingenuous indigenous persons I have seen. I found his arguments convincing and always believed that time would prove that Yasin's statement was indeed prophetic.
Price setting in the so-called free market economy depends, among many other factors, on the market power of bargaining agents. Information economics has unfolded games that agents in the market play to reap maximum
benefit from the bargain. Concealing information, introducing mischievous noise and misleading the gullible suckers etc. are the usual tricks resorted to by the astute and powerful counterparts on the other side of bargain.
Control over high valued or high tech logistics, financial infrastructure, legal and administrative institutions, and also their specialised knowledge and skill are the usual instruments they apply to wrest the market power. The result: the pow erful get what they demand and the powerless grant what they must.
Price determination of primary goods, including petrol, oil, lubricant (POL), is the outcome of power play among players of all three sectors in the market. For a long period up to 1973 the industrialists and service providers kept the price of POL abysmally low, taking advantage of the ignorance, poverty, disparity and disputes among the producers of this crucial product that keeps the economy moving. At this juncture, the table was turned against the secondary sector by a set of young Arab leaders who were enlightened, highly educated, assertive and professionally competent to match elites of the developed industrial countries.
These young leaders carefully and correctly read the market structure of their product and built up the right kind of sellers' organisation to bolster their bargaining position.
This worked well. The producers of most strategic primary commodity asked a price for their commodity which was fair according to their assessment, and developed industrial countries had no option but to oblige. The Arab countries, and other oil producing countries, got the taste of their market power and retained it through assiduous maneuvers since then.
Over time, they have strengthened their position to catapult the price of oil to a staggering height Industrial behemoths have to pay fair price for the primary product that they cannot do without.
Recently, the prices of agricultural products have started soaring upward. Some economists have termed it "agflation." Initially, it was perceived to be a short-term phenomenon. Market analysts now predict that the situation will persist for a long time, maybe for an indefinite period.
Prices of perishable commodities may plummet in the peak season in absence of preservation facilities. Prices of non-perishable
items like cereal crops arc not likely to come down markedly because over abundance of supply in market is not likely in the short run.
Food grains can be stored for a fairly long time. If a country harvests a bumper crop, it will build up a buffer stock to meet emergency situations, which are apprehended to afflict the country more frequently than ever because of climate change. The situation is more precarious for edible oil because oil seeds are being diverted for use as ethanol, a substitute for fossil fuel. Prices of metal orcs will also go up as demand for them outstrips the supply. Easing of the price situation does not loom on the horizon.
The main factor for monotonically increasing prices of primary products is their limited supply. It is now perspicuously evident that the original and indestructible wealth of primary sector is indeed limited in supply. Even if supply can be augmented the time lag, or what the professionals call the gestation period, is substantially long, and cost of increasing additional unit is above linearly defined function.
Many of these products have no effective substitutes, which could ameliorate the crisis. While the income-elasticity of these goods are markedly positive the crosselasticity is often negligible or nil. As the world economy grows and highly populated countries like China, India, Brazil surge ahead, demand for primary products soars both for direct consumption and for use as intermediate goods. No sign of abatement is visible at the moment.
The improved terms of trade for primary sector coupled with the supply constraints have necessitated reformulation of the equations defining the inter-sectoral balance. The development has colossal impact on income and resource distribution. The process is still on; the denouement is not in sight. The initial impact has recruited a lot of apparently negative side effects. It has destabilised economic and social orders in manycountries.
The soaring prices of cereal crops have bludgeoned the poor and people with fixed income more than any other group. Poverty reduction programs were disarrayed in developing countries. Some economies were brought to the brink, with poverty, hunger and despondency parading at every corner. The fall-out at times became simply impossible. Governments were seized with immediate crisis of reaching food to teeming millions; they had no time to readjust the sectoral balance in order to build a more stable and just structure.
In the long-run, restructure they must. The expectation that prices of primary commodities will come down to near the original position relative to those of secondary and tertiary sectors will not come true. As was mentioned earlier, relative prices are determined by the complex power play among the agents of different sectors.
Agents representing primary sector are now well informed and adept in the art of bargaining. They are aware of their relative positions, and umbilical dependence of other
sectors on their goods, particularly in the absence of synthetic substitutes. They will therefore realise optimal benefits from their coign of vantage.
Consumers in general, and producers or providers in secondary and tertiary sectors, have to forget the days of cheap food grains or cheap fossil fuels and metal ores. The portion of family budget earmarked for food and gasoline has to be enhanced, perhaps at the cost of manufactured consumer items and luxury services. Such readjustment for a healthy inter-sectoral balance will produce benign results for mankind in the long run. It will arrest forces of unfair exchange, instability and tension in the society.Governments of developing countries have to adjust themselves promptly to new reality if they want to overcome the impending crisis. They have to correctly identify the groups most vulnerable to spiraling food prices. These groups have to be adequately projected through income enhancement, apposite subvention policy, and precisely targeted safety net programs including pure transfer.
Income-based classification of the entire population has to be worked out assiduously and impartially. Support programs of the government have to be income-based, and their central validity must not be compromised on any pretext. Any deviation from fair treatment may wreak havoc for the whole nation.
In the medium and long-term planning, governments of develop-
ing countries need to put highest emphasis on conserving and expanding natural resources including agricultural land. Self-sufficiency in the production of food grains, other strategic crops and mineral products, including energy sources, must not be undermined in the name of free trade and so-called international obligations.
One must distinguish between autarky and self-sufficiency in the production of strategic commodities. Autarky is self-defeating, but seif- sufficiency in strategic items is reassuring in the present context when altruism seems to be receding fast from the international scene.
Instead of lamenting over price hike of primary products, developing countries like Bangladesh should carefully study the market structure of primary commodities and design their production plans in such a way that they can harvest optimal benefits from strategic import substitution, and from exporting their surplus products. Of course, they have to improve their bargaining skills at the same time.
The strength of developing countries still lies in their natural resources and primary products. They should not, therefore, be alarmed at the assertion of the primary sector. They would do better to prepare themselves well for the ultimate fencing, and the victory thereafter.
Dr. Saadat Husain is Chairman, Pubic Serves Commission.