The Financial Express

The political economy of price rise

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Governments, unlike a business or industrial enterprise, are a political entity even when it is not elected or elected controversially. While a business or industrial concern can decision purely on economic considerations of profit and loss, a government of any stripe of democratic dispensation has to take politics into consideration while taking decisions that impinge on the day to day life of the public.

The recent increase in the prices of kerosene and diesel by Bangladesh Petroleum Corporation (BPC) may appear as the decision of an agency under the government of Bangladesh but actually it is a decision by the government. It is not possible for an agency under the government to take such a major decision on its own. The moot point is whether this decision is based on the template of political economy, as decisions of this nature are expected to be taken in any type of democracy.

Before answering the question a clarification is required about what is meant here by the oft-quoted term 'political economy'. The conventional meaning is the political implication of a decision by government, particularly its impact on public opinion. From this point of view of political economy a decision has to be popular or so tolerable to the majority of people as not to raise public outcry against the government. In either sense, the emphasis is on maintaining status quo in so far as the popularity of the government is concerned. The modern connotation of the term, which I prefer, is on the other hand, to stress on welfare enhancing impact of a decision taken by the government. The two inter-relations are not a matter of semantics, there being substantive differences between the two. The first, the conventional one that focuses on maintaining popularity, by not taking any decision that is to the contrary. The second interpretation, on the other hand, refers to decisions that are welfare enhancing for the people and as a result increases popularity of the government.

The decision by BPC has clearly violated the first meaning of political economy, being abjectly unpopular. It has also fallen short of the second requirement by failing to enhance popular well-being. On the contrary, judged by popular reactions and views expressed by experts the decision has adversely impacted on the welfare of people by raising their cost of living. As a politician one is expected to criticise the decision on the basis of the first interpretation i.e the popularity criterion. But an economist should look at the issue of price increase  from the point of view of the second meaning and more recent of political economy, that is whether it is welfare enhancing or welfare reducing. If someone criticises the decision as 'lacking political foresight' or 'devoid of economic sense' one is not talking like an economist. As an economist his first reaction should be to support the decision by BPC on the ground that faced with higher import cost and without compensatory subsidy it is trying to adjust the cost of import with the sale price in order to remain profitable. In taking this decision it has behaved perfectly as a business entity, which it is or should be. Therefore, on economic grounds, BPC cannot be faulted for having taken this decision.

But the government, as pointed out at the outset, is not a business entity. Unlike totalitarian or authoritarian regimes, it cannot ride roughshod over the public opinion not to speak of remaining indifferent to public welfare. It functions within the framework of the second meaning (welfare enhancing) of political economy. This requirement from the government has become all the more imperative after the pandemic that has pulverised all economies. The various stimulus  packages given by governments all over the world during the past one and a half years, including  Bangladesh, acknowledge this welfare- enhancing role or at least maintaining the status quo in this respect. There is no ideological wrangling involved here, rather the basic role of governments to protect the public from economic hardship for unforeseen reasons has been invoked. America, where big government and expanded public expenditures are anathema, has passed stimulus packages running into several trillion dollars to provide help to individuals and firms affected by the pandemic.

Bangladesh, too, has spent US$ 14.9 billion in various stimulus packages since FY20 which amounts to 4.5 per cent of Gross Domestic Product (GDP). The difference between America and Bangladesh is not only in the huge difference in the amount spent as stimulus but more importantly, in terms of the policy implementation. While America financed the packages out of public exchequer, Bangladesh monetised the fiscal policy, depending on bank financing. This was because of the small fiscal space it had due to recurrent budget deficit and rising public debt. But the government soon found out that in a crisis like the pandemic both capitalists and workers who need assistance, monetary policy is not very helpful as banks are reluctant to finance the minnows because of their uncertain credit worthiness. As a result government borrowing from both internal and external sources increased to expand the fiscal space of the government to meet the emergency requirements to spend following the pandemic. According to Bangladesh Bank, there has been an increase of 12 per cent  in internal borrowing (Tk.1.18 trillion ) amounting to 38 per cent  of GDP. Foreign borrowing also rose during the past year following Covid-19, up by 19 per cent till June, 2021, compared to the same period during last fiscal. Central bank statistics also showed that total foreign debt stood at US$ 78 billion till June 2021 which is 22 per cent of GDP. Both the levels of internal borrowing (38 per cent of GDP) and foreign debt (22 per cent ) are within reasonable limits judged by repayment capacity and as such is not a matter of concern. With exports, particularly garments, picking up and remittance flow on the rise  and improvement in revenue collection the government can increase its fiscal space further to provide additional assistance to individuals, business and industrial firms affected by pandemic.

The BPC selling a strategic product that transmits its effect in all sectors of the economy through costs of production and resultant price level in the market is a prime candidate for receipt of a stimulus package. This is all the more necessary when Tk 100 billion have been appropriated by the government out of its surplus fund. To begin with, BPC can be given benefit through reduction in import duty and waiver or deferral of VAT on its imported oil products. It can then balance its budget without having to increase prices of the products that it sells.

Apart from the welfare consideration through lower price of its products that help keep down costs of production and market prices, there is an equally, perhaps more compelling reason, to provide price support through subsidy, tax concession or a stimulus package. If as a result of price rise of diesel and kerosene there is increase in prices of both food and non-food items the inflationary pressure may take inflation well above the targeted 5.50 per cent.. According to Bangladesh Bureau of Statistics (BBS) point to point inflation rose to 5.59 per cent in September, that is before the price hike of diesel and kerosene in early November. Given the price spiral that has started since the price hike by BPC all the four components of consumer price index--headline, food, non- food and core, will  register upward move taking inflation beyond the red flag. If inflation rises fast, it will weaken the strength of Taka which is already showing signs of depreciation. A sharp fall in the value of Taka will mean rise in cost of imports. This may threaten the country's vaunted growth rate. Therefore, the price hike by BPC not only runs counter to the welfare enhancing role of political economy but may also derail the upward moving trajectory of the economy.

Whether looked at from the welfare meaning of political economy or the text book definition of growth, the price hike of the strategic products is going to deal a severe body blow to the economy which has just begun its post-pandemic recovery. After managing the economy prudently, particularly steering it through the great crisis during the devastating pandemic, the decision on price hike is nothing short of shooting on the foot by policy makers.

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