Monday, January 30, 2012


Communist system of governance depends heavily on government sponsored and managed industrial enterprises to control the market and ensure steady prices for all the daily needs of the citizens. In contrast free market philosophy leaves it to the entrepreneurship and enterprising spirit of the individual citizen to flourish under a competitive market environment, the fittest and the ablest surviving eventually. This is supposed to weed out weak performers and increase the overall efficiency of the economic activity. Spurt in food prices is fraught with social unrest, fostering a feeling of shortages and scarcity which has the potential to even destabilize established regimes. The 2008 food riots in 25 countries across the world are too fresh in the memory of the world and every government makes sure that food inflation is kept to an unavoidable minimum. Chines government, though preaches the Marxist-Leninist communist ideals, it had embraced almost all features of free economy that enabled it to become a strong economic power in the world to day. Now that the food inflation is showing signs of turbulence, government there wants to invest more of state funds in the market to control prices. Here is a take on this recent policy orchestration being propounded by the government. 

"China will focus on government-invested markets as an important way to stabilize agricultural produce prices and
meet people's basic needs according to a document from the State Council. The document released on Monday said
governments at all levels should increase investment in purchasing or constructing agricultural produce wholesale 
markets,farmers' markets and vegetable markets.It is the first State Council document that requires local governments
to purchase and have a stake in agricultural produce wholesale markets, and to clarify the public welfare nature of fresh agricultural produce markets, Dai Zhongjiu, director of the China Vegetable Marketing Association, 
told the Economic Information Daily. Beijing is pioneering government-invested markets and is promoting the model
of using reduced stall fees to lower vegetable prices in government-invested markets, said Dai. Beijing plans to hold 
stakes in 10 vegetable markets and purchase five vegetable markets in each of the city's districts in the future, said
Zhang Yuxi, the board chairman of Xinfadi, the largest wholesale market in the capital, the Beijing Business Today
reported."The main benefit of involving local governments in running vegetable markets is that it will help the 
government control retail sales of vegetables, which will then stabilize prices," said Zhang. "In government-invested
markets, stall fees are easy to control, as the government can just shoulder part of the cost," Li Binglong, a professor
with the China Agricultural University, told the Global Times. It would rely heavily on government investment 
while pushing forward the model, Linoted, while the existence of government-invested markets would influence other market operators. "Rising costs in other areas also affect agricultural produce prices,such as labor costs." Linking sales
directly to production has become a common method of reducing overall distribution costs. The State Council 
proposals encourage large- scale distribution enterprises to have stable relationships with leading agricultural 
enterprises. However, the "hard to sell and expensive to buy" problem is still an outstanding issue across the country. 
In October, potatoes sold at four yuan ($0.63) a kilogram in Beijing, while in the Inner Mongolia 
Autonomous Region, about 300 kilometers from the capital,the price was just 0.6 yuan a kilogram, with fewer
people buying them, the Beijing Business Today reported earlier".

How far government intervention in the market can control food inflation remains to be seen. It is a cardinal truth that no government managed system in business activities can vie with private players in terms of economic efficiency and lowering of the cost of production or manufacturing. Still since the government in China is not based on democracy, it can indulge in many arbitrary and draconian measures to control the market prices. India, in spite of being a democratic country, has shown how prices can be manipulated by creating monopolies in certain commodities with no competition allowed under a protectionist policy regime. Of course this tendency is slowly becoming less and less with many sectors open to private investment. Still the market environment in India is much more competitive than that in China. One big difference between these two Asian "cousins" is the predominant role of "middle men" in India who connect the farmer to the consumer, gobbling hefty margins in the process and often indulging in hoarding and creating artificial shortages. The Onion fiasco last year was a prime example of the vice like grip middlemen have on the food market in India. The hope by GOI to reduce the marketing muscle power of these middlemen through clearing of FDI in retail may be misplaced if one goes by the experience of other countries which had chosen this route in the past.


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