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Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

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The Political Economy of Food Price Policy in Bangladesh

The Political Economy of Food Price Policy in Bangladesh

Chapter:
(p.231) 11 The Political Economy of Food Price Policy in Bangladesh
Source:
Food Price Policy in an Era of Market Instability
Author(s):

Selim Raihan

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198718574.003.0011

Abstract and Keywords

Global food price hikes during 2007–8 resulted in a sharp rise in staple food prices in Bangladesh. Poor and marginalized households were particularly vulnerable to such an adverse situation as their real purchasing power eroded. Studies indicated that the adverse effects of the food price hike in Bangladesh were primarily manifested by the significant rise in the number of households falling below the poverty line income. At the political front, Bangladesh was run by an unelected and undemocratic ‘civil’ caretaker government backed by the military. The caretaker government remained in power until the end of 2008 and undertook several steps to contain price hikes. These measures included cuts in tariffs and taxes, increase in the allocation for subsidies, widening the scope and coverage of the social safety net programmes, public procurement, and distribution programmes, etc. Some of these policies and programmes were effective and some were not.

Keywords:   Bangladesh, food price crisis, poverty, households, government response

11.1 Introduction

The Bangladeshi government moved beyond the public sector-led development strategy to a private sector and market-oriented development strategy through the implementation of different structural adjustment programmes (SAPs) during the 1980s and 1990s. In response to donor suggestions the government adopted the Poverty Reduction Strategy Papers (PRSP) in 2005. It emphasized a greater role of private sector investment and providing appropriate fiscal and other incentives to achieve that. The strategy highlighted the importance of agricultural and rural development and focused on the intensification of major crops (i.e., cereals), the diversification to high-value non-cereal crops (i.e., vegetables and fruits), the development of non-crop agriculture (i.e., fishery, poultry, livestock), and the promotion of rural non-farm activities (i.e., rural construction, transport, and services). The strategy also put emphasis on the expansion of micro-credit and importance of the safety net programmes. A national food policy was formulated in 2006, which called for several agricultural development and extension services. The second PRSP was formulated in 2009, which emphasized enabling the macroeconomic environment for pro-poor economic growth. The Awami League (AL) government in 2010 abandoned the PRSP and reintroduced the Sixth Five-Year Plan for the period 2011–15 which identified a number of core targets in line with the vision and objectives of the Perspective Plan as well as the Millennium Development Goals. These targets are related to a considerable rise in economic growth, significant reduction in poverty, significant improvement in human resource development, water and sanitation, energy and infrastructure, gender equality and empowerment, environment (p.232) sustainability, the widespread use of information, and communications technology.

11.2 Food Price Trends and Shocks

11.2.1 Previous Crisis Episodes and Policy Responses

Over the last forty years after independence in 1971, Bangladesh faced a number of man-made and natural calamities which threatened food security of the poor and marginalized population. These calamities include a famine in 1974, floods in 1987 and 1988, a cyclone in 1991, and a flood in 1998.

During the 1974 famine the food price rose sharply when rising inflationary expectations raised the demand for food while the supply of food decreased as farmers and traders released less food in the market. According to Drèze and Sen (1989) the famine was due to entitlement failure, rather than the per capita availability of food. The government tried to ensure subsidized food to all the urban people on a priority basis through the rationing system. The government’s famine relief efforts were limited and disorganized and the government was inadequately prepared to face the challenge.

In 1987 and 1988 the country experienced disastrous floods. The government undertook various disaster management programmes. Food aid and increased imports of rice and wheat were the major steps. All the international development partners supported a project entitled Flood Action Plan from 1990 to 1996 to formulate a national flood and water management strategy.

The 1991 Bangladesh cyclone was among the deadliest tropical cyclones on record. The government and the international community launched a major response to the cyclone disaster which included food aid and large scale reconstruction.

In 1998, over 75 per cent of the total area of the country was flooded. It was similar to the catastrophic flood of 1988 in terms of the extent of the flooding. The government responded to the crisis by supplying food for immediate relief efforts during the floods and by helping to coordinate food aid commitments and deliveries. At the same time, as part of its price stabilization strategy, the government encouraged private sector imports, a policy that helped avoid a food supply shortage following the floods (del Ninno et al. 2001).

11.2.2 Price Trends for Key Food Crops and Price Transmission

As shown in Figure 11.1, the domestic retail price of rice had been higher than the import cost, insurance, and freight (CIF) price of rice until 2003–4. Though, since 2004–5, both the domestic retail price and import CIF price of (p.233) rice began to rise considerably, the domestic retail price had been much lower than the import CIF price until 2008–9. This is a reflection of the fact that in recent years, Bangladesh has become less dependent on import of rice and therefore, the world price had little effect in determining the domestic price.

The Political Economy of Food Price Policy in Bangladesh

Figure 11.1 World price and domestic retail price of rice during 2001–9

Source: Department of Agricultural Marketing (<http://www.dam.gov.bd/jsp/index.jsp>) and Indexmundi (<http://www.indexmundi.com>).

Bangladesh is heavily dependent on the import of wheat and therefore, the domestic retail price of wheat had always been higher than the import CIF price. The gap between these two prices widened during 2003–4 and 2007–8, suggesting that the domestic retail price of wheat increased more than the rise in world price of wheat. In 2008–9, the gap between these two prices narrowed (Figure 11.2).

The Political Economy of Food Price Policy in Bangladesh

Figure 11.2 Wholesale and retail prices of wheat flour during 2001–9

Source: Department of Agricultural Marketing (<http://www.dam.gov.bd/jsp/index.jsp>) and Indexmundi (<http://www.indexmundi.com>).

11.2.3 Causes of the Price Hike

There are several explanations for the food price hike during 2007–8. Some of them were domestic and some were related to the effects generated at the global level. Raihan and Fatema (2007) identified eight reasons.

  1. 1. Bangladesh had been one of the high growth performing economies over the last ten years. The high growth rate of per capita gross domestic product (GDP) contributed to a demand-pull inflation.

  2. 2. Bangladesh had been a net food importing country. As a result, any rise in food prices in the world market pushed the domestic prices of those commodities to increase.

  3. 3. The Bangladesh government increased fuel prices in April 2007 in order to make domestic prices of fuel closer to the international market prices. (p.234) Though fuel constituted a very small share in the basket of commodities used for the calculation of the consumer price indexes, the rise in fuel prices had some indirect impacts on the prices of commodities by rising cost through two major channels: the high prices of fuels led to high costs for irrigation, which raised the costs of agricultural production, and high fuel prices increased the cost of transportation, which also raised the prices of essential items transported from remote villages to urban areas.

  4. 4. Since 2002 the Bangladeshi taka had depreciated much against the US$ while the Indian rupee has been appreciating. This resulted in a major depreciation of the Bangladeshi taka against the Indian rupee. India had been one of the major sources of Bangladesh’s imports, as imports from India constituted more than 20 per cent of Bangladesh’s total imports comprising many essential food items.

  5. 5. Though there was no concrete evidence of established syndicates in the markets of essential commodities taking advantage of the weak consumer protection laws, there were some short-term alliances among the suppliers of these goods to influence supply and prices. This might have some impact on the rising prices of essential items.

  6. 6. Due to the anti-corruption drive by the military backed caretaker government many businessmen contracted their usual business activities with the fear of legal actions. Furthermore, many informal marketplaces, both in rural and urban areas, were wiped out by law enforcing agencies on legal grounds. Such actions resulted in a disruption in the ‘established’ supply chains, which exacerbated the inflationary trend.

  7. (p.235) 7. There was a declining trend of growth in agriculture over time, especially of the crop sector in Bangladesh. This resulted in less domestic production relative to the domestic demand. Slower growth in agriculture, and especially of the crop sector, was due to failures in the timely supply of fertilizer, seed, and pesticide to the farmers, increased cost of irrigation because of a rise in diesel price, and the decline in the availability of cultivable land because of population growth and rehabilitation. Severe floods during July–August 2007 also exacerbated the situation.

  8. 8. Bangladesh was experiencing a steady rise in remittance inflow until the mid-2000s. In 2006–7, the growth of remittances was 24.49 per cent. Such inflow also contributed to some demand-pull inflation in Bangladesh.

11.3 Broad Impact on Stakeholders as a Result of Price Shifts Associated with the Crisis Period

The impacts of food price shocks on different categories of households would depend on the extent by which the households are integrated to the market. In the case of rice and wheat it appears that while farmers source around 80 per cent of their consumption needs from own production and the remaining 20 per cent from the market, marginal farmers procure more than 80 per cent of their consumption needs from the market and the remaining 20 per cent from own production. The small farmers can source around 56 per cent of their consumption need from own production and the remaining 44 per cent from the market. This suggests that large farmers may gain from rice price increases while small and marginal farmers would lose. Non-producing households such as rural landless households, rural non-farm low-income households, and urban low-income households are extremely vulnerable to price shocks.

Several studies assessed the impact of food price increase on the level of poverty in Bangladesh. According to the World Bank (2008), a reduction in poverty by 5 per cent, between 2005 and 2008, was expected in Bangladesh resulting from the strong GDP growth during that period. However, the study instead projected around a 3 per cent increase in the incidence of poverty from the baseline rate of 40 per cent in 2005 as a result of the increase in food prices. Therefore, the net impact on poverty, from the combined effects of economic growth and the inflation of food prices, was to result in a decline of about 2 per cent; from 40 per cent in 2005 to 38 per cent in 2008. Rahman et al. (2008) showed that in the fifteen-month period from January 2007 to March 2008 the gross income of poor people plummeted by 36.7 per cent. The income erosion of up to 30.5 per cent alone resulted from paying for the (p.236) high food bill, the predominant item in the rather bare purchase list of the poor. In consequence, 8.5 per cent of people comprising 2.5 million households fell below the poverty line.

Raihan (2009) explored the impact of the rise in food prices on the food consumption and education of children in the poor and vulnerable households in Bangladesh. The study showed that during early 2008 the prices of rice, pulses, and edible oil increased exceedingly which threatened the status of food security of these poor and vulnerable households in Bangladesh. As a result of the price hike, a significant percentage of households were forced to cut their consumption of rice, pulses, and edible oil.1 The households who could maintain the same level of consumption of rice could do so at the cost of reduced consumption of other non-rice food items and/or by reducing the non-food expenditure, i.e., expenses on their children’s education.2

11.4 Policy Responses

11.4.1 Increased Agricultural Production through Input Subsidies, Investment, and Enhanced Extension

The government took a number of initiatives for the development of the agriculture sector in the light of the PRSP, National Agriculture Policy, and Millenium Development Goals. Discussions with the policy makers suggest that many of these initiatives were reinforced in the context of rising food prices in the global market. These included subsidy on fertilizer, a rehabilitation programme for flood and cyclone, endowment funds for agricultural research and development, diesel subsidy to the small and marginal farmers, cash incentives for exporting agricultural products, rebate on electricity bills to the entrepreneurs of agro-based industries, reduction of the rate of interest for disbursement of loan for the production of pulse, oil-seed, and spices, and pursuing distribution programmes of agriculture and rural credit (p.237) through state-owned commercial banks. The allocation for these programmes increased during 2007 and 2008 (Economic Review 2008).

The Bangladesh Bank (BB) undertook several initiatives to streamline higher and balanced flow of agricultural credit as well as the distribution of subsidies on agricultural inputs. It was made compulsory for all local and foreign banks to disburse agricultural credits to facilitate agricultural production. The BB introduced a ‘revolving crop credit limit system’ for a three-year period to ensure access of farm loan to farmers continuously engaged in agricultural production.

11.4.2 Domestic Price and Trade Policies

Tariff rates on essential imported food commodities, such as rice and wheat, were brought down to zero in 2007–8. Also, operative tariff rates on other food items were reduced drastically during 2007–8. There was the withdrawal of the provision of an annual renewal fee of value added tax (VAT) registration by commercial importers.

The government also directed the BB to encourage the banks to provide credit facilities on softer terms to new importers, to ease the letter of credit (L/C) margin for food items, and to extend the time for customer facility. In order to curb inflation, the BB stated that it would continue following an accommodative monetary policy.

11.4.3 Social Safety Nets

In the face of escalated food prices in the domestic market, the national budget of 2007–8 expanded the existing food grains distribution through various social safety net programmes. There was also increased coverage and amount of individual grants under those programmes. Some additional programmes, such as Bangladesh Rifles (BDR) ‘Dal-Bhat’ (Pulses-Rice) programme, were undertaken. The national budget of 2008–9 continued these measures and expanded the open market sale (OMS) of food grains at subsidized price.

11.4.4 Procurement and Stocking Policies

In 2007–8, though the government decided to intensify internal procurement of food grains, in reality, total procurement was much lower than the targeted procurement. This was due to loss in production caused by natural disasters and higher prices prevailing in the market compared to the procurement prices set by the government. The government could also not meet the shortfall in domestic procurement through higher imports from (p.238) the international market due to the fact that in October 2007 India imposed a ban on rice exports, and the international market price of rice was much higher than the domestic price during that period, which discouraged private importers from importing.

One important observation made by Dorosh (2009) was that though the government in Bangladesh mostly relied on private sector imports to supplement any shortfalls in domestic production, it also traditionally held public stocks of cereals. The public stock of rice began to decline in 2004–5 reaching a low level in 2006–7 after which it doubled by 2008–9. The public stock of wheat in 2006–7 became almost one-third of its level in 2001–2 and dropped further by 2007–8. It almost doubled between 2007–8 and 2008–9. Dorosh (2009) suggested that the export bans that many traditional grain exporting countries imposed in reaction to the 2007–8 food crisis created concerns among Bangladesh’s senior policy makers that international trade might be disrupted at times when the country needed to import. As a result, the government set a high public stock target of rice and wheat for 2008–9. The increased stock was attributed to lesser off-take and increased domestic procurement and import (FPMU 2008).

11.4.5 Other Policies and Interventions

The national budget of 2007–8 announced the establishment of a task force at the national and district levels to review prices of essential commodities regularly. The country at that time was run by a ‘civil’ caretaker government backed by the military. The activities of the political parties were very limited. The demand for establishing task forces to review prices didn’t come from the political parties; rather the civil society organizations, non-government organizations, and consumer groups were the pioneers in raising that demand. However, discussions with the stakeholders indicate that very little achievements were made in terms of establishment of task forces, and their operations were limited and were mostly ineffective. The inter-ministerial monitoring committee was formed to analyse the price situation of essential commodities. A legal framework was proposed to protect consumer rights which later in 2009 took the shape of a Consumer Protection Act. The civil society organizations, including the Consumers’ Association of Bangladesh, were very active in pursuing the Consumer Protection Act. Also, in the Ministry of Commerce (MoC), there was support for this act, especially due to the fact that the MoC was usually criticized for its ‘failure’ in monitoring and curbing prices and there was a general perception among the high officials in the MoC that the enactment of the Consumer Protection Act would provide them with the necessary instruments to take measures against any anti-competitive practices which prevailed in the markets of essential commodities. (p.239) The national budget of 2008–9 announced medium-term measures such as an increase of production and distribution of food grains through creation of wholesale markets in various places including Dhaka and taking initiatives for introducing a Consumers’ Rights Protection Ordinance. The measures related to boosting agricultural production had some positive effects as reflected in an increased production of agricultural commodities in the subsequent years. However, the enactment of the Consumer Protection Act had little effect in containing the prices of essential food items since the government lacked required machineries, personnel, and capacity to effectively implement this act.

11.4.6 A Timeline of the Events and Responses

Table 11.1 provides a brief summary of the timeline of the major events and responses during 2007 and 2008. The timeline suggests that the government’s major success was raising the boro rice production and on targeted safety net programmes. A significant rise in rice production during April/June 2008 helped the government to increase the public stock of rice.

Table 11.1 A timeline of the events and responses

Year

2007

2008

Quarter

Jan/Mar

Apr/Jun

Jul/Sep

Oct/Dec

Jan/Mar

Apr/Jun

Jul/Sep

Oct/Dec

Events

  • Spike in global fuel prices

  • India bans rice exports

Uncertainties about rice import from India and other major exporting countries

Boro rice harvest 17% up on previous year

Responses

  • - OMS initiated

Bank credit for private food import eased

  • - Agricultural rehabilitation

  • - Intensifications of OMS operation

  • - Continuation of OMS operation

  • - Announcement of highest ever farm price support

  • - India agrees special dispensation for exports of 0.5 million tonnes of rice

Procurement drive for stock build-up

Targeted continuation of safety nets

OMS operation scaled down

Source: Wiggins et al. (2010). Reproduced under ODI Creative Commons Licence (CC BY-NC 3.0).

11.5 Political Economy Context

11.5.1 The Role of Ministries

The MoC and the Ministry of Food and Disaster Management (MoFDM) were at the centre of discussion related to government’s actions against the food price hike during 2007–8.

On 18 March 2007 the MoC, as part of its action to keep the prices of essential commodities within the purchasing power of the common people, announced it would set up a Price Monitoring Cell (PMC) in line with the proposed Consumer Protection Act to monitor the prices of essentials on a day-to-day basis. This PMC was successful in collecting data on prices of essential food items on a daily basis. However, because of the lack of required machineries, personnel, and capacity, PMC also failed to exert any influence over the market prices. The MoC urged the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) to set up a monitoring cell and display price lists at the wholesale and retail outlets. FBCCI’s monitoring cell was ineffective, and the MoC’s instruction to display price lists at the wholesale and retail outlets was largely disobeyed by the traders because of lack of monitoring capacity of the MoC.

The MoC was instrumental in pursuing the Ministry of Finance (MoF) to cut down the tariffs on food imports. According to a report published in (p.240) (p.241) the newspaper on 19 March 2007,3 businessmen welcomed the government initiative of exempting taxes on wheat and rice imports. They also suggested going for the same step regarding import of other food items like soybean oil, milk, lentils, etc. The same report mentioned that some high officials of the Commerce Ministry and the National Board of Revenue (NBR) held the view that the reduction of L/C margin would not play any role in reducing the prices of commodities and only businessmen would benefit from such provision.

Price hikes of essential food items during the month of Ramadan had been a regular phenomenon in Bangladesh. In the months of Ramadan during 2007 and 2008, the MoC had been consistently maintaining that the stocks of essentials were sufficient and thus there was no cause for a price hike. Also, in 2009, when the food prices in the international market were decling, the MoC had been calling the businessmen to reduce food prices in the domestic market. However, the businessmen were arguing that because of the the rise in international commodity prices local prices were getting pushed up. An article published in a British daily newspaper did not find valid reasons for the soaring local prices as the current stocks had been procured when the international market prices were lower.4 The same article also mentioned that despite calls from the commerce minister to the business community to avoid stockpiling and hoarding, especially during Ramadan, as this would create artificial scarcities and thus manipulate prices upward, such practices were still observed in the retail community.5

There were also some debates within the MoC with regard to involving the Trading Corporation of Bangladesh (TCB), an organization under the MoC, as a market player during the times of price hike. TCB is a public organization and it used to have some roles in the past when after the independence the government could intervene in the market through imports of essential commodities using the TCB. However, with the growing dominance of the free market philosophy, the importance of the TCB gradually declined and currently it has become an organization with insufficient funds and manpower. There are some interesting political economic issues related to the debate whether to make TCB effective or not. There was a ‘public’ demand for making TCB effective in the sense that TCB with some sizeable volume of imports of essential food items could put some downward pressure on the prices of essential food items in the domestic market. However, there was resistance from the business community and their lobbys in the government not to extend the operation of TCB. During the episodes of price hike in 2007, (p.242) 2008, and 2009, there were regular features in the national dailies related to this debate.6

During 2007 and 2008, the MoFDM set high targets of public food distribution and building up of the government’s food reserve. However, there were concerns in the media with regard to the failure of the MoFDM in achieving those targets. Quoting a food ministry official, The Daily Star reported that the stocking and distribution of food grains through government programmes had not been satisfactory. That the newspaper also mentioned that the government invited tenders for importing rice 36 times during 2007 and 2008 but the response to the tenders was not good as the import cost of rice became higher than what had been quoted in the tender bids.7

It should, however, be mentioned that the MoC and MoFDM didn’t have any direct power to influence the prices in the domestic market. For example, the MoC didn’t have any direct authority to lower the duties on import of food items. They had to request the MoF to undertake such a decision. Also, to expand the operation of the TCB in terms of increased manpower and increased fund for a larger volume of imports of food items could only be possible through the endorsement of the MoF, which was not straightforward. A number of studies (such as Raihan, Khondker, and Uddin 2010) identified some important non-economic reasons for a food price hike in the domestic market, such as extortion and unofficial payments in the transportation, distribution, and marketing conduits of food. This required actions from the Ministry of Home. The caretaker government, through the Ministry of Home, took a number of measures to combat the non-economic factors and also drove actions against ‘illegal’ or ‘informal’ supply chains. Though some of the measures against extortions were effective, many of those actions against ‘illegal’ or ‘informal’ supply chains were (p.243) counter-productive. CPD (2008) mentioned that strict law enforcements by the joint forces and the eviction of many roadside markets adversely affected the food inflation situation in Bangladesh. Demolition of local hat and bazars did not help either.

11.5.2 Role of Business Associations

The Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka urged the central bank to consult the leaders of private sector businesses and industries and collectively evolve a strategy for controlling inflation. In a statement, published in a newspaper,8 on the fourth mid-year Monetary Policy Statement (MPS) of the BB announced on 12 July 2007, the leading chamber body of the country said the MPS which hinted at a tighter monetary policy in the near and the medium term should not aim at increasing interest rates and effecting a hike of statutory liquidity ratio and cash reserve requirement (CRR) of banks. The MCCI also urged the BB to ensure that the administrative prices of fuels, utilities, and fertilizers not to be increased and ensure that the borrowings of the government be reduced. MCCI opposed BB’s tight monetary policy as it might raise the cost of borrowing for the entrepreneurs, curb the enthusiasm of genuine businessmen to invest in the formal economy, and subdue economic growth. However, such call from the business community didn’t have any impact on the BB to reverse its stance on monetary policy.

The MCCI also urged the government to strengthen the price-monitoring cell. Since the MCCI was the country’s prestigious and elite trade body, they wanted to uphold the clear image of the business people through such actions. They also suggested that the hoarders or syndicates should be given exemplary punishment. Furthermore, they asked for a clear definition of ‘hoarding’ and ‘artificial crisis’ so businessmen could distinguish between what was allowable and what was not. The MCCI also suggested the government turn the TCB into a public limited company and give it enough autonomy to function independently.9 Such a call from the MCCI could appear to contradict its self-interest, since TCB would presumably compete with the private traders. However, as mentioned before, TCB had always been neglected by the government, and it was a common perception among the business people that TCB would never be operationalized effectively. And in fact, despite such a call from the MCCI, TCB was not made functional.

The FBCCI in May 2008 commissioned a task force comprising top traders, ministry officials concerned, and members of the joint forces to monitor the price situation.10 The task force was supposed to collect information on (p.244) the prices, demand and supply, stock and market trends of essentials, and to come up with a set of recommendations to contain the prices. The task force was supposed to meet once every fifteen days and three major chambers—Chittagong, Khulna, and Jessore—would provide daily information for its cell. A website on the task force was also supposed to be lauched. Complaining against the government’s anti-hoarding drive, the FBBCI also demanded a food and hoarding policy, changes to the present food procurement policy, and immediate measures to create a better business climate.

A newspaper report in July 2008, however, mentioned that the FBCCI price monitoring task force was yet to gather pace two months after its launch in May.11 It thus appears that, though a few top leaders of FBCCI were eager to set up the price monitoring task force, they didn’t receive any support from the larger business community.

In September 2008, the FBCCI president urged business people to keep prices of basic commodities within people’s reach by not making unreasonable profits during the month of Ramadan.12 He urged the wholesalers to give vouchers to the retailers for transparency in pricing of the commodities. However, in reality, there was no authority to monitor whether this was practised by the traders.

FBCCI formed a ten-member committee to investigate the sugar scam in October 2009 and recommended possible ways to control the prices of sugar and other essentials.13 Meanwhile, backtracking from its earlier stand to arrest the unscrupulous sugar traders, who manipulated the sugar price during the month of Ramadan, the government in September 2009 decided to form two separate committees to conduct an ‘extensive investigation’ into the sugar price spiral.14 The committees submitted the reports, though the reports were never made public and there were no effective actions against those unscrupulous sugar traders.

In August 2010, the FBCCI urged the government to make a commodity price control policy to tackle irrational price spirals in the market.15 The policy should deal with the issues that affect prices and should define clear strategies and (p.245) guidelines on the pricing of commodities at various levels of commodity supply chains. FBCCI called for continued action from the government in its drive to check food adulteration, deploring the misdeeds of an unscrupulous section of the business people, who tarnish the image of the whole business community. The FBCCI president suggested that the inconsistencies in supply chain could be removed by adopting appropriate measures, including guidelines for tackling the issues affecting commodity pricing, not only during Ramadan but all the year round. The FBCCI chief also called for the abandonment of the demand order (DO) system for sugar and edible oils and replacing it with appointment of dealers, claiming that the latter would better address the price spirals evident in the market. Underpinning the need for using the latest information technology systems to track commodity prices, the FBCCI president mentioned that the prices of all commodities at all levels of the supply chain should be put on the website. He also mentioned that FBCCI would recommend the wholesalers to write out sales slips or receipts for each transaction they would make and ask retailers to display the price lists of the commodities to ensure transparency. The FBCCI, however, noted that a section of the business community and traders were still trying to manipulate prices through their attempts to create an artificial crisis of commodities. However, most of the suggestions of the FBCCI president did not materialize. Only the DO system for sugar and edible oil trade was replaced by the dealership system in October 2010.

11.5.3 Other Institutions

By 19 March 2007, the BDR16 set up ‘free markets’ at seventeen places in the capital, as a part of the government’s efforts to stabilize the soaring prices of essentials.17 These ‘free markets’ sold essential commodities at fair prices to help the lower- and middle-income groups facing hardships due to price spiralling. By 23 March, there were another eight ‘free markets’.18 The products sold at the BDR ‘free markets’ were cheaper than those at the regular markets since BDR could charge very low retail margins. However, such operations were limited in terms of scale and thus had little effect in curbing the market prices.

The government also continued with the OMS. This was part of the government’s subsidized food distribution programmes. According to the newspaper article, in Chittagong there was a huge demand for the OMS on the first day with huge crowds thronging from early morning. However, many consumers returned home empty handed as the stalls ran out of rice stocks very quickly.19

(p.246) The BB intervened in the foreign exchange markets, directly and indirectly, to keep a stable exchange rate against the US$. The BB continued following a moderate contractionary monetary policy. During early 2010, in a seminar, the governor of the BB announced that the government would soon launch the value added agricultural project in collaboration with the Asian Development Bank (ADB) to ensure better prices for growers.20 In May 2010, the central bank raised the cash reserve requirement21 for banks in a bid to contain inflation. However, economists and businessmen thought that would make the businessmen’s access to bank finance difficult, and would also sag the investment.22 The World Bank welcomed the monetary policy stating that as a cautious policy stance.23 In December 2010, the BB took new steps to control the credit flow in an effort to contain inflation. The central bank issued two separate circulars. One of them directed the banks to take back the loans given to rice-mill owners and traders every thirty days, which was forty-five days earlier. In another circular, BB asked the banks to set the loan equity ratio at 50:50 for consumer loans. Earlier, there was no guideline for the loan equity ratio for consumer finance. According to the BB, it was done to curb the credit flow to unproductive sectors.24

The International Monetary Fund (IMF) in July 2008 suggested the Bangladesh government execute tight monetary policy and termed the existing policy too expansionary to deal with the soaring inflation. The IMF suggested that the monetary policy should be less expansionary to contain the already high inflationary pressures.25 It seemed that BB listened to such advice during 2008 and in later years, though this policy suggestion was not welcomed by the business community.

11.5.4 Civil Society

The Centre for Policy Dialogue (CPD), a leading private sector think tank in Bangladesh, praised the government’s step to fix the procurement price for (p.247) paddy and rice, called for increasing the capacity of rice milling and storage capacity, and also called for widening the scopes for social safety net programmes.26

As inflation continued to rise in 2009 mainly because of soaring food prices, civil society organizations and experts blamed volatility in the international commodity markets for the rise in the inflation rate. The suggestion was that the government should monitor the global market on a regular basis so that the government could make a buffer stock by importing essentials when the prices were low in the international market. Also, suggestion was for the government to reduce fertilizer prices to minimize production costs.27 The government reduced the fertilizer prices in the subsequent months.28

Dr Akbar Ali Khan, the former finance adviser to the caretaker government, mentioned that the subsidy and reduction of import duty on essentials would help the government get a grip on the price inflation. He sugggested that, if necessary, the government would have to allocate funds from other sectors of the budget. He also held the view that various initiatives of the government in tackling the price hike including the sealing off of numerous warehouses to prevent illegal hoarding and harassment of business leaders were not appropriate. He advised the government to increase the supply of commodities in the market and, at the same time, enhance its own stockpile and suggested the government import more essentials and undertake a massive essential goods distribution programme for the poor. He suggets that above all, the government would have to put emphasis on food management for overcoming the enduring problem.29 The caretaker government eventually backtracked from its position to conduct drive against ‘corruption’ of businessmen, which was alleged to be responsible for disrupting the ‘normal’ supply chain of essential commodities.

11.5.5 Newspapers

The newspapers played some vital roles in publishing key news, information, and analysis during the period under consideration. Newspapers were (p.248) the major means for disseminating the government’s decisions and policy actions, and the reactions of the stakeholders. A news report on 8 March 2007, for example, revealed that the interim government, in a meeting with high officials of the BB and the armed forces, decided to cut import duties on commodities, ensure increased supply commodities in the market, and ask the joint forces to coordinate their drives targeting the corrupt and dishonest businesses only.30 The report also mentioned that the BB officials in the meeting drew attention to various negative impacts of the ongoing anti-corruption drives by the joint forces. They observed that the drives panicked genuine traders. The meeting decided to ask the law enforcers to coordinate their drives against hoarding and corrupt businesses and take assistance for the drives from government departments concerned—NBR, Anti-Corruption Commission, and BB. The meeting also decided to intensify import of essentials through the state-run trading agency, TCB, to reduce the prices of essentials.31

Another report on 19 March 2007 indicated that the commerce ministry did virtually nothing to control the market during the tenure of the immediate-past government (the government during 2001–5). There were two changes of commerce ministers, reportedly for their failure to exercise enough influence in the market to halt the rise in prices. The report added that the recent unbridled rise in prices was attributed to some factors, which included shortages of essentials in the market, caused by jitters owing to the crackdown by businessmen who refused to import the essentials, leaving the entire supply chain disrupted. The report hailed the CTG as it made a major move to reduce prices of foodstuffs by lifting import duties on rice and wheat and allowing banks to open LCs on liberal terms. The CTG also decided to start an open-market sale of some essentials, and also ordered the opening of the sealed food storages across the country as a way of keeping the supply available in the market. The report suggested the CTG take utmost care so that the benefit of duty concessions could really reach the consumers. The report also called for an effective activation of the TCB. The TCB, established in 1972, was tasked with intervening in the market when the prices of essentials rose. But the immediate past government closed down the TCB in March 2002 with a view to leaving business to the private sector, mostly to its coterie. The report held the view that the TCB, in the past, had played a very vital role in foiling the machinations of the price syndicates and cartels by going into competition with the private sector importers of essentials. The (p.249) reactivation of TCB was thus urgently required for a let-up in the price spiral. The report added that the government’s steps in the recent past, to vend some widely used commodities through the TCB and BDR personnel, brought positive results in containing the price spiral. Such vending should be restarted soon. The report opined that the erratic market behaviour clearly evinced that the syndicates and cartels were still very much active, and were trying to blackmail the CTG. The report mentioned that there was no policy for regulating the storage of foodstuff and other commodities, which led to hoarding. The report suggested the CTG possess effective tools for market intervention, and create a monitoring system that would deter syndicates and cartels from market manipulation.32

11.6 The Policy-making Process

The constitution of Bangladesh is at the centre of all public policy-making processes. It provides the required fundamental guidelines for the formulation of public policies, which includes setting the goals, objectives, and strategies of national development. All these categorically emphasize the issue of meeting the basic needs of the people.

In Bangladesh, since independence, there have been several forms of government. In the early years after independence there was a parliamentary form of government, where the prime minister with his cabinet was responsible for taking major policy decisions. The country was run by military dictators for one and a half decades until 1990 when the policy decisions were taken by the military dictators with their chosen set of people from both military and civil bureaucracies. The parliamentary form of government was reinstated in 1991 and until now this system has continued with the exception of 2007 and 2008 when the country was run by an interim government backed by the military.

Under the parliamentary democratic system the cabinet is a small body of senior ministers responsible for directing the policy administration of the state. As per clause 4(ii) of the rules of business 1996, no important policy decision shall be taken except with the approval of the cabinet. In other words, the cabinet is the ultimate authority of approving a policy. It should, however, be mentioned that during 2007 and 2008, since there was no parliament, the interim government did not have any ministers and a formal cabinet. Instead of a prime minster, the government was run by chief advisor of the CTG and there were several advisors in place of the ministers. These (p.250) advisors looked after the operations of different ministries. It is understood from discussions with different stakeholders that though there was no formal cabinet, the chief advisor of the CTG used to take advice from some senior advisors and in particular from the chief of army.

As per the constitution of Bangladesh, a minister is in charge of formulating policies and their implementation. The minister is also responsible for conducting the business as well as is accountable for the actions of the ministry in the national parliament. Since there was no parliament during the rule of CTG, the advisors, in charge of different ministries, were not accountable for their actions in any people’s forum.

The secretary, a senior bureaucrat, is the official head of a ministry and is responsible for administration and related businesses. The secretary also plays an important role in the policy-making process. During the rule of the CTG, the secretaries in the MoC, MoF, and MOFDM were very active in formulating and executing policies targeted at curbing inflation.

According to the constitution of Bangladesh, the MoF, and the Ministry of Law, Justice, and Parliamentary Affairs play very important roles in both the formulation and approval process of public policy. Clause 13(4) of the Rules of Business clearly sets out that the Finance Ministry should be consulted on all economic and financial questions arising out of any case, particularly in matters of the (a) preparation of export and import policy; (b) negotiation of trade and barter agreement; (c) determination of tariff policy; (d) determination of pricing policy; (e) determination of investment policy; and (f) determination of labour policy. Similarly, consultation with the Ministry of Law, Justice and Parliamentary Affairs is obligatory in matters of (a) all proposals for legislation; (b) all legal questions arising out of any case; (c) preparation of any contracts, international agreements, international conventions, and modifying international law; (d) the interpretation of any law; and (e) before authorizing or the issue of a rule, regulation, or bylaw. Therefore, when the MoC wanted to cut down the duties of the imported food items and to expand the operation of TCB, it had to get the endorsement from the MoF.

National Economic Council (NEC) is the highest political authority for consideration of development activities reflective of long-term national policies and objectives in Bangladesh. It serves as the economic mini-cabinet, consisting of the main economic ministers of the cabinet and headed by the prime minister. The ministries are responsible for adopting their policies, plans, and programmes according to the objectives and priorities set by the NEC. Members of the planning commission and the secretaries in charge of all ministries/divisions are expected to attend its meetings. In addition, other important officials who are required to attend the NEC’s meetings include the cabinet secretary and the governor of BB. The Planning Commission is (p.251) assigned to provide secretarial services to NEC. During the rule of the CTG, the functions of the NEC were limited.

The Planning Commission is the central planning body of the country. It is entrusted to prepare national plans and approve development programmes of the national budget. During the CTG, the planning commission was not involved in preparation of any national plans.

Article 76 of the Constitution provides for the constitution of a number of standing committees composed of the members of the National Parliament. In addition, the parliament also can appoint other standing committees, and a committee so appointed is to examine legislative proposals, or review the enforcement of a law, or investigate or inquire into the activities/administration of a ministry, or any matter of public importance. As mentioned before, in the absence of any parliament during the CTG these standing committees were dysfunctional. However, during the elected government after 2009, many of these standing committees became active in the policy-making process.

It is also important to note the providers of foreign aid play a significant role both in the development and formulation of plans/projects and the management in Bangladesh. Bilateral donors such as the USA, the UK, and India have important stakes in Bangladesh’s national policy-making. Multi-lateral donors such as the World Bank, the IMF, ADB, and the European Union also have significant influence over the policy-making process. On average about 55 to 60 per cent of development expenditure in the national budget is supported by foreign donors and agencies. The donors also play an important role in injecting policy ideas and recommendation of different policy interventions.

11.7 Conclusion

This study has explored the political economy of food price policy in Bangladesh. The analysis suggests that the food price hike during 2007 and 2009 had a profound impact on the welfare of the households in Bangladesh. The then government undertook several measures to contain the overall inflation rate generating mainly from the food inflation. Since the country was then run by an undemocratic, interim, and military-backed government, there was little accountability for its actions. Even under a democratically elected government there was a lack of coordination among different ministries and government institutions. It has also been seen that though the major focus of containing food prices is the MoC, they have very little power and tools in hand to influence the market prices. The power and tools are in the hand of other ministries, such as the finance ministry, though they are not the major focus of such discussion.

(p.252) References

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Notes:

(1) Raihan (2009) reported that more than 25 per cent of sample households in the rural areas were forced to reduce their consumption of rice while the corresponding figure was about 19 per cent in the urban areas. However, the extent of fall in the consumption of rice was relatively higher in the urban areas compared to that in the rural areas, since for the urban households, who experienced a fall in consumption of rice, on average, decreased by around 22.8 per cent, while the corresponding figure was 21.6 per cent for the households in the rural areas.

(2) Raihan (2009) also reported that high dropout rates among the children of these vulnerable households were observed because of the price hike of food items as most of the households could not continue to bear the expenses of their children’s education. On average, 58 per cent and 56 per cent of households in the rural and urban areas, respectively, experienced a dropout of their children from school. A significant proportion of these dropped out children were engaged in different jobs for contributing to their household income.

(3) The Daily Star, 19 March 2007.

(4) The Daily Star, 9 August 2009.

(5) The Daily Star, 9 August 2009.

(6) An article in The Financial Express, 3 October 2012, mentioned that the commodity markets in Bangladesh were characterized by monopolies, duopolies, oligopolies, etc., and frequent price manipulations. Though a significant volume of food requirements is met by import from the international market, the prices of imported food had been much higher in the domestic markets than in the international markets. The report thus highlighted the importance of reactivating TCB. In the early years after its establishment, TCB was used to establish competitive prices in the domestic market as it had a large share in total imports. For example, in 1972−3, it imported 63 commodities and its share of total import was 24.84 per cent. Also, during the period between 1972 and 1977, TCB imported as many as 70 commodities. However, from late 1970s the role of TCB has been curtailed, and in recent years the organization has hardly managed the import of three products (sugar, edible oil, lentils) from the international market. Also its share in total imports has been even less than 1 per cent. The organization has been inactive since the early 1980s, with the beginning of privatization and liberalization of the economy following prescriptions by the World Bank and the International Monetary Fund. The number of TCB employees has been reduced quite drastically over the years—in 1996 the number was reduced from 1,390 to 714, and again in 2002 the number was further reduced to 225. The article highlighted that the TCB has been currently suffering from a shortage of efficient manpower, legislative inflexibility, resource mismanagement, difficulties in its decision-making process, and lack of leadership.

(7) The Daily Star, 6 April 2008.

(8) The Financial Express, 19 July 2007.

(9) The Daily Star, 6 January 2010.

(10) The Daily Star, 8 May 2008.

(11) The Daily Star, 7 July 2008.

(12) The Daily Star, 11 September 2008.

(13) The Daily Star, 1 October 2009.

(14) An article in The Daily Star on 30 September 2009 mentioned that those committees were set up at a time when eight sugar traders had been trying to escape from being arrested as they were alleged to have manipulated sugar prices in the local market. Though the commerce minister persistently stated that legal actions would be taken against those responsible for destabilizing the sugar market, the business leaders were denying the allegations and held the soaring international price responsible for the local price hike. The government’s attempt to arrest the alleged sugar traders created fear among many traders in the large wholesale markets, and some even kept their businesses shut. The article also mentioned that the Consumers’ Association of Bangladesh (CAB) was alarmed that some dishonest members of the business community were trying to create a new sugar crisis to put pressure on the government, and that some business leaders were trying to save business syndicate members. The CAB reminded the government that the commerce minister’s declaration to arrest these syndicate members had not yet been implemented and asked for immediate action.

(15) The Daily Star, 23 August 2010.

(16) A para-military border security force.

(17) The Daily Star, 19 March 2007.

(18) The Daily Star, 23 March 2007.

(19) The Daily Star, 23 March 2007.

(20) The Daily Star, 22 March 2010. The ADB also confirmed that it would extend financial assistance to Bangladesh to grow high-value crops including vegetables, spices, and fruits that would boost incomes for poor farmers and support the nation’s food security. A loan of US$40 million equivalent from ADB’s concessional Asian Development Fund was being provided for the Second Crop Diversification Project. It would be used to support the development of high-value crops in 27 districts in the South West and North West of Bangladesh—including some of the poorest, least developed, and most climate-vulnerable areas in the country (source: <http://www.adb.org/news/adb-40-million-loan-boost-food-security-farm-incomes-bangladesh>).

(21) The reserve requirement is a central bank regulation that sets the minimum reserves each bank must hold against customer deposits. The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country’s economy, borrowing, and interest rates. Any rise in CRR means mopping up excess liquidity from the money market by using the instrument as part of demand management to curb inflation.

(22) The Daily Star, 5 May 2010.

(23) The Daily Star, 20 July 2010.

(24) The Daily Star, 16 July 2008.

(25) The Daily Star, 30 December 2010.

(27) The Daily Star, 15 September 2009.

(28) An article in The Daily Star on 23 October 2010 mentioned that the government for the third time in its tenure, to provide incentive to farmers to grow more winter crops, decided to reduce the prices of non-urea fertilizers—muriate of potash (MoP) and diammonium phosphate (DAP)—by 40 and 3 per cent, respectively. This led to the prices of all non-urea fertilizers being reduced by almost half by 14 January 2009. The report, quoting an official at the agriculture ministry, mentioned that the size of the fertilizer subsidy by the government in that fiscal year would be Tk 22,000,000,000.

(29) BBC Sanglap (Discussion), published in The Daily Star, 16 September 2009.

(30) The anti-corruption drive against the dishonest businessmen by the caretaker government created fear among the business community as a whole which disrupted the ‘normal’ business practices.

(31) The Daily Star, 8 March 2007.

(32) The Daily Star, 19 March 2007.