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Legislating Middlemans Ouster

By Dr. Khalil Ahmad

March 2, 2011

The middleman tends to be eliminated . . . He can only be safely eliminated by natural processes. Sometimes he is of real use and helps production; sometimes he is not; but this cannot be decided by a blind strike, but only by allowing the forces of competition to act upon him.
[Hon. Auberon Herbert]

The middleman tends to be eliminated . . . He can only be safely eliminated by natural processes. Sometimes he is of real use and helps production; sometimes he is not; but this cannot be decided by a blind strike, but only by allowing the forces of competition to act upon him.
[Hon. Auberon Herbert]

Every time Pakistan Muslim League (N) comes to govern in Punjab, it tries its hands at innovative approaches to solve some of the crucial problems facing ordinary citizens. But unfortunately all of them prove unproductive, consume resources wastefully, and leave the ‘attempted problem’ in a greater mess. An important case in point is the problem of public transport – requiring resolution since long. In this regard, every new innovation can be cited as evidence for its previous failure. It seems the Party is fond of focusing on public transport, and whenever it is in power, unsparingly goes for a newer innovation to solve it, and in the end when fails miserably, comes with another innovation. Ironically, the problem remains intact, rather gets complicated.

Other examples include Sasti Roti (cheaper loaf) Scheme, Danish Schools, and the latest innovation, the removal of the middleman from markets. Last month, it was reported in the newspapers that ‘the government is preparing a Punjab Agricultural Produce Marketing Act to ban middleman from fruit and vegetable markets and allow the purchasers and sellers to interact directly with one another.’ The official further disclosed government’s ‘comprehensive plan to establish modern markets in collaboration with the United States Agency for International Development (USAID).’

The details of the plan envisage: that ‘sellers and purchasers would be registered in their respective markets. Market committees would be authorized to charge a registration fee from them. Special Agricultural Marketing Boards would be formulated to control and regulate the affairs of the market. Market Committee’s fee ratio, which currently stands at 0.1 per cent, would be doubled, and the administrators of these committees would be elected by the stakeholders.’

This new innovation derives its inspiration from the age-old prejudice against the middleman. The prejudice declares middleman as an un-necessary link in the production-consumption chain. The product should come from the producer directly to the consumer, it fancies. Anyone putting himself anywhere between the producer and the consumer factually increases the cost and thence price of the product also. The innovative legislation meant to oust the middleman from the fruit and vegetable markets tries to do the same: bringing down the price of fruits and vegetables.

Let’s raise some pertinent questions to analyze the ‘scheme’ aiming at reducing the prices of fruits and vegetables. Does this venture (rather adventure! Wasn’t Sasti Roti an adventure?) require USAID to jump in with its Dollars? Yeah, but really it might have provided the cue to this project! Here is a pack of dollars, do you have a project to claim it, seems to be the motivation behind this venture. Assume it’s not the case. Assume the proposed legislation sincerely aims at price reduction. But has this legislation given thought to other ways of reducing prices? Has it done a cost-benefit analysis of the whole scheme?

Usually minds in any government are not mindful of such things. They never take into account unintended consequences of their actions. They think like gods: the day we enforce it, this is going to take place as we planned. Before this legislation comes into force, representatives of the Kissan Board have registered their objection. They have ‘pressed upon the government to continue with the current system since the new policy would affect thousands who were earning their livelihood by working as middlemen.’

Again, by this proposal, government’s own agenda stands defeated. Most of the governments, and almost all the political parties, which declare themselves as the self-proclaimed defenders of the poor use this argument, this time Kissan Board is making against this PML (N)’s provincial government. Why by this ouster leave thousands of families without their livelihood? Instead, the PML (N) government should promote the cause of the middleman and facilitate them. Aren’t they poor? But the ways of those who come to be in government are strange, devoid of logic and common sense as well. Aim at reducing the prices of fruits and vegetables and snatch livelihood from thousands of poor citizens!

However, the argument this writer wants to put forward is different. He considers middlemen a necessary link in the production-consumption chain. They are by default an indispensable part of the process of economic growth.

Any producer or grower would aim at earning more and more profit. If he is not a cheat, he would try to bring forth quality products at competitive prices to his respective market. To achieve this, he would try to keep the cost of his products lower, and most of the times producers and growers do not invest in making their products reach end-point consumers. They appoint agents or sole agents or distributors, or whatever arrangement is feasible. However, sometimes they do distribute their products but still not to the end-point consumers. That increases cost and requires specialization, at the least. It is only for the small producers, such as bakeries, who have their distribution in their hands, but again they just deliver their products to another link in the chain, the shopkeepers doing business in the vicinity of end-point consumers. When these businesses grow, they do have services of specialized distributors.

Not only comes the middleman in between the two points of production and consumption, but he is an essential part of various stages of both production and consumption also. Vendor industries, specialized importers, general order suppliers, etc, are necessary to facilitate the process of production. Who can ignore all important sectors providing various specialized research, consultancy and technical services to producers, traders, and distributors!

In view of this, the proposed legislation is but an attempt ‘to bomb the fruit and vegetable market to stone age.’ There is a producer and there is a consumer – bring them not closer, but face to face, and that will minimize or at best wipe out the cost of inputs by the middleman and margin of his profit also. That’s the fancy economics! But what about the cost of regulating this or that market? In this case, fruit and vegetable market, for which sellers and purchasers will be registered; they will be charged a registration fee; Special Agricultural Marketing Boards will be formed to control and regulate the affairs of the markets; market committee’s fee ratio will be doubled from 0.1 % to 2 %; and the administrators of these market committees will be elected by the stakeholders.

May one ask who will bear the cost of all this regulatory arrangement? No doubt, the end-point consumers in the name of whom and for the benefit of whom this very arrangement is going to be erected. Whether the middleman who is the target of this proposed legislation will be ousted or not is yet to be seen till this arrangement comes into force!

Before concluding, it is important to take up the issue from another angle. Let’s try to understand how fruit and vegetable markets work. These are specific, known places where sellers and buyers come to trade. Otherwise, they would be trying their luck here and there – sellers looking for buyers, and buyers for sellers. Those who own Addas (shops) in these markets, and are known as Thariyas (sort of platform for sellers and buyers to negotiate the deal), provide various services both to the sellers and buyers, but basically to sellers, and for this they charge in kind or a percentage of the proceeds from the sellers. These Thariyas fulfill a necessary function. Should sellers have no place to do their trade in a specific market, they will not be able to sell their products on competitive prices. Thariyas help them sell their produce. Sure, not every grower or one who brings fruits and vegetables to market can own an Adda in the market, or won’t find it beneficial to his business.

The second entity working in the market is Arhti – one who purchases quantities of fruits and vegetables in bulk either directly from the farmers or from other agents or traders who bring them to the market from far off places. Then, in turn, he using the services of the Thariya for keeping, storing and putting his items to sale, sells his purchases in smaller quantities to small vendors and shopkeepers. Why this link in this chain? What purpose does he serve? Thariya may or may not be an Arhti, but usually he is not, since this may increase his cost of doing business. The Arhti performs certain functions which Thariya would not like to. He sells smaller quantities to small vendors usually not on cash payment but through deferred payment which needs to be made on the next purchase or as agreed upon. The Arhti takes risk on two counts: first, he purchases perishable items in bulk; and second, he deals in deferred payments which may not be made at all or in due time. But he has to fulfill his responsibilities in the market regarding promises and payments.

In principle, these markets are open, there is no ban (but which the PML (N)) government proposes to put) on anyone not to purchase or sell this much or that much quantity of fruits and vegetables, and it is a genuine trade and rightful trading. It seems it is this link in this chain, the Arhti, (the explicit target of the government) which the proposed legislation aims at removing. Is government justified in this middleman’s ouster?

In point of fact, no link in any production-consumption chain is purposeless, unless it is created or imposed from without. Argument has this that it does serve certain function, otherwise other chain links would not allow it to remain there. The Arhti, the middleman, in the fruit and vegetable market connects the chain since he performs certain functions by investing and taking risks, and thus in his own position of middleman facilitates the efficient movement of fruits and vegetables to the end-point consumers.

Thus, the conclusion may not be far from truth that the intention of the PML (N)’s provincial government is mala fide and solely based on a prejudice. Also, it is no different from, and part of governmental traditions to plan and impose things on the market from without. May it be submitted to the PML (N) and its government that leave the fruit and vegetable market to work it on its own, and it will exclude any link which proves to be un-necessary to its working. Better the PML (N) and its government in Punjab focus on its duty of maintaining law and order, protecting person and property of its citizens, curbing the terrorists influence. And, finally if it is too fond of benefiting the ordinary citizens, it should put its energies to ensure competition in the market. In short, it should mind its own business, and let the fruit and vegetable market mind its own.

The writer is founder/head of the Alternate Solutions Institute. The article was carried by The News in its Business & Finance Review on February 28, 2011.