Business syndicates: Real or imaginary?

WHENEVER prices go up, we hear complaints about business syndicatesmanipulating the market and getting away with unreasonable profits.Newspaper reports, TV talk shows, and seminars frequently point thefinger at the collusive operations of such syndicates, and blamethem for any adverse price movements in the domestic market. Thispiece aims to ascertain whether there is any merit in this charge.

Business syndications are possible if trade is controlled by a fewlarge business houses, which generally have connections with theruling regime.

In the past, when imports and exports were controlled throughlicenses and permits and allocation of foreign exchange to theauthorised traders, selected business houses could have enjoyedsome degree of control over the market.

The worst example of such business syndication was during theBritish time, with exclusive rights for trade on important productsgiven only to a limited number of British companies. DuringPakistan time, and the early years of Bangladesh, some degree ofmarket power was enjoyed by some companies (public and private)through access to a limited number of licenses for imports and toforeign currency through foreign exchange control.

The current, more liberal, trade and exchange regimes in Bangladeshcertainly do not allow continuation of such preferential ordiscriminatory practices. During the1990s, Bangladesh abandonedmultiple currency practice in favour of the unified exchange rateregime and removed restrictions on all current accounttransactions.

A few years back, Bangladesh also adopted a floating exchange rateregime with rates determined in the inter-bank market, withunrestricted access for all engaged in external current accounttransactions (including commodity trade).

With the liberalisation of trade regimes, except for a few productsprohibited for health, religious, and security reasons, all otherproducts can be imported by the private sector, subject to paymentof applicable duties and taxes.

As a result, along with the volume of imports, the number ofimporters in Bangladesh has increased to tens of thousands. Inaddition to normal growth in imports, whenever prices go up or downin the international market, we see these importers asking foradditional import letters of credit.

What was our experience when we were hit by price shocks last year?Let's take the case of rice. Which group imported most rice intoBangladesh in the aftermath of the floods and Sidr? Certainly,until the world prices were lower than the prices in Bangladesh, itwas the private sector.

Land ports with India suddenly became active, with thousands oftrucks with sacks full of rice lined up across the border. Shipsloaded with rice docked at Chittagong port in large numbers. Eventhe border crossings with Myanmar became busy trading points.Hundreds of traders placed orders for rice from West Bengal, andthe volume of rice imports reached record levels.

Is it conceivable that thousands of traders could have acted assome kind of a syndicate? If they had, why would the volume ofimports surge to record levels within a very short time?Conventional collusive behaviour would imply that, since ricedemand is very inelastic, traders would try to limit imports to aminimum level collectively in order to maximise profit throughhigher prices.

The sharp increase in letters of credit opened for importing riceand wheat (1312.5% in dollar terms in 2007/08), and edible oil andoil seeds (539.7% over the same period) certainly goes against thesyndication hypothesis.

Could thousands of traders and rice millers ever act like asyndicate? Garment exporters are a good example in this regard.Almost all garment exporters are members of the Bangladesh GarmentManufacturers and Exporters Association (BGMEA), and it isconsidered to be the most powerful and best organised trade body inBangladesh.

But, could it limit competition among numerous manufacturers whoout-bid fellow exporters and sign contracts accepting very low unitprices, which the BGMEA considers harmful for overall health of thesector? In spite of numerous decisions taken by the BGMEA, unitvalues of Bangladeshi exports continued to decline, even forproducts for which Bangladesh is considered to be the mostimportant sourcing country.

When there are thousands of players, the decisions taken at theapex body are not going to be followed in a competitive environmentwithout financial and other sanctions for the violators.

The factories will undercut each other if there is scope for doingso without suffering losses. If BGMEA could not enforce arelatively minor decision, why would anybody believe that somehowthousands of importers could have become organised in an invisiblemanner to follow the orders of the so called "rice syndicate."

The hypothesis that syndicates rule the markets in Bangladesh isalso negated by the recent declining price trend in most primaryessential products. If the syndicates had such market manipulationcapacity why would they allow the price of palm oil to fall fromTk. 105 per kg a few months ago to less than Tk. 70 per kg now? Whywould the so-called syndicate members incur losses of hundreds ofcrores of taka due to the collapse of palm oil prices in theinternational market if they had such control over the market inBangladesh?

The same applies to soybean, wheat and onion, albeit to a lesserdegree. Now that the prices of most commodities are coming down wedo not hear about syndicates, as if they have disappeared in amagical way.

The perception of syndication originates from two factors, and thetendency to blame some groups for the miseries caused by pricehikes. If world prices go up, domestic prices go up almostinstantaneously, since traders use replacement costs of products insetting their current prices.

On the other hand, if international prices decline, the traders donot have any incentive to cut the prices on existing stock and takea loss. The traders who have unsold inventories will minimiselosses by charging at least their cost price by slowing downimports.

At the same time, those importers who do not have large inventorieswould like to order in large volumes at lower world prices, andhave them delivered within the shortest possible time in order totake advantage of the price gaps between the domestic and the worldmarkets.

The gap will certainly disappear as soon as new shipments arrive inthe country. In Bangladesh, given the proximity of Singapore andIndia, the price differential may last only a few weeks.

The windfall profits that the traders get at the time of pricespike in the world market gives the impression that they manipulateprices. The instantaneous price adjustment on products already instock, and bought at lower prices, gives the impression of marketmanipulation.

The traders, however, see this as the means to replace the stockbeing sold with new ones at the prevailing market prices. Thisbehaviour, although rational, leads to sharply higher profits, andmay not be ethical. However, that is a completely different issueand has nothing to do with market manipulation through syndication.

Ahsan Mansur is a former Division Chief, IMF.