ECONOMYNEXT – In the wake of the controversy over import restrictions and price controls that led to shortages in rice, Sri Lanka’s Trade Ministry is now coming under fire over the creation of a new ‘mafia’ in salt.
Sri Lanka’s so-called ‘rice mafia’ and ‘maize mafia’ are crony Mercantilists or rent seekers in economic terms, who are allowed to exploit consumers under cover of 1970s style import licenses.
The rent seekers gain gained market power during the ousted Rajapaksa regime, by restricting competition with state help.
Food being an essential item is one of the easiest ways the businesses close to the elected rulers can extract extra profits or ‘rents’ from the consumers.
Unlike simple import taxes, which pushes up the cost of food by a fixed amount determined by a tax, compared to the prince in export-competitive country, import licensing places a quantitative restriction on consumers, where prices can soar far above the tax+plus price.
Salt Mafia
“Now a salt mafia has developed in this country,” opposition legislator Rauff Hakeem told parliament.
“Is someone giving an incentive to produce this salt mafia? It is against this type of practices that people gave a big mandate to the government.”
Some private salt traders were also involved in the board of directors of a state salt company, Hakeem alleged.
“The price of a packet of salt which was 130 rupees is now 360 rupees,” Hakeem said. “It can be sold at 150 rupees or even 200 rupees.
“Instead of doing that, a big salt mafia that places big burden on the people has now developed.”
Export Competitive Salt
Another opposition legislator, Mujiber Rahuman, alledged earlier in the week that imported salt cost 24 rupees a kilogram and there was a tax of 40 rupees a kilogram which meant that imported salt could be sold at much lower prices even after other processing costs.
According to online offers, Indian crystalline salt is priced at 4,500 Indian rupees a tonne (about 16,000 Sri Lanka rupees) and powdered salt was around 5,500 Indian rupees a tonne (about 19,000 rupees).
“This government is also responsible for the salt mafia,” Hakeem said. “From December it was known that salt production was down. But it was delayed and delayed.
“The same thing happened in the case of rice mafia. You wait till there is a shortage and then import.”
Producer Pressure
Trade Minister Wasantha Samarasinghe admitted that initial plans to import a larger quantity of rice was stopped at the request of a salt producer association, limiting competition to their members.
“We first imported about 12,500 tonnes of salt,” Minister Samarasinghe told reporters in Colombo Monday.
“The salt producers association told us not to bring any more salt after we brought the 12,000 tonnes.”
The natural tendency of producers, whether private or state owned is to restrict competition.
Businesses that control the economic freedoms of the general public through the coercive power of the state (the Western European style nation-state’s ability to control the public through violent action including, arrests, jailing and also fines) are known as Mercantilists.
In the UK in particular until the entrepreneurs behind the industrial revolution ushered in free trade, Mercantilism was the dominant economic system.
The Dutch East India Company and British East India companies which had trading monopolies in multiple goods ranging from tobacco, salt, cinnamon and even slaves were the top exponents of the ideology.
The monopolies in Sri Lanka were dismantled by the British civil service but trade controls returned after independence with the central bank creating forex shortages by rate cuts.
Exploitation by Limiting Competition
“They are going behind powerful
Classical economist Adam Smith was a key advocate of restoring the economic freedoms of the common man and not allowing businesses, manufacturers or traders to exploit the public with the help of government restrictions.
Smith advised government ministers to think twice before following the advice of producers to limit competition.
“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public,” Smith pointed out.
“To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public;
“but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.
“The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
“It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
Lifting the import license could bring imports faster with the later importers trying to undercut the first importers and driving prices down.
In the case of rice, the imports were only allowed for a state agency.
The government also came under public criticism after the Trade Ministry initially only allowed a state agency to import rice due to the licensing which failed to the import rice in time, getting the government into trouble.
Hakeem said when he was a cabinet minister also similar problems had happened. State agencies are used as a cover, he said.
The Salt Shortfall
Industries Minister Sunil Handunetti said domestic salt production fell due to excessive rain, which stopped the crystallization of salt.
A production round where saline water from the sea was pumped around the saltern took about 7 months.
However, he said this year there was high rainfall.
