Friday, May 30, 2008

Inflation and state parasitism

The public in many countries around the world are enduring the pain of ever-spiraling prices of commodities, starting from high prices of oil, high prices of rice and other food products, housing and rental, electricity costs, and so on. Their real income – nominal income minus the value “eaten away” by inflation – is declining.

In UK, truckers blocked major streets leading to London; in France, fishermen blocked ports leading to the English Channel; in Bulgaria, truckers converged in a convoy that also caused traffic near the capital city; in the Philippines, some public transportation operators conducted transport strike – all actions protesting high fuel prices.

Many governments around the world recognize this, and they have instituted certain measures that will hopefully reduce the suffering of the citizens. Among such measures are (a) mandating employers to give higher minimum wages to their workers, (b) requiring companies not to sell goods that are genetically-modified; (c) directing companies to make some of their services free to the public, (d) forcing companies to give some discounts to certain consumers, and (e) commanding companies to make their patented products be available for manufacturing by their competing firms.

All these measures are meant to (i) increase the income of the poor, and (ii) reduce the expenses of the people, the poor especially. Cute and commendable goals. But do those measures respect private property rights, and will they really achieve the stated goals? My brief answer to both questions is NO. Why?

One, wage is a function of productivity, not of inflation or number of children that a worker has. Forcing companies to give higher wages even to unskilled and low-skilled workers will force some companies to stop hiring these people. And unemployment and hunger for this group of people will increase, not decrease. Firms and entrepreneurs should be allowed to set wages commensurate to the skills and productivity of their workers. And the economy should encourage the blooming of more employers and entrepreneurs so that workers can have more choices to whom they want to work, or if they themselves want to become entrepreneurs someday too.

Two, obliging food shops, supermarkets and other retailers not to sell genetically-modified (GM) food products and animal feeds would compel farmers not to produce GM crops and animal products when doing so would reduce their production cost due to fewer or zero need for certain pesticides or the crops and animals would grow much faster and they can harvest quicker. Which results in higher income for them and possibly lower food price, at least for consumers who are not convinced of food-Frankenstein scenarios. If such restriction is removed and food sellers are just required to label their products whether organic or GM or whatever, then consumers will have a wider choice, especially poor people who want cheaper food now and worry less about their so-called “mutation” 2 or 5 decades from now.

Three, compelling companies to provide some of their services free to the public will cause over-use or over-consumption of said services, and since the companies will not earn from said services, they will not expand investment, resulting in mediocre quality of those services, or they may opt to scrap providing that service. And the public will suffer. An example of this is the proposal by many top politicians and regulators in the Philippines to compel the 3 telecomms companies to stop charging for SMS or text messages, charge only on voice calls.

Four, requiring companies to provide discounts and such revenue loss cannot be charged as tax deductible, will force companies to either evade following the law, or harass those entitled to discounts by asking many documents, or give them bad quality service like expiring food and medicines. An example of this, also in the Philippines, is requiring restaurants, drug stores, hospitals, public transportation, other sectors, to give 20 percent discount to senior citizens. Bigger companies can absorb the revenue loss, but others, especially the smaller firms that survive only on low-profit margins, are either complaining or not following the law at all.

Five, coercing companies to make their patented products, where they spent a big amount of money and time to invent, be made available for manufacturing and distribution by other companies so that said products can be sold cheaper, will discourage if not kill innovation. An example of this is compulsory licensing (CL) of some pharmaceutical products. An innovator company usually spends nearly $1 billion and 10-12 years of several clinical trials and other R&D processes to produce one good medicine, and not all of those medicines may be profitable since they will have to be sold at a high price to recover the enormous cost at the remaining patent life, which is only 8-10 years out of the 20-years patent.

What governments are doing in these instances, is extend their regulatory power after private enterprises went through an earlier process of regulations and taxation. Regulation allows the regulators to behave as if they own the firms that they are regulating, even if they are not the owners of those firms. Ownership and control are two different things. One need not own something but if he has control of that thing, he can do whatever he wants. Like a family driver. He does not own the car, but when his employer is away and he decides to drive the car to visit and tour his friends without the knowledge or permission of his employer, he can do it. If he gets caught, that's another story.

Governments have two very important tools in their hands which they can do if they are really sincere in reducing inflationary pressures in society: reduce taxes and free up markets. First tool, reduce, simplify, or better year, abolish certain taxes that make the price of various goods and services become more expensive. In oil taxes for instance, the British government holds the distinction of having the highest oil taxes in the EU, if not the world, where up to 65 percent of oil retail prices are taxes. The US government, both federal and state, collects about 19 percent of oil retail price as taxes. In the Philippines, the government collects 3 different types of taxes for gasoline products: import tax (now at 1 percent, previously 3 percent), excise tax (about US$0.14 per liter) and value added tax, 12 percent.

Second tool, free up markets, reduce complicated regulations. Let the real owners of private enterprises – their stockholders – and their managers do what they think is necessary in a level playing field and competitive environment.

Since many governments do not show intention of reducing their regulatory powers over the businesses of companies and lives of individuals, they only show how parasitic they can be. A parasite creates more harm and problems than solutions to its host. Like sucking the host’s blood and multiplying much faster than the host.

But unlike animals preyed on by worms or fleas, people as host to parasitic governments are capable of exposing their parasites and possibly fighting back. And only if the people will realize the burden of heavy regulation and taxation. The inflationary pressure experienced by many people around the world is one symptom of the weight of thick layers of bureaucracies and regulators who all have to be paid salaries, offices and supplies, travels and bonuses, pension and pork barrel.

A competitive economy with more productive people and less regulators and bureaucrats is capable of holding off inflationary pressure, especially for basic necessities like energy and food. Productive people can produce and distribute more food, more energy sources, more houses, more cars, more schools. An economy can even experience short-term deflation – prices falling down – in a situation like this.

By exposing and understanding the parasitic nature of high government regulation, intervention and taxation, people should be able to free themselves up. And people should be ready to assume more personal responsibility about their own lives, their own family, their own community. Then people can really say that they have high level of individual liberty.

Thursday, May 22, 2008

Free trade 9: Parallel Importation of Medicines

( Posted today in

People want cheaper food, cheaper oil, cheaper shoes, cheaper cell phones, cheaper medicines, and so on. This is a perfectly rationale human behavior. But there are certain irrational interventions often done by governments, which make commodities expensive, which results in expensive food, expensive oil, expensive medicines, and so on. Two of such ugly interventions are multiple taxes and trade protectionism.

Medicines in the Philippines are immediately slapped at least with 5 percent import tax and 12 percent value added tax (VAT). Companies that import, manufacture, distribute, and retail medicines are slapped with 35 percent corporate income tax each, 12 percent VAT on office rentals, plus a host of other taxes and fees. The reduction if not abolition of certain taxes that make medicines more expensive is surprisingly among the things that were never considered by the legislators who wanted cheaper medicines. The legislators with bleeding heart concern for the poor patients were too tax-hungry to spare medicines from high and multiple taxes and fees.

More than a month ago, I emailed Sen. Mar Roxas, the chief author of the Senate version. I admired his keen interest in reducing or abolishing the taxes on petroleum products for “cheaper oil”, and asked why he can’t be equally keen in demanding for the reduction or abolition of taxes on drugs for “cheaper medicines”. I never got a reply from him.

The second ugly government intervention is trade protectionism. The 5 percent import tax is one proof of such protectionism. If we want cheaper medicines, we should have free trade – zero tariff and non-tariff barriers – and allow plenty of reliable pharmaceutical companies to come into the country. They will bring their medicines from Europe, US, Singapore, India, Pakistan, and other countries, and let them compete among themselves. But dismantling of trade protectionism in medicines was not considered in the medicines bill. What was put in the new “Cheaper and Quality Medicines Act of 2008” was the institutionalization of parallel importation.

Parallel importation looks cute: the same medicines of the same dosage made by the same pharmaceutical company currently under patent in the Philippines are sold at only one-half, one-fourth, or even lower price, in India, Pakistan, China, or elsewhere. So, import those medicines even without the permission of the IP owner or patent holder and sell them here. Filipino patients get cheaper medicines, importers make money, the State collects taxes, and there is no IPR infringement done on local patent holders. Everybody happy, except the multinational pharmaceutical companies who are demonized to have made “enormous profit” as a result of their monopoly of their medical invention and innovation.

Parallel importation is not equivalent to free trade. The former is allowing non-patent holders and “copycat-ers” to import medicines that are locally-patented without the permission of the local patentees. Free trade is allowing plenty of medicine manufacturers, especially medicine innovators, who are patent holders to bring in their innovative and patented medicines and products, and they compete among each other here both in quality and price.

Under parallel importation, the State can practice double standards: it creates bureaucracies, and collects taxes and fees to domestic-based pharmaceutical companies that applied for patent and IPR, then turn its back and disrespect the same patent that it granted by allowing parallel imports, then further collect taxes and fees from importers and retailers.

On the other hand, free trade has only one goal: give consumers more choices. The State need not practice double standards to achieve this. If it wants to implement the patent system and protect IPR, then all importers should be patent holders. If there are not enough patent holders and local players, then allow more players from more countries to come in. And they will come in if there is enough profit to make, meaning operational costs – like taxes, regulatory fees, and other compliance costs – are low and simple to follow.

Competition, not bureaucratic regulation, is the best disciplinarian among producers and sellers. Customers can mark those who sell expensive products relative to their quality, those who sell bad quality products, especially unsafe and fatal products in the case of counterfeit medicines. Sellers and providers would naturally aspire to sell only good quality and safe products, even if some of those goods have to be sold at higher prices, and gain customer support and patronage.

The key is to encourage the entry of more innovators who will be directly accountable should the medicines they brought in would turn out to be ineffective and unsafe. Parallel importers may not be accountable when they – intentionally or unintentionally – bring in counterfeit drugs because they are not necessarily the ones who manufactured those medicines. Or if they mishandled or misstored the products which may adversely affect the effectiveness and safety of such drugs. Or if they mislabeled after re-packaging those medicines bought in bulk from abroad.

Medicine innovation should be encouraged to come in if we want newer, more effective medicines, to fight evolving diseases in our evolving communities and evolving environment. Innovative medicines are not cheap, with an average industry cost of around US$1 billion just to develop one good medicine. Copycat medicines are always cheap because the “copycat-ers” never spent a single centavo on medical research and development; they only have to spend on glitzy marketing strategies and sales people.

See also:
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007
Free Trade 7: Class War, Eco-protectionism and Climate, April 02, 2008
Free Trade 8: Global RIce Price, May 13, 2008

Oil Politics 5: $150 a barrel and Government Public Transpo Monopoly

The Financial Times reported yesterday that oil may hit $150 a barrel by end-2008, "Shortage fears push oil futures near $140" .

I think it is not a far-out probability. Judging from traffic volume here in Metro Manila, seems that the volume of vehicles on regular working days at today's $120+ a barrel price were not different when oil prices were at $80 or $100 a barrel. Initial conclusion: oil demand is "inelastic" or not price-sensitive. Thus, it should be safe to assume that the volume of vehicles plying the streets and highways will be the same today as in the next few months even if oil prices will reach $140, $150, or more.

Why? Government over-regulation of public land transportation. Just when people want to leave their cars at home and take public transpo, more efficient and comfortable public land transpo are being discouraged from plying the roads due to government's difficult regulations, coupled with harassing and impounding so-called "illegal" or no-franchise public transpo, which reduces the volume of public land transpo in the cities, forcing many people to drive their cars.

In the US and many rich countries, it never fails to amaze me why the state and city governments cannot trust private enterprises to provide bus lines that compete among each other, because those local governments still monopolize buses! Because of government bus monopoly, the buses are few, they come far and several minutes from each other; the number of served routes are few, resulting in people waiting long for the buses. If you wait long and walk long distances, better ride a bicycle, or drive your car, even if oil prices keep on rising.

That is why governments are among the least credible institutions to "fight GHG emissions and climate change" because they are the main culprit why markets for public land transpo cannot function efficiently.

Meanwhile, I wrote this last week, May 13, 2008.

Peak Oil and Price Bubbles

World oil prices hit the $126/barrel mark last Friday, May 9. It seemed that last week, the commodity was rising by around $1/day on average.

There was one $200/barrel "peak oil" theory that I heard. Goldman Sachs predicted last week that the world will see that mark in 2 years. I feel that the world will see that mark earlier, less than 2 years, judging from the pace of current price hikes, so I think the "peak oil" theory of $200 a barrel is a joke. When the oil reaches $201 a barrel next year, it will further rise towards $300, and people will still be driving their cars -- even on weekends only to tour their families to visit other friends and relatives.

A friend, Cynthia D., noted that much of the latest increase in oil prices has been due to speculation. So many are just taking it for granted that the price of oil MUST continue increasing at the rate we have seen over the last two years. She thinks this has already passed the point which was the realistic value of oil and now we are in a bubble. And no matter what, bubbles eventually pop.

I think there is general recognition, although not a consensus yet, that current world oil prices are bubble prices and hence, will pop up someday. But the bigger bubble that helps prop oil prices is the US$. At Euro 1.60/US$ for instance, many people still think there is a lot of room for further depreciation of the US$ given the spend-and-spend, tax-and-borrow mentality of the US government, from federal to state to county/city levels, as well as the trade deficit. The more fiscal irresponsibility to be exhibited by the US federal and local governments and continuing trade deficit, the more room for $ depreciation.

So people who hold assets in US$ will feel "robbed" by inflation and currency depreciation. That is why many of them dump their $ and buy oil futures and other commodities (gold, copper, rice, coffee, corn, etc.) in order to protect their money.

Another problem is that while the oil price bubble continues, the political instabilities in some oil-producing countries (Nigeria, Venezuela, Iraq, Iran,...) also continue. So if you're a highly oil-dependent industry, better buy oil at bubble prices but you are guaranteed of delivery in the next 2 months at least, than wait for the bubble to pop up next week or next month and have no guaranteed delivery in the next 2 months at least.

The $200 "peak oil" theory is wrong. When you say "peak", no other price can top or exceed it. With the current trend in oil prices, bubble or no bubble, I think a "peak oil" should be in the vicinity of $1,500 a barrel, or perhaps $2,000, 40 to 50 years from now. This is partly due to the fact that no matter how high petroleum prices will be, many governments will not let go of oil taxes. Governments in general are parasitic: their tax revenue increases as the suffering by the public increases, and they couldn't care less.

Half a century from now, many oil reserves in the world would be depleted and the world will consume more renewable energy sources, and the "peak price" will no longer be exceeded, succeeding oil prices can only go down.

See also:
Oil Politics 1: Bush vs. Chavez? March 12, 2007

Monday, May 19, 2008

Markets and natural disasters

In a discussion over the earthquake tragedy that happened in China just recently, killing more than 30,000 people, an Indian friend, Barun Mitra, asked, "In disaster relief, is it a case of market failure so government is seen as the only agency that can provide this service?"

My answer to Barun's question is NO. When Katrina hit New Orleans, I have read that private and voluntary relief work was larger than those given by FEMA + state governments + foreign governments. Here in the Philippines, when super-typhoons kill many people and knock down thousands of houses and trees, private relief is very often very fast, given by civic groups (rotary, lions, masons, etc.), religious and
church groups, media foundations, village associations, etc. This is because there is little if any, mistrust when one gives through these private and voluntary organizations. Where government entities are involved -- city or municipal or provincial or national government, public distrust is high. So government usually gives from its own "calamity fund" and attract little donation from private citizens. In addition, government relief would tend to be late because the Mayor or Governor or the President would sometimes be waiting for some media people to cover their
food and relief distribution.

In terms of weather forecasting, there's a Phil. government bureau doing this, but some people listen to CNN weather, a private news media, for additional info.

Meanwhile, The Foundation for Teaching Economics has created a curriculum addressing the role of the government and the market in dealing with natural disasters.
It's here,

Filipino biologist disputes climate change alarmism

news report yesterday in one Philippine newspaper about an interesting lecture last week, May 14, by the Director of the Institute of Biology, University of the Philippines (UP), Dr. Perry Ong. His paper is entitled, “Anthropogenic Global Warming: Beyond the Hype, Doing the Right Thing for the Right Reason.”

It was a “centennial lecture” in UP to commemorate the 100th anniversary of UP this year. Centennial lectures are big events, where well-known UP academics from different disciplines and colleges are selected to give a talk before a big crowd, including the President and other officials of the university, then it is broadcast in a video-conference type so that other faculty and students from other provincial campuses of UP around the country could hear the lecture live, and they can participate in the open forum, also live. Some media people also cover the event.

Here, Dr. Ong solidly disputed Al Gore's "Inconvenient truth" documentary and partly the IPCC report. These 2 papers look like political documents with scientific twang, urging governments to take more drastic political and economic actions like more environmental regulations to cut emissions. These regulations can take many forms, from higher (or retention of existing high) petroleum taxes to creation of “carbon tariff” (eco-protectionism against exports by emerging and industrializing countries), subsidies to bio-fuels, over-regulate if not kill coal power plants, and so on. These regulations look cute but they can cost us big amount of money, from higher taxes to higher prices (in rich countries) because of protectionism and higher unemployment and poverty (in developing countries) because of protectionism.

Consequently, Dr. Ong is proposing adaptation since it’s not us, humans, who are the main “culprit” for climate change. And if we look around us, it’s not only climate that change – the worlds’ volcanoes, tectonic plates and geological formations, human culture, human religion, human mobility across the globe, etc. are changing.

Incidentally, I'm also a UP alumni, but I'm no bio-logist, I'm a "small-state-logist", hehehe.

Below are some salient points of Dr. Ong’s lecture as reported in the newspaper. I don’t know what other local or international papers covered the event.


Blaming man convenient excuse; UP prof cites Gore errors

By Jocelyn Uy
Philippine Daily Inquirer

....Dr. Perry Ong, director of the Institute of Biology at the UP College of Science, said human-induced global warming was among many environmental problems that interacted in the “eternal tug of war” between global warming and cooling…

Ong said GHGs spawned by humans contribute merely 33 percent to global warming compared to the 67 percent traced to natural causes, which include changes in solar radiation, volcanic eruptions and the shifting of the Earth’s tilt and orbit.

“Humankind is guilty of a lot of crimes against the Earth and pumping greenhouse gases is just one among many,” Ong stressed….

Ong has a Ph.D. in science for behavioral ecology and evolutionary biology. He was given the Outstanding Young Scientist award by the National Academy of Science and Technology in 2000 for his contributions to the better understanding of Philippine wildlife diversity. He was a former representative of Conservation International.

In his talk, Ong disputed Gore’s worst-case scenarios in the documentary, noting that its distribution as an educational material by the United Kingdom Ministry of Education has been challenged in court.

Later, a UK court declared the documentary as a political tract, citing nine blunders in the film.

Ong listed the errors followed by his contentions:

1. Sea level rise of 20 feet or 7 meters.
The 2007 United Nations IPCC reported in its fourth assessment that the harshest picture was merely .59 m at the extreme range with a 4-degree Centigrade rise.

2. Evacuation of Pacific islanders to New Zealand.
Ong said there was no evidence that this happened.

3. Shut down of the ocean conveyor.
The IPCC said anthropogenic global warming could slow down but not entirely shut down the ocean conveyor.

4. Humans, by releasing carbon dioxide into the atmosphere, are causing global temperatures to increase. According to Ong, temperature rises first, then CO2 increases.

5. Melting snows of Mt. Kilimanjaro.
Ong said this was caused by other reasons, not just human causes.

6. Drying of Lake Chad.
Ong said no sufficient evidence was presented to establish that anthropogenic global warming caused this.

7. Hurricane Katrina.
The magnitude of the calamity was apparently caused by the US government’s neglect to fix the levee (an embankment built alongside a river to prevent flooding) before it broke.

8. Death of polar bears.
Ong said only one study was presented with four deaths and this did not support Gore’s claim.

9. Loss of coral reefs.
This could also be attributed to overfishing and pollution rather than greenhouse gases emitted by humans, according to Ong.

“Climate change has become a convenient excuse when there are other [environmental] issues that need to be addressed,” Ong said.

“If we disproportionately blame ourselves for [climate change], our response will be different … we should look at the [bigger picture] and address other issues,” he added.

* To view the full news report,

Tuesday, May 13, 2008

Free Trade 8: Global RIce Price

Politicization of pricing is where political processes like street rallies, media releases, and political horse-trading among political groups and NGOs, and politicians and government bureaucracies is the main determinant of how much (price) and how many (volume) should a commodity be sold or bought by the citizens. It is usually done by administrative measures (a particular government bureaucracy sets the price) or by legislation (enactment of a law by a Parliament or Congress of a particular country).

This is totally different from price setting via the free market system, where producers and consumers "meet" at a particular price point at a given time and place for each similar product or service. Thus, the price of a particular variety of tomato can vary from one province or village to another on the same month, or its price will vary from rainy season to dry season on the same province or village. The quantity and quality of a commodity change on a particular place and time relative to the demand by consumers, resulting in different
prices for the same commodity at different places.

Producers predict or speculate that the price of a particular product or service will rise, or the price might remain but the volume will increase by a big amount, on a particular week or month (say during Christmas, city festival, or village fiesta), so they put their money, time, and effort ahead to prepare for said period in order to make a good profit. This should not be considered as "market manipulation" or worse, "hoarding" on the part of traders because consumers can also behave the same way, say stocking certain commodities when the price is still low in anticipation of future price increases.

In the home front, politicization of many commodities and services – oil, medicines, housing, fare, wages, rice, others – is happening. In rice, the bureaucracy in charge of politicizing rice prices is the National Food Authority (NFA). It makes artificial prices both to farmers and consumers, courtesy of the billions of pesos of tax money every year being plowed to it by Congress in annual appropriation and subsidies. Whether it is really doing its job with zero corruption and hanky-panky is another story; the main story is its role in
politicizing rice price setting, although one can safely assume that zero corruption and price politicization is an oxymoron, a big contradiction in terms.

In the international front, there is a proposed body made last week, calling for the creation of an Organization of Rice-Exporting Countries (OREC), obviously inspired by OPEC, composed of Thailand, Vietnam, Laos, Cambodia, and Myanmar. These are all neighbors of the Philippines and all are member-states of the Association of Southeast Asian Nations (ASEAN), the ASEAN Food Safety Reserve Board, as well as
the East Asia Emergency Rice Reserve (EAERR).

The initiator of this proposal was Thailand's government officials, noting that while Southeast Asia is the "food center" of the world, the region has had little influence on the price.

This is politicizing rice prices at the international level. Company A that buys the rice output of average Thai rice farmers cannot just sell rice to Company B in the Philippines that imports and sells rice to Filipino consumers. Company C that buys the rice harvest of average Vietnamese farmers cannot just sell rice to Company D that imports and sells rice to Hong Kong consumers. All companies in rice exporting countries will need the approval of their respective governments before any voluntary exchange through trade can take place between them and their foreign buyers. Although the bureaucracy is mainly on the supply and exports side, the demand side is also affected because private importers will have to deal with rice trading bureaucrats of the exporting countries. Besides, many governments of rice-importing countries have a rice or food regulatory bureaucracy that controls the importation and distribution of rice.

Hence, the creation of the proposed OREC is a bad idea. But if the proponents and architects of this idea have bad intentions, then it will most likely become a reality. Although bad ideas are sometimes made out of good intentions, most bad ideas come with bad intentions – to control prices, control trade, control who can buy and who cannot buy, control who can sell and who cannot sell. In short, control and manipulate the lives of other people, directly or indirectly.

For ASEAN member-states that are net rice importers, they might think that the creation of a rice export cartel might not adversely affect them since they are just neighbors and belong to the same club of
nations, the ASEAN.

For the Philippine agricultural bureaucracy in particular, they will most likely not find this anomalous. The NFA for instance has been in the business of controlling rice prices, rice procurement and rice trading at a limited degree for many decades now. Dealing with another bureaucracy from its neighboring countries whose business is similar to what it is doing, should be easy for it.

The evil desire to control and manipulate other people through various price control schemes and price politicization, which indirectly alters people's behavior in their consumption and production habits, will always remain in the minds of people who despise individual liberty. Giving other people various choices and options of where they can sell at what price, perhaps makes them shudder. These people should be exposed for what they really are and their evil intentions.

On April 10, 2008, I wrote this:

High Commodities Prices and Government Price Intervention

Are the agricultural producers in developing countries having a good time and good "chance at riches"? With the on-going hikes in prices of agricultural commodities like rice, seems that the answer is Yes.

But the “chance at riches for poor countries” have been there long before the current spikes in commodity prices, thanks to globalization. For instance, many fishermen have stopped fishing and became tour guides to foreign tourists out on scuba diving and/or island hopping. Or farmers who also become carpenters and construction workers during off-farming season to take advantage of construction boom by returning overseas workers who build new and/or expand their old houses with their savings.

What's happening now is “achance at more wealth for agri producers in poor countries”. For instance, major rice exporters Thailand and Vietnam are raking in big profit from the spiralling world rice prices. Although major rice importers like the Philippines are wobbling from the same phenomenon, but many (not all) rice farmers and traders here are earning well.

Many governments including that of the Philippines, are wasting taxpayers money with their rice price intervention. They have state grains trading monopoly corporation that monopolizes rice and corn importation. And they purportedly "buy high from local farmers, sell low to consumers", that's why they are losing big tax money every year. Subsidies often attract opportunists and corrupt government officials -- they corner these cheap and subsidized rice and sell high to big rice traders.

See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006
Free Trade 3: Protectionism Perpetuate Poverty, September 05, 2006
Free Trade 4: FTA in APEC, July 09, 2007
Free Trade 5: Business, Rock Music and Cycling Globalization, July 17, 2007
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007
Free Trade 7: Class War, Eco-protectionism and Climate, April 02, 2008

Tuesday, May 06, 2008

Agri Econ 2: Rice Laissez Faire vs. Subsidies

As rice and other food prices were spiking in many parts of the world, governments were making matters worse by constraining what farmers and traders can store and export on suspicions of “hoarding”. In the Philippines for instance, some traders have refused buying rice from farmers sometime last month after the government’s grains regulation and marketing body, aided by the police have raided some traders and accused them of hoarding, a crime with stiff penalties.

Discouraging, if not prohibiting, bulk storage of rice removes the incentives for current and future profit and hence, people would rather stop producing since there is penalty in stocking supply.

Governments should better step away from regulating, directly or indirectly, rice production, milling, trade and distribution. Grape farmers, cattle farmers, aquaculture farmers, etc. are generally left on their own in the production to distribution aspect of their sub-sector; why should rice farming be exempted and heavily regulated in cases of price spikes?

If rice farmers and/or rice traders cannot stock their surplus rice for sale in anticipation of bigger demand or higher price in the coming weeks and months, many of them would not stay in that sector, and better move to other less-regulated sectors where profit will be higher. Many government agencies are in the business of stockpiling and hoarding, from government food/rice authority, the central bank stockpiling forex and gold reserves, etc., why would rice farmers and traders be treated differently?

Many people still cannot appreciate the virtue of laissez-faire applied in rice farming and agriculture in general. Their mind is too fearful of “market failure” and market abuse, forgetting that government failure and government abuse are often staring them in their faces.

Markets are composed of individuals, you and me, rich or poor, producer or consumer, politician or voter, governor or governed. So when we talk of “free market”, we are talking of “free individuals”. One individual has the freedom to be industrious and get rich someday, while another individual has the freedom to be lazy, poor and miserable. One individual has the freedom to become a farmer and food producer, while another individual has the freedom to become a consumer and a professional street demonstrator attacking high food prices, high oil prices, high drug prices, etc.

If we cannot be laissez-faire with rice farming, what’s the implication - government will subsidize all farmers, including the inefficient, if not lazy ones; then government will hike and hike various taxes to sustain the subsidy? I think that’s what Mr. Kim of North Korea is doing.

Last March 17, 2008, I wrote this

Zero Govt Credit is Possible

The WB recently held a "Partial Credit Guarantee Conference" and they learned that credit guarantees are the favorite scheme used by SME groups and government agencies involved in small credit lending. They also observe that "schemes where the government is in charge of choosing borrowers and recovering loans have typically higher loan losses."

In a small rice farming village in northern Philippines that I visit regularly, I notice that government credit program is zero, but the credit market is alive. The system is locally-called "tampa": for every PhP 1,000 of loan, the farmer-borrower pays the lender 3 sacks of 50 kilos/sack of unmilled rice.

Loan repayment is high because the lenders and borrowers know each other. Bad borrowers are easily blacklisted, or lent small amount only, until he/they improve their credit image among the neighbors. In case of disasters like strong typhoon that destroys or wipes out the rice harvest, the lender can wait for the next crop, or the borrower can pay in kind like chicken or goat or other farm animals.

Lesson: zero govt involvement in lending is possible, and is often desirable. No taxes and bureaucracies needed, no political patronage and small-time-cronyism.

* See also: Agri Econ 1: Food Prices and Government, April 13, 2008