Monday, November 19, 2007

Global Capital 1: Why Market Turbulence are Necessary

Market turbulence shakes and shocks many people. It is those painful financial adjustments, sometimes approaching crisis situation, where stock markets swing wildly if not tumble, currencies significantly depreciate or appreciate, values of assets and properties often head downward while prices of major commodities head upwards, and big debt write-offs are reported along with announcements of resignation or sacking of CEOs of some very big banks and companies. Hence, fear of such turbulence is understandable because at the end of the day, incomes, savings and jobs are in danger.

But what people often refer to as "turbulence" are only those periods of economic downturn such as those described above. When new innovations and products come on stream, or new discoveries (petroleum and mineral deposits, attractive real estate development, etc.) are announced, they are also part of turbulence where old technologies and processes are discarded in favor of new ones. So that many people make money, and many new jobs are created. Thus, people are scared only of negative turbulence but applaud positive turbulence.

Increasing globalization should result in more turbulence across all countries and economies around the world. This is because in theory, mobility and migration of capital, technology, labor and commodities should result in equalization of their prices (other factors held in constant) across the world. And for many decades, the world has known only very expensive countries and dirt-cheap countries, so that "price equalization" over the long-term is a far-out possibility.

But markets can also follow natural laws. The law of gravity says that objects will fall down the earth or low-lying areas when the force that hold them up high is spent up. Capital can follow countries or territories where skilled (or trainable) labor, land and office rental, and other factors of production are lower, so that profits can be maximized. Thus, poorer countries that are capital-deficient suddenly becomes capital-surplus, and this creates positive turbulence there. Whereas countries that used to be capital-surplus suddenly find a growing portion of their capital migrating elsewhere, and this creates negative turbulence for them. In short, market turbulence is as natural as sunrise and sunset, as natural as the Newtonian laws of gravity, inertia and action-reaction. Market turbulence therefore, is necessary, so that countries will be forced to adjust, to liberalize their trade and investment rules, to encourage and respect innovation, and to abandon complacency, if not laziness.

The current market turbulence in the US subprime and house mortgage markets, the bigger than expected losses of big US banks, the continued depreciation of the US dollar relative to all major currencies and many currencies of developing economies, and the slowly-but-surely inching of world oil prices towards the symbolic 3-digits $100 a barrel or more, is causing headaches to many people, both economic policy makers and ordinary citizens alike. In the case of high world oil prices, it is unlike in the 70s, the 80s and the early 90s where the spike was driven by supply disruptions, both actual and anticipated. These days, the spike is due mainly to sustained high world demand as millions of people from emerging markets become richer and buy more cars or travel more often via public transportation (land, sea and air). Which is a case of positive turbulence creating some negative turbulence elsewhere.

Should governments step in to introduce new regulations, or upgrade existing regulations to stricter ones? There is no logic in doing this except to show that the state is "doing something". As argued earlier, turbulence like these allow markets and people to adjust to changing situations. Some people bought expensive houses though their current and future incomes cannot support the high amortization needed, so loan default should happen along the way. You multiply this a thousand times, or a million times, and you have an economy-wide, or world-wide financial turbulence. If we allow individual responsibility to take its course, to allow individuals learn lessons from their earlier decisions and actions made, then more government regulations will be unnecessary, if not counter-productive over the long-run. Because more state regulations often encourage complacency among individuals, not to mention financial costs in terms of taxes and fees, to sustain a new army of bureaucracies and regulators being created.

Friday, November 16, 2007

Excellence in math and science of Confucian Asian students

There's a report today saying that students (about 13 years old) from Singapore, Taiwan, S. Korea, HK and Japan -- the "Confucian Asians" (China should be part of this group) -- are the best in math and science around the world. Below:

East Asian students shine in study of math and science scores
By Sam Dillon
Published: November 15, 2007

”Students in Singapore, Taiwan, South Korea, Hong Kong and Japan significantly outperform American students on math and science tests, according to a new study from a U.S. nonprofit organization. But U.S. students, even in low-performing states like Alabama, do better on math and science tests than students in most other foreign countries, the study found. "In this case, the bad news trumps the good, because our Asian economic competitors are winning the race to prepare students in math and science," said the study's author, Gary Phillips, chief scientist at the American Institutes for Research, a nonprofit independent scientific research firm….”

I wonder why Chinese students are not in the top list. I am among those who believe that "Confucian ethics" is one of the important factors why many East Asian countries experience veryfast economic growth. The ethics are simple, like "hard work and frugality is a virtue". You compare that with the growing "entitlement mentality" in many developed countries today.

The neighboring countries of these Confucian Asians, mainly the Malay Asians -- Thailand, Malaysia, Philippines, Vietnam, Indonesia, etc. -- are somehow "infected" with these ethics and discipline by virtue of closer proximity. It's just that many governments of these Malay Asians have tried and got burned, with socialist or dictatorial governments, which explains for their slower economic growth than their Confucian neighbors.

Spontaneous Market 5: Limits to Free Market?

A friend, Geronimo "Indian" Sy, wrote in his column in Manila Times last week, a paper entitled “Face control”. He noted that
In the land of equality, liberty and fraternity, I find the strangest thing—face control. In certain places in Paris, notably in bars and party places, there are gatekeepers—bouncers in our parlance—who allow people in or exclude them not based on anything except how they look…. The face control is not based on science. Neither is it based on logic. My friends tell me the ones who are turned away are usually Middle Eastern-looking…. To top it all, the queues are long, snake­long. The crowds continue to jostle in and be counted. In a democracy, can one really do that?
I wrote him and argued that in a free society, or where there is a "rule of law" (unfree society only have "rule of dictators and bureaucrats"), people are free to set their own limited rules, so long as such rules do not result in harming other people's lives and property.

For instance, if I put up a pizza house, the food are soooo great at a good price, then I attract hundreds of customers everyday, I can make my own rules whom I can allow entry or whom I can refuse. This attitude might turn off other people, so they also put up a rival pizza house nearby, they also attract plenty of customers, and they make their own rules that are different from mine. Fine, that is free market and competition. Nothing wrong, right?

Problem would arise if my pizza house is a government corporation, funded by tax money, and I am just an appointed bureaucrat, a crony in short, and I make rules that exclude other taxpayers while allow entry to other taxpayers. This is wrong. But if my pizza house owes nothing from tax money, then I have the freedom to set my own rules.

Indian replied that while I got some good points, he believes that there is “inherent limit to free markets”.

Yes, there is a limit to free markets -- competition. Competition makes sure that players behave well in dealing with their customers, with the public in general. Because if they don't take care of their customers, others will, and that can be the end of their business, the end of their job creation capacity.That is why policies that limit competition, like government-created monopolies and oligopolies (through franchise, whether by congress or by certain national government agencies or local government units), in the name of "protecting the public", actually works against the public.

Another friend, Rica, wrote that “there is an inherent limit to private enterprise being free, that point is where you infringe upon human dignity or human rights. This face control is similar to someone’s policy of physically banning a caddy from the private compound which is indirectly managed by him, and he does not even own the property. Although they are "free" to do this because it is private property, there is a point of human dignity.”

Yes, there will be some abuses or disrespect of human dignity elsewhere, somewhere, but such incidents don't invalidate the freedom that humanity enjoy under a free market system.

A father spanks his son for saying words the father does not like, the mother fights her husband. One can call this abuse of human dignity of the son by the father, or a mother consenting with the bad attitude of her son who abuse the dignity of his father.

Micro cases, household level cases, firm or company level cases, school or church level cases, you will find millions of different cases like these. But they do not invalidate the freedom that individuals enjoy under a free market system. That is why there are rules and laws that apply to individuals, even rules that apply to members of a household or family (like no wife or husband battering), to preserve order in society.

In the case of that guy who bans a caddy, if that golf course is owned by the state, and that guy is a cabinet minister or big-gun Party official of a dictatorial government, not only that he can ban the presence of that ordinary caddy, he can even kick and punch the caddy for no reason at all, and that caddy nor civil rights groups will have no power to punish any bureaucrat for his abusive behavior. And the caddy may not be able to find other golf courses to work for because all golf courses are owned by the state and all are managed by cronies and state bureaucrats.

My two related papers in recent weeks:

(1) Beelzebub and Government DNA

October 30, 2007

Last October 24, 2007, the International Policy Network ( announced the winners of the 6th Annual Bastiat Prize for Journalism. There were 5 finalists -- Mr. Clive Crook of Atlantic Monthlymagazine, Mr. Jonah Goldberg of National Review, Mr. A. Barton Hinkle ofRichmond Times Dispatch, Mr. Dominic Lawson of The Independent, Mr. Patrick Mcllheran of Milwaukee Journal Sentinel, and Mr. Amit Varma of Mintnewspaper in India.

First prize winner got $10,000, wow! Second prize got $4,000 and third prize winner got $1,000. The winner, Mr. Varma, has a witty writing style. The 3 papers he submitted were, "Where's the Freedom Party?", "A beast called government", and "The devil's compassion". The latter is about a speech given by the devil Beelzebub at the convention of demonic beings.

Remember The Queen's song, "Bohemian rhapsody"? There's a part there where Freddie Mercury sang,

"Mama mia, mama mia
(mama mia, let me go)
Beelzebub has the devil put aside for me,
for me, for me..."

In "A beast called government", Mr. Varma argued that wastes in government is not an aberration, but it is written in its DNA, because government bureaucrats (a) want to multiply subordinates, not rivals, and (b) officials make work for each other.

Second prize winner, Mr. Crook, has a more formal writing style. His 3 articles were: "The fruitful lie"(about lies that trade protectionism benefits the poor), "MiltonFriedman's unfinished work" and the "The Ten Cent solution" (aboutprivate schools that educate the poor).

For 6 straight years, IPN has attracted more journalists and columnists from around the world who write about the principles of a free society -- including free market, rule of law and property rights -- to join the competition.

(2) Advancing Property Rights and Liberty

November 07, 2007

A friend from Singapore, Pin-quan Ng, wrote an essay on market solutions to developing world health care access issues. His paper has been published in the 'Young Voices in Research forHealth 2007' compilation for the 11th Global Forum for Health Research in Beijing.
Compilation pdf can be found here:

Yes, we need to assert more market solutions, not more government solutions, to health care -- and pension, housing, education, infrastructure, food production, etc. -- issues. Markets are driven by real service; you don't serve well your clients and consumers, others will, and you lose your business and your shirt. No forced revenues (aka taxes) that will subsidize or bail you out.

Another friend from Sri Lanka, Atty. Mala Gunasekera, got a new website --
It's the site of Women's Chamber of Industry and Commerce, empowering women in business (not in bureaucracies) . The site is cool and easy to navigate.

Mala is also busy doing research and legal work on forgery of title deeds in Sri Lanka, other Asian countries. In short, she is busy making private property rights work in her country.

Meanwhile, Asia is really a place of irony. Our continent has the fastest growing economies in the world. Three of the 4 largest economies in the world (size of GDP expressed in PPP values) are Asians -- China, Japan, India. The tallest buildings in the world, the longest buildings, etc. are in Asia. Yet in our midst are also some of the notorious dictators in the world. People like Gen. Tan Swe of Myanmar, Gen. Musharaff of Pakistan, and Kim Jong il of North Korea. Less notorious but also prince and princess of treachery and public deception are also with us, including the Philippine President.

Advocating collective freedom is already hard. Advocating individual freedom and liberty is much harder. But we're in the midst of this fight already, we need to persist.

* See also Spontaneous Market 4: Entrepreneurship, Community and Property Rights, October 23, 2007

Tuesday, November 13, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes

Below is my article published in Business Mirror( last Friday, November 9, 2007, page 10,Opinion section. Can't get the url for that day though.

Why a $100/barrel oil price and various petroleum taxes don’t mix

Bienvenido S. Oplas, Jr. *
November 7, 2007

Oil price, like the price of any other commodities and services, is driven mainly by the dynamics of supply and demand. High demand relative to supply means prices will go up. High supply relative to demand means prices will go down. And there are dozens of factors that determine both supply and demand. For instance, when millions of newly-riched Chinese and Indians, plus other people around the world buy new cars, then demand goes up. When oil producing-countries (OPEC or non-OPEC member-countries alike) pump more oil, and there are no supply disruptions (meaning no oil refinery or oil pipeline is blown up by bombs or knocked down by hurricanes), then supply goes up. But even if crude supply increases but oil pipelines are blasted, like the attack on pipelines in Yemen the other day, then supply can still go down, adding fears to oil consumers and traders, which further push prices up.

On Wednesday, world oil prices hit $97 a barrel, or just $3 away from the symbolic 3-digit level of $100 a barrel. This is partly due to the fact that despite continuing world oil price hikes in the past few months, world demand does not decline, staying at 85 million barrels a day on average.

Should oil prices finally reach $100 a barrel and stabilize there for say, one month, if not rise further, then it should be the right time for governments to cut petroleum taxes. In the Philippines there are at least 3 direct taxes slapped on petroleum products -- import tax (3%), excise tax (more than P5/liter for gasoline), and value-added tax (12%). Not included here are taxes slapped on companies that refine, distribute, and sell (wholesale and retail) oil.

The Philippine government says it is lukewarm to reduce or abolish the import duties. The DOE and DOF leadership say doing so will deprive the state of some P450 million/month in revenues while the people will only save around P0.23/liter. But what if a motorist, say a taxi driver, is consuming 60 liters a day or more, that’s a savings of around P14 a day. And there are more than 35,000 taxi units in Metro Manila alone. Another way of looking at this is that if the government will abolish the import duties, then the Filipino people will have P450 million/month of additional money in their pockets.

The continued imposition of excise tax on petroleum products is a callous decision. Excise tax is slapped on so-called “public bads” – petroleum (causes pollution), tobacco and alcohol products (can cause diseases to people). But is petroleum a “public bad”? People who do not want pollution from petroleum products should ride carabaos, horses or bicycles. A few people do this, but the majority can not. The use of petroleum to power vehicles that move people and their goods and services over far away places, is as necessary as food, clothing and shelter. Thus, abolition, or at least drastic reduction, of excise tax on petroleum products should be another measure that government should consider if it is honest in saying that it cares for the people.

The 12% VAT on oil products is possibly the only tax that can be retained. A zero import tax, zero excise tax, and 12% VAT, should be the best compromise between the public and the state to cushion an ever-increasing world oil prices without depleting the state’s coffers.

I got 3 comments from 3 friends on my article above.

(1) From a friend working in Saudi Arabia, Lorrie Gallego. He wrote:

”You are correct Noy, Reduce taxes, reduce the number of congressmen, reduce the number of government employees!

”On supply and demand stats on oil, I remember between 1982 and 1985 
Saudi Arabia was producing about 2.3 million barrels of oil per day. The price of crude at that time was ranging from 14 to 19 dollars per barrel. Now Saudi Arabia is producing around 9.5 million barrels per day and the price of oil is almost 100 dollars per BBL. In the last two years the world demand (or actual consumption) for oil remains around 84 million BBLs per day, but the price of oil went up from around $60 two years a go to near $100 now. Parang hindi proportionate ang price increase sa increase ng demand.

”Saudi Arabia's target production is 12 million barrels per day by 2009, and other middle east countries are drilling more oil wells too to increase their share of the oil supply. But I will predict that it will not take another decade before oil price will cross the 150 dollar per barrel mark.”

(2) From Ron:

“Noy, how about substituting petrol with nat gas or other 'green' alternatives? seems that phils do not consider this. jakarta has been using nat gas in some public transport, particularly their controversial busway system.”

(3) From Wyn:

“Then your point is to reduce if not eliminate big government taxes on petroleum. While this would be an immediate salve to our economic problems, i disagree. :) For the reason that fossil fuels are a fixed and diminishing resource. We can argue about when "the oil will run out", but run out it will.
Given that, i'd tend to support heavy penalization (thru taxes) of use of petroleum. Sure, it's *very* painful in the short run, but either we learn to curb our "oil appetite" gradually, or get a really rude shock sometime in the future.

Despite its immediate impact on our people, i believe that a stringent, penalizing energy regime is the way to go. It will teach us to pay attention to the (non-renewable) energy that we use and encourage development and use of renewable sources.”

Below are my reply to them.

(1) For Lorrie:

Thanks Lorrie for the additional information. Yes, $100 a barrel might be "expensive" for some people, especially the car owners. But other people who have never driven a car all their lives, they have been riding horses or bicycles only (like the millions of Chinese and Indians), now own a car, so what if the price of oil is $130 a barrel or more? The freedom of moving anywhere one wants to, along with his family and/or friends, can be priceless. Besides, they don't intend to use their car everyday, they can take the public transpo or their bicycles for their weekdays use. But on weekends or holidays or on special occasions, they need their car to tour their family, relatives or friends.

So it's not so much the price of oil as a result of supply-demand dynamics that's the issue. It's the hypocrisy of oil taxes, because the government that says it wants to help the price of oil "affordable" to the people, is the same institution that makes the commodity more expensive.

As I have argued in my paper, a 12% VAT on oil and leaving import tax and excise tax at zero should be fair to both the state and the Filipino consumers. But listen to what government officials will say -- they will not forego collections from import tax and excise tax, because they need the money to "help the people". So you can see the hypocrisy.

(2) To Ron:

Substitution is always a possibility under a free market environment. For instance, I contract a consulting work with A Consulting, Inc., I'm not happy with the outcome, so I go to (substitute you with) B Consulting, Inc., simple. Problem is no matter what substitute you make -- green substitute, brown substitute, black or pink substitute, if the mentality in government is "tax and tax and tax", the price of whatever substitute to petroleum or other "non-green" commodities will still go up much higher than the equilibrium price of that commodity if plain supply-demand dynamics was left alone.

(3) To Wyn:

My point in advocating the drastic cut, if not abolition, of import tax and excise tax on petroleum products, while retaining the value-added tax on the same, is because Malacanang, the DOE, DSWD, Congress, and every bleeding heart policy-makers and NGOs in this country say they care for the people who complain of high oil prices. So they think of various measures to "cushion" the impact of high world oil prices. In short, everyone in the above-mentioned category think of the price of oil, and not so much about oil depletion (or "peak oil") in the long-term.

So, if high oil prices is the main problem, as those guys have defined it, then one solution to bring down oil prices is those tax cuts on oil products. They can retain the excise tax on beer, wine, gin and brandy, cigarettes and tobacco, fine, but they should cut the excise tax on oil products.

I have anticipated earlier that some guys who trumpet too much about global warming and energy conservation would come forward and say that one solution to reduce global warming (and oil conservation) is the retention, if not the doubling, of current oil taxes. And I don't like that scenario. If governments want to encourage substitutes to petroleum products, those "green" energy, they don't have to trumpet cute slogans. They just abolish (or at least drastically reduce) all direct taxes and regulations to companies that develop wind energy, solar energy, nat-gas, geothermal, hydro, other "renewable" energy sources. But have we heard any government in the world brave enough to do this? So far, it's 100-100, or 587-587, nada, nothing.

* See also

Wednesday, November 07, 2007

WHO is trampling freedom of expression?

A few friends in our Asian Liberty Forum (ALF) ygroups, Alec vanGelder of IPN (London) and Barun Mitra of Liberty Institute (Delhi) were barred by WHO bureaucrats from attending the WHO meeting in Geneva. Only NGOs, sometimes more aptly called government-funded organizations (GFOs), who are in favor of weakening (if not abolishing) intellectual property rights in health and medicine innovation, were allowed and heard.

Pretty soon, it is possible that we'll have some private medicine innovators shifting to innovating new skin whitening, new shampoo, new bath soap, new toothpaste, new fat burners, but not new and more effective medicines to cure human diseases. Why? Your IPR in developing new shampoo is respected. But your IPR in developing more effective medicines to cure AIDS or respiratory disorder or hypertension is weakened. Thanks to the health socialists, manygovernments and the WHO!

Below is a note from Julian Morris in the November 2007 issue of IPN Newsletter:

FREEDOM of speech is a fundamental human right. It also underpins liberal democracy. When the state intimidates, imprisons, or murders journalists solely for what they have written or might write, it gives up the pretence of both liberty and democracy. The list of states that engage in such vile acts is, sadly, long. Russia and Iran are among the most egregious, but Burma and Egypt have been doing their bit to catch up. This Friday, a second series of rallies are being held around the world for Abdul Kareem Nabeel Suleiman, a 22-year-oldEgyptian blogger who last year was imprisoned for four years for things he wrote on his blog. I believe that those of us able to speak freely have an obligation to defend those denied that freedom. So I encourage you to take part in the Free Kareem rally near you – if you are able.

Meanwhile, as I write this, freedom of speech, private property and the rule of law are all being undermined by the World Health Organisation. At its headquarters in Geneva, the WHO is holding a meeting to discuss plans to create a new global treaty that would transfer medical research and development from the private sector to the government. IPN has arranged for several people to be at the WHO to explain why it would harm human health and hold up progress. Unfortunately, Alec van Gelder and Philip Stevens from IPN, as well as Barun Mitra from the Liberty Institute in New Delhi, Tom Giovanetti from the Institute for Policy Innovation, and Jerry Norris from the Hudson Institute, have all been barred not only from observing the meeting, but from entering the Palais in Geneva where the meeting is taking place. By contrast, the many NGO proponents of health socialism have been allowed in; some are in the drafting room ... This selective denial of voice to legitimate representatives of civil society highlights the lack of democratic legitimacy of organisations such as the WHO.