Market failure vs. Government failure, Part 6

An article today in BWorld says,  

"A market failure, in the parlance of economics, means a situation in which free markets produce wasteful outcomes."

The above statement is wrong on 2 counts: 

(1) Market failure is literal, demand is there but supply is low or zero, or vice versa. So failure of the market to adjust supply and demand. 

(2) Market failure is often a parlance of politics and government, less of economics. It is a good justification for endless government intervention and expansion for people who have no or little concept of "government failure."

Anybody can create a market failure anytime, anywhere. How?

1. Mr. X and his friends demand a 500 GB USB that is sold for only P1,000. Demand is there but supply is zero, so market failure.

2. Mr. Y and his friends supply a rice variety that is said to cure 10 types of common diseases and sold at P800/kilo, no one buys their rice. Supply is there but demand is zero, so market failure also.

Given these two examples of market failures, do they justify government intervention? Like (1) using taxpayers' money to create a new govt-owned IT company to supply that 500 GB USB and sell only at P1k or less. Or (2) Govt to procure that rice and distribute for free or at high subsidies to sick people?

No. In public finance econ (Econ 151), there is one definition there, something like "Market failure is a necessary but not sufficient condition for government intervention."

Rightly so. Because (1) market failures are generally short-term and are signals for market solutions in the short- to long-term, and (2) government intervention may only worsen the original market failure and introduce its own government failure.

From the same article, it says, "Public education... make economies more prosperous, and most economists support it, but no one can point to just why the free market doesn’t educate enough people on its own."

If people pay lots of taxes, fines, regulatory fees, mandatory social contributions, etc. to both national and local governments, there is little "disposable income" left for food, clothing, housing, gadgets, appliances, travel, etc. This explains why not many parents/guardians can send their kids to private schools, majority of parents send their kids to public education.

It's like the government disabling the people with some physical attacks then govt gives them a wheelchair and expects the people to be thankful to government for the wheelchair.

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See also: 
Market Failure vs. Government Failure, Part 3, June 23, 2010
Market Failure vs. Government Failure, Part 4, March 22, 2014 
Market Failure vs. Government Failure, Part 5, June 16, 2015

Agri Econ 23, Why forever Agrarian Reform should stop

I am reposting portions of a presentation by Dr. Raul Fabella made at UPSE in May 2014. I agree with his arguments -- the endless, forever extended deadline of agrarian reform (AR) or forced land redistribution should end. It is now 44 years since the Marcos AR program in 1972, longer if AR programs in the 50s and 60s by previous administrations are counted.

Forever AR is a major source of uncertainty for agri business development and modernization. For instance, you buy and convert a 10 hectares low-productivity farmland, spend huge amount of time, years and money. When the land has become productive and you start earning big to get some returns for your investments and hard work, pay for some loans, the Department of Agrarian Reform (DAR) people can suddenly come in from nowhere to tell you that your land will be forcibly redistributed by the government to your workers. The government will pay of course, but at lower rates and valuation dictated by the state, not at prevailing market rates and prices.
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The Record

* By 2014, CARP shall have distributed 5.05 million hectares, leaving but 321 thousand hectares or an accomplishment rate of 99%.

* 2.6 million farmers shall have gained some form of ownership to an average 1.2 hectares, shall have acquired and distributed 16% of the total Philippine land area of 30 million hectares.

* Japan’s vaunted land reform distributed only 1.76 million hectares of its total 37 million or 4.7%.

* Taiwan distributed 0.5 million hectares of its total of 3.62 million or 14%.

- (Adriano, 2013)

2008 APPC Study: “Land Reform, Rural Development and Poverty in the Philippines: Revisiting the Agenda”

• Per Capita Income: Income of ARC members with land was greater than income of ARC members without land. Income of Non-ARC members with land is greater than income of Non-ARC members without land;  Land ownership seems to matter.

• But when other factors are controlled for, neither being an ARB nor being an ARC member explains differences in income per capita.

• This implies that “land ownership via CARP” is an “inferior type ownership.”

• Our hypothesis: inferiority is associated with Section 27 and Section 6 (the land ownership ceiling of five hectares) of CARP.

• Being an ARB correlates negatively with access to formal credit even though land ownership correlates positively. This shows the property rights frailty of CARP.

• Conclusion of APPC Study

“Twenty years later, the results of the Comprehensive Agrarian Reform Law (CARL) launched in 1988 were below expectations. Productivity growth in agriculture has been low by regional standards and poverty still plagues rural areas. Total agricultural factor productivity has grown only 0.13% per year during 1980-1998, compared to 0.87% per year in Thailand and 1.49% in Indonesia…”

Design Flaws

• Unequal exchange: The productivity of land depends in its capacity to command financing. CARL effectively outlawed that capacity, making the land conveyed to the beneficiaries “effectively inferior” to that bought at market price from the landowner.

• Entrepreneurship Myth – give a tenant a piece of land and he/she morphs into an entrepreneur. Self-selection be damned.

• Coase Theorem be damned! Section 6 (ownership limit) and Section 27 effectively outlaw land asset exchange.

• The market be damned! The state supplants the market as arbiter of efficient use of assets.

• Economic size: If the land (3 hectares) is not “economic size” for a crop and location, it is a high-default risk, loses the capacity to command credit and is worth less than as part of a larger credit-worthy parcel.

The beneficiary is short-changed and condemned to fail! Economically unviable property rights are not stable.

• Size Economies: if economic size farm for a crop in a vicinity is > 5 hectares, consolidation will go underground (up to 100% in some villages) where property rights are unstable.

(India’s land ceiling ranges from 4-21 hectares depending on state; Sri Lanka’s is 20 hectares; and Cuba’s is 67 hectares!)

• Comprehensiveness: Same rules for all crops, whereas successful, templates stopped at rice lands! The Marcos effect?

• Consequences: Private capital flight; Sumilao as parable; a permanent credit crunch in the agricultural sector; low investment rate due to unstable property rights and no scale-up possibility. High rural poverty!

Private Capital Flight from Agriculture

Ratio of Total Bank Lending Share to Share in GDP: Agriculture

 1980, 60%;  1990, 50%; 

2000, 35%;  2010, 19%.

Quo Vadimus?

• No farm land ownership limit for publicly-owned firms listed with the PSE.

• Allow efficient farmers to own up to x > 5 hectares of agricultural land.

• Allow banks operating in rural areas unlimited ownership of land.

• Finish converting Collective CLOAS to individual CLOAS.

• A progressive farm land tax vice LAD.

State Capacity and Failure

• When a state overreaches, the result is a state failure: actions by government makes market failures look like God’s gifts.

• The Philippines widely recognized as a weak state: does too many things badly; too many windows for waste and corruption; it should do fewer things well.

• Poverty Reduction by sticking to basics: better courts of law, better highways, better overall governance, cheaper and more stable power supply.

The 1662 Book of Prayer expresses best the relation between societal health and state overreach:

“We have left undone those things which we ought to have done; and we have done those things which we ought not to have done. And there is no health in us.”

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See also:

Agri Econ 5: Land Reform Without Timetable is Wrong, July 01, 2010

Agri Econ 9: On Agrarian Reform and Agri Credit, April 29, 2013

Agri Econ 14: NO to Further Extension of Agrarian Reform, July 03, 2014 

Agri Econ 20, On NFA-BOC Campaign for Expensive Rice, May 19, 2015

Agri Econ 21, Rice protectionism as poverty-maximizing policy, September 25, 2015

Agri Econ 22, Why "peak food" hypothesis is wrong, December 25, 2015

Market Failure vs. Government Failure, Part 5

* This is my guest article for suarakebebasan.org, a new website for freedom created by some Indonesian friends.
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Market Failure vs. Government Failure

Expert Column   Bienvenido Oplas Junior  | 15 Jun 2015

The main reason  why governments (local, national, regional/multilateral) around  the  world keep expanding is because they want to correct and address “market failure”, generally defined as the failure of the market players – firms and households – to supply certain goods and services at prices and  quantity that the public needs and demands.

While this is a generally accepted justification for government intervention, there is also  caution that “market failure” is only a necessary but not sufficient condition for such  intervention. There are two reasons for this.

One, market failure attracts market solutions (not government intervention) and such solutions may not be available today but will be available tomorrow. Good examples are mobile phones. Before, many poor people wanted to have their own phones but could not afford one. Today, prices of this commodity are affordable to the poor, including some of those cute, touch screen and  wifi-ready phones.

Two, it is highly probable that government will only exacerbate the problem and replace market failure with government failure. Good example is healthcare. There is widespread belief that governments should provide free or highly-subsidized healthcare to the poor, but systems are either too bureaucratic, or fast but wasteful and subject to corruption and robbery. And public dissatisfaction with government healthcare remains very high.

Sources of market failure

In economic theory, the two sources of market failure are identified. First,"public goods" character of a commodity or service. Once it is provided, it is difficult or impossible to exclude non-paying people from enjoying and free-riding the benefits of such good or service; or the cost of excluding the free-riders is high. Examples are national defense, traffic lights, peace and order and justice administration.

Second are "externalities", positive or negative. Examples of negative externalities are air, water and noise pollution, and examples of positive externalities are clean air and good peace and order situation.

With modern technology and management systems, various market solutions have been invented to deal with such perceived market failures. Examples are private villages, townships and industrial and economic zones. Almost everything that governments would normally provide are provided by the private sector there: roads and drainage, security, traffic lights, street lights, garbage collection, public parks, even schools and mini-hospitals. Thus, the “public goods” character of those services is not absolute. Their provision can be done entirely by the private sector, various market players and civil  society organizations.

The externalities aspect of those goods and services can also be internalized. Meaning the private sector players can internalize and absorb the full cost of providing such services, no government taxes and  fees are needed to finance them, partly of fully. These private villages and  ecozones have their  own systems of  internal revenue mobilization and local spending.

Sources of government failure

After identifying one "market failure" after another, governments began intervening in many sectors and sub-sectors of society. And the first source of failure is created: many bureaucracies. Government should be in healthcare, education, housing, roads, ports, credit, irrigation, trains, media, and so on. And many of those bureaucracies at the national government level are replicated at the state or provincial, city/municipality and barangay/village levels. Duplication, multiplication or missing of functions create wastes and distortions in society, not to  mention big opportunity for corruption in various levels of government.

A second source of failure has to be invented: more taxes, fees, fines, penalties, mandatory contributions, to finance the huge and  expansive bureaucracies. If one will check the World Bank’s “Doing Business” annual reports, as well as Price Waterhouse Coopers (PWC) “Paying Taxes” annual reports, one will see big number of taxes and fees, national and  local, that an average private enterprise will have to pay. Not included there are the costs of getting auditing, business compliance and law firms to help them understand and  comply with new and sometimes  overlapping requirements, permits and  fees to pay.

Since government administrators and officials are spending not their own money, the tendency and temptation to over-spend, to live beyond their means, is high. And huge public debts were invented. Almost all countries in the world now have public debts. While some have a debt/GDP ratio of only 20 percent or lower, many governments have debt/GDP ratio of 50, 80, 100, 200 percent or more.

The litany of reports and citizen complaints of government corruption, plunder and other forms of waste and crimes especially developing countries confirm that government failure is often worse than the market failure that such intervention wanted to correct.

Many people who demand more government intervention forget that aside from more taxes, fees and charges; huge and extensive bureaucracies also mean more regulations, inspections, registrations, accreditations, permits and licenses.

It is now difficult to identify any sector or industry and sub-industries in our social and economic lives where there is no government intervention and registration required. In many cities and countries, ven repairing or remodeling one’s office or condo requires city hall permit or license. And to reoccupy said office after a remodeling would require another city hall permit.

Those in the "informal" or "underground" economy do not exactly escape 100 percent of  those government permits and licenses. It is more like out of 10 or 20 business registrations, taxes and fees required by government, they only managed to escape perhaps 50-70 percent of them.

Good governance can cure government failure?

Very often, government failure is addressed or “corrected” by another set of government intervention. Like creating a new anti-corruption office or task force, creating new internal regulations and mechanisms to check and double check procedures and release of funds. These moves are essentially pouring more public money to determine how much public money have been stolen and wasted already.

The new key word being sold to the public to accept new interventions is "good governance", more transparency and accountability of public institutions and government officials and personnel. Implied in this formulation of course is the retention of a big, expansive, and interventionist bureaucracy; only to expect them to behave more transparently.

An option to go "back to the market" and "less government intervention" is far out among the minds and demands of many groups and people, even from those very vocal sectors and individuals that regularly note government failure, like those in media, the academe, NGOs and civil society groups.

Anyone anywhere can create a “market failure”. If people demand a USB with 20 GB memory and sold for only US$10, they create a market failure.  Demand is there but supply is zero. The price these people are willing to pay is too low compared to what producers are willing to sell. Or a biotech firm supplies a particular rice variety with several nutritional values but sold at $10 per kilo and no one buys it, also creates  a market failure. Supply is there but demand is zero, market failure.

Rent seeking

In the book, "Government Failure: A Primer in Public Choice" written by Tullock, Seldon and Brady (2002, published by Cato Institute, Washington DC), Chapter 4 is entitled “The cost of rent-seeking”. Examples of rent-seeking are (a) trade protectionism, where the protected local industry benefits but the local consumers are worse off; (b) private monopolies, and (c) direct income transfers by government where A is taxed and B receives the money.

Trade protectionism is trade dictatorship. The domestic consumers are being told that they can only buy or import from this country but not from other countries; or they can buy from anywhere but only for xx tons volume; or they can buy anywhere at any amount but at 10 percent, or 100 or 500 percent more expensive price because of import tariff and  other national and local taxes and fees.

Private monopolies via government franchising is enterprise dictatorship. The public, the consumers are told that they can only purchase a particular product or service from a single company.

Direct income transfers are political cronyism and nepotism. Very often the targeted beneficiaries are old political supporters, relatives and clan members of the  politicians  and officials in charge of money transfer, in cash or in kind.

Voluntary Exchange vs. Forced Exchange

In voluntary exchange, producers come or attract consumers to sell their products or services like fruits, fish, beer, hair cut, tutorial, cell phone repair and so on. Consumers choose from various producers who offer the same or  similar goods and services, and chose those who offer them good value for their money.

No one is coerced or arm-twisted to surrender his/her money to someone else. Only when the consumer is satisfied with  the product or  service will  he/she give the money to the product seller.

In forced exchange, people are coerced to surrender their money to a big and armed body or institution. Their monthly salaries are automatically deducted of a certain percentage; their earnings in bank deposits, stocks and commodity markets, are automatically withheld of a certain percentage. When they buy or purchase something like hamburger, the price they pay is higher because of taxes and surcharges imposed on the original price of those services and commodities.

And even if the people do not like the personnel and officers assigned to help them because they are arrogant or lazy or corrupt, their taxes and fees will be used to sustain these people.  Or if people feel that certain services being offered and already budgeted are unnecessary, there is little choice to stop them. Lazy and arrogant government personnel can be kicked out of office, true, but one must set aside substantial time and effort, and money of course, to take short leaves from work and stand up as witness to usually long court procedures.

Market, state and civil society

Markets and trade were invented to fulfill certain human demands for survival and modernization. Fishermen who have surplus fish catch need wood, nails and carpentry tools to build their house. They also need a boat, fuel and fishing gears and equipment. People specialize in doing a particular skill and they can have many things  they want through trade.

Government and the state was invented mainly to help enforce agreements and contracts among people, to have rule of law. Before people will stab or shoot each other over disputes in contracts, verbal or written, misunderstandings and disputes are settled in peaceful and transparent way and the penalties for violators are also made transparent.

Civil society was invented to help address certain government failures. As government deviates from its basic function of promulgating the, rule of law – the law applies equally to unequal people, no one is exempted and no one can grant an exemption – it creates one government failure after another. Civil society is non-state, non-government entities that help people to have mature, responsible and voluntary assistance to other people. The idea of being shamed among peers and neighbors is sometimes a worse punishment than government prison and incarceration.

It is important that individuals should assert their personal freedom, their right to voluntary exchange, and oppose an ever-widening system of forced exchange and government intervention. This is not a call for zero government. Government has an important but limited function in our lives. Its expansion to so many sectors and facets of our lives however, is not only dangerous, but has already wreaked havoc to our lives. The task of asserting our individual liberty is a continuing challenge for all of us.

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Alasan utama mengapa pemerintah (lokal, nasional, regional atau multilateral) di seluruh dunia terus berkembang adalah karena mereka ingin mengoreksi dan memperbaiki "kegagalan pasar", yang secara umum didefinisikan sebagai kegagalan pelaku pasar - perusahaan dan rumah tangga - untuk memasok barang-barang tertentu dan jasa dengan harga dan kuantitas sesuai kebutuhan masyarakat dan permintaan.

Meskipun alasan tidak bekerjanya pasar adalah pembenaran yang berlaku umum untuk intervensi pemerintah, ada juga mengingatkan bahwa “kegagalan pasar" hanya kondisi yang perlu (necessary), tetapi bukan kondisi yang cukup (sufficient) untuk intervensi tersebut. Ada dua alasan untuk ini….

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See also: 
Market Failure vs. Government Failure, June 07, 2006 
Market Failure vs. Government Failure, Part 2, March 03, 2008
Market Failure vs. Government Failure, Part 3, June 23, 2010
Market Failure vs. Government Failure, Part 4, March 22, 2014

Market segmentation and pricing, October 09, 2007
Limits to Free Market?, November 16, 2007 
Are Markets Moral?, January 05, 2014

Market Failure vs. Government Failure, Part 4

Market failure can be created by everyone and anyone in this planet, anytime and anywhere. For instance, person A will demand a USB/flash disk with 100 GB memory sold for only P300. Person B may demand for the same product for only P400 (their “willingness to pay”) and so on. There is a demand for that product. Where is the supply? Zero at those prices. There is no market clearing price as its current price could be several thousand pesos now. Market failure.

Person C has invented through biotechnology a tilapia variety that can grow to commercial size within a few weeks and selling the fingerlings at P50 each. No one buys as the price is deemed too high. There is supply for a particular product but demand is zero. Another market failure.

In both cases of market failures, should government intervene as often advocated by many sectors, that government should come in anytime anywhere where there are clear market failures?

Nope. There are millions of unmet demand  every day in this planet. And conversely, there are also millions of unmet supply every day in the planet. It is simply impossible both for technical and fiscal/financial considerations for government to come in for each of those market failures. Market solution to market failures can occur within the day or within a year or within a decade or century. Where there used to be market failure several years ago, there is market solution by now, or next month.

An economist friend, Prof. Nandy Aldaba of Ateneo Economics Department, noted that

The Philippines has P 1,025 Billion for all the Departments. We want job generation for inclusive growth and the Departments in charge are the poorest: NEDA, 5 Billion and DTI, 2.8 Billion…  DA has a very big budget - 63.7 Billion but with all the corruption in this agency, nothing much has happened to our agricultural sector. 

I commented that we do not want government as currently the biggest employer to become “biggest-est” employer. Nandy agreed and added that even in mainstream economics, market failures such as coordination failure and externalities need government intervention, and would  require sufficient resources.

He is right, and in mainstream economics, it also says that market failure is only a necessary but not sufficient condition for government intervention. Because frequent intervention often introduces government failures, solutions that can be worse than the problems they intend to solve. Whereas market failure invites market solution.

The single biggest job that government can do to encourage more private sector and civil society employment, plus self-employment, is to have strong rule of law system in the country. Contracts should be respected and enforced and people will have long term faith in the economy.

This is not to say that "we abandon all government interventions." No, no, only anarchists would say that. Having rule of law, like impartial and credible courts, police and justice system, stable policies, is one important form of government intervention that must be pursued.

It is important that people should recognize that frequent government intervention to correct any perceived market failure is counter productive. Very often, it would help if government will intervene less, regulate less, in addressing certain market failures, real or imaginary. Regardless of the people or personalities in government that we put in.

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See also: 
Evolution of Market and State, October 25, 2005
Market Failure vs. Government Failure, June 07, 2006 
Market Failure vs. Government Failure, Part 2, March 03, 2008
Market Failure vs. Government Failure, Part 3, June 23, 2010

Market segmentation and pricing, October 09, 2007
Limits to Free Market?, November 16, 2007 
Pol. Ideology 10: Joe Stiglitz and the Market, December 16, 2008
The Pope and Capitalism, December 03, 2013
Are Markets Moral?, January 05, 2014

Fat-Free Econ 33: Institutions and Why Governments Fail

This is my article yesterday in TV5's news portal, 

http://www.interaksyon.com/business/49935/fat-free-economics--institutions-and-why-governments-fail

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Institutions are mechanisms and structures of social order, whether created via volunteerism or by coercion. Private institutions are characterized by their voluntary creation and sustenance while public and government institutions are created by coercion through the Constitution, legislation, or other government orders or proclamations.

In most public discourse, institutions often refer to those in the public sector because they prescribe certain behaviors of the people through various regulations, and they are sustained via taxation and other mandatory fees and contributions to the government.

When institutions are weak, they do not function properly. They or the officials that lead them do not enforce certain rules and regulations that they are mandated to do. Rather, they exercise certain arbitrary powers and allow exemptions as to whom the rules and penalties will apply and to whom the rules can not apply.

In their book “Why Nations Fail" (published 2012, 529 pages), Daron Acemoglu, an economist from MIT, and James Robinson, a political scientist from Harvard University, argue that nations can fail if they have more “extractive” rather than “inclusive” economic and political institutions.

Extractive institutions do not properly enforce law and order, they do not secure property rights, and there is “absolutism” in public commands. Inclusive institutions on the other hand ensure law and order, secure private property rights, allow for economic competition and political pluralism.

These points were discussed extensively by one of the authors, James Robinson, in a conference on December 5 at Mandarin Oriental Hotel jointly sponsored by the Angara Center for Law and Economics and the World Bank.

I agree with the Robinson's analysis that the main function of government is to promulgate the rule of law and protect property rights. And that is where the Philippines and other governments fail. They do not strictly promulgate the rule of law. Rather, there is more rule of men, deciding to whom the law and prohibitions will apply and to whom they do not apply. So it is more of government failure, not national failure. And the question is, why governments fail.

Examples are the protection of shops and malls, hotels and buildings, schools and universities, airports and seaports, ordinary individuals and so on, are done mainly by private security agencies, not government police and armed units. The police and other agencies are generally corrupt that people and businesses distrust their capacity to protect the citizens and their properties, so they get private security agencies to protect themselves and their properties. They turn only to the police after a crime has happened for legal cases later. But the crime prevention function is done mainly by the private sector.

There is also government failure in various welfarist and subsidy programs. There are endless programs like education and healthcare for the poor, housing and credit for the poor, tractors and electric tricycles for the poor, cash transfer and roads for the poor, condoms and pills for the poor, and so on. Someday there could be cars and iPads for the poor - and poverty still persists.

In the current global and regional public finance condition, almost all governments have dis-savings and are heavily indebted. The public debt-to-GDP ratio can range from 20 to 200-plus percent. Yet many economies have positive savings rates, meaning their savings-to-GDP ratio is positive - from about 14 to 50 percent among Asian governments alone. This is another example that savings and efficiency in the private sector is compensating for dis-savings, waste and inefficiency in the public sector. 

It is a bankrupt idea that more power should be given to governments (local, national and multilateral) and people should work and pray that "enlightened and good" leaders will wield such powers to do central planning and redistribute wealth, regulate and regulate, tax through "inclusive institutions". And when thieves and dictators grab government authority, people should rally and mobilize again to replace and topple them. Then gamble again that the next round of leaders are not thieves and dictators. This is precisely the experience of the Philippines and many countries for many decades now.

People are not idiots that government, whether ruled by thieves or angels, should nanny them from education to healthcare, housing, transportation, agriculture, condoms and so on.

One of the discussants in the forum, Dr.Bernie Villegas of the University of Asia and the Pacific made a correct position during the roundtable that the PNoy administration should focus its last three years on building or strengthening public institutions - the courts, the legislature, and various bureaucracies - to become "inclusive" and protective of law and order, protective of property rights. But he stopped there. 

For the government to focus on that very important thrust, it should stop creating new welfarist programs, step back and focus its resources on improving existing programs, or even abolish those programs that were more of debt generators than productivity enhancers. 

The free market, more personal responsibility - as opposed to more and bigger government - still has a long way to go in this country and elsewhere. There are just too many central planners around us who endlessly produce “great ideas” and they seriously think that their bright ideas should be forced on the rest of society, and taxpayers should finance their grand ideas endlessly.

It is this central planning mindset - of more forced collectivism and coercion in society - that causes conflict among people. We should have less coercion in society. It is good that people have lots of “bright ideas” but such ideas need not be forced and slammed on everyone else. Rather, bright ideas can survive and thrive via voluntary exchange and civil society volunteerism.
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See also:
Fat-Free Econ 29: Anti-capitalism, Fanaticism and the Poor, November 13, 2012
Fat-Free Econ 30: BPOs and Obama, November 14, 2012

Fat-Free Econ 31: On the Kasambahay, Solo Parents Welfare Bills, November 26, 2012

Fat-Free Econ 32: GDP Growth, Stockmarket and Rule of Law, December 01, 2012

Rule of Law 15: RoL and Government Failure, August 16, 2012
Rule of Law 16: On the New SC Chief Justice Ma. Lourdes Sereno, August 25, 2012
Rule of Law 17: Justice Without Discrimination, October 18, 2012

Rule of Law 15: RoL and Government Failure

* This is my article today in the online magazine,
http://www.thelobbyist.biz/perspectives/less-gorvernment/1342-on-rule-of-law-and-government-failure
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“Let anyone do anything he pleases, so long as it is peaceful; the role of government then, is to keep the peace.” – Leonard E. Read, Founder, Foundation for Economic Education (FEE).

I agree with the above statement so I posted it in my facebook wall with the following intro, “The main role of government is to promulgate the rule of law, protect property rights.”

A friend way back in the late 80s when I was still a believer of Karl Marx and socialism commented, “Property rights? How about those who have nothing and those who have own a lot? In my view, the role of government is to redistribute income and property, take away from those who own a lot and give to those who have nothing. If government will not do this, what is its purpose? Why do we need government if the law of ‘might is right’ and ‘survival of the fittest’ will prevail?”

My friend was simply advocating a socialist society where the main function of the government is to have forced equality among the people in society. And this is something that I do not agree, that is why I stopped being a Marxist and a socialist since the 90s.

Why allow and respect private property rights and not state or collective property ownership? Many people work hard abroad, sacrifice not seeing their family for several years, or they may be working here but they work long hours. After some sufficient savings, they buy a house and lot, and/or a farm, or a private resort. And government will come in to confiscate any “excess” property in this case, to be given away to those who have nothing, without asking carefully why some people have nothing. That is not right.

The main purpose of promulgating the rule of law is to enforce the law against killing and murder, the law against stealing and carnapping, the law against rape and kidnapping, the law against extortion and terrorism, etc.

One may be rich because of inheritance from hard working parents, or due to own hard work. then some criminals will come in to steal the car and other properties, to kidnap the kids for ransom, to abduct and rape a sister or daughter, or murder a friend or other family member for some flimsy reason. And government cannot solve many of such crimes because it is busy looking around who have improved their lives and how to confiscate more of their income and properties for redistribution first to its wide and expanded bureaucracies, then to those who have few or nothing.

This is clear example of government failure. The protection of citizens’ right to life and dignity, the citizens right to private property, and the citizens’ right to liberty and freedom of expression, is a basic, fundamental function of government. It is not to force equality in condition among people.

Many developed countries like the US, Canada, Japan, and many European economies are actually limping from too much forced redistribution, forced equality and expensive welfare programs. The huge public debt, both actual and contingent debt, is clear proof of the inefficiency of this policy. Many of the social programs are simply driven by envy. One is a demon because he is very efficient and hardworking and has become very rich, so government will get more and more from that demon.

But the redeeming action why those rich economies still do not collapse yet, is their promulgation of the rule of law. People pay high premium for the peace and order and low crime in their communities, killers and thieves are more easily apprehended, contracts are respected, policies are predictable and generally stable. Many businessmen and job creators still prefer this arrangement despite the huge and multiple taxes and fees slapped on their businesses, personal income and property ownership.

On another note, another friend way back in UP in the mid-80s, Maricris Valte, recently made this observation:

“The tragedy of the urban poor, particularly informal settlers, is that the poverty they confront invites repulsion rather than compassion. Much of society sees them as thieves, living off the sweat and property of others…. Sure, there are low-lifes and criminals in these informal settlements, but you have worse criminals driving around in armored vehicles. living in gated subdivisions and occupying powerful positions. The fact of informal settlement is an issue of social inequality. The proliferation of informal settlements is also a result of politicians cultivating electoral bases and making money out of deprivation. Government response must address both, if we want a sustainable solution. Oh, and that solution should include higher property taxes on idle private lands and residential properties that exceed 200 square meters. When a household of three occupies a house good for 12, that's criminal.”

I commented that the above observation that we have "worse criminals driving around in armored vehicles. living in gated subdivisions and occupying powerful positions" is one clear example of government failure. When the criminals that the government should go after and enforce the rule of law are sitting in government itself.

About the informal settlers or “squatters”, they should live in medium or high rise condos to save land space. The sky is the limit for vertical structures. So contrary to Maricris’ proposal, the government should instead drastically cut if not abolish real property tax (RPT) for condos, at least for low-cost and small unit condos, instead of raising that tax. All government taxes and regulatory fees are ultimately passed on to consumers and buyers, and this makes the prices of houses, medicines, etc. go higher and less affordable to the poor.

One solution by the government is that its own agency itself, the National Housing Authority (NHA) will build housing for the poor. One problem with this is that with the current bad governance culture, the tendency of the government implementing agencies is to jack up project cost instead of reducing it, so that there is some commission for them. The alternative scheme is to invite private developers in a competitive bidding. Connivance between the winning bidders and the government implementing agencies will remain a possibility, so the process of bidding should be made as transparently as possible.

But government taxes like the RPT by LGUs should be drastically cut if not abolished, for low-cost condo projects and condo units. When the poor move out as informal settlers and become formal settlers with clear private property rights to their house, that takes off certain spending program off the back of government and hence, reduces the need for more revenues.

Helping people to become self-reliant, to depend less on government welfare, is one offshoot of promulgating the rule of law and protecting property rights.
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See also:
Rule of Law 9: Laws, Prohibitions and Corruption, June 30, 2010
Rule of Law 10: On Wang-wang and Government Laws, July 04, 2010
Rule of Law 11: RoL Index, October 15, 2010
Rule of Law 12: Gloria Arroyo, Travel Abroad and the SC, November 16, 2011
Rule of Law 13: Freedom Barometer 2011, March 23, 2012
Rule of Law 14: Appointing the New CJ of the Supreme Court, June 17, 2012

Dirty Creeks 3: Divisoria, Paco

Since governments, national and local, often cite environmental protection, or ensuring a clean environment for the people, as among their important functions, I started the "Dirty Creeks" series here, and this is the third.

Below, the creek in Divisoria, Manila. I took these photos last June 10, 2012. Ugly and dirty. The only consolation is that it could be dirtier, if there were plenty of floating solid wastes. At least here, there were only a few.

Below, photos are from a story by Dennis Villages, "Estero de Paco: Life Along the River" posted in May 2009, http://dennisvillegas.blogspot.com/2009/03/estero-de-paco-life-along-river_08.html. Really dirty and ugly.

Here is the continuation of Dennis Villegas' story and photos, "Views from a Dead River" dated May 29, 2009,  http://dennisvillegas.blogspot.com/2009/03/estero-de-paco-views-from-polluted.html.

I do not know if this creek or estero has been finally cleaned or not.

Nonetheless, it is clear that at one time or another, there is government failure, not just "market failure" that we  hear often, in ensuring a cleaner environment. Some people will say that those garbage were produced by the people and individuals themselves, so it's market failure. True, but governments made rules against such indiscriminate throwing of garbage. Since government did not fully implement those rules and laws, then that is clear example of government failure or omission of function.
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See also:
Dirty creeks 1: Makati, January 18, 2011
(Not so) Dirty Creeks 2: Makati again, August 09, 2012

PhilHealth Watch 3: Market failure vs. Government failure in health insurance

When my wife gave birth to our 2nd child early last week, I needed to get her member data record (MDR) as one of the requirements for PhilHealth claims/deductions. I went to PhilHealth Quirino Ave. office to get it. The printing of that document should not take more than 1 minute, I guess.

But the long lines just to get that MDR -- as shown in this photo -- was que horror! About 30+ people queuing to get an MDR or PhilHealth ID and only 1 PhilHealth staff to entertain them all. It took me 1:40 hours just to get that simple document.

Does PhilHealth think that their members are jobless people who have nothing else to do and hence, can endure queueing for hours just to get simple documents, or file claims? I filed a claim, again for my wife who was hospitalized about 3 months ago. Just to file the claim took me 2:05 hours. Then we will have to wait at least 60 working days (roughly 2 1/2 months) to get the claims.

While people endure the slowness of PhilHealth bureaucracy when their members get their rightful claims after religiously paying their mandatory monthly contributions for years, there is a poster inside, shown in this photo, that members can send in their contribution by texting. When you send your contribution, PhilHealth wants to get it within seconds or minutes. When you get your claims, PhilHealth wants you to wait for hours queuing, and several months waiting for the actual claims.

Now we are resigned to the fact that PhilHealth's universal coverage will become even bigger and bigger, fine. The poor deserves healthcare. But do we all pay bigger mandatory monthly contributions then? Do we all endure even longer queues and longer waiting period to get Philhealth benefits?

The future is not yet here but my guess is that the answer to my own questions above are all Yes. Endure more ugly government bureaucracies.
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On March 25, 2009, I wrote this:

Health Insurance and Markets

Yesterday afternoon, I attended a round-table discussion by the "Ayos na Gamot sa Abot-Kayang Presyo" (AGAP), or Good ,medicines at affordable price. While I did not share with AGAP its position on the "cheaper medicines law", some leaders of AGAP are my friends as we belong to a new big coalition of NGOs on health transparency in the Philippines(to be formally launched in the next few days). That's why I was among those invited to attend the round-table discussion.

The topic was about health insurance in the Philippines and the main presenters were officials from the state-owned Philippine Health Insurance Corporation (PhilHealth), as well as a staff of a Congresswoman who authored a bill revising the law on PhilHealth. Other participants were mostly health NGOs affiliated with AGAP.

The PhilHealth guys presented and made further elaboration during the earlier part of the open forum. I have to raise my hand to make several points.

1. Our main concern is expanding access by more people to quality health care, or access to quality food, quality clothes, quality cellphone, etc. The problem has been identified and the solution is either more government intervention and subsidies, or less government intervention. Most of the concerns and sentiments are for the former.

2. But think of this: there is no government food insurance corporation -- all restaurants, all fastfood chains, all carinderias and street food vendors, are private, there is no government restaurant or government carinderia, and people are eating. There is no government transportation insurance corporation -- all buses, taxis, jeepneys, tricycles, airlines, shipping lines, etc. are private, and people are moving. There is no government clothing insurance corporation -- all clothes, pants, shoes, etc. are privately manufactured and distributed, and people have various clothing and footwear.

3. In education and health care, there is heavy government presence and intervention, and that's where problems and scandals come -- the Department of Education (DepEd) is among the most corrupt agencies in the government as perceived by many people, PhilHealth was used during the 2004 elections where millions of non-contributing people were given health cards, there are many reports of stealing and padding of claims by some hospitals, physicians and members amounting to huge amount of money.

4. Even if the staff and personnel of PhilHealth are good people and angels, but if the President and/or top political leaders are corrupt, the institution will be corrupted and so indirectly, will be its staff. Why did the "membership" of PhilHealth jumped suddenly in 2004 and not in 2003 or 2005? Because of the 2004 Presidential elections. So we can expect the same pattern next year where there will be another Presidential elections.

5. It is apparent therefore, that the solution lies in making the government step back, in reducing its intervention and allow the markets to come in a competitive environment. I am not saying that PhilHealth should be abolished or privatized, it can be shrank and become one of the many health insurance providers in the country. Membership in PhilHealth should also not be made made mandatory; it should be voluntary.

One reason why there is low formal business activities in the country, why there is high incidence of the informal sector, is because businesses have to pay plenty of mandatory taxes and contributions to the government: (1) BIR for monthly remittance of income tax, value added tax, other taxes; (2) SSS for monthly remittance of social security mandatory contributions; (3) Pag-IBIG for mandatory housing contributions, (4) PhilHealth for mandatory health insurance contribution, (5) local governments, (6) SEC, (7) DTI, etc. Government is a big burden for entrepreneurs, so that making health insurance voluntary and not mandatory will help reduce the burden in business and entrepreneurship. Also in the "cheaper medicines law", the government boasted of advancing this philosophy, yet government taxes and fees (national and local governments) comprise about 20 percent of the retail price of medicines, making said government pronouncements an irony if not a hypocrisy.

Oww, I could see some smiles and grumbles from the audience while I was talking. After I talked, some laughter. Maybe some were wondering, "which planet does that perspective come from?" :-)

More discussions and exchanges later, one PhilHealth official mentioned about "market failure" that is why government must come in to provide support to the poor and disadvantaged people. This I could not allow to pass, I rose my hands again and spoke for the second time.

There is market failure, true, but when there is stealing in government, that's "government failure". When the thieves in government do not go to prison and keep their positions instead, that's another "government failure". If those thieves will hire fellow crooks, thus perpetuating the system into large-scale, from top to bottom levels of corruption, that's another case of "government failure". There are many cases of government failures that we don't realize, we only hear "market failure".

Besides, there will always be market failure anytime, anywhere. If I demand a USB with 10 GB memory and sold for only P500 (nearly US$10), there is already market failure because while there is a demand (my personal demand), there is zero supply. So will government come in to produce that powerful but dirt-cheap USB? Another case, if there is a helicopter service from Quezon City to the Manila international airport for xxx thousand pesos and there are no takers or passengers, that again is market failure because while there is a supply of a service, there is zero demand. So will government come in to subsidize the fare in that helicopter service, in order to prevent the bankruptcy of the helicopter company?

There will always be market failure but it does not imply that government should come in all the time. Many if not most market failure does not need any government intervention because the market is capable of correcting itself (reduce or stop the supply of something if demand is small or zero, or vice versa).

In the case of health insurance, my idea is that people can have dual health insurance -- the one by government (PhilHealth) and a private health maintenance organization (HMO). The latter will be operating in a competitive environment and level playing field, so that each player will be forced to continuously improve their services. Allow also price segmentation, so that HMOs can charge P1,000 per year or P10,000 per year or P100,000 per year, depending on the budget and specific needs of their clients. Lower annual payment for fewer services, higher annual payment for plentiful and elaborate services.

This way, instances of claims-padding by the contributing members and/or physicians and hospitals can be minimized if not stopped because PhilHealth's coverage will be capped to a certain maximum. Whether patients will stay in a hospital for only 1 day or 1 week or 1 month, claims padding will be minimized. Whatever amount in excess of PhilHealth coverage can be sourced by the patients and their families to their HMOs or personal/household savings, or they can approach their local politicos for assistance. Price segmentation or price differentiation is a wonderful mechanism to allocate resources properly among people with different budget and different needs.

It was a great afternoon of exchanging ideas, but for me, it was an opportunity to douse some sense to heavy statist philosophy that more government intervention, taxation, regulation (and the corruption and waste that often come with such heavy intervention), is the solution to any social or economic problem.

Market Failure vs. Government Failure, Part 2

One big reason why there are so many instances or scandals of corruption and inefficiency in government is because there as so many opportunities for stealing and waste in so many agencies. And it has come to that situation because government has assumed or arrogated upon itself so many functions and responsibilities, many of which should have been personal and parental or corporate responsibilities in the first place. No thanks to many people who endlessly rant “market failure”, the “greedy nature of markets”, and “tendency for wide social inequity under markets” thinking.

Repeated attacks and distrust of the market is often bordering between ignorance and just evil desire to intervene in other people’s lives, like taking a big portion of people’s income and savings through various taxes and fees. The market is often equated with big corporations, like those engaged in the stock market and foreign exchange market. But market refers to all individuals, both consumers and producers. Even the economically dependent (children, physically or mentally disabled, old people) and the plain lazy and irresponsible people who don’t want to work, are part of the market. Because even if they earn no income, they consume (food, milk, medicines, alcohol, cigarettes, haircut, etc.) and that makes them part of the market for various goods and services in society.

“Market failure” has been abused to justify various forms of government intervention, regulation and taxation. And a number of people who enter the bloated government have seen opportunities for stealing and corruption. Some politicians run for public office, or bureaucrats beg to be appointed to high government positions, mainly to steal; or secure certain business favors that would not be available to them if they are out of government. Or perhaps just an ego-trip to show to other people how “intelligent” and how well-connected politically they are.

Those in government whose main intention is to steal can do it in various departments and their attached agencies or bureaus. Or there are several hundred government corporations, financial institutions, state universities, even constitutional bodies, to occupy where stealing or rent-seeking can be done. Or head certain regulatory agencies that decide who can do business and who cannot. All that one who leads any of those regulatory agencies do, is to make plenty of strict regulations, so that some of those who want to be allowed to do business quickly will be forced to pay bribes or grant certain economic and political favors. This largely explains the widespread existence of illegal gambling, illegal drugs, prostitution, and other services despite the fact that government prohibits all of them, at least in paper.

Those multiple and repeated instances of robbery, or small-scale wastes that happen a hundred or a thousand times elsewhere, already constitute ample proof of “government failure”. But instead of government withrawing from those sectors and services where abuses, red tape and corruption are repeatedly noted and reported, "government failure" is addressed by another set of government intervention, by instituting plenty of anti-corruption bodies and counter-check mechanisms and procedures. These moves are often pouring more public money to determine how much public money have been stolen and wasted already.

An option to go "back to the market" and "less government intervention" is far out among the minds and demands of many groups and people, even from those very vocal sectors and individuals that regularly note government failure, like those in media, the academe, NGOs and civil society groups.

There will always be market failure in all spheres of our lives as individuals and communities become more specialized, as tastes and preferences constantly change and evolve. For instance, Juan demands a rice variety that also boosts his and his family’s immunity against dengue and malaria because they live in a mosquito-infested neighborhood. But such rice variety does not exist yet, so this can be taken as “market failure” already. Or even assuming that such variety is already available but its price is too expensive for Juan and his family, other people will again call this “market failure” because the supplier/s of such rice variety only think of their profits, not public health and nutrition.

Market failure often creates market solutions. An initial lack of supply of a certain good or service that caught the attention of a big section of the public results in entrance of new players and producers. Pretty soon, the problem is no longer lack of supply but over-supply. Over-supply sends a signal to various producers and suppliers in the form of declining prices. The market's self-correcting mechanisms guide societies, producers and consumers alike, to allocate resources where they are needed, and stop supplying those resources when they are no longer needed.

Government failure on the other hand, almost always results in more government checks and balances, more bureaucracy, and hence, more taxes and fees to finance the expansion of the bureaucracy. Government failure is more sinister, more damaging and more disastrous to the lives of people, of private taxpayers especially.

Crisis situation of corrupt administrations should be a good opportunity to remind people that the problem lies less on the morality of the people that administer the state, but in having a big and interventionist state that can turn angels into devils. Stop or limit this transformation of people by limiting the size and power of the government.