BWorld podcast 2, TNVS fare and surge control are wrong

My second podcast in BusinessWorld was posted last May 17, 2018.

I discussed there what I frequently argue in my column -- that government interventions in pricing in a deregulated sector is wrong, that price and fare control is wrong. Government restrictions in number of land transportation franchises and transport network vehicle service (TNVS) like Uber, Grab, new players like Hirna, are wrong.

Government should encourage more players and competitors per sector, per industry. Consumers and commuters must have more choices in ride sharing.

See also: BWorld 156, Integrated PPP vs hybrid PPP, October 04, 2017.

BWorld 207, Fare control and surge cap are wrong

* This is my column in BusinessWorld last April 23, 2018.

 “The consumers force all those engaged in production to comply with their orders…. It makes competition work. He who best serves the consumers profits most and accumulates riches.”

— Ludwig von Mises,

Economic Freedom and Interventionism (1990).

Market competition is good. It gives consumers more options and forces competing players to adjust to their varying demands and wishes.

However, several government regulations — such as price and fare controls — go against this principle because it discourages companies from introducing innovation.

When Uber pulled out of Southeast Asia and decided to merge with Grab, it was simply exercising its prerogative. After all, the company, or any company for that matter, can freely enter or leave a market on its own.

Uber has helped popularize technology-based ride-hailing in the region and has inspired Grab and emerging players to do the same, and even improve on the technology aspects of the business.

What should worry the public, especially the commuters, is when government — via the LTFRB, DoTr — decides to bureaucratize the emergence of new players by imposing new regulations like fare control via cap or ceiling on price surge, among a host of other requirements.

Grab as the surviving big entity cannot and should not be considered as “monopoly.” After all, regular cabs, airport taxis, and hotel cars remain available.

If commuters really want cheap rides, they are free to ride buses, jeepneys, and UV expresses.

The price surge in exchange for availability of cars when they are most needed is a trade-off that many Filipinos and Southeast Asians can accept.

Here are four reasons why.

First, people in the region have rising income and therefore, more people have the ability to pay for more expensive trips in exchange for convenience, comfort, and safety.

These numbers show two things: (1) car sales are high and are rising further (except in the Philippines which implemented increased excise taxes on cars due to TRAIN), and (2) per capita income is either high (Singapore, Malaysia, Thailand) or at medium level but the expansion is high, 30-38% in just five years (Indonesia, Philippines, Vietnam).

Two, the price surge is an incentive for drivers to go to “inhospitable” areas. A person living in a very congested neighborhood but has to bring a family member to hospital emergency may not bother paying a price surge 10x or 20x because it is a matter of life or death for the loved one. And it is possible that the driver may not even charge at all if he/she sees the condition of the patient and have pity.

Three, the contracting system by taxis is a form of a price surge, an incentive for the taxi driver to pick up passengers despite heavy traffic, or flood, or late hours of the night or wee hours of the morning.

Many passengers would agree to pay for increased fares so long as they reach their destination safely. The LTFRB cannot track price surges by taxis but can check price surges by tech companies and this is where agency harassment is most pronounced.

Four, an expensive dominant player is good news to new and upcoming players. They might have a big volume of instant customers if they can initiate and offer lower prices for the same level of convenience and safety.

In a similar case, a friend who runs a UV Express made this observation.

We at the UV Express side are experiencing purging. Transportation is a very good source of livelihood but up to now government does not open any franchises for the transport sector. “Colorum” vans and operators are treated like criminals with a shoot order. All these operators and driver want is a decent job. Government does not have an alternative solution to incorporate returning OFWs who use their hard-earned money to buy cars or vans hoping that government will open new franchises to do business in the country. Government treats would-be small businessmen as criminals since it prevents the people the opportunity to be legal.

A government-imposed price and fare control is wrong. Its move to restrict franchises is wrong. Government should encourage more players and competitors per sector or industry, not less. Regulations like fare control and franchise control can discourage more innovative entrants. The government should give commuters more options as to which players to use and support.

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See also:
BWorld 204, Mining attractiveness index and the Philippines, April 30, 2018 

BWorld 205, Energy mix and wishful thinking, April 30, 2018 

BWorld 206, Intellectual property rights in East Asia, May 09, 2018

BWorld 193, TRAIN, inflation and emerging DOE price control

* This is my column in BusinessWorld on March 5, 2018.

More countries are reporting their January 2018 inflation rate and it is becoming clearer that majority of them have reigned in the inflationary pressure of the big rise in world oil prices. West Texas Instrument (WTI) prices, for instance, rose from $43.2/barrel in 2016 to $50.9/barrel in 2017, and $63.7/barrel in January 2018.

Of the 13 major Asian economies in the table, 10 have experienced a decline in their inflation rate compared to their December 2017 level and only three, including the Philippines, have experienced an increase. But the rise in the Philippines was big 0.7 percentage points (see table).

The big question is: Why is the Philippines the outlier in Asia in inflation rate movement?

The proximate reason is the recent tax law, RA 10963, known as the Tax Reform for Acceleration and Inclusion (TRAIN). The cut in personal income tax was good, but it was more than negated by the tax hike in oil and other commodities — coal, sugar beverage, etc. The anticipated pass-on effects of such tax hikes should be big.

How about Japan, which experienced a 0.3% point increase? There are two possible explanations.

One, it is experiencing a re-inflation trend after deflation in 2016 of -0.1%, then 0.5% in 2017. Two, it has a tax reform bill in 2018 that includes a 15% tax credit for corporations if their workers have higher pay of at least 3%, and if domestic investment in depreciable assets is equal to or more than 90% of depreciation. This means there will be expected higher household consumption due to higher salaries for workers and managers, and higher re-investments.

TRAIN’S IMPACT ON ELECTRICITY PRICES

The effect of TRAIN on electricity prices would be felt in four avenues.

1. Oil tax hike (for peaking plants in WESM), about 1 centavo/kWh.

2. Coal tax hike (P10/ton to P50/ton in 2018), another 1 centavo/kWh.

3. VAT application on electricity transmission charge, about 6-7 centavos/kWh.

4. Rise in universal charge (a big hike in electricity cost for many islands and provinces running on gensets/oil, subsidy passed on nationwide), perhaps another 1 centavo/kWh.

Sources for the first three points are Meralco as reported in the papers.

EMERGING DOE PRICE CONTROL

Last January, the Department of Energy (DoE) directed all distribution utilities (DUs) to require their power suppliers, the generation companies (gencos) to explain any additional charges that will arise from TRAIN.

Then last February, the DoE suggested that gencos should absorb the initial cost of higher oil and coal taxes. Meaning there will be no pass-on to the consumers. This was never done before.

In addition, the DoE also mandated the oil companies extend subsidies to public utility vehicles (PUVs) as a “cost cushioning mechanism.” This is another no pass-on policy.

These are price control measures. These are ugly policies to make the ugly tax hikes under TRAIN appear “less ugly” and “non-inflationary.”

TRAIN DOUBLE TALK

The architects and apologists of TRAIN are confused and are engaged in double-talk.

First, they make cheaper oil and coal become expensive, then deny the potential big inflationary pressure of such a measure.

Second, when inflationary pressure is higher than their projected and concocted figures, they blame speculators and not the law that created speculation.

Third, TRAIN exhibited favoritism and cronyism for renewable energies (REs) like wind-solar because their feed-in-tariff (FiT) revenues from WESM, then FiT-All, were again exempted from VAT. Natural gas is also fossil fuel but TRAIN did not slap it with excise tax, only oil and coal.

Fourth, TRAIN’s architects deny that additional revenues were largely meant to favor Chinese contractors and suppliers because many big projects that were already under the integrated PPP were reversed and put under “hybrid” PPP to be financed by ODA and foreign loans from China.

Fifth, they now propose price control measures in energy and other sectors to make TRAIN look “less ugly” and “non-inflationary.”

The Communist Party of China and Xi Jinping’s “thoughts on socialism” could be a rising influence in the economic and energy policies of the Philippines. This is wrong.

The Philippines should stay the course of more market reforms, not more state interventions and taxation. China’s communism and dictatorship is a lousy “model” that should never be entertained by the Philippines and other developing economies.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

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See also:

BWorld 188, Estimating electricity price hikes resulting from TRAIN, March 10, 2018.

BWorld 190, TRAIN, inflation and the stock market, March 15, 2018 

BWorld 191, Solar insecurity, energy stability and affordability, March 15, 2018 

BWorld 192, Cobalt mining and TRAIN, March 16, 2018

Inequality 18: Piketty, Fabella, Equity-Efficiency Nexus and EPIRA

A good artice from my former teacher at UP School of Economics. The italics-red highights are mine, meaning I like them. The italics-blue highlights after the article are observations that I am skeptical or disagree with. Enjoy.
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Power and the pursuit of equity

Introspective

Raul V. Fabella

Posted on June 08, 2014 08:09:32 PM

INEQUALITY is back. The trigger is the book Capital in the Twenty-First Century by Thomas Piketty. Three allusions to the book have appeared in the BusinessWorld opinion section in the last month alone. Piketty claims that ever-rising income inequality is the inevitable harvest of unimpeded market economies. And the market cannot heal itself of this infirmity. Piketty flies in the face of the venerable Kuznets (1955) who claimed that in the process of development, income inequality first rises, reaches an apex and then falls as income per capita rises. Inequality was already the focus of the widely cited 2011 Ostry and Berg piece Inequality and Unsustainable Growth: Two Sides of the Same Coin? They showed that income inequality shortened the duration of growth even after taking on board other factors.

The Piketty thesis is being subjected -- as it should -- to a spirited academic debate. But whatever the final verdict on the thesis, the inequality aversion it triggered is now a global staple. We can expect this aversion in the West to wash up the shores of developing countries and recalibrate development policy. There is great promise but even greater risk here for developing countries.

 If equity must be served, how should it be pursued? In the past, many attempts to level the income distribution took the form of shackling the market. The most popular form is administered prices: price controls on basic commodities, productivity-divorced minimum wages, rent controls, and usury laws. Another is making illegal certain markets, such as for farm land in the rural areas. What they mostly accomplish is an empty cupboard that leaves most everyone but especially the poorest worse off. These efforts turn pro-poor intentions into anti-poor outcomes. This lesson has a long history.

According to Lactantius (300 AD), in the late 3rd century AD, Emperor Diocletian issued the Edict of Maximum Prices in an attempt to limit prices of commodities by law. As a consequence, much blood was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever. Until, in the end, the law, after having proved destructive to many people, was from mere necessity abolished.” Unfortunately, Will and Ariel Durant’s famous paean to human frailty still holds: History teaches but man never learns.

 The fact of the matter is that equity could be pursued without stultifying the market. The main lesson of microeconomics venerable Second Fundamental Theorem of Welfare is that equity can be pursued without sacrificing efficiency. While this may be an unattainable ideal itself, the residual rule remains wise: Employ equity-pursuing policies which give the market the widest berth. Thus, wealth taxation is preferred to income taxation and income taxation when duly collected is preferred to commodity taxes.

 If you want to help the poor, give cash transfers to the targeted poor; don t artificially keep prices of commodities low. Artificially low prices, say, of electricity, are leaky buckets that benefit Forbes Park more than the poor. In general, fiscal transfers to expand opportunities for the targeted poor and their children, such as education, are the best equity strategy.

 It is now fashionable to attract investment through public-private partnerships (PPP). But the state must be ready to respect the pricing provisions of the contract despite populist pressure. The government, for example, has lately buckled on the treatment of corporate income tax in the concession contract for water in Metro Manila. This sours the PPP climate and will raise the cost of future procurements. As part of the original come-on for bidders, the tax treatment provision has been priced into the calculation and should be respected by the state.

 Currently, the government via the Energy Regulatory Board has embarked on a creeping administration of the Wholesale Electricity Spot Market (WESM) and bilateral contract prices on the pretext of market failure and abuse of market power. At the root of periodic spikes in electricity prices in the recent past and the highest electricity prices in the region is the dearth of new lower-cost baseload generation capacity coming on stream since Electric Power Industry Reform Act (EPIRA) became law. This makes the energy market a sellers market. If administered pricing becomes the rule, private investment in new capacity envisioned in EPIRA will be even less forthcoming.

 The Energy Secretary recently said that there is enough power for 2014 and 2015. If this is as much assurance as the government can give, potential investors in the Philippines will look elsewhere. The government can step in to procure new capacity to forestall a looming power crisis, but EPIRA prohibits the government from directly procuring new units unless there is a declaration of a power emergency by the President. Shouldn t PNoy seriously consider declaring a power emergency now and sign contracts for delivery of new baseload to ensure growth beyond 2016? After all, a zero or negative GDP growth is peerless in growing inequity.

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I am skeptical of the observation that  if you want to help the poor, give cash transfers to the targeted poor.

Yes, but if government must invent new welfare programs for the poor, government should also shrink or abolish other welfare programs that do not work. Have a spending-neutral welfarist policies.

I do not like this part, Shouldn t PNoy seriously consider declaring a power emergency now and sign contracts for delivery of new baseload to ensure growth beyond 2016?

There are many baseload plants on stream, they need to be assured that NO unnecessary delays be imposed, like the usual bureaucratism (about 100+ signatures from barangay to DOE to BIR needed to get a power plant constructed to running).

Also, price control is now practiced by ERC at WESM. The original ceiling price of P62/kWh has been reduced to "primary ceiling" of P32/kWh. And last April-May, a "secondary ceiling" of P6.+/kWh was imposed. And ERC is considering of extending that secondary price ceiling to June-July, or even longer.

Bureaucratism + price control are good formula to discourage new power investors and hence, formula to court  brown outs in the future.

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See also::

Inequality 14: 99 Percent to Support the 1 Percent, October 20, 2012 

Inequality 15: SM, Henry Sy and Class Envy, October 20, 2013  

Inequality 16: Inclusive Growth and Central Planning, October 21, 2013 

Inequality 17: The Koch Brothers and Their Critics, April 04, 2014

The Pope and Capitalism, December 03, 2013 
Are Markets Moral?, January 05, 2014 
Globalization, Mobility and Inequality, February 18, 2014
EFN 38: Report on Globalization and Inequality, Jeju Forum 2014, June 02, 2014

Drug Price Control 36: Advisory Council, James Auste and China

Another long article as a result of some exchanges we have in our discussion within the Coalition for Health Advocacy and Transparency (CHAT) googlegroups. This is four pages long, enjoy.

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After my reply to James Auste of the Cancer Warriors Foundation (CWF), contained in Drug Price Control 32: Policeman of Pharma Companies (June 04, 2013), then Drug Price Control 35: DOH Procurement Price and Lobbying for Another Price Coercion (June 29, 2013), James replied early this week.

He said that Unilab (while the biggest pharma company in the Philippines) and other local pharma, are not asking for a price increase of their products.

MALAKI MAN ANG KITA BUMABALIK SA LOCAL ECONOMY! SA INTERNATIONAL PHARMA SA KANILANG HEAD OFFICE SA IBANG BANSA  PUMUPUNTA ANG KANILANG PINAG KAKAKITAAN SA PASYENTENG PINOY!(HAVE DATA TO SHOW)  

KAYA CONGRATULATIONS SA LOCAL PHARMA! AT SERBISYONG TOTOO! PARA SA PILIPINO! CONGRATULATIONS SA UNILAB PASCUAL PHAREX  ATBP NA PATIENT FIRST BEFORE PROFIT! 

I replied that Unilab, Pharex, Pascual Lab, etc. were all affected by price control. That is why not one, not one, local pharma supported price control. Their prices are pulled downwards even if such prices are already low.

I remember from key leaders of local pharma, saying that some small local firms went bankrupt after price control, they could not bring down further their prices as these were already low due to competition among many players. Past President of the Philippine Chamber of Pharmaceutical Industry (PCPI), Edward Isaac, said in one  Advisory Council meeting that, 

This is the first time that we are united with PHAP in opposing a government policy. Before, it was easy for us to take a position. Kung saan sila, doon kami sa kabilang side. But this time, we are one with them in opposing price control.

James countered that the issue is the request by international pharma for a price increase, at least back to their levels before price control was imposed in mid-August 2009. And that there should be more  transparency in the health sector, that those multinational companies should open their financial statements (as submitted to SEC).

I think there are probably 200+ pharma companies in the country: PHAP members + PCPI members + non-members of the two federations.

The CWF data refers to the "top 25" taxpayers (in 2011 or 2012). But at the bottom of those 200+ pharma companies, these are the ones that can easily lose revenues and profitability in events of large price shocks, like the price control policy, and are likely to go bankrupt.

This situation can be illustrated by this hypothetical scatter plot below. Each point represents profit rate of each player. I made this illustration myself.

Before price control, companies have wide price ranges and hence, have wide range of profit margins among themselves for a particular drug molecule,. There is competition among them say in the 100-200 percent profit rate per tablet, another set of competition in the 50-99 percent profit rate, in the 5-49 percent margin.

After price control, the upper ranges were abolished and players have to adjust at lower profit rates, affecting everyone else. Those that used to make 10 percent profit rate must deal with just five percent and those that used to have net income of just 5 percent or less will suffer a loss, be in the negative territory. Some of these players may be able to float for sometime while others will simply have to close shop.

Agri Econ 8: On Rice Price Stabilization

Agriculture is among the sectors with heavy government intervention and subsidy. In some European countries like France, the number of government agri-related bureaucrats could be as many if not plentier, than their farmers.  

During the Federation of ASEAN Economic Associations (FAEA) conference last November 28-29, 2012 held at the PICC, Manila, one of the panel discussions was on agriculture and food security. I did not attend that panel because I went to the panel on Competition policy. Nonetheless, I have some of the presentations in USB during the conference.

One of the papers in the Agri panel was "Strategies for Influencing the Rice Price Stabilization in Indonesia" by Wijoyo Santoso, Nurhemi, Guruh S. Rokhimah, all from Bank of Indonesia. 

It's not a free market oriented paper, so I won't bother to copy their discussions, I just copy paste here some of their tables and illustration. These tables can be useful, especially the last one, I think the major rice importing countries. 

Major rice producers and exporters are Thailand and Vietnam. We often hear that "their rice scientists only studied in IRRI and UPLB but look where they are now, more advanced in rice production than the Philippines.

My usual answer to such claim is this: Even without government support or subsidy or technology, Thailand and Vietnam have natural comparative advantage in rice production compared to the Philippines because of the following:

1. They have few typhoons a year, the Philippines has about 19 per year, mostly coming from Pacific Ocean. Should these storms reach Vietnam or China, they are generally weaker and less destructive compared to their landfall in the Philippines.

2. They have about 10 million hectares each of rice land, the Philippines has only about 4.5 million hectares, since the 60s up to the present. They also have one major landmass, vs. the Philippines' archipelagic geography.

3. They have huge rivers like Mekong that can irrigate millions of hectares of rice land in several SE Asian region. Vietnam also gets water from Ton :Le Sap (?) river that crisscrosses Cambodia-Vietnam. The Philippines has only a few big rivers as the water easily drains into the sea.

The comparative advantage of the Philippines is tourism, not rice production. We should not aspire for "rice self-sufficiency" but rather, "rice or food security." Hong Kong, Japan, Singapore, S.Korea, they have "food security" even if they are not rice self-sufficient, they have the money and resources to buy the type and quantity of rice that they want. But I digress.

Here's one graph or illustration from the same paper by the three authors, about buffer stock stabilization by the government. In normal condition, demand (D) meets supply (S1) and an equilibrium price is set at their intersection point. But during bumper or big harvest, the supply can move to S3 while during prolonged drought or bad storms or pest attack, supply can move to S2.

Government sets a base or "floor" price where it will intervene by buying the excess harvest of farmers to prevent the price from further going down. Government also sets a high or "ceiling" price where rice consumers will be adversely affected by very high prices, so government will sell its stored rice.

I labeled that graph as "implicit price control" via government purchase, storage and sale of rice. In both cases of government buying and selling, taxpayers money is used for such price stabilization goal. In the Philippines, the "buy high, sell low" price intervention is done via the National Food Authority (NFA) and this agency is one hell of public debt generator every year, losing billions of pesos every year.

One problem with this model is that it assumes that only the supply curve can shift while demand is stationary. If such government intervention is absent or kept to the minimum, rice D curve can also shift to the left (reduced consumption temporarily, shift to other staples) or to the right (higher rice consumption). Rice traders -- individual or corporate traders, rice farmers themselves via cooperatives, other NGOs -- and importers can fill the gap during the seasonal up-down-up-down in rice prices, and rice supply can be stabilized even with little or zero government intervention.

We are not talking about possible large scale corruption with this scheme. This is often done by "buying high" from crony farmers groups or cooperatives, often political supporters of local and national politicians. Then "selling low" to crony traders, again of local and national politicians.

Just leave the consumers' demand curve to shift and adjust to changes in the producers' and traders' supply curve. As shown by industrializing and industrialized Asian economies, people's consumption of rice declines relative to the rise of their household income. Wealthier people shift to bread, potato, pasta, vegetables and fruits for their staples and consume less rice. The latter's rice D curve therefore shifts leftwards, allowing rice supply to be dedicated more for the poor.

The main function of government is to enforce the rule of law, protect private property rights and the people's right to life and liberty. People will not be happy and would feel insecure if they get all types of subsidy (rice, tilapia, poultry, education, healthcare, housing, etc.) but criminals can steal their property or abduct, rape or murder their children anywhere.
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See also:

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

Agri Econ 2: Rice Laissez Faire vs. Subsidies, May 06, 2008

Agri Econ 3: Dr. Samran Sombatpanit and WASWC, July 03, 2008

Agri Econ 4: Government Agricultural Interventions, October 21, 2008 (long paper)
Agri Econ 5: Land Reform Without Timetable is Wrong, July 01, 2010

Agri Econ 6: My Treehouse, August 16, 2010

Agri Econ 7: Bt Eggplants vs Environmentalism, December 20, 2010

Oil Politics 6: Price Control, Political Opportunism and the Oil Speculators

An article by Romy Bernardo on "Oil Price Controls" was uploaded at the "UP School of Economics Alumni Association" section of the UPSE website,
http://www.econ.upd.edu.ph/alumni/?p=488

If only the UPSE can take back the PhD degree it gave to President Gloria, the shameless economist. Nowhere in Econ 11 or Econ 102 and higher econ subjects was it ever justified that price control as an economic policy is good. It's bad and stupid, period. The short-term gains are very small compared to the long-term losses of low and uncertain investor confidence in the country. Investors would think twice or thrice, at putting up more gasoline stations in the country knowing that the government can declare oil price control anytime for whatever reason/s and for unspecified period of time, forcing the players to sell at a loss.

The President’s populist decision is of course echoed and supported by her other officials. In particular, the Secretaries of the Department of Energy, Department of Justice, Press Secretary and the Executive Secretary.

The State should be spending its time running after criminals, killers, rapists, kidnappers, carnappers, corrupt officials, etc. There are too many of them on the loose yet. Running after private enterprises which are in the business of selling various goods and services -- from medicines to hamburger to gasoline to hair cut, etc. -- is none of its business. Unless they are selling counterfeit or substandard medicines, hamburger with poison, gasoline with water, haircut with head injury, etc. If people think gasoline is expensive, then they should car pool and ride bicycles or walk. If the government thinks this is unfair, then government should also put a price control on fuel products (from Saudi, China, etc.) or refined products from Singapore, etc. Since it cannot do this, then it should to abolish taxes on petroleum.

But government is often a bunch of hypocrisy. Price control on the final products but no control on taxes, regulations and bureaucracies, not to mention corruption and robbery.

There is price for stupidity. Especially when the stupid one is the government. But at the end of the day, it is us consumers and taxpayers who get screwed. We are the ones who will suffer from oil rationing and shorter operating hours of gas stations. Government does not suffer, it always gets the first priority in any oil rationing.
.
But government stupidity should not go unpunished. The President’s opportunism should be punished. It is up to us how we should punish the administration, not only in the coming elections, but more so in writing the future history literatures of Philippine economic policies.

Of course there are plenty of jeepney drivers and operators, Mr. Jose Concepcion of Consumer and Oil Price Watch (COPW) and the hordes of other fuel consumers who favor oil price controls, even calling for government oil subsidy – from other taxpayers who economize on oil consumption. That's one danger of democracy. The demagogues and the mobs use coercion, State coercion, to enforce their will upon the less-noisy minority. If the majority think that oil prices are expensive, then they should economize on their trips, or they should ride bicycles and walk. But they should not coerce you and me to pay extra taxes so their oil consumption will be subsidized, if not provided free.

Socialists and populists like everything to be provided cheap, if not free. At the expense of everyone else, of course, especially the rich and middle class. For socialists and populists, to become rich and well off is a crime. Hence, they should be punished with high and multiple taxes.

Such thinking that persists up to this day, encouraged by coercion inherent in supposedly a democracy, is among the main reasons why economies stunt or do not grow to their potentials. And why policies driven by envy persist.

Meanwhile, I posted this last July 11, 2008.

Are Oil Speculators to Blame?

As world oil prices remain high, many people and analysts are blaming the "oil speculators" for the current "artificially high" oil prices.

I don't go along with these analysts. It's true that many oil speculators made lots of money here, along with rice speculators, gold speculators, real estate speculators, currency speculators, and several dozen other types of speculators, on the products or services that they are dealing with.

Speculation is like gambling, like stock trading, like observing and guessing whether your current girlfriend or boyfriend will be a good spouse someday or not. Hence, speculation is a perfectly rationale human behavior.

When some people think that there will be a war between Israel and Iran exactly 30 days from now, then they will sell their houses, their cars, their other properties and stocks, and buy as much oil futures they can at $140 or $145 a barrel, and hope to sell at $160 or $180 in 40 to 50 days.

But more people will speculate that such war possibility will happen in 9 years, 11 months and 29 days from now, there's no need to panic now, and will spend their money buying the houses, cars, stocks and other properties of those guys in the above group, at a bargain of course.

So who's the "better" speculator, the former or the later?
Any bet one picks, does not matter. And it's not only traders who speculate. Consumers also speculate. A person who thinks that oil will reach $200 within 10-12 months from now will sell all his current big cars at a bargain, and buy those small, fuel-efficient, or "green" cars even if they are expensive now. While a person who thinks the $200 oil will happen 3 or 4 years from now, will buy the big cars sold by that person at a bargain.

Speculation will happen, it is a perfectly rationale human behavior, so long as there is instability and unpredictability. And unpredictability will be with us for as long as we live, for as long as the sun will shine tomorrow and 4 or 5 billion years from now. Because change will always be with us. If we don't initiate change, our neighbors or other people will. And we will be forced to adjust or adapt to the changes initiated by other people.

So, are oil speculators to blame? NO.
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See also:
Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes, November 13, 2007

Oil Politics 4: Is Expensive Oil Good for the World Economy?, March 18, 2008

Oil Politics 5: $150 a barrel and Government Public Transpo Monopoly, May 22, 2008

Spontaneous Market 7: Price Control is Price Dictatorship

The price of a commodity is an indicator of both its value or usefulness to society (demand side) and its availability or scarcity (supply side). Thus, when a product or service is deemed useless by the consumers, say telegram or personal pager, then its price based on the willingness to pay of the consumers, will be zero or near-zero. At that price, no service provider will supply the service. The result will be clear: telegram or paging companies will cease to exist.

On the other hand, when a commodity or service is deemed very useful to society but it is freely available, or the supply is unlimited, like air, then the price for its consumption will be zero. Luckily, the supplier of that service – nature – does not demand any monetary compensation. But there are certain places and instances where air is very thin if not absent and hence, people will have to buy a “bottle or tank” of air for them to survive, like those in scuba diving or those climbing Mt. Everest or other very tall mountains.

Price, therefore, is a beautiful mechanism that tells people and producers what products and services are most or least demanded by certain groups of consumers in a particular place in a particular time. It is necessary therefore, that pricing of commodities and services be left as freely and spontaneously as possible to allow both producers and consumers, both sellers and buyers, to adjust to each other. If the price is too high, consumers can walk away and the sellers will not sell anything and go bankrupt, even temporarily. If the price is too low, producers will not supply and consumers will buy nothing that they need and they will be the end-losers.

The idea of controlling the price of anything is born out of various motives, from humanitarian and pure public service, to political rent-seeking and pure envy. Price regulation and control is a clear proof and explicit signal that an economy is not free, that pricing of the regulated commodity is highly politicized. Price control is also a naked and blunt proof that there is price dictatorship: the price dictators decide at what price the producer and/or seller of a final product or service can sell, even though the same price dictators do not decide nor dictate the price of all inputs and intermediate products and services needed to produce that final product or service.

Thus, while the rationale or alibi given to institute price regulation and control is to “give justice to the consuming public”, there is great injustice to the same consumers when producers and/or sellers of commodities whose price has been politicized and regulated will be discouraged from producing further. When prices are controlled, producers who can possibly make some “miracle” products at sky-high and “miraculous” costs will be discouraged from innovating and producing those products. Ultimately, it is the public, the consumers, who will be the losers because they will be deprived of enjoying such revolutionary products.

Can people expect the “same” quality of a commodity after government has distorted and coerced a lower price? This does not look possible.

Producers will be discouraged from producing better quality commodities or products that require higher cost of raw materials and intermediate inputs, higher wages for higher labor and technological skills, higher office and plant rentals for cleaner production environment, higher cost of storage and packaging, etc. When the price of the above-mentioned production and marketing costs are uncontrolled, plus there are uncontrolled taxes and fees slapped on them, then the price of the finished product will be controlled later, then it is a perfect formula to discourage production of good quality commodities. Only low quality and mediocre products will be produced and sold in a politicized pricing system.

This partly explains why under normal, non-coerced, non-politicized pricing system, there are different prices for different quality products of the same generic category. For instance, there are different prices for different designs and brands of running shoes. And people love this price segmentation or price differentiation for differentiated designs, quality and packaging of products.

Here in the Philippines, price control is seldom practiced, thanks to some sanity in the minds of government regulators and bureaucrats. Unfortunately, that populist and interventionist policy is never erased in the minds of many people in government. That is why in the recently-enacted “Cheaper medicines law” or RA 9502, price control of some drugs and medicines “when national emergencies exist” was included.

This already sends a negative signal to producers of good quality and innovative medicines while sending positive signal to producers and traders of low quality, non-innovative, even counterfeit medicines. Because a “maximum price” to be set by the government through the Department of Health (DoH) and ordered by the President of the country will now be used by the second group of medicine producers and traders as a “target” price. Even low quality and non-innovative drugs can be priced near or at the level set as “maximum price” by the State.

The potential damage of the price control provision in the law, however, can be mitigated if the implementing rules and regulations (IRR) that will be issued will make it difficult and nonarbitrary to declare a “national emergency” to justify medicine price control. Thus, certain safeguards that are strict enough should be included in the IRR.

The current draft IRR prepared by the DoH somehow lists some good and strict criteria before a maximum retail price (MRP) can be declared. Among such criteria are the dozen-plus factors and inputs that contribute to the final price of medicines, like cost of research and marketing, taxes and fees, exchange rate, and so on.

But the composition of the Price Control Advisory Body or Consultative Council was not defined. This writer suggested some proposals on who should be in that body or council, mainly players from the private sector plus consumers. Since the composition of the body or council is not defined in the DoH draft IRR, it is possible that such body may be packed with lots of government officials, like people from the DoH, DTI, BFAD, DoST, DSWD, NEDA, DILG, and so on.

A definition of what constitutes “national emergency” was also not made in the section on Definition of Terms. Again, there is danger that such phrase can be abused by an abusive and corrupt DoH Secretary and President of the country someday. They could threaten the manufacturers and distributors of safe, effective, but “expensive” medicines with: “Hey, we will issue price control (or compulsory license) on your most popular and blockbuster medicines, unless you pay us…”
This is not to say that the current DoH Secretary and President are corrupt and extortionists. This law will stay with the citizens and residents of this country for the next 20 or 50 years or even longer, unless amended by another law where the price control provision is removed and abolished. The appearance of corrupt and extortionist DoH Secretaries and Presidents of the country in the next 20 or 50 years or even longer, is a big probability considering the bad governance culture and history in the country.

Hence, mechanisms should be instituted to make it difficult for future corrupt and extortionist DoH Secretaries and Presidents to impose medicine price regulation and control arbitrarily. More innovators and inventors of effective, revolutionary and safe medicines should be encouraged to come in, and not discouraged with politicized pricing and patent confiscation. With more competition among such type of medicine producers, the public will be protected with quality and affordable medicines.

* See also:
Spontaneous Market 5: Limits to Free Market? November 16, 2007
Spontaneous Market 6: Removing Pork Barrel, December 16, 2007