Tuesday, April 8, 2008

Government-made Disasters

JOHN MANGUN of the Business Mirror has some interesting thoughts on governments, free markets, the biofuel and food security issues. (Via email)

By John Mangun

There is an ancient Hebrew adage found in the Book of Proverbs. “Pride goes before disaster, and a haughty spirit before a fall.”

A more modern translation of the ancient Hebrew would read, “First pride, then the crash; the bigger the ego, the harder the fall.”

For the last 30 years, governments around the world believed that the answers to basic human needs are fulfilled best only when under their legislative and administrative command. Governments have created laws and infrastructure to take more and more control over economies out of the hands of the people and have therefore subverted the free-market system.

Today, around the world, we are seeing the results and consequences of government pride and subsequent action to control the vastly complex organism called the economy.

From Europe and Africa, through Asia to the Americas, the world is facing a food crisis. No nation will be spared from the “unintended” consequences of many widespread bad government policies over several decades. Even China, while officially denying (as usual) any supply problems, is paying farmers substantial cash amounts to increase wheat and rice production.

Riots and near-riots occurred in several countries in the last few months, in as diverse places as India, Mexico, Egypt and Russia. Although public unrest over food shortages is not uncommon through history, the recent disturbances center primarily on the availability of subsidized food.

Perhaps the most indicative example of bad government policy happened in Egypt where literally thousands “torched buildings, looted shops and hurled bricks at the police who responded with tear gas Sunday” (Associated Press). Since the 1970s, the Egyptian government has subsidized bread prices, a loaf selling for the equivalent of 1 US cent or about 40 Philippine centavos. Bread that is not subsidized by the government sells for about 10 times higher.

Of course, this 30-year policy was designed to “help the poor.” Then again, all government interference in the free market is to help the poor. How much is Egypt spending each year on food subsidies to help the poor? Nearly $14 billion.

That means that the Egyptian government could give each year $700 cash to every adult and child living below the poverty line, almost doubling their average annual income. Something about teaching a man to fish and not simply giving him food for one day.

In 2006 I wrote a column entitled, “The ethanol-biofuel deception.” I received an e-mail from the director of the Agricultural and Development Economics Division (ESA), United Nations Food and Agricultural Organization (FAO), kindly saying, “It’s the best piece I have read about biofuels and certainly the most sobering.”

National governments would not listen to the FAO’s concerns about food-supply disruption. Now, the United Nations is being forced to limit food-distribution programs because of the rising costs due in part to the shift from food production to biofuel-crop production.

On the subject of biofuel, although underreported in the local media, the Philippines is about to become a big importer of another commodity—ethanol. From Reuters: “The Philippines plans to import about 170 million liters of ethanol from Brazil and Thailand in 2009. The Philippine government had passed a Biofuel Act in 2007 that made it mandatory to mix 5 percent of ethanol in gasoline from February 2009. ‘It will translate into 200 million liters of ethanol a year,’ said Archie Amarra, executive director of Philippines Sugar Millers Association Inc. ‘Our production capacity is not much. . . we have one ethanol plant with capacity of 30 million liters per year.’”

Now here is the sentence that scares me; “‘The ethanol imports would be a temporary measure as the Philippines would boost capacity to meet its domestic needs within the next five years,’ Amarra said.”

The current world price of ethanol is about P20 a liter, meaning we will import about P3.5 billion worth of ethanol this year; and maybe this amount annually for the next five years.

Does that make sense? Perhaps the law should have been written to more slowly increase the amount of biofuel mix mandated to avoid having to spend billions to import ethanol. Doesn’t anyone in government that makes policy think about the future?

Sen. Mar Roxas II has called for a 10-year food-security plan. The senator proposes a “soup-to-nuts style,” meaning from seed distribution to market access. It sounds noble, but it may create an economic disaster for the Philippines.

When the biofuel bill was passed, did anyone know that the Philippines would spend P3.5 billion in 2009 to import ethanol? Were the future consequences ever discussed?

When the bill was passed, one congressman said the country would save about $300 million a year in foreign exchange. I wonder if that amount is before or after the $100 million we will spend on ethanol imports next year.

The nation does not need a 10-year plan. What we need is for policymakers to consider the results of their action three, five, 10 years in the future.
The road to hell is paved with green, err, good intentions.

Speaking of food, I was shopping in the Baguio city market. There's a new coffee available at both Garcia's and Umali's (deep in the back of the market area near the vegetable "bagsakan"--Sagada Black Roast (P270/kilo, unless you are a suki P230/kilo). There is also civet coffee at P6000.00 per kilo...but only the European tourists are suckers enough for forest cat sh*t coffee. Strawberries are plentiful, deep dark red and luscious (P80-140/kilo). Small pungent ginger is P100 for a ten kilo sack. Sayote tops, broccoli, carrots, and Nueva Viscaya citrus (dozens of varieties) are all widely available at good prices. Even the poor can live in abundance as long as they don't seek their salvation in Manila's slums or depend on the government for handouts...


blackshama said...

All government induced environmental disasters can be explained by a corollary of the Principle of Resource Use

(FYI, The Principle of Resource Use is stated as "It is not the lack of resource that is the problem but the lack of quality resources)

Subsidizing resource wasting initiatives to win votes.

Examples are ethanol biofuels, rice prices below market rates, diesel discounts to inefficient PU vehicles etc.

Subsidies do not enhance the quality of resources thereby contributing to its inefficient(thereby environmentally damaging) use.

An economist with a PhD like Gloriana should know that high quality resources have higher prices than low quality ones. Human nature is that when you have a high quality resource the tendency is to conserve it.

Example: The Blue Label Johnnie Walker we opened last Christmas hasn't been fully downed!

marvin said...

The problem with governments is you could hardly expect it to work with math-like precision. Sometimes it's corruption, sometimes it's the need for political survival, sometimes it's plain incompetence, and sometimes it's some or all of the above. These extraneous non-math like variables muddle up governments' work, they make presidents wielding economic theories based on mathematical formula dangerous.

cvj said...

A concurring view from a physicist:


cvj said...

...and from an economist:


Dave said...

Here in the USA it takes 1.5 barrels of crude oil to make the 1.25 barrels of fuel needed to produce 1 barrel of ethanol.

Ethanol has 70% the calories of gas or diesel. Methanol has 60% BUT you can get LOTS more methanol for the same amount of effort.

Best use of alcohol would be to cut the incoming crude at the refinery leaching out the unrefineable bunker fuel and thereby getting slightly more useful produce plus recovering a portion of the alcohol.

Better yet, convert surplus/waste to crude thereby getting better fuel plus getting those equally critical by-products and generaing some alcohol in the process. Has potential

What we are now seeing is nothing but corporate welfare and the expense of the most needy.