Sunday, November 25, 2007

Shut up and eat your genetically modified corn

In conventional breeding, the biologist promotes good genes (genes that express physical traits that make the organism economically more valuable) through natural reproduction. The breeder though gets to choose who mates whom. The end product is a genetically modified organism.

In genetic engineering, the biologist shortcuts the reproductive process. She isolates the gene of interest, and inserts it (I'm an economist, don't ask me how) into the DNA of a subject organism. The end product is a genetically modified organism.

So should you eat your genetically modified corn? Your already are!

Now a mad scientist could set up an experiment where, by conventional breeding, he develops a really tough termite that resists the usual pesticides. Or he could try to do the same thing using genetic engneering. If he has access to facilities and personnel, the latter would probably be faster. But the end productive is the same - an unusually destructive termite that could inflict billions of dollars of untold damage.

Now suppose our biologist grows a conscience and instead chooses to develop a type of corn that resists pests. Similarly the latter would probably get her there faster, but with similar results.

But wait! Isn't genetic engineering dangerous? Might as well ask: is conventional plant breeding dangerous?

Actually, YES - the products of conventional breeding have inflicted great costs on the environment. Monocrop agriculture is the global norm, with the resulting erosion of genetic variability, intensification of chemical application, etc. Not good. But yields are up, way up. Not bad. We take the bad with the good. That's why even environmentalists don't paddle a canoe to attend their global confabs.

And genetic engineering? A faster way to get the benefits - and costs - of conventional genetic modification.

Don't believe me? This Reason page has plenty of links to get you started on the science of GMOs. Happy enlightening!

Saturday, November 24, 2007

Jaw-dropping JPEPA analysis

Browsing through Inquirer I saw this. So would the proposed free trade agreement with Japan lead to free entry of Japanese fleets into Philippine waters? I'd never heard of this argument. Intrigued, I downloaded the full text here (care of PCIJ). I even went to the Junk JPEPA blog to see where I could find fishing access anywhere in the Agreement. The claim is bodacious:

"JPEPA through Articles 28 and 29 of Chapter 3 allows unhampered access Japanese fishing industry to Philippine EEZ."

In reality, Chapter 3 is about defining "rules of origin", i.e. how does a product get to be classified as "made in the Philippines" or "made in Japan" and get free trade treatment. (Given that a lot of foreign inputs may be used, the classification is not trivial). Article 29 says we can classify goods like fish as Filipino-made, even though they were caught outside our territorial waters, as long as a Filipino fleet owns them. It adds furthermore: "Nothing in this sub-paragraph shall affect the rights and obligations of the Parties under International Law, including under the United Nations Convention of the Law of the Sea." Absolutely, the Philippines retains its rights to the Exclusive Economic Zone under the UNCLOS.

So why the qualification? Simple: when we import a fish from Japan caught in say Chinese waters, and give it duty-free status because it was caught by a Japanese ship, we don't want to be entangled with legal problems with China who could dispute the legality of Japan's incursion into Chinese waters. We don't accept the fish was caught legally, but under the treaty we would still give it duty-free status.

What is behind this staggering falsehood of natural resource plunder by Japanese fleets? I don't know. I just hope the debates in the Senate are not conducted at this level of analysis. If this is the norm, we're done for.

Tuesday, November 20, 2007

Sunday, November 18, 2007

The bankruptcy of the "alternative development" paradigm: an outline

I've always wanted to write a definitive essay refuting the "alternative" development paradigm adopted by leftwing intellectuals and pseudo-economists. But I seldom write long essays for fun, mainly because they aren't. And this kind of paper cannot possibly have an original bone in its body. So I haven't gone beyond the outlining stage, as follows:

  • Thesis

The axis of evil: fascism, feudalism, capitalism. Global capitalism as imperialism. The faces of domestic oligarchy. Alternatives: protection, nationalization, expropriation, industrialization.

  • Antithesis

The critical dichotomy: exchange relations and property relations. Booty capitalism and transformative capitalism. Pitfalls of the alternative strategy.

  • Synthesis

Transformative capitalism. Equity as a necessity. Conclusion: the grave irony.

Pragmatic considerations regarding the death penalty

One of the reasons for opposing the death penalty is the probability of executing an innocent person. Suppose our policy choice regarding the death penalty has the objective of minimizing wrongful deaths, which is the sum of private murders and mistaken executions (which is tantamount to murder). A numerical example will help fix ideas: consider a population of 10 million identical persons. Over a given period, the probability of any one committing murder is = 0.00002; then the expected number of murders is 200. With a death penalty, the probability of comitting a murder drops, say to 0.00001; then the expected number of murders is 100. Suppose the probability of obtaining a conviction is 0.5, for which the probability of a mistaken execution is a high 0.1. Then without the death penalty, the expected number of wrongful deaths is 200 + 0 = 200; with the death penalty, the expected number of wrongful deaths is 100 + (100 * 0.5*0.1) = 105. The deterrent effect would have to be really small, i.e. a difference of 0.0000009 in the probability of committing murder, for the expected avoidable deaths to be equal between the with- and the without-death penalty scenarios. In short, wrongful execution requires an actual murder and a conviction, hence this will be a very small number relative to the population, and a small number even relative to the expected number of murders.

Put in another way: by not imposing the death penalty, the State is allowing 95 more wrongful deaths, but itself inflicting none. State without a death penalty would seem to be one in which the weight of a publicly-sanctioned wrongful death is much, much greater than the weight of a privately-committed wrongful death. Is there a good justification for such a weight?

Friday, November 16, 2007

Thoughts of a young economist

Written just after the contentious period of debate on approval of the Uruguay Round. These days the term "booty capitalism" is more common. Otherwise, still my thoughts on the matter.

Oh yes, if you know the joke, this means that I have no heart.

With the issue of the GATT, the fragmented Philippine left found reason to unite. A common theme in their arguments against ratification was the specter of global capitalism tightening its hold on less developed economies with their integration into the world trading system. Instead of integration, they advocate a return to the "nationalist" strategy based on extensive State intervention, emphasizing controls on imports and foreign investments, selective and generous incentives for heavy industries (steel is a special favorite), cheap foreign exchange, and similar measures.

Unfortunately, their critique of global capitalism and their program of State-sponsored industrialization suffer from a complete misunderstanding of the foundations and dynamics of capitalism. The recent approval fo the GATT is thus regarded as a betrayal of "the people", rather than what it truly is: an opportunity for economic advancement.

Capitalism operates on the dynamic of exchange or market relations made possible by stable property relations. These exchange relations, as they are voluntary, are to the mutual benefit of the transacting parties. If I buy imported sugar, it is beneficial to me, as well as to the foreign sugar grower (but probably not to the domestic sugar planter). Naturally, the process of exchange organizes and improves production. For example, with free trade resources devoted to import-competing sugar may be reallocated export crops, which are sold in more lucrative foreign markets.

However, to teh extent that the State engages in market restrictions, there is an opportunity to accumulate wealth, not by innovating a superior organization of production, but by appropriate the coercive power of the State. For example, domestic sugar planeters may lobby to restrict the entry of cheap foreign sugar; Filipino consumers are coerced into accepting less beneficial trades with these planters. Capitalism, in its free exchange form, organizes and advances production and is therefore a benevolent force. (It's distribution of society's output is, however, only as equitable as the existing property relations.) On the other hand, capitalism which employs State coercion is the foe of economic progress; it is the backbone of a backward conservatism.

It is this reactionary conservatism of a protected few which is most interested in rejecting agreements which restrain State coercion, as the GATT. Ironically, this conservatism is precisely what radicals unanimously advocate, whatever their differences on other issues. All this in the name of "the people."

I do not question the sincerity of the radicals; what they suffer from is a mistaken identification of capitalism in the Philippines as a manifestation of exchange capitalism, rather than what it truly is - coercive capitalism. Mass poverty and underdevelopment are blamed on exchange capitalism, rather than coercive capitalism and unjust property distribution (the heritage of a feudal and colonial past).

In a world where central planning has been totally abandoned, trade barriers are falling and exchange capitalism is replacing structures of coercion, perhaps it is not only the veteran ideologues who are victims of this tragic irony. Unfortunately, the youth and studentry by and large remain captivated by an obsolete mode of analysis (one needs only read many of the other column pieces appearing in this space. If instead the energies of these idealists were directed toward opposing coercive capitalism, as well as toward advocating justice in property relations (such as redistributive land reform), they might yet live up to their vehement profession of being "pro-people."

- Philippine Daily Inquirer, Youngblood, 27 December 1994, p.7; byline corrected December 28, p. 8.

Much later I had another column in Business World, August 20, 2002. But that one has an electronic copy. I've had a few other columns, but the rest are crap.

Wednesday, November 14, 2007

The price of oil is telling us something

The record levels that oil price has recently hit is surprising; the fact that oil price has been rising over time, is not. Way back in 1931, the economist Harold Hotelling argued that prices of exhaustible resources should be rising over time. His fundamental equation (in modified form) states that:

Growth rate of net resource price = discount rate.

The net resource price is simply the market price of the resource, less the marginal cost of extraction. The discount rate is the "rate of time preference". It is the amount by which the subjective value of one peso falls if it is received next period, rather than now. This can be proxied by the interest rate. An alternative way to express this is:

Net resource price now = (1 + discount rate) x (Net resource price last period).

Extracting one unit of the resource now rather than a while ago, requires that the net price now exceed the previous net price by the rate of time preference. If the marginal cost of extraction is constant, then the net price will rise only if the market price rises.

Short-run price increases can be explained by rising demand, or rising marginal costs of extraction, or both. Because of this, the oil market appears to have undergone a permanent upward shift in the trend line. Speculative forces also introduce short-term volatility in oil prices. Nevertheless, Hotelling's equation supposedly captures the slope of that long term trend line.

The story however does not end there. Rising prices signal to consumers (and producers) to adjust their activities by searching for relatively cheaper substitutes. Hence the search for renewable energy sources to replace oil, at least at the margin. The price signal - and consequent behavior adjustment - is precisely what averts a "collapse" in consumption as the resource is finally exhausted.

Unfortunately our baser instincts drive us to interfere with this economic process. Through our government, we want those greedy oil companies to profit less. We also accept interventions to impose "energy conservation", like banning this or that "frivolous" use of energy (Christmas lights, driving at the speed limit, etc.) This is a lot of wasted energy (pun intended). And taxing away those profits tells oil companies to shy away from risky ventures like oil exploration - precisely the set of activities needed to keep price growth in check. Ultimately some want the government to own all the oil companies - yeah, like that's gonna work.

I'm not saying that all intervention is bad. Market failures may justify some interventions, say in research and development, setting up infant renewable resource industries, imposing a tax on carbon emissions, and so on. But the distinction between bad and good intervention is subtle. Too often it vanishes in the scramble to appear to do something, anything, against $100 oil. Folks, let that $100 sign tell you what to do.

Wednesday, November 07, 2007

The scarcity of oil runneth over

Once energy was cheap - cheap enough that the idea of growing plants for their energy seemed absurd. Obviously, plants are grown mostly for food. For thousands of years thus it has been, so shall it ever be.

But now energy is dear - dear enough that some plants in some places can be profitably grown for energy, creating biofuels. This takes space and other resources away from growing plants for food. The old conventions are being abolished. The agricultural landscape has been permanently altered.

Much to the discomfort of many. The idea of farming to feed cars is somehow deplorable compared to farming to put food on the table. But this is knee-jerk alarmism. Consider:

1. If the criterion is getting the most quantity of food out of given farmland, then even now we are not doing it. The reason? We eat animals. And animals need to be fed. Either with plant feed - which often takes away land for growing food for direct consumption - or worse, other animals, which themselves need to eat plants. And the feed conversion ratio is (aside from poultry) is much higher than 1 (reaching up to 8 in the case of ruminants). Anybody complaining about the corn we feed to hogs rather than directly to people?

Come to think of it, everytime we set up a shopping mall, a parking lot, a school, a laboratory, we are taking away land that could be used for farming. Bad for "food security". Tsk, tsk.

2. There are a lot of distortions introduced by policies. Particularly notorious are the biofuels incentives in the US, which artificially makes it profitable for some US farmers to plant for energy rather than food. Take away these incentives and we'll see a lot less of this diversion from food to fuel. Rather other options may be explored, such as growing energy crops on marginal lands. (There is some promise from crops such as sweet sorghum and Jatropha plant for such options.)

3. Food will get more expensive. Bad for consumers. But this is good for farmers. Without deeper analysis, we can't tell whether the net effect is anti-poor.

My best guess is, biofuels will play a role in the overall energy mix, but not a major one (at least within the energy sector). However within the food sector the emergence of biofuels will have long term implications for the trend in future food prices. The era of cheaper and cheaper food is over, as well.