Price gouging oil companies redux

When will this ever end? From the Business Mirror:

Oil firms’ bottomline unscathed

WHILE consumers grapple with the skyrocketing fuel prices, multinational oil firms have been raking in huge profits as shown by their income statements submitted to the Securities and Exchange Commission (SEC), a senior administration congressman disclosed Tuesday.

Liberal Party Rep. Abraham Mitra of Palawan made public the income documents submitted by Pilipinas Shell and Petron Corporation, two of the country’s biggest oil firms, “not to accuse the oil giants of price gouging or excessive profiteering, but to let the public draw its own conclusion from what the cold numbers present.”

Mitra, vice chairman of the House Committee on Appropriations, said that based on the statements furnished by the SEC, Shell’s net profit jumped by 102 percent in 2005, while Petron’s surged by almost 50 percent in the same period.

Shell reported a net income after tax of P5.672 billion last year, more than double the P2.846-billion profit it pocketed in 2004. As a result, its earnings per share doubled too, from P4.12 to P8.34.

The firm’s net sales jumped 17 percent from P126.7 billion in 2004, to P148.9 billion in 2005.

Petron, which is partly owned by the national government, saw its income after tax surge to P5.765 billion, up from the P3.886 billion profit it reported in 2004. This represents a 48-percent increase in profits.

In its income statement, Petron declared that its gross sales soared to P191.2 billion, up by 29 percent from the P147.5 billion in 2004. With this, Petron’s earning per share improved to 61 centavos from 41 centavos in 2004.

Again some basic economics (this is easier done with graphs, but then I realize some of us may not be that familiar with the use of supply-demand diagrams). A price increase occurs either because either costs go up, or demand goes up. If costs go up, producers pass on the increase in cost to the consumer; however they are not able to do so completely, because consumers cut back on their purchases. In the end their profit falls, even as prices paid by consumers increases. On the other hand, if demand goes up, then consumers are willing to pay more to get extra units of output. The firms are thereby persuaded to increase their production, but of course in the process, the market price goes up. What happens to their profit? Of course, it goes up! The increase in profit is precisely the incentive that is required to increase production and therefore satisfy the extra consumer demand. We should find it a remarkable mystery to observe firms obliging consumers' higher demand, without requiring any extra incentive to do so.

However, it is not a mystery that legislators would want their names in the news by pandering to popular mythology.

Does globalization help the poor?

Angry Bear has an old post summarizing some recent papers linking trade and growth. The author concludes:

So let me amend my summary of the emerging consensus as follows: sometimes trade causes faster growth, and sometimes it doesn't. But protectionism is never good for growth.

Trade is good for growth, and growth is good for the poor, ergo trade is good for the poor. This is a conventional way for arguing the positive effect of trade liberalization on poverty. Globalization though is broader than trade liberalization, and "the poor" are not some homogeneous mass of people whose well-being move in the same way. Pranab Bardhan's article in Scientific American provides good overview of globalization and the poor. A more technical discussion is found in this forthcoming volume on Globalization and Poverty from an NBER Conference.

My answer to the question: yes, on the whole; sub-sectors though will suffer from increased global competition. Globalization is neither the catastrophe that critics decry, nor the panacea that some proponents profess. This may help explain why the Philippines, despite two decades of trade liberalization, has failed to reap the expected reform dividends. (On the other hand, it is almost certain that the economy would be even worse off had the status quo on trade been maintained; moreover in many industries there has been significant flip-flopping on liberalization, especially in agriculture.) To end with a quote from Easterly (from his contribution to the abovementioned volume):

Globalization is less important for the wellbeing
of the poor than the (unfortunately more mysterious) process of productivity growth.

The box that opened world trade

The box that changed the world just celebrated its 50th anniversary. I'm fascinated with these erstwhile nondescript innovations that turn out to have revolutionary impacts on the global economy.

A Wired article discusses how things were, pre-1956:

But look back to the 1954 film On the Waterfront and you'll get a good idea of how things used to be. New York dockworker Terry Malloy (played by Marlon Brando) climbed into the rusting hulls of cargo ships and used brute muscle to move freight using nets and grappling hooks. Loading and unloading was so slow, ships might remain in port for days, even weeks. Only four decades ago, contemporary photos of Singapore's port showed shirtless workers stumbling down wooden gangplanks carrying enormous bundles of bananas on their backs. It was called break-bulk shipping.

This inefficiency irked Malcom McLean, a crusty North Carolina trucker who defied convention to spark a logistics revolution that continues to reverberate today. Dubbed the Father of Containerization, he laid the foundation in the 1950s for what would arguably become the world's first truly packetized transport network.

McLean reckoned there had to be a better way of loading and unloading ships than the clumsy, slow, and theft-prone process of break-bulk. His first brainstorm: stacking sealed truck trailers on flatcars for long train journeys, trucking them only the few final miles to their destination. But the railroads weren't interested, so in 1955 he bought a small tanker company named Pan Atlantic and modified two of its ships to carry 58 detachable trailers. In order to stack the trailers, he removed the wheels and strengthened the sides. In April 1956, the first of these converted ships sailed from New York Harbor to Houston, and containerization became a sunrise industry.

The Wikepedia article describes the advantages of containerization: first, it allows a trucker to load cargo in sealed containers directly onto a ship, and unload cargo directly back onto a waiting truck. No more messy loading and unloading of individual packages or boxes. Second, the use of sealed boxes greatly enhanced cargo security, helping eliminate the "falling off the truck" problem.

So important was this simple innovation that "it is very unlikely that we would all be buying Japanese TVs, Costa Rican bananas, Chinese underwear or New Zealand lamb. In fact, globalisation would probably not exist and the World Trade Organization would have a lot less to talk about," according to this BBC article.

Simple ideas that change the world. Wish I could think of one.

The real pro-labor approach

Today is Labor Day. As the rest of us honor the day of the working man and woman, unions use the opportunity to press for more stringent regulations on the labor market. At least two come to mind: first is the demand for an across the board minimum wage increase. Second is the demand for elimination of the contractual labor category and provision for security of tenure.

Bulatlat.com provides a good summary of these demands from the labor perspective (Bulatlat article):

Citing government data from 1990-94, a research by the Asia-Pacific Research Network (APRN) in 2000 revealed that the combined share of casual, contractual and part-time workers in total enterprise-based employment was between 14-15 percent. It went up to 18.1 percent from 1994 to 1995. By 1997, the figure has reached 21.1 percent, meaning that for every five workers one is a casual, contractual or part-timer worker.

For example:

In the more than 20 branches of Shoe Mart (SM), one of the biggest chain of shopping malls in the country, in 2002, nine out of ten workers are contractuals, hired either through an agency or by a concessionaire, said Maristel Garcia, spokesperson of the Sandigan ng mga Manggagawa sa Shoemart, the union of SM employees.

Contractuals abound in export zones and industrial parks around the country, such as those in Baguio City, Cavite, and Laguna. A survey of APRN covering 14 unions under the Kilusang Mayo Uno (KMU or May 1st Movement) in the National Capital Region revealed that contractual workers comprise 67 percent of the workforce at the time. This is despite KMU’s efforts at protecting job security and benefits.

“It is true that contractual labor is now really extensive. Easily seven in every 10 companies practice contractualization,” Donald Dee, president of the Employers Confederation of the Philippines, told Manila Times in 2003. “We know for a fact that contractualization is meant to avoid regularization,” admitted Dee.

Today the share of contractuals in the total workforce may even be bigger. For example, after SM management practically crushed the union by terminating all striking union workers in 2003, Garcia said, it stopped regularizing workers and was able to employ more contractuals.

In other large firms, threats of retrenchment complemented by early retirement schemes resulted in a stripped-to-the-core number of regular workers. The Philippine Long Distance Company (PLDT), the country’s largest telecom company, was able to reduce its workforce from 14,000 to 10,000. Its rank and file union membership has dwindled from 7,000 to 4,100. It was also able to reduce the 3,000-member supervisory union to just about 2,000. The rest of PLDT’s required manpower comes from contractual workers who are paid piece meal, per phone installation or telecom services sold.

In Japanese-owned Asahi Glass Corporation, the ranks of regular workers have been decimated after a wave of forcible retirements. Retired workers were subsequently rehired as contractuals. At present, there are five contractual employees for every regular worker.

The benefits of higher minimum wages and greater worker security are clear. However, are there any negative consequences we should know about? (That is the problem with such ideologically slanted analysis. We are told of all the benefits of this or that anti-market imposition, but any attempt at analyzing cost is slammed. So much for critical thinking.)

Okay the negative effects are:

1. Higher minimum wage means more expensive workers. More expensive workers means, within a market economy, capitalists will higher fewer workers. (The alternative is to go the planned economy route and eliminate capitalists altogether; all productive capital would be owned by the state. Then the government becomes one big employment agency. It can pay all the higher wages it wants. Heck it can even print money if there's no budget for it. Worker's utopia indeed!)

2. Enforced security of tenure means firms have less flexibility to deal with economic change. If the market for their product sours, they are forced to produce less. In the absence of worker security, they can cut costs, in part by laying off workers. However with worker security this is difficult. Enforced security of tenure also means that removal of individual workers because of poor abilities, mismatched skills, low productivity, and so forth requires a lengthy adjudication process (i.e. the termination "for cause" provision in the Labor Code.) Finally with security of tenure comes a long list of costly but compulsory worker benefits. Because of this, firms either decide to higher fewer workers, or hire workers who can easily be removed - i.e. the casuals.

3. The "casualization of labor" cited in the Bulatlat article is therefore a consequence of regulations enforcing security of tenure, particularly on workers hired for a year (Labor Code provision) or more than six months (a guideline that is being increasingly used as a cut-off to determine which worker is becoming "regularized."). However this is going to create a lot of "churning" in the labor market. Ever wondered why some salespersons in SM are rather inept? It is likely that by the time they became familiarized with their duties their six months is up. To be replaced by someone who has to learn the ropes all over again. This is probably going on also in many factories. Once you learn the skills on the shop floor, you have to be removed. This is not the best way to develop a quality labor force!

Note finally that the benefits of higher minimum wages and enforced worker security are ultimately enjoyed by those who are currently regular workers. No wonder they have a strong interest to fight for them. Even if this would cause misery among the ranks of those who are outside this group - mainly the unemployed, or casual workers.

(More detailed arguments for reforming labor markets are found in this paper by Gerry Sicat. It's a great read.)

That is, the real pro-labor approach would be: fewer regulations, rather than more. Not only that: it would be pro-growth as well.

Seeing those demonstrations and strikes and pro-labor legislators and bureacrats in the Department of Labor and Employment, I wonder: who will protect us workers from our protectors?

The oil price stabilization tax - US version

Amadeo has pointed out in a comment entry in this weblog that some US legislators are also pushing for their version of the oil price stabilization tax. The issue has been picked up by US econobloggers. Manuel Lora of Mises.org is rendered speechless by the plan, which combines a $100 rebate plus stronger anti-price-gouging measures.

James Hamilton has a thoughtful post on the Chief Executive's policies towards the oil price hikes. He says:

There is currently an almost religious conviction by many Americans that the price of oil, rather than being determined by world markets, is controlled by a few big oil companies, as if the 2.5 million barrels of crude oil per day that ExxonMobil produced last year somehow give it the ability to control the price of the other 82 mbd that got sold. The certainty with which people hold this conviction seems directly related to the complete absence of any supportive facts..

Indeed. Even the fact that OPEC countries control 40% of oil exports is no slam dunk case for international "price gouging". OPEC has been around for about thirty years; did they all just get their act together all of a sudden, just when China and US ratcheted up their oil demand? Does not compute.

And:

I think there is an overwhelming political instinct in the current situation to do something huge, drastic, and ultimately quite harmful.

This is exactly how the average grandstanding politician would act. When something this big is going on, one must give the appearance of activity, inasmuch as passivity is the ultimate political crime. Hippocrates was right: a physician confronted with a baffling ailment is tempted to apply all sorts of mysterious nostrums. So he said: First do no harm!

Greg Mankiw also gives advice on how not to deal with higher gas prices. One interesting point: the US deficit is on a unsustainable path, so a tax rebate would be most unhelpful in moving towards fiscal sustainability.

What is a "sustainable deficit", anyway? There are several definitions, but two are most easy to remember: first is the "no Ponzi game" definition. In a Ponzi game, interest payments on debt can only be financed by borrowing. The analogy to pyramid schemes is perfect: in a that scheme/scam, the scammer's promise of high returns can only be met by new investors also chasing high returns. Insidiously, government may be playing a kind of pyramid scam with its deficit management. Second is that the public debt-to-GDP ratio must be constant or decreasing. The idea is that the GDP is the base from which to extract revenue, and therefore service the debt. The debt itself must not grow out of proportion of this tax base. Both these definitions are long run definitions; in the short run some violation of these rules is possible, but these violations cannot be pursued indefinitely. The creditors will eventually wise up, the way scammed pyramid investors do, and the whole thing comes tumbling down. The government becomes insolvent. Or it pays its debt by printing paper - fueling hyperinflation.

This time the message is: between taxes and excessive public borrowing, which one does less harm?

Oil Price Stabilization Tax

What's going on? As oil prices go up, legislators in the Philippines are again calling for suspension of the value added tax on petroleum, which is 12%.

I remember the good old days of the Oil Price Stabilization Fund. (This is what passes for sarcasm among economists.) It worked as a variable subsidy: at a given domestic price, when the foreign price went up, the oil firms would be subsidized by the fund; when the foreign price went down, oil firms would put money back into the fund. Well it might work if the regulated domestic price equalled the long run equilibrium price. It doesn't take an ijit to guess that the regulated price was set way lower than that, so that the "fund" was perpetually in the red, burning holes through government coffers.

What the legislators are proposing is in effect a variable levy. Foreign price up: suspend tax; foreign price down: impose tax. It is more feasible to implement because government doesn't actually have to cough up financing for a subsidy. But the idea is as flawed as the Stabilization Fund, and the effects are more insidious.

First, does anyone really know the long run trend in the world price of oil? Is US$ 65 per barrel it, as Rep. Salceda is guessing? Nobody knows. If anyone did, they would make a killing in the futures market. (If it were different, that is.) Suppose the oil price hold steady at today's high levels. Does anybody seriously think this tax can be reimposed?

Which brings us to the second point: suspension of the tax would forego, by some preliminary estimates, revenue of about 40 billion pesos. Representative Salceda recommends restrictions on spending and the scrapping of the rationalization program. But these are truly lousy ways of meeting government borrowing targets.

How about the "hardship to the people"? Well excessive government borrowing, or restrictions on public spending, are themselves sources of "hardship to the people." I am pleasantly surprised with Senator Recto, who shows lots of good sense, by claiming that the suspension would hurt people more.

Another way to approach the problem is this: suppose you are foregoing 40 billion in tax revenue anyway. Compared to repealing the VAT on oil, is there a better way to structure the tax system? My (very preliminary) simulations with the updated PhilCGE suggest there is. For example, halving the sales tax rate on petroleum products has about the same revenue loss as removing 5% off the sales tax rate across-the-board. However the latter involves a welfare improvement of about 30% more. This confirms that a more uniform tax structure tends to be less distortionary on the economy. Unfortunately the suspension of the EVAT moves towards a less uniform (and more distortionary) tax regime.

The de facto oil price stabilization tax is only good for one thing: political mileage. Yep, I can hear 'em downshifting to high gear all over.

Blame-thy-neighbor policy

One of the charges levelled against China is a "beggar-thy-neighbor" policy: keeping its currency artificially cheap, effectively subsidizing its exporters (while penalizing importers). Last week's meeting between Presidents Hu Jintao and Bush provoked a comment from the latter: "There has been some appreciation in the currency. We would hope there would be more appreciation in the currency."

Some review: a currency peg is when one country fixes the conversion between its own and a foreign currency at a given value. It is said to be following a fixed exchange rate policy in contrast to a flexible or floating exchange rate policy. A domestic currency appreciates when the rate at which one unit converts to a foreign currency goes up (conversely, when it takes fewer units of a domestic currency to buy one unit of a foreign currency). A depreciation is the reverse. The real exchange rate, is the market value adjusted by relative inflation (the difference between domestic inflation and inflation in the country holding the foreign reference currency). The idea is that domestic inflation at given market exchange rate is equivalent to an appreciation of the domestic currency. Depreciation accompanied by the same rate of inflation yields an unchanged real exchange rate.

So now we are ready to consider the question: is the yuan undervalued? Most economists would agree: yes, but not by a lot. Certainly not by magnitudes of 27.5% called for by some US Congressmen. (Though revaluation of yuan by that magnitude would do wonders for the Philippines' trade surplus with that country. Whether that's economically desirable is doubtful.)

Since the mid-1990s China has been on a currency peg; based on ADB data, the yuan/dollar exchange rate has fluctuated within a narrow band of 8.3 to 8.28. Using inflation rates in China and the US from 1996-2005, the yuan has only depreciated in real terms by less than one percent. Finally, overall trade surplus of China is only 2.6% of GDP, around the same level as in 2000.

More arguments against the undervalued-yuan claim here. Brad Setser also has plenty of discussion on the China-US imbalance.

It seems that some elements of the US Congress have become very adept at the "blame-thy-neighbor" policy. China-bashing bandwagon, anyone?

The China chance

China has received blame all around. For rising oil prices. For vaccuming up all the foreign investments. For grabbing markets for consumer manufactures, such as apparel, footwear, textiles, toys...

China - a country of 1.2 billion, where per capita GDP (PPP-adjusted) has risen over tenfold from 1980 to 2002 (reference). Now the second biggest economy in the world, thanks to decades of rapid economic growth.

What's not to fear from China? Lots. (See this link.) It's showing the early stages of the classic Lorenz-curve pattern - with inequality rising initially during growth. Back in 1980, the Gini ratio was 0.2 (quite equal), but now it is 0.45 (about the same as the Philippines.) Not good for social stability. The type of growth that has been pursued showns signs of unsustainability, in the environmental sense:

Rapid industrialization is producing massive environmental devastation. China is the world’s second largest greenhouse gas emitter (the U.S. is first). About 60 percent of China’s major rivers are classified as being unsuitable for human contact. Seven of the ten most polluted cities in the world are located in China. Air pollution alone claims 300,000 lives prematurely per year. Acid rain falls on 1/3 of the territory. More than 1/3 of industrial wastewater and 2/3 of municipal wastewater is released into waterways without any treatment. Over the last few decades, increased industrial agriculture and commercial grazing has resulted in creating over 2.67 million square kilometers of desert land—around 27.9 percent of China’s total territory. Many claim that foreign investment and the introduction of “green” technology will help clean up the environment in China; however, this has not been the case to date. One of the reasons for this is because China’s State Environmental Protection Agency (SEPA) has little authority. SEPA estimates that although water treatment facilities are installed in most major industrial plants under government mandate, round one-third are not operated at all and another one-third operate occasionally. Often the fines it levies are less than the expenses of using the “green” technology. (Business Week, August 22, 2005)

Well I for one am hoping that it's rapid export-oriented growth is sustained. A competitive Chinese export sector means cheaper products which we can import. And a big Chinese economy means a big market to send our goods. In 2000 the export share of China was only 1.74%; in 2005 it was 9.86% and growing. In terms of value, exports to China in 2000 were only US$ 663 million; in 2005 it was over 4 billion, more than a sixfold increase. You may not realize this, but our imports from China in 2005 was only US$ 256 billion. (So what's all that "made in China" stuff? Well it turns out that China exports to other countries, which export back to us the made in China stuff.)

The global economy is not a zero sum game where one country becomes better off only if others become worse off. Simultaneous growth is a very real, in fact very realistic, prospect.

Energy prices up again

Much has happened while I was missing in action beating a couple of deadlines: the Thaksin problem in Thailand has been resolved; in the Philippines, local governments are pushing for Constitutional reforms, while the President suspends all executions; but the global development I'd like to flag for now is the recent uptick in oil prices. In the past month, prices have gone up by 16%, with Brent crude exceeding US$ 71 per barrel.

While many analysts (cited in the article) point to uncertainties with respect to Iran as a proximate cause, James Hamilton thinks it's still a prosaic supply-demand story: oil production in the US is down, as well as in Nigeria (due to their political problems). "And demand remains strong, with U.S. economic growth resuming at a faster pace than some of us had anticipated, and Chinese use of petroleum continuing to climb. If demand is up and supply is stagnant, small wonder if we see the price continue to rise."

For the Philippines, what is the impact of this? Suppose a high crude price is sustained yearlong, leading to an increase in prices of petroleum products, within the range of say 20%. In 2005 the country's total imports was US$ 44.9 billion, of which about US$ 6.1 billion was in the form of mineral fuels, lubricants, and related products (except coke and coal). This accounts for about 13.6%. Hence the average import price (assuming constant shares) would rise by about 13.5% x 0.2 = 2.72%. For good measure I raised this to a worse scenario of 5%, and ran this average price increase scenario into a macroeconomic forecasting model I am currently working on. Voila, what did I get? The price increase shaves off a little over a percentge point off our GDP growth in 2006. So if the forecast is 5.2% growth for the year, then with the shock, growth is only around 4.2% or so. Interestingly, even if the average import cost was permanently higher, growth would recover to its unshocked trend already by 2007!

So the bad news: higher energy costs are a serious drag on growth. Good news: the economy is not going into a tailspin.

More good news: notice that demand remains a key reason for fuel prices rising, and China and the US remain a major source of this demand boost. And how is that good news? But that's for another post.

Termites in the woodwork

Interesting that the heads of government in both the Philippines and Thailand are both grappling with credibility crises. Under a Parliamentary system as in Thailand, elections can be called to test the mandate of a sitting government. Under the Presidential system of the Philippines, a President serves a fixed term and can only be removed by impeachment. Both solutions have been tried in each country. In the Philippines the impeachment bid failed in a Congress whose Lower House (where impeachment must be initiated) is dominated by the President's allies.

In Thailand meanwhile the crisis has probably gotten deeper, mainly because of the opposition boycott. This boycott has often puzzled me, given the relatively credible electoral system in Thailand. Why would the opposition intentionally attempt to undermine institutions that have served Thailand well, so far?

Well, as explained in the CNN report, a large bulk of the population remains rural (70%). Apparently agriculture-led development has worked in Thailand, preventing the massive rural-urban migration observed in other Asian countries, such as the Philippines. I hypothesize that the rural population tends to be more conservative in their voting strategy, as long as the sitting government is delivering basic services. Abstract values of governance tend to be dismissed as petty bickerings of a distant urban center. Knowing of their impending defeat at the polls, the opposition organized a boycott among urbanites - deepening the crisis of institutions in that country.

The case of the Philippines is different. In Thailand, there appears to be a strong urban-based constituency towards actively replacing the administration. In the Philippines, a loose oppositionist alliance with vague middle and lower class support has repeatedly called for the President to resign. However these calls have not provoked mass demonstrations. Ironically, an unpopular President continues to rule because extra-constitutional measures are themselves highly unpopular.

As an economist my biggest worry is that political paralysis and pessimissm would extend to economic decision-making, particularly in the area of fixed and financial investment. In the Philippines the "firewall" appears to be holding, but things seem more tenuous in the case of Thailand. Would an economic crisis the magnitude of the 1997 exchange rate debacle hit Thailand, again? Maybe not soon. But in both cases these credibility problems are simply burrowing deep in the woodwork - like termites.

Immigration supply

A Reuter's story (through Yahoo) relates a discussion on the supply side of immigration. The context of course is the raging debate on the US on immigration - though Mexican immigrants are the biggest group affected, lots of Filipinos illegals stand to benefit as well.

Per capita income is a good indicator of local wage rates. The disparities are indeed enormous. The case of Spain and Portugal are held up as examples of how tackling the supply side - evening out the income disparities - will do much to ease immigration pressures.

What happened to Spain? Well way back in mid-1980s its US$ per capita income (PPP-adjusted) was 10,435; today it stands at 25,100. That is per capita income rose by a factor of nearly 2.5. That can be done by plodding along at a decent growth rate of about 4.5% per year (in per capita terms). Once your economy is that size, you don't need Tiger economy growth rates (in the rate of 7% and above) to double hit developed country levels in a short time. All Mexico needs to do is to trundle along at about that pace; in fact its per capita growth has been in the range of 1%-2% in the last couple of decades. So the US can expect a lot more migration from the South in the medium term - that how that entry is managed is their call.

What about the Philippines? At about US$ 1,000 per capita, even doubling income will still keep us at a poor country level. If we can make our per capita income grow by 3% per year (around the growth rate last year) then in 20 years we can hit US$ 2,500. Pretty impressive, no? That's about Thai standards now. What we need is really fast growth (Tiger - standard). At 7% per capita growth (9.5% in GDP terms), we quadruple income in 20 years. But that's only about Malaysia standard (these days). In fact, the past couple of decades our per capita growth has been lower than Mexican standard!

So we can expect lots of migration from the Philippines over the next several decades. Slow growth and employment generation at home has been a major "push" factor behind all that worker migration. If we can rack up decent growth rates, there will eventually be a slowdown in the rate of growth of overseas remittance - and even a reversal. I do not believe that overseas remittance growth has contributed in a significant way to slowing down our growth rate - my gut feel is that the effect has been positive.

Experimenting with corruption

The Economist points to this great study, in terms of scientific approach and relevance to development. The paper (PDF) is mostly nontechnical (and is completely accessible to an economics major.) The study looks at road projects in Indonesia and compares actual expenditure with measured expenditure, working backward from the observed quality of the road. The difference between the two is the effect of corruption (pocketing project money that should have gone to purchasing materials and labor.) The experiment is made by introducing community-based monitoring and central government audit at random across the sample of projects, prior to the conduct of the projects.

It shows that - surprise! - officials respond to announcement of audit. This is observed within a corruption-prone society. More "modern" approaches, which relies on community-based monitoring, is found to be less effective, or effective only for controlling corruption with respect to labor purchases (which are observed by the community). Since only one-fourth of the road project is composed of labor, this is not very effective on controlling overall corruption.

Here's what you take home (from the author's conclusion):

By contrast, increasing grass-roots participation in monitoring the project affected only missing labor expenditures, with no impact on materials and, as a consequence, little impact overall. These results suggest that grass-roots monitoring may be more effective for government programs that provide private goods, such as subsidized food, education or medical care, where individual citizens have a personal stake in ensuring that the goods are delivered and that theft is minimized. For public goods where incentives to monitor are much weaker, such as the infrastructure projects studied here, the results suggest that using professional auditors may be much more effective. This does not mean that empowering community members to discipline service providers has no role in an anti-corruption approach. In fact, the results suggests that the audits were most effective when the village head was up for re-election, which suggests that local level accountability may be an important mechanism for disciplining public officials. However, the results suggest that grass-roots monitoring alone may not be sufficient, and that for detecting corruption professional monitors may also important. The results in this paper present the results from a short-run intervention. If auditors are bribable, over time villages may develop repeat relationships with auditors which may make bribing auditors easier than in the one-shot case examined here. This might suggest, for example, that frequent rotation of auditors – or lower probabilities of audits combined with higher punishments – may be optimal.

One good deed leads to Dutch disease

Dutch disease manifests in many forms. Here is the latest incarnation from Zambia (via Mahalanobis).

In short: the debt write-off (under the rubric of the MDG) effectively transfers foreign exchange to Zambia, causing a currency appreciation and hurting exporters.

Earlier I had written about a similar Dutch disease in the Philippines. Now I realize that the latter form is less of a problem than that experienced by Zambia, or other countries afflicted by the "natural resource curse".

The reason is simple: remittances wind up in the hands of private individuals (families back home), who allocate the funds based on market incentives. However in Zambia, the transfers are disposed of by the government; similarly in resouce-driven appreciations, state-owned companies typically get the bulk of the bonanza.

I am very suspicious of government acting as if it were a market entity, when it is actually shielded from market incentives. There is no guarantee that the foreign exchange earnings will be used for the right purpose, whether investing in human development directly (welfare programs and safety nets) or indirectly (investing in profit-making enterprises). So the Zambian government (and other recipients of the MDG debt write-off) better be careful that the long-term gains from their investment more than offset the short-term repercussions of the Dutch Disease.

Inane proposals on migrant labor

Why restrict the overseas Filipino professional? So asks this Inquirer columnist, who talks about a full page ad put out by Fair Trade Alliance. I didn't read the ad myself, but I have a pretty good idea what it would say ... and Mr. Pagalangan relates the gist of it: keep them home.

What the %^&*@#$$?!!!

The skilled Filipino worker gets paid higher wages outside. His or her well-being goes up; as a fellow Filipino this should count for something, no? Even if he or she happens to be living abroad? What is more, he or she remits income back to the Philippines, increasing the well-being of the family. So far so good.

The cost? We back home get deprived of some cheap skilled workers. Well, time to get real folks - other people overseas are willing to pay for our workers. And we pretty well have to learn to match these wages if we want to keep them here.

What about our health care, and all those "critical professions"? Same thing. It's the price system at work. You get what you pay for - whether it's food, drugs, or people. Any suppression of the price system (say, by inane regulations on overseas work), is going to backfire. Probably the regulation won't work as workers, placement agencies, and public officials themselves circumvent its obvious stupidity. Worse still, it may work - and in the medium to long term you will see fewer people investing in quality education and training. (Those prospective high wages abroad have got everything to do with all that studying!)

How about "return service"? I've got a better idea. Why subsidize all that higher education anyway? Do away with tertiary education subsidies entirely. All that money is better spent on providing quality education at the primary and secondary level. Then let the professional - who has invested in their own human capital - make their free choice about where to work.

Disclaimer: I had a brief stint abroad (in Malaysia, 2 years) doing research in an agricultural research center. I probably have a vested interest in this issue. So? The idea is still $%%^&$#!! stupid. And I'm still right.

Fish - one of the most active sectors in agriculture today

Fish is an important source of food and livelihoods in Southeast Asia. Fish provides a large share of animal protein intake, from 40% in the Philippines and Thailand to 57% in Indonesia and Cambodia. Low value fish in particular is a major component of the diets of the poor. Fisheries are also a significant source of livelihoods for communities on coasts, riverbanks, and floodplains, which cover a large bulk of the populations of Southeast Asia.

Recently the fisheries sector has been undergoing unprecedented changes: production in the region has grown rapidly, averaging 4.2% average annual growth from 1980-2003, compared to a 2.7% average annual growth over the same period for all other agricultural products. Fish has spearheaded the globalization of agriculture, following the reduction in import barriers and duties and the harmonization of food safety standards under the World Trade Organization (WTO) Agreements. The share of fish all agricultural exports reached 20% in 2003, compared to only 6% in 1980. The value of fish exports in 2003 (US$ 8.6 billion) is far in excess of exports of fruits and vegetables (US$3.5 billion), cereals (US$ 2.7 billion), coffee, tea, and cocoa (US$ 2.3 billion), and poultry (US$ 1.2 billion). For example, Vietnam is well-known as a coffee and rice exporter: however the export value of these two crops combined was less than US$ 1 billion in 2003, compared to fish exports of US$ 2.4 billion in the same year.

However rising global demand for fish has placed tremendous pressures on aquatic ecosystems and wild stocks. The "live reef food fish trade" is a case in point: consisting mostly of groupers, snappers, and wrasses, this trade involves exports of reef fish mostly to Hong Kong - China to meet a nearly insatiable demand for live fish. Unfortunately extraction of reef fish is both too heavy, and often done in an unsustainable manner (e.g. reliance on cyanide fishing).

What is the future of global fish trade, given rising demand and dwindling stocks? Not so bright - higher prices are in the offing, including for fish consumed heavily by the poor. (And there are ways to project the magnitude of these price increases, and even the impact of these future trends on economic well-being). But while gloomy, the situation is not hopeless. Yet. (I think.)

Unintended consequences

A common prescription to save fish stocks is to "throw it back", pertaining to immature fish that have been caught by fishers. Interesting point I didn't think about: well that strategy may have its drawbacks, according to a Scientific American article cited by Mark Thoma (posting in the Environmental Economics blog). The unintended consequence is that fishing selects in favor of small fish - leading to a gradual evolution of populations with smaller individuals. And these individuals seemed to be duller and weaker than those that end up on our dinner table.

The answer? Not throw back any fish at all! Well in tropical Asian fisheries, the entire "trash fish" industry is built on the idea of landing and selling everything. Unfit for human consumption? There's a great big aquaculture industry (shrimp, grouper, milkfish) waiting to gobble it all up.

Of course this is an ecological no-no, so the article suggests throwing back some big ones too. I can imagine environmentally-conscious fishers doing that. Especially those using hook and line, or longliners.

Kidding aside, I think nothing beats cutting down on fishing effort, period, by whatever means - state command-and-control; individual transferrable quotas; community-based controls; whatever it takes. Otherwise we would be looking to a future of - not just smaller and dumber fish - but none at all.

Singapore - after decades of liberal trade and investment

Okay so I'm stuck here in Singapore on an eight-hour wait for my connecting flight. An airport display informs you of the following factoids:

Did you know that Singapore makes:
1/3 of all hard disks?
1/3 of all hearing aids?
20% of all photoflash lamps?
Oil and gas equipment?

About 26% of GDP is accounted for by manufacturing, of which nearly 40% is in electronics, 26.4% is in chemicals, 17% in mechanical engineering, and 7.6% in biomedical products.

Of course we all know that Singapore is a global transport hub. One-third of the world's oil passes through Singapore; it has the 3rd largest oil refinery hub; it has 50% of the world market for fast ferries. It is the world's number 1 in shipbuilding repair, cornering 20% of the world market. Changi airport exemplifies this excellence: all cargo is cleared within 13 minutes; the airport has been voted best airport by "Business Traveller" for the last 17 years.

Was this achieved because the government closed off the economy to foreign investment and trade? You gotta be kidding. It's one of the freest economies in the world, next to Hong Kong. One of the beauties of the market is how it identifies export winners in such detailed niches that no planner or economic model could possibly foresee. Well okay, a world transport hub, maybe; but friggin' hearing aids? Photo flash lamps?

Okay lots of people are complaining about the repressive political environment. However what is important is total freedom - economic and political. Some countries have lots of political freedom but place plenty of economic restrictions. Time to realize that these restrictions fall within a continuum of repression. So before we say in the Philippines fault Singapore for this and that, tell me, how long does it take for you to register your real property in the Philippines, grease-free, in the Philippines?

Cultural attitudes towards science and pseudo-science

Answer first:

1. Which nationality is more likely to believe that astrology or fortune-telling is scientific? Chinese, South Koreans, Europeans, or Americans?

2. Which nationality is more likely to support public funding for science? Chinese, South Koreans, Europeans, or Americans?

3. Which nationality is more likely to say that science does more good than harm? Chinese, Europeans, or Americans?

Now peak at the answers here. And read the whole thing while you're at it.

Those silly Confucianists. (Crash!)

Game theory satire

Whenever I read an article or book on technical economic theory, I often get the impression that I am in a fantasy world no less imaginative than Middle Earth or Narnia. By a long chain of assumptions, we are assured that this is an "approximation" of the real world.

Often this kind of imagineering (to borrow a phrase from Disneyites) is essential. One wonders though whether sometimes economists have gone overboard with it.

Check out this satirical piece on the toilet seat problem. Are some articles in Econometrica or Journal of Economic Theory no less absurd than this piece of toilet humor (bad pun, sorry!)?

BTW, am headed off for a workshop in Malaysia next week (on the live reef food fish trade) and (you guessed it) I am ducking my blogging duties. Expect light posting over the next couple of weeks. (I'll explain what "live reef food fish" is - that's good for at least one post already!)

Economic growth - forever

Many environmentally-minded people have the impression that fixed natural resources, in principle, makes perpetual economic growth impossible. This seems to make sense from an input-output perspective: growing output requires growing input (true); however some of the required inputs are fixed (true); hence output must stop growing eventually.

However the mistake is this: growing output requires at least one growing input. If the growing input can substitute for the non-growing inputs, then it is mathematically possible for the limiting point (zero natural resources) to be reached at time infinity - with economic growth happening all along the way.

What can be this perpetually growing input? In human history, economic growth has typically been driven by technology. Technology ultimately is based on human intelligence, or information processing.

It seems that the ability to discover new stuff is limitless. That is, it seems that humans will also be able to discover new things that the market values. This is the crucial point: economic growth is not just a matter of piling up new stuff by weight. Then certainly economic growth is limited. Economic growth is a matter of piling up new stuff by market value, based on subjective assessment of individuals, collectively summed up in the market price. This process holds the key to perpetual economic growth.

Scattalaxis has another way of putting it. In addition to the economic sphere and the biosphere is the "noosphere" (was this originated by de Chardin?) The products of the noosphere appear to be limitless, as valued by the noosphere itself.

Now all of these are possibilities are based on theory. On the other hand perhaps humans will run out of innovations, or perhaps inventions are not as substitutable with natural resources as we think. For example, perhaps it is not possible to find a cheap substitute for oil-powered transportation.

In the long run, my money is on the human mind.