Politics, economics, rice

The paradox of advantage

The production, consumption, and importation of food (rice or grains) have posed contentious as well as analytically difficult issues even when economics was still in its infancy. In the early 1800s, David Ricardo came up with the idea of comparative advantage to explain why countries trade. On its face, it presented a paradox because comparative advantage suggested that a poor country (one endowed with limited technology) should export a good such as rice even if it didn’t have an absolute advantage in its production (it just needed to have a comparative advantage). Ricardo was also not one to advocate self-sufficiency as he was pretty much a proponent of free international trade. Today’s debate on the merits of rice tariffication presents conundrums and even unanswered questions, though the latter have perhaps more to do with politics than economics.

Bread and circuses

But even earlier, when economics was not yet a social science, kings and despots already knew that to survive insurrections, they made sure that the price of bread or grain (or any food staple) was affordable to the masses. The Roman poet (Juvenal) considered on or around 100 AD that political stability required whoever was in power to provide bread, as well as circuses! Forget the Romans. The Bible has its share of stories where kings had the burden of protecting their subjects from suffering in times of famine. Closer to home here in the Philippines, when the price of rice spiked in 2018 and became part of an inflation scare, there was a fair amount of wrangling on what to do.

Tariffs in international economics

The conventional wisdom today in economics, particularly in the textbooks on international economics, hasn’t changed much in the last two hundred years. Free trade, because it is voluntary and anchored on the concept of comparative advantage, was (and still is) a good thing. And yet, here we are in today’s age of wondrous innovations dubbed as the “fourth” industrial revolution, fulminating at the specter of rice prices remaining high for the consumer but falling to penury-inducing levels for rice farmers. What has gone wrong?

Lawmakers as villains

The twitter-verse has focused on a conspiracy theory based on an impending demise of domestic rice production. The story is that we have a heartless and gutless set of legislators who pushed what is known as Rice Tariffication, which has by now had the effect of making rice farming unprofitable (requiring all kinds of governmental intervention to support the poor rice farmers), thus also forcing the price of rice land to the levels of a song for real estate developers who know how to convert such idle lands into houses and lots. This state of events runs afoul of the Emersonian and romantic view of the idyll of (rice) farming in the hinterlands (so, planting is not a joke but it is both honorable and upright, especially if food self-sufficiency is a nationalistic priority). It is of course easy to blame the “rich capitalists” who dominate the real estate industry for the plight of the poor farmers.

The lessons of history

There is nonetheless more to the story. The historical record traces the timeline of rice farming as a battle towards high productivity and self-sufficiency that didn’t get anywhere. One study states that the Philippines imported rice from 1885. Although we had a brief heyday of self-sufficiency in the late 1960s and 1970s, the Philippines has since become the world’s second largest rice importer (next to China). The official line has been that we aimed for the three goals of self-sufficiency, high incomes for rice farmers, and affordable prices for consumers. What has been unsaid is that these goals are basically incompatible. Without a gigantic leap in domestic productivity, only the last of these goals could be attained, and only if the rice-exporting countries (such as Vietnam and Thailand) were to sell rice on the cheap.

And more. We had a commitment to the international community to abide by free trade rules (apparently, the nameless bureaucrats at the World Trade Organization believed that what was good for the world was good for us), but like a stubborn-headed child we dug in and said, no, we want to “protect” our domestic rice farmers. We opted also to engage in this protectionism by applying quantitative restrictions on rice imports (also known as quotas). The persistent WTO gave us this leeway while suggesting that an equivalent restriction through tariffs might be a better idea. So, with the apparent fiasco today, should we blame the WTO?

The Catch-22

Back to the drawing board of international economics. If outright free trade is best, what could be the second-best? Is it quotas? Or tariffs? Here, our economic managers have been caught in a Catch-22 bind. A Catch-22 is a unique situation. Applied to the tariff-quota controversy, it goes roughly as follows. Both tariffs and quotas can result in the same domestic price – higher than the world price; and the same level of domestic production (but higher than if we had free trade) and imports (at the same level as if we had simply applied quotas). But there are differences. A tariff generates government revenues, which can be collected and then misused. A quota results in “windfall” profits for those given import licenses, and is said to be a major source of corruption. In short, either way, tariffs or quotas, we face the same inevitable temptations for the abuse of public office for private gain.

But there’s a mystery that accompanies the Catch-22. Theoretically, the situation of the rice farmer is the same under either tariffs or quotas – he produces at a level higher than under free trade, and benefits from a domestic price that exceeds the world price (by the size of the tariff, which today is set at 35%). What has happened, and this has been documented by both the proponents and opponents of Rice Tariffication is that rice farmers earn less under tariffs. The unanswered questions are: Why? Is the 35% tariff too low to make its effect equivalent to that of the quota system? Is it because there is a local cartel that can dictate a lower farm-gate price under tariffs than under the old quota system? If there is such a cartel, is it engaged in a form of retaliation because they lost some lucrative opportunities under the quota system? Can such a cartel continue to operate? What if there were a political will to dismantle such a cartel?

No way out?

What seems not in dispute is that Rice Tariffication was aimed at achieving “parity” between farmers’ incomes under the quota system and under the tariff. We can perhaps argue that good intentions are not good enough. The hard question is what should be done?

My personal view is that tariffication (or quotas) was never the answer. (Neither was self-sufficiency.) It is, after all, a second-best form of protectionism that allows inefficient domestic producers to continue as they have done for almost fifty years, or even longer. We should now consider whether “creative destruction” (an idea from the economist Joseph Schumpeter) should be allowed. Let the rice farmers find other higher-value crops. Let the government support them in any way it can, especially in the provision of public goods in the form of extension services, better farm-to-market infrastructure, and a “clean” bureaucracy. But why create a P15 billion kitty (from the rice tariff) that would tempt politicians the way that pork makes them giddy with cholesterol?

As to the doomsday story that rice lands will end up becoming subdivisions, that is one for those thinking about land use policies and legislation. That is altogether another story.

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POVERTY BLUES

It isn’t just the price of rice that keeps the poor poor. It’s the oli-cartels, the land use rules, the dysfunctional educational system, even the labor law. There is much to do, and mega-infra is just a small part (but perhaps lucrative).

Philippines vs China

WHY WE WON

It seems that we can boil down the legal conclusion of the arbitral ruling as based on only two key questions.

One, what is an island? A rock is not an island. So there. Even if China builds up a rock, it still cannot become an island. It may be a feeler island, but still that’s not an island in the legal contemplation of international law. UNCLOS says that artificial islands are not properly islands. (Otherwise, any oil rig can claim to be an island!)

And there’s the economics of islands. Under UNCLOS (Art. 121(3)), only natural formations that can sustain economic life on its own, can have maritime zones, such as an Exclusive Economic Zone (EEZ).

Two, what is an archipelagic state? It is one composed of many islands. PH is archipelagic. China is not. It appears that China conceded its status as a coastal (non-archipelagic) state when it signed the UNCLOS because the UNCLOS classifies countries in only two ways — archipelagic or coastal. The Tribunal ruling, in para. 573, categorically restates that China is a coastal state.

The answers to these two questions determine the EEZ, which is 200 miles from the coastline of a non-archipelagic state; and 200 miles from the archipelagic baseline of an archipelagic state. The baseline is a point-to-point boundary that encompasses or includes the islands of an archipelagic state.

An outlying island in the South China Sea, even if it could be claimed as territory of China, cannot result in an expanded EEZ based on archipelagic baselines because China is not an archipelagic state. (Consider the following related question: Can the US consider the waters between Hawaii and Los Angeles as “internal waters” using the archipelagic baseline approach? The answer is in the negative because, like China, the US is not an archipelago.)

The EEZ of an outlying island is 200 miles around that island because such an island is treated like any other land territory (Art. 121(2)). The EEZ cannot extend beyond the 200 miles (beyond this, there would be continental shelf (something else) or open international waters (high seas)). And an EEZ could be delimited if competing EEZ’s from other nearby states exist.

The ruling states that the disputed territories are not at all islands, and therefore cannot provide China an EEZ. Practically all the major disputed territories are inside the EEZ of the Philippines because it is an archipelagic state. Therefore, even ‘rocks’ can be useful to the Philippines, if they are located within the EEZ based on the archipelagic baselines of the Philippines. These useful rocks include Scarborough Shoal, Second Thomas Shoal, Johnson Reef, McKennan Reef, Hughes Reef, and Mischief Reef. Some of the disputed rocks are outsize the EEZ of the Philippines.

An important caveat is that territory and sovereignty are matters of international law not subject to the UNCLOS. Nonetheless, disputes relating to the EEZ are pointedly the subject of the UNCLOS.

WHY IT MATTERS

EEZ means maritime zones (not necessarily territory in the usual ‘conquest’ or ‘historic’ sense) that we can, under international law and UNCLOS, consider as usable only by us. We can, by negotiation, lease or allow others to use the EEZ, but the extent to which the Philippine Executive can do this is governed by the 1987 Constitution.

NB: The map of PH EEZ is from Wikipedia.

PH EEZ Screen Shot 2016-07-14 at 2.07.29 PM

 

Rappler and oblivion

I’ve tried to make sense of its business plan. Now and then they produce good work. The problem is in the in-between.

Click-bait for ads won’t work. Advertisers can monitor effectiveness.

Leading thoughts and brilliant conversation won’t either. They just leave you dangling, if you ask Simon and G.

Wannabe journalism cum political correctness is too a dead end. That would be too much on feelership. And also trying hard to mimic Huffington.

Can Rappler be a kinda FB for the in crowd? Not if it has to hang on FB to skate. The in-crowds can exist within FB as it is.

Could it be a pay-for-play version of Linked-In? For the PH market? Who will pay? Too thin.

Maybe some b-school type a la McKinsey is giving its investors advice. Only they’re not talking. If you had an undiscovered gold mine, would you?

I don’t know and know that I don’t. Maybe if they know, then they’d know. And I wouldn’t have to ask.

If only it could go to IPO, at least the early birds could do a ponzi dance. Good luck.

The shrinks might say cycling between bargaining and acceptance can take forever. But sooner not later the potato chips run out.

It is a puzzle.

Flood coming? Let’s dig ponds and make lakes

Here’s an apparently serious proposal to solve the perennial flooding problem of Metro Manila.

For what it’s worth, I think the solution – to dig ponds and lakes – is plain silly and possibly even useless. It sounds good if you think of planning a beautiful community with artificial lakes, etc.  It also reminds me of that grade school catechism story about St. Augustine at the beach which was partly about digging holes in the sand.  Nonetheless, the solution won’t work.

Continue reading “Flood coming? Let’s dig ponds and make lakes”

Reversible error

The law school dogma is that the Supreme Court cannot commit reversible error.

Wrong, according to Rene Saguisag.  The people can reverse.  Here’s an excerpt:

I share the view that we cannot add to constitutional qualifications. Hence, my reservation on bank waivers. Total obliteration of any zone of privacy, the right to be let and left alone, is the aim? Only the rascals who park their money in their children’s names, for instance, may go to, and remain in public life. The JBC can set policy and may ask for the transparency vow. We, the people, have the right to know.

Sandbagged Rene is to get the credit for the new transparency? We might as well thank Osama Bin Laden for our anti-terrorism law and safeguards.

Happy Independence Day!