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.

Steak Intelligence

Orlando Roncesvalles

In a celebrated movie (When Harry Met Sally), we are treated to a reverential dig at the leisure habits of the first world. Restaurants in the ‘80s were, according to Nora Ephron’s writer-philosopher character, what the theater was in the ‘60s. That, after all the angst suffered by English departments in the ’60’s, was an inevitable consequence of the oft-repeated idea that the theater had died. If you believe pop music, even that (music) died when Buddy Holly took that damned plane. Why is life so tough? We don’t really know, but from today’s gadget-driven internet of things, we realize that whining is part of the human condition, amplified by social media but dulled by the haptic syndrome of touch screens, or even (by now anyway) accepted, without a nasty retort by the likes of Siri and Alexa. Machines can substitute for psychotherapists if you know how to tweak settings.

Tough is however that thing we do not accept in certain things. The night has to be tender. Terms of endearment also must be. Criticism directed at our significant others must be delivered sotto voce. And, of course, steak must with a capital T be Tender. Thus, Anthony Bourdain expressed his disdain for the despicable heathens who order their steak well done. Chefs welcome such arrogant ignorance because they can get rid of mis-delivered meat without offending a free-spending type (usually on a business account, if not using plundered funds as though that never went out of style).

What does it take to get steak tender? According to Guenther Sanin of Casablanca Boulevard fame, it must be aged and just so. Our tourism honchos don’t understand this. They ought to be bringing in technology so we would do our aging locally, but they seem fixated on media contracts and duty-free shopping. That’s what we get when we have the best and brightest officials. Tough steak. But who cares? Our lucky officials travel to exotic places, outside the country, to get their beef. Lucky them. But I exaggerate.

A steak ought to sing for itself without a backup band of exotic sauces. A-1 will hate me for saying this, but they sell something to hide the fact that we couldn’t afford the best cut, and have to do with a little ‘taste enhancement.’ A-1 is good at what it does, so give it credit. Still, I remember that a good steak-frite combo could be had in the ‘80s in a now-gone place called Le Steak in Georgetown (that place by the Potomac River), and it came de rigeur with Béarnaise. So I asked Guenther why Béarnaise sauce appears almost incognito hereabouts. The answer was that it was too special a sauce to make, and it would eat up too much expertise and good butter to be just right, though you can try some from a cheap substitute fix served up by Amazon. Basically, for authentic Béarnaise, you need expert whisking.

How often can one indulge in a steak? The answer is ‘not too often,’ because, as the cardio experts say, it can clog up those arteries. There are remedies. I had a German mission chief who lined up his statins soon after he ordered the best steak in the best restaurant in Tripoli, Libya. Then there’s also red wine. Why white wine pales is a mystery I have not explored; I look for a good Cabernet and keep my counsel. But if any white wine guys can point me to a cholesterol-cutting moscato, I’d gladly take their tips under advisement.

The end matters too. What dessert goes with steak? Le Steak had something called La Surprise de Monique (an ice cream confection with candied chestnuts in the unseen bottom, hence the surprise). In another dining room in Washington, DC, it was called Coupe aux Marrons. It may still be there; just go to 700 19th St., NW. If all else fails, there’s creme brûlée (leche flan). Deciding the best creme brûlée in Dumaguete is still on my bucket list.

SATOSHI 2.0, or how to create a better Bitcoin

Will Bitcoin survive? In what form? These are the two most pressing questions on the most popular ‘virtual’ currency, or crypto currency, today.

Bitcoin emerged along with a computing technology called block chain. Once understood, block chain promises to permit security arrangements for payment and even barter systems that are vastly superior to existing ‘centralized’ systems.

For the use of a virtual currency, the block chain has already proved itself as a solution to the counterfeiting problem while also giving transactors a relative degree of privacy. With the internet, the portability of a cryptocurrency clearly surpasses that of gold. Because of advances in computing technology, the transaction costs of a virtual currency are likely to be smaller than for existing payment systems, including the use of cash. Economists and thoughtful policy makers, including some heads of central banks, consider that virtual currencies have a useful role to play.

But the existing Bitcoin has a fundamental flaw. Its market price is too volatile for anything that aims to be a substitute for fiat money.

The problem can be traced to Bitcoin’s fixed supply (21 million coins) coupled with its lack of a ‘commodity anchor.’ The first means that the market price will be volatile, subject to shifts in demand. The latter – the lack of an anchor – underlies and exacerbates the price volatility problem.

The extreme upside is supposedly when bitcoin could supplant gold, and one calculation suggests that it would do so at $500,000 per coin. This scenario has driven wide-eyed fanaticism and speculators into the Bitcoin ecosystem.

The extreme downside, on the other hand, is that bitcoin holders could for some reason ditch the cryptocurrency and make it worthless.

In between, there could be ‘pump and dump’ scenarios, characteristic of a legal-but-Ponzi-like speculative asset that would occasionally have its Minsky Moments.

A better approach may be to think of a cryptocurrency as a ‘digital’ banknote that at least maintains its real purchasing power. To some extent, the banknotes of central banks with low inflation targets already provide the best protection there is to those who hold their monies. Can there be a better, kinder, saner version of Bitcoin?

Perhaps, if the pricing problem could be solved.

The way out seems to be as follows.

A new virtual currency, to be called, say, the bitdollar, is initially priced at par with the existing dollar. Its initial supply is then set as elastic as can be — the first ‘investors’ in the bitdollar will decide, through the amounts they commit to buy, the initial stock of bitdollars.

From there, bitdollars would go on ‘secondary’ trading just like the current Bitcoin.

If the price of a bitdollar falls below par, the initial investors would realize that they were too optimistic. Nothing else happens, and the crypto currency may fall into disuse.

But the initial stock of bitdollars is fixed, and sooner or later its price would recover if it attains usefulness as an alternative to currencies. It may then be seen as an alternative to banknotes but with a supply that an issuing central bank cannot control or alter.

When the price gets to exceed, say, 20% of the fiat dollar, by prior agreement among bitdollar holders, they would expand the supply by 10%. This should be enough to keep the price from shooting up, and also enough to keep it above ‘par.’ If the price continues to remain above 20% over parity, a sliding scale of new ‘issuance,’ say, 5% of the initial stock is calendared.

If the initial issuance is judged too small relative to (growing) demand, new secondary offerings would be issued at prices close to then market prices.

Over time, the price is likely to fluctuate in a range above par, but perhaps close to 10-15% over par. The stock of bitdollars would naturally rise to meet demand but at a price that is essentially anchored to that of the fiat dollar.

This scheme depends on the soundness of the anchor currency. If the central bank prints too much money, the bitdollar holders can or would decide to slow down issuance with a view to stabilizing the purchasing power of bitdollars. In effect, the fiat and virtual currencies will compete as different but similar moneys.

An important question: What happens to the money paid in by initial investors? I suggest that this be sequestered into essentially risk-free long-term government securities held by an agreed custodian bank. It will be set up as a trust fund to cover the possibility that the bitdollar would be unwound. The same rule can be applied to any new secondary public offerings of the cryptocurrency. This approach sets up the crypto currency as akin to commodity money, with the anchor currency as the underlying ‘commodity.’ (It is also akin to a share of stock in the trust fund holding the backing for the virtual currency.)

How would the block chain system be maintained if there is no ‘mining’ as in the current Bitcoin scheme? The obvious answer is that the computing services needed for validating the block chain will be bidded or contracted out in such a way that their cost can be recovered through fees paid by cryptocurrency holders.

Who will profit from the new scheme? As with the current Bitcoin, competing platforms for validating transactions (‘mining’), trading, and transferring of bitdollars will emerge, and would earn fees for transaction processing. Merchants who accept bitdollars would profit from paying a lower transaction fee than that paid to credit card companies. The trustee holding the backing for the bitdollar earns seigniorage in the same way that issuers of travelers checks do, and some of that seigniorage could be distributed to bitdollar holders.

Although in theory the block chain and efficiencies in computing would minimize the cost of operating the system, any crypto currency remains vulnerable to untoward events that generate mistrust in its operation. Trust in the cryptocurrency will have to be earned, requiring the participants to abide by legislation and guidance from monetary authorities. This is particularly important in combatting money laundering and use of virtual currencies by organized crime or terrorists. New platform providers who might try to cartelize transaction fees could also undermine the demand for virtual currencies.

CONCLUSION. Like Humpty Dumpty, Bitcoin is good but with its fixed supply, it is likely to take holders and speculators on a frenzied ride headed for a great fall. Caveat emptor.

Will Bitcoin crash and resurrect?

NOT BITCOIN but better.

One use of Bitcoin is for anonymous transactions, i.e., as a substitute for ordinary cash or bank notes.

The problem is that the currently available bitcoins fluctuate in value. The ideal is a bitcoin that is stable for at least a certain determinate or even indefinite time against a major currency, such as the US dollar. In short, we want or need an alternative bitcoin that is like a dollar banknote. We imagine this alternative works better than keeping banknotes under the mattress or in a safe deposit box, because it avoids thievery and the transaction costs of going to the safe deposit box.

It can be done. The easiest is for the US Fed to do it. It would allow anyone to buy something we might call the official bitcoin dollar in exchange for a guarantee that bitcoin dollars are exchangeable into US banknotes. If this works, it will be because it would reduce the costs now paid by the central bank for printing currency and going after counterfeits. In this scenario, the blockchain ensures that counterfeit official bitcoins cannot exist.

Another way is for a major private bank to ‘create’ its bitcoin dollar. Imagine that Chase does it, and calls it the Chase bitcoin dollar. All it is is a special debit card account where Chase guarantees to make the Chase bitcoin dollar exchangeable for cash. The guarantee is in effect a promise that Chase will honor Chase bitcoin dollar liabilities ahead of its any other liabilities. To ensure such a guarantee, Chase would enter into a ‘currency board’ arrangement with the US Fed by maintaining Fed fund balances in a separate special account solely for the purpose of redeeming Chase bitcoin dollars. In short, the fractional nature of the private banking system will not apply to bitcoin dollars.

The blockchain also allows Chase to ensure that no other entity can create Chase bitcoin dollars. The ‘supply’ of Chase bitcoin dollars will always be the same as the demand for such dollars.

Any other private bank would be allowed to participate in a ‘branded’ bitcoin currency. I can imagine HSBC issuing special debit cards for HSBC bitcoin dollars, HSBC bitcoin euros, or HSBC bitcoin yen. They may be allowed to compete through enhancements on convenience of use, allowing for fee-free global transfers, or even the payment of interest.

One important enhancement would be US consumer protections against fraud now being given to users of credit cards. Any merchant declining to honor a bitcoin debit card would be presumed to be up to no good.

The similarity with bank notes will have to be carried to an extreme that meets certain anonymity and privacy standards. The issuer of a bitcoin dollar will have to honor the bearer of the account provided that said bearer satisfies identity requirements.

At the same time, the use of such accounts will have to be protected by bank secrecy rules, but subject to money-laundering limits. For example, bitcoin dollar transactions in a particular account cannot exceed $10,000 per day, and a bank cannot allow a depositor more than one bitcoin dollar account. A maximum-balance limit of, say, $100,000 per account, could be imposed, in parallel with limits now applied under existing deposit insurance schemes.
Central banks could also impose limits on how many bitcoin dollar accounts an individual can have. To protect banks from money-laundering, bitcoin dollar accounts would not be available to corporations.

Will the advent of such official or private bitcoin dollars kill the existing bitcoins? It could, especially if bitcoins continue to be more attractive as speculation vehicles than as means of payment.

But bitcoin exchanges could create ‘hybrid’ bitcoins whose ‘mining’ or supply-side arrangements are fully transparent, and whose value could be stabilized in some fashion desired by the bitcoin holder. In short, there could be different bitcoins for different purposes. Caveat emptor and ‘know your customer’ rules would still be needed. However, such bitcoins would remain without guarantees similar to deposit insurance, and they may still be vehicles for speculation.

My best guess: Bitcoins will evolve, i.e., the fittest will survive. The Dutch tulip variety will become extinct. As of now, they’re pretty much as primitive as Dutch tulips.

Cell phone emergency and how to deter theft

The following instructions – from a post on FB – seem applicable to cell phones bought and in use in the USA.  But some of the instructions (on IMEI and reserve battery power) likely work globally.  The instructions on how to report theft raise a suggestion on how to deter theft worldwide.

4 Things you might not have known about your Cell Phone

(This should be printed and kept in your car, purse, and wallet.)

There are a few things that can be done in times of grave emergencies. Your mobile phone can actually be a life saver or an emergency tool for survival.

FIRST (Emergency)

Continue reading “Cell phone emergency and how to deter theft”

FREE LOAD for real – a challege for Pinoy techies

FREE as in yes!
FREE as in yes!

It is almost election time, and candidates will promise anything, including free load.  Should you fall for it? Nah, you can do it yourself.  All it takes is a little social network, and some great work by Pinoy techies.

Why give some politician “credit” when you can do it yourself?  This makes me wonder about all sorts of proposals to tax text messages.  It is almost as though the politician making the proposal is pulling our collective legs.  How can you tax something like knowledge or a Google search, whose price is effectively free, without being accused of oppression?  Libre na nga, papatongan mo pa ng buwis? Besides, somebody has to pay the tax, and ultimately the consumer pays.

Continue reading “FREE LOAD for real – a challege for Pinoy techies”