The Hindu Business Line : Believing in markets during difficult times

The rise of global food prices has sent many governments scrambling to react to the situation and re-visit many of their past policies. The reactions of most governments have ranged from protecting domestic consumers to domestic producers.

Free trade benefits have been sacrificed by moves that make good headlines in the short run but also send wrong signals and reveal many of the inconsistencies in the policies of many governments.

For instance, even while the profits of grain companies are soaring and farmers are seeing good times, the US Congress (i.e., parliament) recently passed a farm Bill that not only continues subsidies that do not make sense but also links the rates to today’s high prices, which means that the farmers would continue to receive lavish subsidies for many years to come.

The farm Bill has enough supporters with an eye to their constituencies to override even a presidential veto. Such subsidies in the US, the EU and Japan have been a sticking point in the progress of the Doha round of WTO negotiations, and so don’t expect much progress on that front.

With food prices having gone up the way they have, it has put many governments in developing countries, with large populations at subsistence levels, in a tough spot. How do you manage the rich-poor divide, the urban-rural divide, the consumer-producer divide, and so on? Policies to protect or help one side are going to be at the cost of the other. And when decisions have to be taken with political consideration in mind, as with the US farm Bill, there is plenty of room for bad economics.

The Indian government, which only recently came to the rescue of the indebted farmers by (wrongly) deciding to write off several thousand crores of loans, has now thrown the poor farmers’ concerns to the wind by banning exports.

You can keep prices low to help the consumers, but thereby deny the suffering farmer the chance of earning more money from his hard work. The artificially depressed prices may also send a signal to the farmer to restrict planting, thereby perpetuating the problem of insufficient supply for the future!

Markets are all about signals. Prices send a signal to the consumer and the producer and governments need to be careful while intervening in the market’s functioning about how they are tampering with those signals.

Philippines, Thailand case studies

The reactions of the Philippines and Thailand to the current food situation also make for interesting case studies of the effects of selective interventions. The Philippines is the world’s biggest importer of rice. The government has a 50 per cent tariff on imports, in order to protect local farmers and give an incentive to raise local production. When domestic production falls short of demand, the gap has to be met by imports.

The government does it through its own agency, the National Food Authority, and absorbs the tariff. The NFA, in typical bureaucratic fashion, announces tenders for the quantity it wants to import, which sends a signal to global suppliers about how much the government wants to buy, further influencing the prices at which they offer.

Instead, as many in the country are suggesting, the import trade needs to be privatised, liberalised, and the tariff needs to be eliminated.

Private firms would then import through the year, as and when necessary to bridge the local gap between demand and supply. The poor surely need to be protected but this need not be at the cost of reducing the efficiency of the market. Since the government has introduced a ‘family access card,’ a ration card to ensure that only the poor get subsidised rice, it can help the poor, ensure the market functions, and reduce the losses of its NFA.

Thailand, at the other end, is the world’s largest rice exporter. The government sees the current high rice prices as an opportunity for its farmers to benefit and plans no restrictions on exports. Contrast this with India and Vietnam, other rice exporters, which have decided to sacrifice the interests of the farmers by restricting exports.

Even while most countries of the world have moved away from a reliance on government planning and control to a reliance on market, it requires a leap of faith to leave things for the market to sort out when faced with emergencies. While intervening in the markets, governments need to institute policies that would take advantage of market processes to achieve their objectives. This requires a reliance on ‘fiscal’ rather than ‘physical’ controls, even when they undertake interventions during short term emergencies. Taxes and subsidies do not distort the market as much as bans and quantity restrictions do.

Venezuela in a hurry

Hugo Chavez, President of Venezuela, is seeking to correct the injustices of the past in a hurry. The policies of former right wing governments had only helped to worsen the income distribution in the country, without alleviating poverty. But he now seems to have no time for (or understanding of) markets. As a major crude oil exporter in an era of high prices, Venezuela is raising sufficient resources for its populist policies. But it needs to do that without destroying the golden goose. Chavez, looking at the profits that oil companies are making, decided to get a bigger slice by raising taxes and royalties. Most governments do this when their valuable resources are in private hands, and the ideal would be to find the right rates at which oil companies continue to make enough money that would keep them developing fields and investing in the projects.

But his orientation is not one of exploiting the market but an ideological commitment to tired ideas of state control of the economy through ownership. Again, physical versus fiscal. Recent data shows that oil production has fallen since major oil-field operators were nationalized. Moving on from squeezing the oil companies, he is now on a plan to nationalise cement producers in the belief that he needs to own cement production in order to progress on housing and other infrastructure projects. The economic pitfalls are many along the path to good intentions.

And Bolivia too

Chavez is not alone in his ideas about government interventions in the market to set right perceived faults. His neighbour, Bolivia’s President Evo Morales, is on a similar path. Hailing from the indigenous Aymara community, he is also on a mission to right past wrongs, and in the process, redistribute some of the skewed wealth in the country.

And with the intoxicating power of the government, he is also on a path of nationalising telecommunication and energy companies. He does not believe that energy, water, communications and such can be in private hands. But the result is that Bolivian natural gas production, one of the major resources in the country, has started to fall, with the companies curtailing investment in reaction to the nationalisation threats.

When there are competing and very vocal interest groups in a democratic society, it takes even more courage for a government to not rush into precipitate action, but structure policies that provide safety nets for the weak while the market takes care of the rest.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

More Stories on : Agriculture | Economy | American Periscope

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Freeing up nutrient supply

Believing in markets during difficult times

World Bank’s 10-point plan for the food crisis

Blind man’s buff with inflation

Build a dream, not a nightmare

Dreaming spires

IT is changing the face of India’s logistics sector

Inflation

Pilot fatigue