Gold Smuggling: A Deepening Trend Not Just in the Philippines

Economic repression leads to the informal economy. That's because people respond to the incentives brought about, not only by environment, but also from social policies.

In the gold mining sector, increased economic restriction has driven the expansion of smuggling activities. Moreover, unseen to the eyes of the mainstream and politicians, interventionism in the gold mining sector inflates the risk of environmental hazards, corruption, violence and political instability as I earlier pointed out here. This is simply called the law of unintended consequences.

Well, the prolific peripatetic analyst Simon Black of the Sovereign Man echoes my observation on smuggling (bold original)

Like most places, unfortunately, the Philippine government is idiotic and continues to pass new laws and taxes in order to get their ‘fair share’ of other people’s sweat, especially related to mining projects.

As the law stands, all gold and silver produced must be sold to the Bangko Sentral, the country’s central bank.  Yet after the government started enforcing a 7% tax on precious metals last year, most small-scale producers are now selling to smugglers instead. 

According to Assistant Central Bank Governor Manuel Torres, who heads the bank’s refinery operations, as much as 95% of all the gold mined in the Philippines is now being sold to smugglers and moved out of the country illegally.

And the trend has been accelerating. In 2011, central bank gold purchases dropped at an annualized rate of 4%, then 76%, then 88% during the second, third, and fourth quarters. In the first quarter of 2012, gold purchases were down 92%. It’s staggering.

And of course, someone’s foolishness could present as opportunity for another.

Most of this smuggled gold finds its way here to Hong Kong, and then onward to China, where there is a voracious demand for gold despite rising prices. 

Of course, it’s perfectly legal to bring gold, tax-free, into Hong Kong.This is why when Hong Kong reports its official trade statistics, ‘gold imports’ from the Philippines are 30 times higher than what the Philippines government reports as ‘gold exports’ to Hong Kong!

It’s an enormous discrepancy, and it gives a huge indication of how much gold smuggling is really going on.

Gold smuggling in the Philippines looks like a symptom of a larger global disorder

In Mongolia, so called ‘ninja miners’ also use crude methods to avoid government tax, mining and smuggling gold across the border to China. Gold smuggling in Sierra Leone became so problematic that the government finally had to capitulate, slashing its mining tax in half for small-scale producers.

It’s certainly an important lesson that governments should heed, further proof that obtrusive attempts to impose heavy taxes only push economic activity into the black market.

While the Philippines gets much of the attention for such glaring and embarrassing policy failures, incidences of gold smuggling seems to be mushrooming around the world: Nepal and Bhutan, Burma, India, Italy, Congo,  Russia, Turkey and elsewhere for the same reasons: economic repression.

Given that monetary inflationism have become the dominant policy in combating the seemingly interminable government sponsored debt crisis, economic restrictions will only intensify the cat-and-mouse dynamic between guerilla capitalism (informal) and governments. 

Guess who will prevail?

Are Taxes and Regulations as Primary Business Obstacles a Myth?

The McKinsey Quarterly writes to supposedly debunk the myth where taxes and regulations poses as key obstacles to small businesses:

Many business leaders will tell you that taxes and regulation are the biggest barriers to starting up and enlarging small businesses. It’s true that some regulations and laws have inhibited the growth of small businesses; the Sarbanes–Oxley Act, for instance, had the unexpected consequence of discouraging some companies from making initial public offerings, a step typically followed by a burst of hiring. But taxes and government oversight are not the primary barriers to stimulating the growth of small businesses. In the latest recession, their owners pointed to a lack of market demand as the primary problem, as well as an inability to obtain financing

In reality, the alleged inadequacy of consumer demand are no less than symptoms of invisible but real underlying causes.

The perception of the lack of consumer demand as the main culprit to business or even economic deficiencies represents a populist Keynesian fallacy.  As the great Friedrich A. von Hayek explained  (Unemployment and Monetary policies, p.40; hat tip Professor Don Boudreaux) [bold mine]

The conquest of opinion by Keynesian economics is due mainly to the fact that its argument conformed to the age-old belief of the businessman that his prosperity depended on consumer demand.  This plausible but erroneous conclusion was derived from his individual experience in business, namely, that general prosperity could be maintained by keeping general demand high.  Economic theory had been rejecting this conclusion for generations, but it was suddenly made respectable by Keynes.  And since the 1930s it has been embraced as obvious good sense by a whole generation of economists brought up on the teaching of his school.  Thus for a quarter of a century we have systematically employed all available methods of increasing money expenditure, which in the short run creates additional employment but at the same time leads to a misdirection of labor that must ultimately result in extensive unemployment

The policies of inflationism, aimed at increasing “money expenditures”, that has prompted for the large scale or clusters of “misdirection of labor” and resources that “must ultimately result” in capital consumption which gets to be manifested as “extensive unemployment” and consequently, the dearth of consumer demand.

In short, boom bust cycles fosters what mainstream sees as lack of demand.

Additionally, regulations that prevent markets from “clearing” or allowing markets to coordinate resources and labor towards consumer preferences also poses as unseen but real hindrance to additional consumer demand.

High taxes divert resources from production to consumption, thereby decreasing capital investments that suppresses income and eventual demand.

 

Bailouts and subsidies too or the transference of resources from productive to politically preferred unproductive areas (e.g. Obama’s green energy projects) also results to wasted resources, high costs to taxpayers, crowding out, diminished capital investments and subsequently a paucity of demand

Lastly, arbitrary regulations have been the major obstacles to business creation or expansion.

Some real life examples: In Georgia, policemen shut down a child’s lemonade stand (due to lack of permit) and in Chattanooga City Tennessee, a pedicab project has been shelved simply because state officials didn’t like it. 

Of course, there are many more instances of economic repression from political agents. Deprivation of livelihood from political interference, signifies as a source of the lack of demand. No income, No spending.

Bottom line: The world does not operate on a vacuum. People just don’t act because they wake on one side of the bed and feel either confident or anxious. People’s actions are driven by incentives (and not by moods or by animal spirits). 

Lastly, effects must not mistaken as the cause.