The Real Nature of MWSS Privatization Program: Crony Capitalism

Like in the contemporary movies, in the world of politics, life is shown as either existing in black or white, or a choice between good or evil or taking sides between oppressor and the oppressed.

Media’s populist moralism can be seen in today’s headlines where supposed iniquities has been committed by private sector concessionaires, whom had been alluded to as 'greedy' since these firms profit from society by passing their costs to the consumers.

From the inquirer.net

A long list of expenses, including those for foreign trips, entertainment and recreation as well those for advertising, gifts, flowers and other tokens for all occasions, had been passed on to customers of the two water concessionaires in Metro Manila and nearby areas, according to a consumer advocacy group.

The Water for the People Network (WPN) said these expenses were on top of the P15.3 billion in income taxes that Maynilad Water Services Inc. and Manila Water Co. had passed on to consumers from 2008 to 2012.

WPN said the two concessionaires “have effectively turned water service into a profitable business while consumers shoulder the burden of onerous charges and taxes.”

Sonny Africa, executive director of Ibon Foundation, one of WPN’s convenors, called on regulators to disallow the recovery from consumers of such expenses and to thumb down proposals for rate increases.

“We are sure these same items are included in the business proposals of Maynilad and Manila Water for the next rate rebasing (cycle),” Africa said.

Maynilad wants a P5.83 per cubic meter increase in its basic charge while Manila Water plans to raise its rates to P8.58/cu. m. from 2013 to 2017. The concessionaires are allowed to seek an increase every five years.

Maynilad currently charges P48/cu. m. and Manila Water, P38/cu. m.

The Metropolitan Waterworks and Sewerage System (MWSS) allowed the recovery of income tax through tariffs in a resolution issued in 2004.

And so it seems.

Lost within the controversial article is the foundational relationship between the principal, Metropolitan Waterworks and Sewerage System (MWSS) and two water concessionaires

In another article, the Office of the Government Corporate Counsel (OGCC) recently clarified that these concessionaires are “agents of a public utility” and not public utilities. 

The fact is that the MWSS is a creation of the Philippine Congress via REPUBLIC ACT No. 6234 in 1971 and is regulated by the 5-man Board of Trustees, three of whom including the Chairman are appointed by the Office of the President but with the consent of the Commission of Appointments.

The government agency’s General Manager is also appointed by “the President of the Philippines with the consent of the Commission on Appointments”. Assistant managers are also appointed by the board, “with the approval of the President”.

In 1997, MWSS had been transformed into an agency empowered to privatize the provision of water services via RA 8041 via the Water Crisis Act.

The price setting function by MWSS have been determined by the Board of MWSS, where a sitting majority comprises appointees of the President

According to Wikipedia.org

Water tariffs in Manila are adjusted on the basis of four mechanisms:

First, tariffs are adjusted automatically on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Initially this mechanism was applied with a lag, but after a contract amendment it is now applied every three months.

Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index).

Third, tariffs are adjusted every five years to guarantee a certain rate of return to the private concession holder (rate rebasing). The company's performance vis a vis regulatory targets is also considered in determining the tariff.

Fourth, extraordinary price adjustments can also be granted, but only in spefific circumstances such as a change in law or force majeure.

Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.

In short, the pricing mechanism by the highly politicized water industry has not been set by the markets but according to the interests of the political leaders.

Nonetheless, legalistically the regulator and the people running MWSS have all been protégés of the President. 

Thus, it seems a logical corollary that these private contractors would have to be in good or cordial standings with today’s political leaders or else…lose their political-economic privileges 

This is a neat example of the functional relationship of public partnership partnership (PPP).

As I previously wrote,

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

And considering the politicized nature of these public utility sub-agencies, aside from regulatory limitations on profit, as I pointed out in the case of Meralco (bold original)

In a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.

So whatever alleged padding of expenses as enumerated by the article appears as natural offshoots to the politicized nature of operations between, on the one hand, the MWSS and the Office of the President, and on the other, the privileged private sector contractors.

What has been seen as privatization program has in reality been a form of rent seeking crony capitalism. This can also be described as the localized version of privatization of profits and socialization of losses.

Contra media, such imbalances has hardly been about good or evil but about the (anti-competition-protectionist) political-legal-institutional framework from which the domestic political economic environment operates on.

Changing concessionaires or increasing regulations on them will hardly alter the essence of their relationship.

Of course the alternative or the populist innuendo has been to ‘socialize’ water services.

But there is no such thing as free lunch as subsidized water or subsidized anything else would have to be financed by higher taxes and inflation (loss of purchasing power). 

Moreover, subsidies lead to waste, misallocations, and eventual shortages. Indonesia’s recent riots, for instance, has been due to the lifting of unsustainable subsidies on oil which has brought about huge unwieldy fiscal deficits.

In my view, the answer to cheaper water is to de-politicize the industry by encouraging competition by abolishing legal obstacles, and by promoting decentralized and spontaneously driven self-organized governance system (Common Pool Resources)

Obviously mainstream would have none of them.

Video: Should the Government Subsidize...Silly Walks?

At the Learn Liberty, Professor Art Carden talks about the essence of government subsidies

US-China Pork 'Imbalance'

Here is another interesting development in the international "Pork" market.

There seems to be an ongoing divergence in China and the US.

In China, pork prices seem to be collapsing.

This from the Wall Street Journal, (bold highlights mine)

``Pork prices have fallen 14 weeks in a row according to China’s Ministry of Agriculture, their lowest level in four years, and cheaper even than some vegetables. In the first week of April, the average hog price was 9.43 yuan ($1.38) a kilogram.

``The porcine price plummet has forced the government to add to its much vaunted frozen pork reserve, a series of icy warehouses around the country it set up a few years ago to stabilize pork prices.

``One Chinese press report, citing government statistics, says live pig prices have dropped 21% this year. Another report says pork prices have fallen below the lowly lentil.

``The hope is that by adding to the frozen pork hoard, the government demand will take enough meat off the market to drive prices back up.

``Why does the government want higher prices? Farmers are complaining. According to several stories in the Chinese press too many slaughtered pigs are coming to market, driving farmers to despair.

``Pork plays a vital role in China’s commerce. There are almost half a billion pigs in China, one for every three people. In gross terms, like in humans, China dwarfs other countries in pigs. And there’s no India of pigs to rival China. The next biggest producer is the U.S., which has 65 million pigs, according to the United Nation’s Food and Agriculture Organization. In fact China produces more pigs than the next 43 pork producing countries combined."


And here is why Pork supplies ballooned in China, back to the WSJ,

``The cause of the recent glut of pigs was a reaction to a shortage just a few years ago. An epidemic of blue pig ear disease wiped out pigs across the country and sent pork prices skyrocketing, leading inflation to dangerous levels. The virus attacks pigs’ reproductive systems.

``After the 2007 and 2008 price spike, the government set up the frozen pork reserve and offered subsidies to pig farmers to get the pig population back up. It seems to have worked too well.

``A Ministry of Agriculture report also says changes in the economy have also curbed the growth in the nation’s pork appetite. Demand for pork from migrant workers in big cities has ebbed as more country folk stayed home after the economic slowdown."

In short, markets reacted to the surge in prices by dramatically adding to supply, which had been exacerbated by government "subsidies".

So a pork "bubble" may have developed, which apparently could have just imploded.

At the other side of the continent, in the US, pork prices are going into the opposite direction.
Pork futures (lean hogs) seem to be skyrocketing! (chart courtesy of ino.com)

I have little clue on the status of the global pork trade, except for the following

-the global agriculture market remains one of the "closed" areas.
-the US became a net pork exporter since the mid 1990s.
-Chinese reportedly will reopen to US exports following a ban due to concerns over H1N1 virus.
-current rise in US futures is due to 'tight supplies'

I would suspect that such imbalances could have been mostly due to the distortions brought about by trade restrictions.

This means that the global pork market could be alot inefficient hence the immense disparity in the prices. Otherwise, in a free market, allocative adjustments through price signals would have approached the law of one price.

To add, there seems hardly a cross currency factor here influencing trade ("no 'low' yuan makes us poorer" meme here; move along nothing to see here).

Worst, closed markets, plus government interventions seem to give rise to miniature boom-bust patterns.

Bubble Thoughts Over Meralco’s Bubble

``The lies the government and media tell are amplifications of the lies we tell ourselves. To stop being conned, stop conning yourself.”-James Wolcott, American Journalist

Meralco is in the spotlight anew.

The country’s premier utility firm, which holds the exclusive franchise for the electricity distribution for the National Capital Region (NCR), caught the public’s attention following a spectacular record romp by its share prices.

And last week’s parabolic vertiginous ride appears to have been playing out the blowoff phase of a conventional bubble cycle. (see Figure 1)

Figure 1: Bubble cycle (left) and Meralco (black candle right)

Importantly, like typical bubbles, the culmination of which can be identified by delusional rationalizations aided by experts exacerbated by media- Meralco’s skyrocketing price has been attributed to speculations on a prospective ‘tender offer’ (Bloomberg)!

Allegedly one of the titans involved [see King Kong Versus Godzilla at the PSE; Where Politics Trumps Markets] in the drama of the recent corporate joust has acquiesced to a purchase price of Php 300 per share which would require a mandated offering to minority stockholders!

Yet rising prices and some special trades (block sales and cross trades) have been used as signs to confirm on such myths.

Why do we think all these rationalizations seem ridiculous?

Simply said, because logical reasoning has been totally thrown out of the window!

As financial writer and investment speaker Joe Granville warned, ``the media is the biggest enemy of the small investor, mostly headlining the wrong news at the wrong times, playing on his misguided reliance on fundamentals and his normal fears and greeds.”

Putting A Perspective On Meralco’s Price And Corporate Disconnect

To put on some level headed perspective we will deal with some key issues.

First, on a year to date basis, despite the recent turbocharged upsurge, Meralco hasn’t been the only leader with 284.87% of gains (as of Friday’s close).

Other issues like Phisix component mining giant Lepanto Consolidate (+271.43%) and Business Process Outsourcing Paxys (+358.33%) have seen the similar or greater level of share price action as seen in the above chart represented by the green and red lines respectively.

As an aside, I wouldn’t suggest that the latter two would seem in a bubble considering the U-shaped recovery vis-à-vis Meralco’s actions which appear to have replicated the motions of a bubble paradigm as shown in the chart.

Although from a trough to peak basis, Meralco, hands down based from last year, does hold the tiara for market outperformance (700%).

Nonetheless, one must be reminded that past performances are not indicative of future outcomes.

Two, Meralco’s share in the Phisix has now jumped to 7.7% from less than 1%, as we similarly pointed out in Beware Of The Brewing Meralco Bubble!, and now holds the second spot after PLDT in terms of free floated market cap.

This for a company whose profits are constrained by political forces! (see below)

Meralco has effectively, leapfrogged over former heavyweights Ayala Corp, Bank of the Philippines, Globe Telecoms, Ayala Land and SM Investments.

With Meralco’s share of the Phisix gaining more weight, any ensuing volatility from its share prices will likely be reflective on the directions of the Philippine benchmark unless counterweighted by the lagging erstwhile behemoths.

Three, financial valuations, if any of these apply at all, have ENTIRELY been jettisoned for wanton speculations and nonsensical justifications.

As we discussed in Meralco’s Run Reflects On The Philippine Political Economy, the share price movements in the local markets hardly reflects on corporate fundamentals.

The first three factors cited above have clearly been validating our Livermore-Machlup model where Philippine equities move in tidal fashion underpinned by liquidity or loose monetary landscape.

This climate essentially begets a predominant horse racing outlook or mentality, where canards touted as facts mostly emanating from the foibles of cognitive biases.

In short, NO liquidity from loose monetary policies equals NO bubbles, and all the rest are simply footnotes.

As writer Peter McWilliams warned (bold highlights mine), ``The media tends to report rumors, speculations, and projections as facts... How does the media do this? By quoting some "expert"... you can always find some expert who will say something hopelessly hopeless about anything..” Indeed.

Fourth, common sense should dictate to us that perhaps none of these engaged (supposedly cunning and astute) Taipans, whom have built their wealth and “credibility” over the years, would likely pay for excessively or overpriced assets, unless they have other undeclared agenda in mind, which are exclusive of profits meant for the institutions which they represent.

Yet, any outrageous and reckless acquisitions, that would put at risk the interests of such institutions involved, could provoke a minority shareholder revolt. That’s assuming shareholder activism is alive here. Nevertheless, even in the absence of it, we should expect the minority foreign shareholders to vote with their feet.

In short, the supposed buyout, from the alleged stratospheric levels, signifies as tremendous costs to the interests of the company they represent from both the majority and minority stakeholders’ perspectives.

Needless to say, the present day hysteria from rising share prices is temporal in nature and subject to market cycles and does NOT represent the underlying fundamentals. Unless people think that these tycoons are dimwits, I would bet on the opposite…that the so called godfathers involved are cognizant of this!

Fifth, even if the so called buyout does occur, it is less likely that such deal would be consummated in transparency or reflective of market conditions.

These titans could have such transaction wrapped up much earlier than known by the public, or have done so with attendant compromises such as rebates et.al., and could use recent actions as a partial exit point to profit from today’s insanity.

Lastly, as we have been repeatedly arguing, the Meralco brouhaha is beyond the sphere of normal financial analysis because it is a POLITICAL SENSITIVE public listed company.

You can’t just attribute earnings without comprehending on the business model from which the company operates on.

Besides, here, the interests of the owners under the said platform are divergent from the interest of the minority shareholders.

Here is why.

Meralco’s Business Model: From RORB TO PBR

Lately, Meralco’s business model has shifted from Rate of Return Based (RORB) to Performance Based Rating (PBR).

According to GMANews.tv, ``The new PBR scheme also replaces the return on rate base (RORB) formula, which charges customers for using Meralco assets — including posts and cables — in bringing electricity to its end-users.

``Under the RORB, public utilities such as Meralco are disallowed from charging rates exceeding 12 percent of the worth of its total assets.”

So what’s PBR?

According to the same article, ``The new scheme provides “rewards and penalties for performance and non-performance respectively, Jose de Jesus, Meralco president said.

``Under the said mechanism, Meralco may be required to pay fines should its performance — such as failing to immediately respond to a blackout — fall below certain standards.”

And why PBR?

According to the “quasi independent” regulator of Meralco the Energy Regulatory Commission (ERC),

``The ERC adopted the PBR for distribution utilities starting in 2005 pursuant to its authority under Section 43 (f) of Republic Act No. 9136 (EPIRA) to adopt internationally accepted rate making methodologies. PBR strives to achieve a balance between efficient price levels, allowing utilities efficient revenue to ensure their sustainability, and maintaining or improving network service performance levels. It provides strong incentives to improve operational efficiencies. International experience (Australia and United Kingdom) indicates that, over time, with its built-in mechanisms for incentives and fines depending on the utilities’ performance, PBR leads to reductions in the real price of electricity distribution while improving service levels.”

Aside, the ERC has required Meralco to implement a subsidized rates for the poor by the so-called “NEW LIFELINE program, where ``The ERC reiterated that customers consuming only 20 kWh and below shall continue to enjoy the 100% discount granted them and shall pay only the adjusted PhP5.30 per month metering charge, while the other lifeline customers shall enjoy a discount corresponding to the consumption level under the new lifeline program approved under the DTI case, including the PhP21.00/customer/month minimum charge.”

Implications Of The Business Model: Absolute Dependence On Political Discretion!

What ALL of these means:

1. Basically prices charged to the paying consumers of Meralco are solely determined by the ERC and NOT by the markets.

This means that Meralco’s profits are ultimately determined by fickle political winds.

As Ludwig von Mises described of Bureaucratic Management of Private Enterprises, ``But ours is an age of a general attack on the profit motive. Public opinion condemns it as highly immoral and extremely detrimental to the commonweal. Political parties and governments are anxious to remove it and to put in its place what they call the “service” point of view and what is in fact bureaucratic management.”

Think $100 oil. Rising energy prices are likely to stoke political discomfort among the society’s underprivileged from which would force politicians to focus on “windfall profits”.

Yet, in a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.

In short, where financial reports will unlikely be transparent, the interests of the owners of Meralco and the minority shareholders departs.

2. Meralco maintains a subsidy for the poor from which are tacitly charged to the account of the middle and high income consumers.

This exemplifies as a “private” company, functioning under stringent control of political interests, conducting the political redistribution aspect in behalf of the government. Hence Meralco acts as a subcontracted implementing agent under political behest.

This implies that economic rents or “profits” for Meralco’s owner managers will only be attained under the auspices of the political leadership for as long as the political interests are served.

3. Under the PBR, the ERC determines the “carrot and stick” for Meralco.

Basically, Meralco’s lifeline hangs on ERC’s dictate!

This implies that the ERC and Meralco will haggle over what comprises as sufficient or inadequate under the PBR guidelines and NOT the consumers.

And since rules are always technically subjective and subject to nonlinear or amorphous interpretations, they will be subject to compromises. Ask the lawyers.

Therefore this implies two things:

One absolute subservience to the political office, where to quote Ludwig von Mises in Bureaucracy, ``Under this system the government has unlimited power to ruin every enterprise or to lavish favors upon it. The success or failure of every business depends entirely upon the free discretion of those in office.” (bold highlights mine)

Second, instead of looking after the welfare of its clients (Metro Manila consumers), the unlimited dependence on the discretion of the government bureaucracy means conflict of interests from parties involved abound.

Principally, the owner’s priorities will mostly be directed into the realm of public relations; of wheedling or currying favor with that of ‘The Powers That Be’. Satisfying the public will requirements will be subordinate to this.

Again from Ludwig von Mises, ``In such an environment the entrepreneur must resort to two means: diplomacy and bribery. He must use these methods not only with regard to the ruling party, but no less with regard to the outlawed and persecuted opposition groups which one day may seize the reins. It is a dangerous kind of double-dealing; only men devoid of fear and inhibitions can last in this rotten milieu. Businessmen who have grown up under the conditions of a more liberal age have to leave and are replaced by adventurers.” (bold emphasis mine)

The sordid and unfortunate experience of the current managers in the besieged Lopez group (who appear to be outgoing****), having to oppose the PGMA administration politically, serves as fundamental and shining example of the consequences of political defiance.

So those nurturing the view that owner-managers of political enterprises will be looking for one dimensional financial bottom line growth are living in a world of fairy tales.

Thus, financial statements have little relevance to Meralco’s valuation as a financial security because economic rents accruing the owner-managers of Meralco may come in sundry forms, than simplistically “profits” as defined by textbooks.

Besides, as pointed out in Has Meralco’s Takeover Been A Good Sign?, the current managing owners of Meralco have to deal with socio-political, bureaucratic and political risks, which ultimately mean that they need to be in constant harmonious relations with the current and forthcoming political leaders.

These are things that are learned outside of traditional or mainstream school curriculums. And yet these signify as unorthodox or contrarian views that operate realistically.

4. The ERC’s leadership is appointed by the President of the Philippines.

This makes the agency hardly independent as purported to be, but instead beholden to the administration.

Again since political appointments are almost always based on political affiliates or interests and are hardly ever about virtues or meritocracy, the direction of regulatory implementation and compliance will likely be dependent on the caprices of the political leadership.

Conclusion/Additional Comments

All these imply that the rewards from the ownership of Meralco comes with the blessings of the ‘Powers That Be’ combined with a possible implied backstop (guarantee) in the case of failure or bankruptcy, provided that the interests of the company’s owner managers or political entrepreneurs operate along the lines of interests of the incumbent political leaders.

Therefore it would be foolhardy or naïve to believe that the tycoons that got engaged in Meralco with billions of pesos of investments, had been there to only leverage on the political misfortunes of the present owners and to speculate on share prices while at the same time ignoring the risks associated with the political aspects of having a stake in Meralco.

Also, this implies that the changing dynamics of the ownership structure of Meralco strongly alludes to the next president-the identity of which only the kingmakers or the chief Meralco proponents know.

****The prevailing notion is that there has been an ongoing power struggle in Meralco.

For me, this seems like an oversimplistic crock.

In my view, both protagonists appear like unheralded allies, only awaiting the appropriate opportunity for a graceful exit for the Lopezes, which I think should come after the elections.

As per Joe Studwell in Asian Godfathers, ``The reality is that tycoons are typically forced to invest together because of the environment in which they operate.” (emphasis mine)

Considering that Meralco’s destiny is fundamentally intertwined with the Presidency, this probably implies that both godfathers could be straddling in support of different candidates in the forthcoming Presidential elections where its outcome will decide who among the two groups will takeover.

Although it is most likely that a price agreement for the prospective exchange may have already been sealed but perhaps at prices much less than the rumors (my guess is anywhere Php 90-120).

Moreover, it has been my inclination to believe that the Meralco saga will unfold similar to the Philippine Airlines privatization, where former PLDT chair Antonio Cojuangco initially fronted for the bidding which ultimately landed in the laps of Taipan Lucio Tan, the current owner.

Finally, of course, both parties would want to see Meralco’s share prices remain elevated, hence through various associates or intermediaries, they might continue to float stories from which the public so eagerly yearns for, as appetizer for their innate speculative instincts operating under today’s loose monetary environs.

However, the idea is-once the political matters have been settled, excess shares could be sold through the markets or that if any contingency arises (such as a dark horse winner in the Presidential elections) both parties can avail of present lofty prices as an exit strategy.

Risk Of Food Crisis Creeping Back?

In a recent article Whatever happened to the food crisis?, The Economist drudges anew over the enigma of conflicting developments: rising food prices in a recessionary environment.

Nonetheless like us they see the risks of a food crisis creeping back.

(bold emphasis mine)

``If this was happening during a boom, it might be understandable. But recession would normally dampen down price rises. So what explains the return of food-price inflation? And does it mean that the so-called world food crisis is returning?

``There are two clusters of explanation: cyclical factors—features of the farm cycle and world economy that fluctuate from season to season—and secular, long-term factors. Cyclical influences include re-stocking: cereal stocks were run down as prices spiked and need to be replenished. In 2006 and 2007, stocks fell below 450m tonnes, about 20% of consumption; now they are back up over 520m, or 23%. That is one source of new demand. Another comes from ethanol. As oil prices rise, ethanol starts to be competitive again (as a rule of thumb, ethanol is profitable when petrol costs $3 a gallon in America, a level it has just reached in California). The fall in the dollar and in freight rates has also kept the local-currency costs of importing a tonne of cereals lower than dollar-denominated world prices. This has encouraged many countries to buy more.

``Lastly, it is possible that the widespread hunger brought about by soaring prices—the FAO says a billion people will go hungry this year—may have reached a peak and the poor may be back in the market for grain again. This may sound unlikely, as traditionally poor consumers have had little influence over world food prices, but economic growth has continued in the largest emerging markets (notably China and India) and governments in much of the developing world have been expanding aid programmes for the poor, such as conditional cash-transfer schemes. That may be boosting demand; it would explain why prices of grain, which everyone eats, have been rising this year while prices of meat—the food of the rich and aspiring middle classes—have continued to fall."


My comment: So cyclical factors of restocking, rising oil prices (transmitted via the ethanol channel) and low prices could have contributed to a demand boost, although the Economist admits that government programs-such as aid expenditures could have also been key variables.

And as we have long mentioned inflationary policies impact prices relatively. It affects sectors that are the primary beneficiaries of government programs- in this case, aid spending which could have resulted to the disparities between meat and grain price trends.

However, sustained government fiscal spending is likely to cause a diffusion of increases consumer which means that even meat prices will likely increase over time.

The Economist adds some important secular trend dynamics,

``But the world food crisis of 2007-08 showed that food prices are not influenced solely, or even mainly, by cyclical factors. They soared in large part because of slow, irreversible trends: population growth; urbanisation; shifting appetites from grain to meat in developing countries. There is no sign that these trends are abating."

Finally, the Economist imputes regulatory and political obstacles as substantially distorting the marketplace.

``The failure of farmers in poor countries to respond to price signals does not mean they are deaf to them. Rather the signals they get are often scrambled or muted. Farmers were frequently not paid the full world price for their crops, because governments were determined to keep local prices low in order to relieve hard-pressed consumers. Some governments also banned food exports.

``Even in rich countries, farmers are responding to many things other than food markets. Take oil prices, for example: these (and government subsidies) determine how much maize is planted for ethanol. That in turn influences how much land is planted to soyabeans, which for American farmers are interchangeable with maize. Growers are also responding to the flow of investment capital into farming as a result of the global financial meltdown. Food is recession-resistant, and farming has been one of the sectors least affected by the worldwide slump. The FAO’s Abdolreza Abbassian argues that increasing links between farming and other parts of the economy are making it more difficult for farmers to calculate in advance the profitability of any one crop, so the area they plant is tending to fluctuate more sharply from year to year. Farming—as the past two years have clearly demonstrated—is becoming a more volatile business, both in terms of price and area planted."

``On the face of things, markets last year were adjusting exactly as economic theory predicts they should: prices rose, drawing investment into farms; supplies then rose sharply, pushing prices down. But that was not the whole story. The price fluctuations of 2007-09 suggested that uncertainty in the world of agriculture was deepening under the influence both of oil prices and capital flows. The fact that prices are still well above their 2006 average, even in a recession, suggests that the spike of 2008 did not signal a mere bubble—but rather, a genuine mismatch of supply and demand. And this year’s price increase suggests that there is a long way to go before that underlying mismatch is eventually addressed. “I don’t see that anything has fundamentally changed,” says Mr Abbassian. “That means we cannot go back to where we were in 2007.”

While the Economist alludes to capital flows as another variable in passing, it didn't dwell on the influence of global monetary policies -where zero bound interest rates and a loosened credit policy environment have sparked credit booms in emerging markets as China and may have added further pressures on the demand side.

At the end of the day, the growing risks of a food crisis all boils down to extensive government intervention that has deadened market price signals, and severely distorted the balance of supply and demand.

Aside, this could also possibly signify a flight to commodities or the crack up boom phase of our Mises moment.

Free Lunch Isn’t For Everyone, Ask Japan

Pundits have long debated about why and how Japan’s policies (e.g. ZIRP, Quantitative Easing, Infrastructure spending, etc…) have failed to “reinflate” its economy following the bubble bust in 1990s, which eventually led to “the lost decade”.

Naturally there won’t be one single or simplified answer to a complex problem, although it is just our thought that this article just may have provided one important clue.

This excerpt from Washington Post’s article entitled “Free Money? In Japan, Most Say They Will Pass”.

All highlight mine.

Japan is having trouble giving away a free lunch.

To perk up the fast-shrinking economy, Prime Minister Taro Aso announced late last month that his government would give everybody money. A family of four would get $600.

Then the trouble -- and the confusion -- started.

Should rich people get it? How rich is rich? Who decides who is rich, and how long will it take to decide?

Aso, who came to power in September and within a year must call a national election that polls show he may well lose, declared initially that everyone, rich and poor, would get the money.

Then Kaoru Yosano, the minister for economic and fiscal policy, said that perhaps the rich should not get any money. He noted that such a giveaway could be viewed as an unseemly attempt by the prime minister and his ruling Liberal Democratic Party to curry favor with voters.

Aso found that to be a reasonable argument and said an income cap would probably be a good idea.

Then his finance minister, Shoichi Nakagawa, said that figuring out who is too rich for a handout would create an excessive workload for local governments. He also said it would delay the distribution of money, which Aso wants to get into people's pockets by March.

Aso found this, too, to be a reasonable argument and said on Monday, "No income cap will be implemented."

Now it turns out that voters do not want the money.

Sixty-three percent said they think that a handout is unnecessary, according to a poll published Wednesday in the Asahi, a national daily. Every age group opposes it, as does a majority in Aso's ruling party, the poll found.

One answer is C-U-L-T-U-R-E.

The Japanese are such fanatical savers that they are the reigning titlist as the world’s biggest savers, which according to aol.com, ``boast nearly $15 trillion in domestic household financial assets, about half of which sit in bank deposit accounts.”

So with so much money stashed in the banks, obviously there isn’t any urgency for most of the Japanese for free lunches in the same way most of the world drools over such opportunity.

The other dilemma clearly emphasized by the article is how noble intentions dreamt or conjured up by regulators and egalitarians get cluttered with the argument over classifications, conflict of interest and the unintended consequence of bureaucratic nightmare.

The morals of the story:

Since everyone would have different set of values, you simply can’t please everybody.

There is no single "regulatory" solution to the problems of mankind.

Has The Underperformance of Philippine Markets Been Due To Policy Credibility?

``In our opinion, global economic conditions are fraught with potential difficulties but Asia’s economic position puts the region in a strong position relative to the developed world. Budgetary and fiscal surpluses mean that countries have the scope to provide domestic stimulus. The banking sectors have ample liquidity and low non-performing loans; real estate prices are not in a bubble phase; corporate debt levels are low and after years of low investment there is not much excess capacity.” Edmund Harriss-Guinness Atkinson Funds, Asia Brief June 2008

So what else is new? The Philippine financial markets continue to get whacked. Again everything is being blamed on either high oil prices or “inflation” as if this whole episode is a restricted to a Philippine only affair.

Figure 1 from Dankse Bank shows the monthly returns of the Peso (left) and the Phisix (right)

Figure 1 from Denmark’s Danske Bank shows the Philippine Peso have been the worst hit among emerging market currencies (see red circle left), while the Philippine stock market benchmark has been the fifth worst performer among emerging markets (red circle right).

The Danske research team suggests that this has been all about central bank credibility. They for instance noted that Indonesia has far outperformed emerging market rubric in both currency (even gained last month) and stock market terms (the least losses) because investors perceived government actions as fitting to the present conditions.

From Danske (highlight mine) ``government has cut subsidies to avoid serious worsening of the fiscal situation and the central bank has moved fast to maintain its credibility. Indonesia has been rewarded by becoming the best currency in Asia, while India and the Philippines have been punished for dragging their feet on both fiscal and monetary policy.”

Indeed, pertinent to interest rates, Indonesia has ‘aggressively’ raised its benchmark rate for the third successive month (Bloomberg) compared to the Philippines which has reluctantly lifted only once (last June) for the first time in 3 years (Philippine Inquirer).

But for Indonesia to get “rewarded” for cutting subsidies where the Philippines has none is to assume the analogy of rewarding Indonesia for the transition from worst to bad when we are punished for maintaining the bad level. I don’t think this is the correct angle look at figure 2.

Figure 2 PIMCO: Real Policy Rates Are Negative in Emerging Markets

If negative real policy rates extrapolate as the fuel to the inflation fire, then certainly Singapore’s Central Bank should be interpreted as a paradigm or representative of the “bad policymaking” for having the steepest negative rate environment and should have been correspondingly meted with a market “penalty”. Likewise, Thailand, whose monetary regime has been similar to the Philippines, should also feel the heat. But where?

So if the conduct of policy doesn’t reflect the issue of real rates, then it can’t be about subsidies too. Look at figure 3 from the IMF.

Figure 3: IMF study: Change in Fuel Price Subsidies as a percent of GDP: 2006 to 2008

In IMF’s recent study “Food and Fuel Prices—Recent Developments, Macroeconomic Impact, and Policy Responses” it notes, ``Thirty-eight countries increased or decreased fuel price subsidies between 2006 and 2008. The increases (in 29 countries) range from near zero to 4.0 percent of GDP, with a median increase of 0.7 percent. The biggest increases have occurred in countries with large pre-existing subsidies. The decreases (in 9 countries) range from 0.2 to 5.3 percent of GDP, with a median of 0.6 percent, with the largest decreases in countries that were restructuring their subsidy programs.”

If the market’s “reward or punishment” system stems from policies of either subsidy reduction or subsidy gains, then those bars on the left (reduction) should see their currencies and stock markets outperform relative to those on the right (increases). Unfortunately the markets apparently don’t reflect on this line of thought.

Now of course currencies are valued based on relative terms. Or if we apply policy as a measure in valuing national assets classes then we have to parse on the obverse side-particularly policies governing the US dollar.

With 36 states in the US facing a decline (recession) as of May see figure 4, government’s fiscal positions risk getting slammed from declining revenues or tax collection in the face of rising government expenditures.

Figure 4: Nelson A. Rockefeller Institute of Government: 36 States on Decline

This from the Nelson A. Rockefeller Institute, ``The national economic slowdown—or recession —is depressing state tax revenue and restraining local government tax revenue. To date, the tax revenue weakness has been mild compared with past recessions. However, the seeds of greater fiscal stress are already sown: economic weakness is spreading rapidly and tax revenue from the “continuing” base should be very weak in the April-June quarter, although perhaps partially masked by payments with 2007 tax returns. After June, tax revenue is likely to be extremely weak as most states begin their fiscal years — and such weakness may linger as the year progresses. Many states finalized their 2008-09 budgets during the April-June quarter, when conditions may have misled forecasters into revenue projections that were too rosy. Governors in some states may, then, face difficulty implementing their new budgets —raising the prospect of midyear cuts and other actions to eliminate emerging gaps.” (emphasis mine)

What this suggests is that fiscal conditions in the US are likely to worsen. It would have to address this by painstakingly cutting expenses or inflating its way to cover such budget gaps or increase borrowing by issuing more debt instruments from foreigners or raise taxes. Whatever route taken is unlikely to be “positive” based on relative fiscal positions when compared to the Philippines.

All this go to show that while policymaking direction could be a factor influencing the market’s action, it certainly doesn’t show up in straightforward linkage.

However, we do share the frustrations over the Bangko Sentral ng Pilipinas’ dilly-dallying. In addition, we get even more concerned when we hear of our officials proposing to borrow money-$900 million from World Bank and ADB (Bloomberg)-in order to intervene in the currency markets to shore up the Philippine peso. This is like throwing money to a sinkhole, whose unnecessary losses will be charged to the taxpayers.

It would be a better option for the BSP to raise interest rates and reduce the negative real rates environment if they aim to defend the Peso and contain the consumer goods and services inflation pressures. But if the BSP is concerned about the impact to economic growth from higher interest rates, the market is doing it anyway for them through higher yields in domestic treasuries and from rising consumer prices. By closing the real rates gap at least they can’t be held solely responsible for “bad” policymaking. Besides, we read this labeling of bad policymaking as “reverse psychology”, maybe foreigners could be hoping for higher rates from the Peso to allow for them opportunities from a wider yield arbitrage.

Energy and Food Crisis: The Fallacy of Government Heroism

``The genius of capitalism lies in its ability to make self-interest serve the wider interest. The potential of a big financial return for innovation unleashes a broad set of talented people in pursuit of many different discoveries. This system driven by self-interest is responsible for the great innovations that have improved the lives of billions.” –Bill Gates

I’d like to profusely thank profound thinker and international fund manager, Mr. Louis Vincent Gave, CEO of the Hong Kong based Gavekal Capital for bequeathing two of their latest marvelous books to your lowly analyst, the Roadmap for Troubling Times and Jesus: The Unknown Economist. It feels wonderful to be in good graces with people whom I wish to emulate.

****

Over the week we came across an article where a high ranking church personality, South Cotabato Bishop Dinualdo Gutierrez, threatened to withhold communion rites to rice hoarders because of “greed” and correspondingly called on the Philippine President to impose “political will” to resolve the crisis.

GMANews quotes Bishop Guiterrez ``Something is wrong. The reason is greed of the businessmen. Some people are hoarding and the others are taking advantage of the crisis to get more money….She has all the power, so use the power to solve the rice crisis because there is supply but the price is critical. There is rice so it’s only a matter of will power of the president."

In a world of villains and heroes, Bishop Guiterrez espouses “hook line and sinker” the government propaganda that business people are “evil” and government as the “savior”.

And since rice is only a “matter of willpower of the president” this implies that Philippine government has an infinite stash, or like money, can “print up” the supply of rice that the people requires-where all PGMA needs to do is to wave the magical fairy wand and everybody’s problem will be settled. What Hooey!

This is exactly the oversimplistic socialist fantasy that has brought about the present predicament. When absurd politicking overwhelms economic reality or commonsense, then populist solutions will only lead to short term appeasement at the expense of greater and prolonged pain.

In a skewed sense, Bishop Guiterrez is right. More government “power” leads…not to resolve the crisis but to further exacerbate it.

Since the food crisis is related to the soaring oil and energy prices we might as well give some illustrations on why more government “heroism” or euphemism of interventionism is nothing but a fallacy.

Saudi’s King Abdullah, US President Bush Does Not Need The Bishop’s Communion

Hoarders and speculators have been vilified by the government, the pious and the populace as having “caused” today’s troubles.

But at $135 oil who is doing the hoarding?

From Reuters last April 13^th (highlight mine),

``Saudi Arabia's King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world's top exporter for future generations, the official Saudi Press Agency (SPA) reported.

``"I keep no secret from you that when there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'," King Abdullah said in remarks made late on Saturday, SPA said.

``The U.S. President George W. Bush in January urged the Saudi king to help tame soaring prices by encouraging OPEC to pump more oil. On separate trips to Saudi Arabia this year, the U.S. energy secretary also asked for more oil, while the vice president discussed high prices with the king.

``The kingdom has spent billions on building over 2 million bpd of spare crude capacity and is the only country in the world able to bring online large volumes of crude supply quickly to deal with unexpected supply shortages.”

More from the Business Intelligence, ``During the meeting, King Abdullah highlighted the significance of oil revenue and said that as long as there is oil, the Kingdom would not experience economic problems. “I told them once, 'may God give it long life'... they asked me what is that... I told them petrol. As long as petrol is there, we will remain well. Our country will not have any problems,” he said.

So not only has the request of the US President, the world’s most powerful nation, been rebuffed, the world’s largest oil producer has openly declared that it has purposely been withholding supplies because “their children need it”.

According to Swaminathan S. Anklesaria Aiyar of the Cato Institute, ``But countries imposing export controls, have, in effect, become hoarders themselves, creating an artificial scarcity in the world market, and an artificially high world price.” (underscore mine)

This simply epitomizes the escalating symptoms of the politics of RESOURCE NATIONALISM where government themselves have been the major hoarders and price manipulators of oil! Stated differently, the world’s oil or food crisis has been MOSTLY about geopolitics, or global governments’ attempt to control natural resources as an instrument to exercise the political heft.

From this perspective it wouldn’t be a farfetched notion to expect the increasing likelihood of prospective military conflicts emanating from heightening resource competition.

Of course the recent volatility in the marketplace has prompted the Saudi leadership to moderate its outlook, according to the New York Times, ``Saudi Arabia is currently pumping 9.45 million barrels a day, which is an increase of about 300,000 barrels from last month.

``While they are reaping record profits, the Saudis are concerned that today’s record prices might eventually damp economic growth and lead to lower oil demand, as is already happening in the United States and other developed countries. The current prices are also making alternative fuels more viable, threatening the long-term prospects of the oil-based economy.”

As you can see, when the winds of the political interest shifts, the Saudi leadership has shown its willingness to adjust accordingly in order to maintain its advantage.

But this is not just about Saudi, the US is the MOTHER of all “hoarders” with an above ground oil stockpile of 702.7 million barrels or representing 97% of capacity which is more than twice the size of private crude inventories with enough reserves to cover against 58 days of supply disruptions (AFP) through its Strategic Petroleum Reserves. Nevertheless, the US congress recently compelled the Bush administration to halt its shipments to the SPR.

And this is not restricted to the US alone, above ground stockpiles or strategic oil/petroleum reserves in China has been estimated at 292 million barrels or 30 days of import (eMediawire) and keeps growing.

Coming from both the supply-export side to the demand-import side, the proverbial 800 lb gorilla in the room has been global governments in the race to corral oil stockpiles! Yet it has been the small fries, who have been simply responding to the incentives set by the authorities, who always take the blame.

Unfortunately, for our beloved Bishop Saudi’s King Abdullah, US President George Bush and China’s Premier Wen Jiabao won’t need his blessings.

The Tragedy Of The Commons

Has the world run out of oil to justify today’s price?

Figure 1: BP: World Oil Reserves in 2007 at 1237.9 billion barrels!

Not if you ask British Petroleum, see figure 1.

From BP’s website, ``Reserves have grown 107.8 billion barrels since 2001 and 168.5 billion barrels, or 14%, over the last decade.” Proven Oil Reserves are estimated at 1.23 TRILLION barrels! Wow that’s a lot of oil out there.

So why has oil prices been climbing?

Like us, British Petroleum chief honcho, Tony Hayward argues that it is due to policy instituted distortions.

From the Economist (highlight mine), ``Mr Hayward blames poor policy-making or, in his florid phrase, “the madness of men”. Some 80% of the world’s oil reserves, he says, are in the hands of state-owned oil firms, which tend to allow firms like his only limited access. He believes that if these riches were fully exploited, the world could easily produce 100m barrels a day (b/d) or more. That’s a big increase on last year’s figure of 82m b/d, and a level that other oilmen, such as the boss of Total, another big Western firm, think impossible.”

Figure 2: API: Myth of Big Oil, 80% of Oil Reserves are Controlled by National Oil companies!

Figure 2 from API shows that government owned companies control 80% of oil supplies!

Since global government owned companies control 80% (some says more) of the world’s proven reserves, any speculation or hoarding can handily be counteracted upon simply by the release surpluses or by producing more supplies as previously discussed in If Oil Is A Bubble, Then It Is A Government Sponsored Bubble!, but has this happened? Unfortunately for us the answer is a NO.

In theory, in a well functioning market, rising prices should trigger supply side responses by attracting and increasing investments that should lead to more production output that would meet demand thereby lowering prices in the future. But, with national governments essentially CONTROLLING and RESTRICTING ACCESS to oil for political (resource nationalism, environmentalism et. al.) or other reasons (lack of capital or technology, unrest and etc…), this hasn’t happened.

And this applies within the US too. High prices simply mean demand far exceeds supply, so much so as bidders are willing to bid up prices for whatever reasons. In corollary, this means that the solution to high prices is to introduce more supplies.

Figure 3: Prof. Mark Perry: Environmental Restrictions

Figure 3 courtesy of Professor Mark Perry at the University of Michigan demarcates the areas from which the US government has restricted oil or energy drilling because of environmental concerns.

To consider, even the world’s premiere capitalist country can be shackled by politics.

CNSNews notes that there are about 279 million acres under Federal management with a potential 117 billion barrels broken down into onshore 31 billion barrels onshore (19 billion barrels inaccessible & 2 billion barrels for standard lease) and offshore 85.9 billion barrels (all off limits).

This is a concrete example of how political based regulations have basically stymied the supply equation contributing to the imbalances reflected in today’s record high oil prices!

Nonetheless, the distortions are also seen from the demand side, Christof Rühl author of the BP’s Statistical Review of World Energy 2008 says taxes and subsidies likewise impact the demand dynamics, again from the Economist, ``According to Mr Rühl, consumption is falling in countries with heavy taxes and rising only sluggishly where taxes are moderate. But in countries with subsidies, it is rising faster than normal, and fastest of all in the countries with the highest subsidies.”

RGE Monitor quotes CIBC (Hat Tip: Craig McCarty), ``Fuel subsidies breed soaring rates of domestic fuel consumption, particularly in OPEC countries, where gasoline is 25 cents/gal in Venezuela and 50-60cents/gal in Saudi Arabia, Kuwait and Iran. No sign of plans to remove subsidies soon in any of these countries.”

Yes, with oil prices drifting at near record levels, additional revenues for oil exporters is expected to reach $400 billion while official assets of oil exporting economies could expand by $800 billion at a conservative estimated average oil price of $115 bbl (Brad Setser), thus curbing consumer subsidies is indeed an unlikely scenario.

True enough, some countries mostly in Asia have acted to ease the government’s fiscal burden by passing the price increases to its consumers at some political costs as previously discussed in Philippine Politics: The Nationalist Hysteria Over Energy Issues.

But overall, where it counts most, like China which accounted for 50% of the global energy consumption growth in 2007 (Tanser-Kiplinger), gasoline prices remain heavily subsidized ($2.6 per gallon-LA Times), which means they are unlikely to get negatively impacted compared to other countries with less subsidies. Let us not forget China’s forex reserved climbed to a new record $1.76 trillion at the end of April (AFP) which also means China can afford to sustain such subsidy for a longer period. This is bad news for us because China and the other Oil exporting countries will continue to ravenously consume oil from which the pain of higher prices will be felt by those incapable of subsidies.

The Economist concludes, ``In other words, the root of the high oil price in BP’s view is not a mismatch between strong demand and feeble supply, but failure on the part of various governments to allow markets to work their magic. There are hints of an improvement on the demand side: several Asian governments have recently decided they can no longer afford subsidies. But it is hard to imagine the world’s ardent energy nationalists suddenly throwing their doors open to foreign investment.”

Politics, Not Greed Result To Higher Food Prices!

Basically, the same dynamics apply to food crisis seen in rice or the wheat markets but with an additional twist,

This quote again from Swaminathan S. Anklesaria Aiyar of the Cato Institute,

``International rice and wheat prices have doubled or tripled in the last two years, but world grain production will reach a record high this year. So how come millions are falling into poverty and starting food riots across the world? The answer lies not in any outsized surge in world demand or fall in world supply, but in the fact that several countries have imposed duties, quotas and outright bans on agricultural exports. This has reduced the amount of grain available for world trade.

``The United Nations Food and Agriculture Organization estimates that world production of cereals was a record 2,108 million tons in 2007, and will hit a new record of 2,164 million tons in 2008. Rice production will rise by 7.3 million tons and wheat by 41 million tons. World cereal consumption has been growing slightly faster (3%) than production (2%) for a decade, so global stocks have fallen to 405 million tons. But this is not a disaster scenario, and it hardly explains skyrocketing prices.

``In the U.S., one-fifth of the corn crop has been diverted to ethanol, and in Europe, some vegetable oil has been diverted to biodiesel. These ill-conceived policies have induced farmers to switch significant acreage from wheat to corn, soybeans and rapeseed, but world wheat output has nevertheless risen from 596.5 million tons in 2006 to an estimated 647.3 million tons in 2008. Corn-based ethanol cannot explain the runaway increase in the price of rice, which grows in very different conditions.”

Yes the added twist comes with the subsidies to biofuels, which was nobly aimed at reducing dependence on fossil based fuels. Of course since regulations by nature are responses to unfolding predicaments then the great tendency for the lack of indepth appraisal. Hence, unintended consequence occur, in this case biofuel subsidies distorts the farmer’s incentives for cropping, see Figure 4.

Figure 4 courtesy of Prof. Mark Perry: Corn From Food to Gas

Figure 4 courtesy of Professor Mark Perry at the University of Michigan shows of how agriculture as signified by corn production originally intended for food to feed people now has to compete with feeding the gas tank…US Corn production for ethanol is expected to climb to nearly 30% of total harvest in 2008!

Nonetheless, since growing corn requires fertilizers- about 90% of the cost of manufacturing nitrogen fertilizer depends on natural gas prices- this leads to a parallel increase in demand for natural gas which means higher prices for natural gas!

From James Finch (highlight mine), ``Nearly 95 percent of U.S. ethanol distilleries use natural gas boilers. Citigroup analyst Gil Yang estimated 28 billion cubic feet of natural gas would be consumed for every one billion gallons of ethanol produced. Cumulative ethanol production could surpass 12 billion gallons. Some analysts are predicted a natural gas demand increase up to one percent from the ethanol boom. But their estimates do not include increased fertilizer demand to increase corn yields.”

``Corn acreage is one of the largest consumers of nitrogen-based fertilizer. And because of the recent ethanol subsidies, more corn will be planted this year than in the past six decades. According to the U.S. Department of Agriculture, corn growers intend to plant 90.5 million acres in 2007. Because forecasts of ethanol production are expected to increase, expect more corn to be grown. In 2008, about 25 percent of U.S. corn production is planned to produce ethanol. By 2012, 4.3 billion bushels of corn are anticipated for ethanol production. It takes about 450 pounds of corn to produce 25 gallons of ethanol fuel to power an SUV.”

So by tweaking on one sector’s incentives, i.e. corn for biofuels, via policy directives, this creates a feed back loop- where more demand for natural gas equals higher energy-and a vicious chain effect of rising energy and food prices!

Moreover, the US corn based ethanol story doesn’t here.

Brazil’s sugar based ethanol, the world’s largest and the most efficient producer (Ethacane is twice as productive as ethacorn -- 6,800 liters per hectare for the former and 3,100 liters per hectare for the latter. It also produces 24 percent more fuel per hectare than the beet- or wheat-based ethanol common in Europe.-Alexandre Marinis) has been restricted entry to the US by virtue of a tariff of 54 cents per gallon. The tariff was introduced in 1980 with the intention of protecting US corn based ethanol producers.

Yet who benefits from the tariffs and farm subsidies instituted by the US government?

Figure 5: Heritage Foundation: Subsidies for the Rich, Famous and the Elected

The rich, the famous and the elected as shown in Figure 5 by the Heritage Foundation.

According to Heritage Foundation’s Brian M. Riedl, ``Eligibility for farm subsidies is determined by crop, not by income or poverty standards. Growers of corn, wheat, cotton, soybeans, and rice receive more than 90 percent of all farm subsidies: Growers of nearly all of the 400 other domestic crops are completely shut out of farm subsidy programs. Further skewing these awards, the amounts of subsidies increase as a farmer plants more crops.

``Thus, large farms and agribusinesses--which not only have the most land, but also are the nation's most profitable farms because of their economies of scale--receive the largest subsidies. Meanwhile, family farmers with few acres receive little or nothing in subsidies. Farm subsidies have evolved from a safety net for poor farmers to America's largest corporate welfare program.”

The recent passage of the expanded subsidies of the Farm bill has generated uproar among other WTO member countries. Why? According to Reuters, ``Critics say high U.S. farm subsidies distort the world trading system and squeeze poor-country farmers out of their markets, as well as putting a burden on U.S. taxpayers and giving incentives to U.S. farm businesses that do not need them.”

So again you have governments subsidizing the rich and maligning market signals (which impacts spending investment cropping etc) to the detriment of less fortunate American farmers or the taxpayers as well as farmers in the emerging markets as the Philippines.

Of course, subsidies in the US or Europe (Common Agriculture Policy) isn’t the only story. It’s almost everywhere. And collectively speaking such imbalances have been building overtime.

An example, Steve Hanke of Forbes magazine on Japan’s subsidies, ``Japan announced last month that it wants to export rice. The Japanese rice industry is superprotected, and the government holds huge stockpiles. Part of these stocks are accumulated because Japan agreed, as part of a World Trade Organization deal, to make regular purchases from foreign producers, mainly the U.S. To keep domestic rice prices high, the Japanese government hoards its WTO-mandated imports. Now that Japan wants to unload some of its rice, opposition is flaring up in Washington and other capitals, claiming that re-exports are not allowed under the agreement. When it comes to filling or releasing government stockpiles, politics clearly rules the roost.”

Again with politics as the top agenda for global governments instead of allowing market forces to seek direction, we can be assured that energy and food prices will continue with its upward trek until market forces will ultimately prevail via a recession or crisis of sorts.

The belief that governments can micromanage an economy in a highly globalized world is an illusion. Why? Because, to quote Steve Hanke, ``it assumes that government bureaucrats possess the same knowledge of market fundamentals and face the same incentives as well-financed, farsighted private traders. It also assumes that politics will not raise its ugly head. Both of these heroic assumptions are not met in the real world. Government buffer-stock schemes are rife with politics, and instead of generating profits from buying low and selling high, they tend to generate losses.”

So we suggest that our venerable bishop visit instead the embassies of the countries mentioned above and deliver his sermon of “greed” on the politicos.