Bullseye! Crowding Out Effect in Motion: Sugar Farmers Move to the Construction Industry! Excise Taxes: Will Sardine Manufacturing Be the Next Coca-Cola?
In my January treatise on the crowding out effect from the “build, build and build”, I wrote,
However, as earlier noted, public sector construction has grown at the expense of the private sector. Think of it this way: A construction crane used in public sector projects is the same construction crane that will NOT be used in the private sector. Hence, private projects are the opportunity costs of public works
Vital Signs from Expenditure 2017 GDP: Bye Bye Consumers, Welcome Big Government; Automobiles Dominate Capital Spending and Bloomberry shares as Giveaway! January 30, 2018
A media report provides for a live example of this dynamic at work. [bold mine]
The Sugar Regulatory Administration (SRA) is trying to find ways to keep the sugar industry alive as more and more farmers shift to working in other industries with better pay.
In an interview with SRA administrator Hermenegildo Serafica, he said the agency had to make adjustments on its production outlook this year as reports from different provinces showed the country’s sugar producers are gradually leaving the sector.
“Almost all our milling districts right now are affected with the infrastructure project, especially the cane cutters. If you are a cane cutter,you will opt to work in the ‘Build, Build, Build’ since the salary is bigger,” he said…
Board member Roland Beltran said the going rate for industrial and construction workers are higher against what they earn as farm workers.
“Although there are additional benefits and bonuses given through the sugarcane amelioration program, it’s not enough to compete with industry standards,” he said.
Inquirer.net Sugar workers turning to construction work for better pay — SRA March 2, 2018
See, another bullseye!
Aside from the crowding out, this anecdote provides two other incisive perspectives. The first is the conflict of economic policies. The SRA is tacitly competing with the public agencies engaged in Build, Build and Build. Or, the crowding out syndrome applies even to government agencies.
The most important is that the National Government (NG) now determines the direction of the economy!
Yet, such crowding out dynamic will have very nasty effects.
Unless landowners mechanize sugar farming to replace the loss of farm labor, the industry’s output will diminish. HIGHER prices of sugar or on agricultural products affected by the worker migration will ensue.
As a side note, while mechanizing farms should be productive, this will likely be obtained via increased imports, thereby contributing to the deficits. The next question is how will farm mechanization be funded, through credit or savings? Should such farm modernization be financed by credit, the interest rate channel is where the “crowding out” will be vented on. There is no such thing as a free lunch forever!
Oh, please don’t expect so much from domestic manufacturing. The struggles of the manufacturing industry have only been worsening! Despite price pressures in the real economy, deflation in the producer’s price index deepened (-2%) in January to signify tremendous slack in demand.Industrial production tanked by 10.3% in December. How the heck did the manufacturing post increased growth in 4Q GDP? Even worse, the Markit’s Manufacturing Survey the Nikkei PMI index in February suffered “the joint second-lowest in the survey history” as “inflationary pressures intensified, driven up partially by new excise taxes” and as “slower rise in input inventories and job losses weighed on sector performance.”
Back to the crowding out.
And to control prices from spiraling, the government will likely allow imports of sugar and other agricultural products. These imports would then compound on the trade and current account deficits, which would exact toll on the nation’s hard currency (US dollar stash), and thus prompt for additional pressures on the peso.
So while the mainstream experts disingenuously acclaim such deficits as a function of “economic growth”, the reality is that these imports would signify a function of the redirection of resources towards activities determined by politics that consumes capital or towards areas affected by the shift in the use of capital to the political sphere.
Public work and other political projects derive its appeal on the fixation on the immediate effects while taking for granted the comprehensive longer-term costs.
At what price do these government profligacies come with? What are its opportunity costs?
As the report showed, lured by higher wages, farmers transfer to the construction industry as laborers. Working to improve one’s weal is intuitive. However, borne out of the aggressive public works, the fast-expanding social welfare projects, military upgrades and burgeoning bureaucracy, the crowding out syndrome (e.g. shift in activities from farm to construction), and the fall of the peso, price pressures in the real economy would only negate whatever interim income gains the farmers acquired from such shift.
To top it off, the corralling of labor and resources into the construction sector brings about concentration risks, showcasing the exacerbation of misallocations or malinvestments.
Hence, if the government terminates these projects, the farmers turned construction laborers will likely be unemployed. And increased social tensions will result from mass unemployment. And capital committed to these projects will become idle.
As one would observe, these are just the initial impact from the transitional phase of the evolving political economy.
Back Shifting Effects from the Excise Tax: Will Sardine Manufacturing Be the Next Coca-Cola?
And more anecdotes exhibiting the mounting of economic strains
In reaction to the present political environment, manufacturers of canned sardines have appealed to the NG to adjust prices. (bold mine)
Manufacturers of canned sardines will ask the government for a price increase because of higher production costs due to the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
A report on 24 Oras said canned sardines manufacturers will ask the Department of Trade and Industry (DTI) for an increase of between P1.00 and P2.00 per can of sardines.
The report said that according to the manufacturers, the cost of imported raw materials for canned sarines, including the tomato paste, has increased due to the TRAIN Law.
The manufacturers also cited the increase in the pump prices of petroleum products and electricity…
The DTI, meanwhile, said the pending price hike petition may be turned down because it was too much.
GMANetwork Manufacturers to ask for canned sardines' price increase due to TRAIN March 3, 201
The political gods believe that they can control economics. They think that sardine manufacturers will have to sacrifice from earning a decent income to accommodate lavish political expenditures.
While the NG will likely accommodate SOME increases, the likelihood is that this would barely be sufficient to cover the rising costs of inputs.
Thus, like the Coca-Cola episode, the back-shifting effect of excise taxes will come into motion. [See HB 10963 TRAIN’s Initial Victim: Coca-Cola Will Be Laying Off Workers! The Back Shifting Effect of Excise Taxes Validated! February 8, 2018]
Sardine manufacturers will likely scale back on capital investments, retrench labor, reduce operating expenses and diminish output. Marginal producers will likely suffer losses and close shop. Higher prices will be the likely outcome!
And because of price controls, canned sardines will likely trade in the black market than in the formal markets.
So instead of transitory, upside price pressures will likely be a persistent feature for the Duterte regime.
