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Tag Archives | Economic distortions

Should autos be allowed surge pricing?

If you don’t restrict the market you don’t need to restrict the price.

The Mumbai auto drivers followed their brethren in Paris and New York and went on a one-day strike against the growing number of cab-aggregator services in the city. The strike itself is a testimony to the popularity of these new and innovative means of urban transportation. It shows that people are interested in trying out new options if it helps them save time and money. The resistance from the entrenched players is obvious but what is not obvious is what the government will do about it. The confusion begins right from the start, is this public transport or private transport?

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Source: Flickr

We generally refer to autos and taxis as public transport even if they are privately owned. Perhaps because the government mandates many things that the autos need to do. The color, the fare, the uniform, even the number of autos that can be on the roads is fixed by the government. In fact, the increase in the permit charges from 200 to 10000 is one of the reasons for the strike. But why would a government try to restrict the number of autos (by increasing the price of the permit or not allowing more permits)? If there are more people who want to commute by autos, then shouldn’t there be more autos on the road? The reason generally given is to protect the livelihoods of the auto drivers. Then why are the auto drivers themselves striking against the decision?

The auto drivers in Mumbai are one of the best in the country when it comes to plying by meter. But will they be now tempted to do surge pricing as well? The way to control surge pricing is not by capping it. But by allowing more vehicles and drivers to offer their services. This is beneficial for both drivers as well as passengers. The central government sent out an advisory in July of 2015 and Karnataka State Government has come out with its own policy for regulating the cab-aggregators. Both policies have focused on treating this new phenomenon like traditional auto or a taxi service. Which it is most definitely, not.

Safety should be the chief concern of these regulations. Other operational parameters like prices, hours of service, etc. should not be unnecessarily regulated. Urban public transport is in desperate need of innovation and the government should do all it can to support it. Greater use of such services will result in less vehicles on the road and easing of pressure on the current municipal transport systems. Both would benefit the poor who are dependent on fast and cheap public transport for their everyday needs. Creating a regulatory framework which puts safety and ease of compliance at its heart would be a step in the right direction in this regard.

Siddarth Gore is a Research Scholar at the Takshashila Institution and he tweets @siddhya

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Aftermath of Venezuelan Socialism

Venezuela is on the brink of a complete economic and political collapse, which has been building up since the early days of Bolivarian Socialism.

How does one know that things are going bad in Venezuela? – By the fact that there are no reliable ways of knowing it. Good economic data about Venezuela is conspicuous by its absence. It seems that President Maduro has made it State policy to not publish data. The last time that the Venezuelan central bank published inflation data was in January 2015 and it was 63% at that time, already the highest in the world. By the end of 2015, it was estimated by the IMF that inflation rates would have reached 275%

The Venezuelan economy and the government is in complete shambles and the only question is, as a Washington Post article points out, is which one will collapse first. A combination of bad policies and global situation has put Venezuela on the edge of the precipice.

The Venezuelan economy is driven by oil. In fact, it has the world’s largest oil reserves and like many oil-exporting countries today, is suffering due to low global crude oil prices. However, this is just the proximate cause. The seeds of destruction were sown with the extreme socialist measures taken by the late populist President Hugo Chavez. When oil prices soared in 2000s, it offered Chavez the funds to pursue a hyper-populist and socialist reforms in the economy. The Chávez government pursued a series of “Bolivarian Missions” aimed at providing public services (such as food, healthcare, and education) to improve economic, cultural, and social conditions. Very soon, fiscal spending ballooned in a view to retain loyal political support. Two cent gasoline, free housing, highly subsidized food from government controlled supermarkets and a whole range of such populist policies were practiced.

The first part of his inequality reduction was to conduct land reforms. Many productive agricultural lands were seized with the belief that land belongs to the state and not private individuals. With this move, a sizeable area of productive land previously owned by individuals were now sitting idle under government control, which led to reduction in food supply.

Further, the Chavez government set price controls on about 400 food items in 2003, in an effort to “protect the poor”. In March 2009, the government set minimum production quotas for 12 basic foods that were subject to price controls, including white rice, cooking oil, coffee, sugar, powdered milk, cheese, and tomato sauce. As it has been throughout history, price controls lead to massive shortages and to the creation of underground economies. In January 2008, Chavez ordered the military to seize 750 tons of food that sellers were illegally trying to smuggle across the border to sell for higher prices than what was legal in Venezuela.

As many socialist countries in the past will bear witness, one set of distortions introduced by the government will lead to many more and an attempt to correct those leads to further distortions. Price controls led to supply shortages. A few of the supermarkets that could manage to get its hand on essential supplies charged a price higher than what was stipulated. The government seized all of these supermarkets and the shelves have been empty ever since. This was a pattern that was found across all industries. A few examples:

  • Price controls caused shortages in the cement industry and led to a downturn in construction activities. The government nationalized the cement industry, including hostile take over of multi-national companies, which completely eroded business confidence in Venezuela, and led to a marked decrease in cement production.
  • The largest electricity producer in Venezuela was a private US firm, which was later nationalized. In 2013, 70% of the country plunged into darkness with 14 of 23 states of Venezuela stating they did not have electricity for most of the day
  • Similar cause and consequences were seen throughout Venezuela. Cable and telephone companies were nationalized – led to government censorship; Steel companies were nationalized – led to drop in production and capacity underutilization; Food plants – shortage of processed food; bank nationalization – a banking crisis in 2009-10, etc.

The biggest development that has led to present crisis is the complete take over off their biggest oil company. Even though the Petroleos de Venezuela was State-owned previously, it was at least run professionally before Chavez took over. People who knew what they were doing were replaced with people who were loyal to the regime, and profits came out but new investment didn’t go in. Accusations of nepotism were ripe. The result was that the company did not receive any new investments, which made the much-required technical upgradation impossible. Consequently, oil production in Venezuela declined by as much as 25% between 1999-2013.

The current economic crisis is a direct result of economic mismanagement in the past decade. Price controls led to reduction in supply and export bans led to shortage of foreign exchange needed for imports. The result is empty shelves on most retail outlets and a severe shortage of food supplies and being on the route to galloping inflation rates. Two to three hour-long lines in front of government owned supermarkets are not an uncommon sight. The government even deployed security personnel to kick out shoppers from the lines and introduced a two day per week limit for buying groceries.

People line up to buy food at a supermarket in San Cristobal, Venezuela. Source: Gateway Pundit

People line up to buy food at a supermarket in San Cristobal, Venezuela. Source: Gateway Pundit

 

Excessive government spending has led to deep fiscal imbalance and huge external debts. Many analysts are betting on a Venezuelan default by the end of the year, which will cripple the economy’s ability to rebound from the current crisis.

When faced with huge debt with no ability to raise revenues and limited borrowing opportunities, countries inevitably resort to one thing: printing notes and Venezuela has been doing it relentlessly. This has caused the Bolivar to drop 95% in the last two years, from 64/$ to 959/$ in the beginning of 2016. Given this, the IMF estimates inflation rate to touch 720% in 2016, which will no doubt intensify civilian protests in the country.

The Bolivar has dropped 93% in the past two years. Source: Washington Post

The Bolivar has dropped 93% in the past two years. Source: Washington Post

The need of the hour is economic reforms in order to dull the pain of an intensifying crisis. However, even if Maduro is prepared to bring in some much-needed reforms (which he probably is not), the opposition will not allow him. The opposition has just won the Congressional elections, which has given it a veto-proof majority, and they are determined to stall any plans that the ruling government may have.

The possibility of the opposition blocking Maduro’s reforms is a moot point. Maduro has far too much conviction in his socialist ideals and doesn’t look like he is too eager to change his policies. In fact, he passed a law, which has made it impossible to remove the Central Bank Governor that he has chosen and surely, he has chosen a remarkable candidate. He has chosen a central bank governor who doesn’t believe in the concept of inflation. As the Washington Post quotes the governor:

“When a person goes to a shop and finds that prices have gone up, they are not in the presence of ‘inflation,’ but rather parasitic businesses that are trying to push up profits as much as possible. Let me be clear, printing too much money never causes inflation. And so Venezuela will continue to do so”.

Please Mr Maduro, ask any Zimbabwean how this went down. Many economies have been on a similar path in the past and it is not pleasant. Venezuela will keep printing money until it runs out of money to buy printing paper. Hyperinflation (with inflation rates in millions) will ensue, before a complete economic and societal collapse, which will include asset stripping, rent seeking, and resource capture and hoarding by those who have power. In the end, generations in the future will suffer.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

Read about Brazilian economic crisis here and the Chinese debt burden here.

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Distortionary Public Policy

Bad public policy creates severe distortions in the economy, can lead to macroeconomic imbalances, and often has large societal costs.

Badly designed public policy can cause a lot of harm. It can cause severe distortion in the economy, misalign incentives, and finally produce bad outcomes in the economy and society at large. Take one example of a large US federal scheme that is worsening the drought conditions in the West coast.

The US states of California and Arizona are facing one of the worst droughts in recent history. It has received sparse rainfall in the past four years, less than 34% of expected rainfall, and there is a severe water shortage in the desert land. With experts claiming that the drought like situation could last for a few more years to come, this has already been termed as a ‘megadrought’.

California Drought: Before and After

California Drought: Before and After

Exacerbating the natural crisis is the pattern of agricultural land use. The preference of most farmers in the region is to grow cotton, which is one of the thirstiest crops, in a desert landscape. Each acre of cotton planted here demands six times as much water as lettuce and sixty percent more than wheat. That precious liquid is pulled from a nearby federal reservoir, siphoned from beleaguered underground aquifers and pumped in from the Colorado River hundreds of miles away. Ironically, billions of dollars have been spent on building reservoirs, aqueducts, and power stations to push water from the Colorado river to the dry states of Arizona and California. Similarly in California, production of almonds, another exceedingly thirsty crop, is expanding and it now accounts for nearly 80% of global production. However, it also consumes more than 10% of the state’s annual agricultural water use – or more than what the entire population of Los Angeles and San Francisco use in a year.

The reason that farmers are growing water thirsty crops in the middle of the desert during a harsh drought like situation is basically misdirected government policy. A relict from the dust bowl era in the 1930s, the US Farm Bill, provides misdirected incentives to farmers to grow certain crops, though it may not be in the societal interest at large. No American law has more influence on what, where and when farmers decide to plant. And by extension, no federal policy has a greater ability to directly influence how water resources are consumed in the American West.

The Bill offers monetary incentives to farmers planting cotton seeds in the ground; it also provides heavily discounted loans, which they do not have to repay in case the crop fails. Further, the government provides insurance cover on the entire cotton crop, guaranteeing that the farmers will be financially protected even when natural disasters like drought prevents a good harvest. In total, farmers in Arizona and California have received $4.1 billion in cotton aid.

The subsidies are bad enough in creating a fiscal strain and in creating incentives that draw farmers away from growing other crops. Also, due to the implicit government guarantee on the crops, banks are more willing to lend to farmers growing cotton than any other crop. However, the bigger damage it does is in distorting water usage and providing incentives to use more water than would be used in an open market. The final push comes in the form of providing water all the way from the Colorado River, a distance of 230 miles, for a minimal price. The government is also considering building a billion dollar desalination plant to purify ocean water and feed the crops.

If farmers were charged for the water, as well as for the cost of transporting water (using generators to pump the water, cost of building the infrastructure, etc), no farmer would even consider planting a water intensive crop.

In their textbook, Tyler and Alex Tabarrok dwell on this subject:

Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply.  Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop which can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water.

Closer to home, there are several governmental agricultural policies in India that have similarly changed the incentive structure for crop choice. The Minimum Support Price, the minimum price paid by the government to the farmers for their produce, has introduced severe economic distortions. Rice and wheat have a higher MSP than most other crops, which naturally tilt the preference of farmers towards them; rice is a fairly water intensive crop and despite this, it is grown in arid areas across India. Pulses, which do not get much support from the government, are not grown in adequate quantities. There is a chronic shortage of pulses on the Indian market, prices have risen and it has to be imported in large quantities.

As the example of Farm Bill and MSP show, bad public policy and unnecessary government intervention creates severe distortions in the economy, which leads to macroeconomic imbalances and often has large societal costs.

Anupam Manur is a Policy Analyst at Takshashila Institution. He tweets @anupammanur

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