Archive for Economics
Fijese…No Mas Azucar
Posted by: | CommentsFor weeks we´ve been hearing these rumors of how the country is running out of sugar. Knowing that sugar is a domestically produced commodity, I gave the rumor no credence at all. Imagine my surprise to read in various publications over the last few days that the rumor is, in fact, true.
The consensus seems to be that Mexican buyers have been willing to pay more and thus have purchased all of the capacity, only to now sell it back to Guatemalans at a higher price. I have my doubts (given the propensity of locals to speculate and blame northern neighbors), and I wonder what kind of crisis this could spark given the average daily consumption of the Chapins I know.
This does raise great questions about trade. I´m a free trader, but my atheist/Marxist/collectivist/Keynesian friends were shocked the other day when I admitted that occasionally controls were important. For example, if China is flooding the US market with subsidized steel in an attempt to gain market share, and the result is that US steel makers leave the market because they cannot compete, then US national security is threatened by the loss of domestic steel production, which is not easily resumed once lost.
So, I explained, I thought governments should intervene when foreign suppliers threaten domestic production that is critical to the national security. Without steel you can´t build buildings, cars, bridges, factories to produce other things and of course most importantly, tanks and planes to carry bombs to drop on other people who defy us.
This brings us to the question of sugar. Is sugar a vital national resource to Guatemalans? Should the government intervene to control production and/or export so Chapins can be guaranteed their 4 tablespoons of sugar with their 1 cup of leche and 1/2 cup of cafe?
Update: Expat Mom has apparently been stockpiling sugar for some time. I guess I know where to go if/when I run out.
Blackout In Middle of Chavez Anti-Bush Speech
Posted by: | CommentsFrom the “You Can’t Make This Stuff Up” category, strongman Chavez was taking a page from brother Obama’s playbook by giving a speech in which he was blaming all the world’s problems on former President Bush when the power went off.
Friends in Venezuela tell me conditions continue to worsen in the worker’s paradise. I think it’s hysterical to watch the predictable endgame play out in Marxist economies while US politicians promise the masses that national socialism is the answer to every human desire. Meanwhile the Chinese prove they’re smarter than we are by quietly embracing free market economics and simultaneously begin to dump US debt. Como se dice, “Will work for food” in Mandarin?
Along those lines, I was with a Ladino the other day who actually admitted to voting for Colom. He said he liked the idea of giving the Indians 300Q a month (or whatever the figure is), a plank of Colom’s election campaign, and it was one possible reason he won every department other than the capital.
I told this Chapin that he was just suffering from ‘white guilt’, and explained the history of politicians building electoral constituencies by stoking racial tension and using a redistribution of wealth . Setting the issue of whether state sanctioned theft is moral, he said, “Yeah, but they are poor”, to which I responded, “In the US we have spent trillions of dollars buying votes on welfare, which hasn’t changed much in the way of poverty but has gotten decades of Democrats elected, bankrupted the treasury and tricked the uneducated into a lifestyle of dependency. It’s economic bondage, courtesy of Karl Marx.”
My amigo thought about it and said, “Perhaps that’s what the rich and powerful wanted all along.”
And who said Chapins can’t think critically?
I’m Hungry
Posted by: | CommentsEl Blogador makes a regular-almost daily-habit of reviewing movies. One topic that recently caught my eye was the movie ‘Food Inc’, not because I’ve seen it, but because I worked on a business plan recently which touched on this topic.
I’m going to skip commentary on the apparently anti-market movie and El Blogador’s anti-American sentiment, since neither their opinions or my response is likely to be of surprise to readers, but the primary topic should be. As I’ve learned in recent years, 98% of the food supply in the US is produced by only 2% of the population, and the bulk of the food is produced and distributed by a few large companies. (If I were a liberal I would say, ‘a few evil multinational corporations’).
Naturally these companies respond to market pressures to produce large quantities of food at low prices. Despite what the poor and uneducated may believe, these companies do not begin with the objective ‘produce low quality food’, but rather, interpret market demands and then seek to satisfy them. In the US, and it would appear around the world, people want lots of good tasting food and don’t want to pay very much for it. Imagine that.
Because the market works more efficiently in the US than in most other countries-and certainly most other large economies due to the relatively low level of governmental interference-the market is getting what it wants, and that means that the food is not very nutritious but it looks/tastes good and is cheap. El Blogador blames this on subsidies, and while there are subsidies (that debate will have to wait), subsidies represent a tiny fraction of the US food production marketplace. I therefore conclude the structure of food prices has more to do with The Invisible Hand than the subsidies, which are really designed to keep domestic production viable when it might otherwise disappear due to foreign government subsidies of their exports.
What does this all mean? Well, the Nutrition Nazis have long favored locally produced organically grown food, mostly for the wrong reasons. They want us to eat mostly vegetables because consuming animal products is wrong, because locally produced food deprives evil multinational agribusiness of revenue, and because organic processes respect the rights of insects and diseases.
The truth, of course, requires a little more discernment and won’t be as satisfying to the partisans. Locally produced food has the great advantage of being fresh and being close to the consumer. Freshness usually translates into higher nutritional density, and a shorter supply line means disruption is less likely and also the cost of delivery is lower. It almost always translates to higher prices, since the small farmer cannot reasonably compete with the large one in terms of price or efficiency. It also means that diversity suffers, since local production is likely to be more specialized. For the libs, this diversity-challenged farming approach really should be a deal-killer.
Organic would seem on the surface to make sense, but one challenge is the loss of efficiency that goes hand in hand with a reduction of fertilizers and pesticides that deter and or prevent plant death and disease. The lower efficacy of organic approaches lead to reduced crop yield, which has two consequences: lower supply and higher prices. The left’s obsession with organic has reached levels similar to the demagoguery that surrounded DDT for most of my life, only to be proven to be largely politically motivated.
There are some good reasons to choose locally produced and organic food. I enjoy knowing that much of the food we now consume here in Guatemala was produced within a short drive from where we live. This means that there are few risks to the food supply and less is spent on distribution and marketing. This, combined with a low cost of labor, is the reason local food is inexpensive. These are market-relevant factors, not politically motivated ideologies that run against market forces.
I enjoy organic food here because I know the people producing the food are concerned with the nutritional value. Those producers who are working to achieve size and beauty in their produce have an incentive to achieve these objectives without regard to the nutritional value. They may be sufficiently motivated even to chemically manipulate their produce in a manner that is unhealthy. Knowing that in the US there is some regulation of the food suggests that the manipulation is measured, whereas here I can have no such confidence. So organic is a reasonable choice-perhaps a gamble-that the nutritional density is greater. Add to this consideration that the organic grower’s concern for nutrition may translate into a more hygienic handling of the product and you have a formula which justifies the substantially higher price.
One final comment-US food prices have remained relatively low for a long time, despite record levels of crop failure and destruction (due to weather), increasing use of corn for alternative fuels (ethanol), and a booming, more affluent population in Asia, which translates into a much higher caloric intake. Were global warming true, this would likely solve the world’s food problem (longer growing seasons and a larger global production area), but as some of us have long suspected it is a total fraud, and in fact the earth is likely entering another little ice age, which spells further trouble for the global food supply, and means higher food prices for you and I.
GuateCalling
Posted by: | CommentsI mentioned this phenomenon in a previous post and some newbie emailed and asked me to explain.
Here in Guatemala there are more cell phones than there are people. That’s because many people carry more than one phone, to use networks for different carriers. I haven’t figured out whether this is so they can take advantage of different plan promotions, or whether there are different benefits to calling certain users on the same network, or what.
Additionally, there are about 5 times more cell phones than land lines. This is because the cell phone network began to expand in the country before the copper wire network was fully matured, and naturally it’s easier to put up towers than it is to lay cable, so the then-monopoly stopping investing in wire copper. Finally, it’s really easy to get a cell phone whereas a land line requires deposits, contracts, and the available wire in the ground.
Anyway, most cell calls here are expensive, relative to the states, anywhere from 1-2Q per call, depending on the carrier, your plan and other factors. That translates from 12 to 24 cents US per call. When I recharge my phone by buying prepaid minutes, I usually buy 100Q worth of time, enough for about two weeks in my case. However, I’m told by reliable sources that the major carriers sell far more of the 5Q cards than they do any other denomination. That means most people here are buying enough credit to make at most 5 short phone calls. Based on my own usage I would say it is more likely you’ll get only 2 phone calls out of 5Q.
The result of all this is that most people have phones but have no ’saldo’. I can’t tell you how many times I’ve asked someone why they didn’t call to say they would be late, or why they didn’t tell me they couldn’t make an appointment, or why they didn’t just call instead of getting on a bus and riding across town and the answer is always, “But I don’t have any saldo”.
This lack of saldo is common, and for a long time I thought there was something seriously wrong with my phone because I would get a call but it would only ring once. I wouldn’t even look to see who called, and then a few minutes later it would ring again, just once. It got to the point that I finally asked someone and he explained that the caller isn’t charged for the call until you answer, or when voicemail picks up, and so even someone with no saldo can place a call and then hang up, which gets the attention of the recipient without incurring a cost.
I know some gringos who refuse GuateCalls, on the grounds that a person basically wants you to pay for the opportunity to talk to them. They argue that anyone worth talking to should invest the 1Q in the phone call. Perhaps my situation is different since I’m so much more reliant on others for helping me in all the ways that I still require, what with business ventures, needy children and dysfunctional Spanish, so I usually respond to GuateCalls.
The other day I learned that one or more of the carriers now allow you to send saldo to another user, so perhaps this will cut down on GuateCalling. I suspect the carriers will charge for this service, which is amusing to me since they’ve found a way to make money off of the fact that nobody in this country has any money to make the call in the first place.
Mark-Ups, Ripoffs and Market Forces
Posted by: | CommentsEl Blogador hasn’t been blogging as often recently, perhaps because he’s spending time in Tapachula instead of London or Antigua:
But a couple of days ago I went to buy a medium-sized cup of iced coffee in the shop within this nicely rennovated bandstand in Tapachula, and was asked to pay 27 pesos for it ($2). It would have cost roughly the same in London, capital of soi disant ‘Rip-off Britain’. But this was Chiapas, which in many other respects still seems to offer the most sensible prices in Central America.
Still, I’ve kind of grown used to rip-off prices in Guatemala, even if I don’t quite understand them. A cup of capuccino or a pizza from Domino’s costs approximately 20% less than it would in London, but I can’t think of any overheads affecting the restauranteur which could mount up to anything like 80% of their UK equivalents.
The killer in London is the cost of renting a retail unit suitable for a coffee shop. Any building in the centre which doesn’t cut it as a locus for shopping can relatively easily be switched to alternative, more rentable uses such as office space or car parking. The owner of the building will generally go for the most profitable usage. Wages are also considerably higher in the UK, with the national minimum set at roughly $9 an hour.
So why is a lot of restaurant food (especially the faster sort) so expensive in Antigua? Can’t be the ingredients (mostly local), the property rent or the labour costs. Maybe red tape is a major overhead here, but then Guatemalan businesses aren’t paying anything like the same sort of corporation tax.
And bear in mind that the average middle class consumer is also earning a lot less (though arguably also paying less to the banks and the government), and so if the pizza seems pricey to me…
Maybe it’s because there’s scarcity, but on the demand side: the number of people able to pay X for a Domino’s pizza in Antigua is as small as the number of affluent tourists in Tapachula and so the price of X has to go up to cover reduced volume. Hmmm, maybe I am economically naive after all.
El Blogador is in Chiapas and is wondering why his iced coffee costs so much when other goods are relatively inexpensive. Note that he is buying an iced coffee (and we can assume it’s good coffee), not tortillas and beans, and that he’s buying it from a nicely renovated shop. This hints give us a preliminary understanding of why the coffee is relatively expensive, at least to other goods in Tapachula.
The drink he ordered is not a common one in Tapachula. Locals don’t drink a lot of iced coffee. They do eat a lot of tortillas and beans and don’t care how well renovated the eatery is. They certainly wouldn’t willingly pay more just to eat at a nice eastablishment. So in the cost ingredient of the coffee we have built in both an exotic product (if not because the coffee itself is exotic because of the relative scarcity of the availability in the aforementioned form), and also a nicer establishment from which to buy the product. Both of these issues contribute to higher overhead, driving the price higher. The exotic product requires a greater investment in bringing it to the market and there is a greater risk that it will go unsold. When you are a bean merchant in Mexico or Guatemala, there’s not much risk of demand evaporating; in Tapachula they have many reasons to worry that foreigners might stop showing up, or at least in as great numbers (Swine Flu, regional violence, economic crisis, etc).
Next El Blogador considers Antigua prices and the overhead, surmising that although prices in Antigua are generally lower than London, the latter’s prices can be somewhat justified when considering overhead. As we discussed before, overhead is a factor, and although Antigua commercial rents are quite high (you can rent a place in Phoenix at a lower price per square foot), this alone doesn’t justify the price. (You’ll have to wait for my dissertation on Antigua real estate prices).
Just as in Tapachula the product offering was an exotic one, this also is the case in Antigua. Whether it is Dominos or a cappuccino, the product is essentially an import. Yes, I know they make coffee here but the coffee the locals drink and the coffee I get in my cappuccino is not the same, and I’ve seen coffee bags around town that have been imported from the US. It wouldn’t surprise me to discover the coffee was grown here, shipped to the US, packaged and shipped back. Even if it remains here and is manufactured and marketed for local consumption, the buyer of that coffee is not the common man, but a wealthy local, extranjero or tourist. More goes into the packaging, marketing and sales of the product than the actual ingredients. Don’t fall into the temptation of thinking this isn’t ‘fair’; most products are this way (and life isn’t fair, just ask my teenager).
This means that the market for the product is greatly reduced. Normally a smaller market means lower prices, because small markets often have corresponding small demands (in the aggregate), but occasionally this is not true. There is a small market for a Ferrari, but the price remains high because it is an exotic product and the small market has the ability to pay for it. Ferrari wouldn’t make money selling at half the price, and probably wouldn’t want to sell a product half as valuable, and so at a greatly reduced price the Ferrari would not be available. It is the same with pizza and lattes in Antigua. The demand, in the aggregate, is small, but within the market it is quite high. I suspect prices for coffee and Dominos pizza could go up by 30% and there would be very little change in volume, because the demand-though limited-is intense, and further, the demand is for good coffee.
This deserves an additional consideration. How are prices determined? El Blogador considers overhead, and market forces, but neglects to mention the primary motive for setting prices: profit. The merchant must cover all of his costs, he must cover the cost of his own time, he must put a value on the risk his capital is taking, and finally he must set prices to provide a profit.
If the price of the product does not cover all these things, then the business will fail. You see this daily around town as businesses are closing up because at a given volume they could not adequately meet all those objectives. Where there is not profit, there will not be a lasting, profitable business. (In this country many will survive but will not be profitable). In Venezuela we have recently seen why socialism always fails, why it must fail, because prices are subsidized to promote a political ideology instead of allowing to work, which brought about scarcity and eventually a currency devaluation. That too will have to wait for another time.
Another factor is the government. El Blogador and other promoters of substantial government involvement in society (also known as Marxists), point to the benefits of governmental involvement and would cite regulations that benefit the consumer, strong infrastructure, etc. Naturally there are costs that come along with that, first and foremost a high tax rate, secondly the drain on economic growth that comes with government taxation and regulation, and finally the infringement of personal and economic freedoms. Most importantly when the government consumes money it returns to the economy less than it takes in, whereas private businesses return more through the creation of value, through innovation, etc.
In Guatemala the government is so dysfunctional you have both the presence of taxes and regulation, though they are widely subverted, and you have the lack of the societal benefits or infrastructure that is normally the product of government’s involvement. For all my complaints about governements in general, the streets in the US are generally well constructed, well maintained, and traffic lights work, etc. But here in Guate the streets are a mess, there is inadequate parking, buildings are crumbling, and genrally infrastructure is insufficient. In addition you have the violence, a poorly trained work force, and high rates of crime.
The whole point of this is that there are substantially greater risks to the entrepreneur and his capital here than elsewhere. If you invest in London or NYC, you do so without a great deal of fear about certain risks to your capital, whereas here you must protect your capital like a pioneer might who was headed west in 19th century America. Those risks keep a lot of businesses out of the market, which reduces the supply of products and services. This forces prices higher. (It also means the opportunity for those of us who are here is greater).
As with all prices, the market determines them. In this case El Blogador’s willingness to ‘overpay’ for that iced coffee is itself a testament to why the price is so high, just as I am willing to pay 16Q for a cappucino at the park or 100Q for a Cohiba or 150Q for a good pizza (not Dominos). There is a concentration of people like El Blogador and Don Marco in this town, which is why the prices are so high (for everything from real estate to cheese).
So in conclusion, prices in Antigua tend to be high, relative to the economy and the region. They are high because the goods in question are unique/exclusive, because there are relatively few of them and because the risks to the merchant and his capital are great, and because the demand, while small, is intense. The next time you find yourself wondering at prices in Antigua (or Atitlan), apply this approach and you’ll find the answer.
What Depression?
Posted by: | CommentsIf you’ve studied the data in the US, it’s clear we’re on the verge of a depression, perhaps the greatest depression in modern times. The commercial real estate bubble is about to burst, the money supply has been expanded in geometric terms, the central government is spending at record levels (to no effect), our foreign creditors are refusing to buy our debt, and consumers are, for the first time in a generation, saving their money rather than spending it. 2010 is likely to be worse than 2009, and it might be worse for Japan and the UK than the US due to their aging populations and already excessive tax levels. However, here in Guate I can see no signs that anything is wrong.
Yesterday I went to the capital for a few meetings and to make the normal stops at Hiper Paiz and Pricesmart. The traffic on Roosevelt and the 20th Calle area was so bad I spent hours just sitting, breathing in fumes, and more perpelexing to me were the huge numbers of people in the stores, with shopping carts overflowing.
Ten days earlier I visited both of these stores with the Wife, and was shocked at how busy they were. I know that these stores cater primarily to the wealthy and the small, but growing middle class, but there were thousands of regular people at these stores, grocery carts full of cheap, junky toys from China, huge bottles of Coca Cola, gigantic bottles of hair gel and other stuff. Naturally, each cart was accompanied by 6-10 members from two or three generations of family. I was reminded that Guatemalans have gotten their aguinaldo and are going to spend every centavo of it as quickly as possible.
Which is why I was so surprised that yesterday the stores were still busy, even more so than in the days before Christmas. I had to resort to leaving my cart in an aisle and doing solo missions for items, returning, and then going back out on recon while the 9 year-old watched the cart. What should have been a three hour trip turned into an eight hour journey. Well, there was a detour to Vesuvio’s for lunch where we did our best to kill off a meter of pizza (and failed), but still…
You would never know you were in the capital of a third world country, and one of the poorest in the hemisphere. The Miraflores area felt like a busy suburan US shopping complex before Christmas, with people honking and fighting for parking spaces, which were so sparse that I couldn’t even park in the Pricesmart Parking lot, but had to park on the on-ramp to Anillo Periferico, just outside.
All this made me wonder about the aguinaldo. If national spending jumps dramatically when the bonuses are paid, it suggests there is pent-up demand among consumers. This pent-up demand would be better satisfied if the people are given the money regularly so they can better manage their own needs. The fact that much of the purchasing at Christmas seems not to be need-based but for (relatively speaking) luxuries tells me that many people who go the whole year and don’t have any extra are spending their bonuses on things they don’t really need.
I suspect most of these families would indeed be better off with a twice monthly paycheck increase of 16% (the two annual bonuses divided into 26 paychecks) than to get these twice a year cash injections. With a little more every two weeks, needs could be better provided for, and consumers would have to plan and save to splurge rather than having a bulge in their pants at the very moment when commercial interests are in overdrive.
Social justice is a buzz word that some theists and liberals like to use that essentially masquerades for Marxism. The genuine essence of social justice is not collectivism, but a responsibility among men do be mindful of their brethren. Liberals don’t like this because it involves me being concerned for their welfare and how their personal conduct affects themselves and others, and conservatives don’t like this because it obligates them to be concerned for the welfare of others.
I believe social justice here would urge a reform of the system, eliminating these bonuses and including the pay into regular checks so families could better meet their true needs instead of being flush with cash when retailers want to sell stuff. The retailers will have to work a little harder to sell products and services to consumers that meet their true needs as they come about and consumers will have to learn to save and plan for purchases. Both require self-discipline and restraint, which is why it will be roundly opposed.
Comments?
I’m Glad I’m in Guate
Posted by: | CommentsBack in the US, the economy is in shambles, one industry after another is being nationalized, the dollar is in free fall and things are likely to get worse as the commercial real estate market collapses and foreign governments stop buying our debt.
This little detour we took to Central America that was originally scheduled for 12 months is already 18 months long, and I have no plans to return. What would I do, anyway? I don’t think there are a lot of mergers and acqusitions going on, at least those that aren’t being funded by the government; I’d rather export coffee or Noni or chocolate than assist implementing the agenda of the National Socialists.
Instead of being one of many former private equity guys looking for a job in the US, here I am one of very few people trained to evaluate and capitalize on opportunities. A friend of mine recently said it reminds him of doing business in Australia 20 years ago; I responded that it reminds me of studying 19th century American history, which ought to tell you something about Australia.
This chart should tell you a lot about how bad it really is for the US. It is a representation of the ratio of debt to total income, and that ratio is 349%, much worse than during the Great Depression, and when you consider that neither Social Security nor Medicare are fairly represented in these debt figures, it could be closer to 600% of income. Another interesting fact is that WW2 did not get us out of the Depression; you can see here that by the time Pearl Harbor was attacked, debt relative to income was at pre-war levels.
Deleveraging-the fancy name for digging out of debt-will be painful.
GuateTime Explained
Posted by: | CommentsIt’s been awhile so I thought I would post on GuateTime. You see, here in Guatemala when someone commits to you to be somewhere at a certain time, it is almost meaningless. The problem is that you don’t know whether they’re the rare person who means what they say and will take the precautions necessary to be early, or whether they don’t care.
It’s not a class thing or an education thing, because it happens at all levels. I recently drove to the capital to meet someone, a Guatemalan of education and high social rank, and the guy wasn’t even at his office. There was no email, no phone call letting me know not to come to the capital, and there was no apology afterwards.
A few days ago the Wife and I invited some friends of ours from the capital, he’s a retired Doctor, she dabbles in real estate, they are wonderful people but when they called 30 minutes after the agreed upon lunch time, they were merely letting me know they had not left the capital yet. They had invited someone else to join us-with our permission-and apparently he was late. They arrived 90 minutes after we had agreed on, late enough that I had a conflict with another appointment.
Further aggravating this dilemma is the fact that some expats are unpredictable. Recently I have had both Nancy and her daughters over for dinner, Art & Rosie for an afternoon of steaks and hot dogs, as well as Jim and Emily, the lefty PCVs. Each arrived on time or early. It’s a pleasant surprise. On the other hand, I know gringos that could be 15 minutes, 30 minutes or an hour late to an appointment. At least they feign an apology.
I think everyone can relate. What no one has been capable of doing thus far-to my knowledge-is offer a good explanation for this phenomenon. However, fear not dear readers, for as you are so accustomed to controversial and intellectual delights on this blog, I am prepared to offer my explanation for this local oddity.
I believe there are two primary factors which have led to the circumstances I refer to as GuateTime. First, most people here are poor, and have little hope of ever not being poor. When you are poor you value what you do not have, e.g., sufficient food, warm clothes, or luxuries. However, because you have lots of time-seemingly more than you know what to do with-you do not value time. Everyone has it, they have lots of it, and therefore it is not a scarcity.
Things which are not scarce have a low value. In Guatemala there is lots of water, which is why it is free. Air is free, which is why they don’t care about polluting it (if it cost something they would care). Similarly, time has no value. Even if people wanted to exchange their time for consideration (for you Obama disciples that means something else of value), they do not get very much for it. There is a point of diminishing returns where the value they receive for their time is so little that it is hardly worth the effort necessary to achieve that.
This phenomenon, repeated through many generations, has created a cultural phenomenon where the concept of time being ‘wasted’, as it would be a waste to leave your cash on the sidewalk, is beyond their comprehension.
What about the rich, whose time is valuable?
Well, here we enter the second part of my thesis. First, Read More→
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