Archive for Economics
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.
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?
How Governments Crush Development
Posted by: | CommentsGovernments almost always do exactly the wrong thing. This is because they are not accountable in any real way. Sure, there might be elections in a few years, but since you can fool most of the people most of the time, re-election really has little to do with job performance. Of course, that’s not even considering the relative scarcity of common sense.
Anyway, some of you may remember that the little trade war the US got involved with in the late 1920s contributed to the severity of the Great Depression. It makes sense that if you make something more expensive, you’ll get less of it. Of course, that lesson is lost on bureaucrats who care little for the lessons of history or the laws of economics, which is why in the middle of the worst economy in 80 years the Messiah has started a little trade war with this minor financial partner of ours we call China. Apparently they own so little of our debt and are so inconsequential financial partners with us that we can give them the bird. Or maybe it just has to do with the Congressional elections in 2010 and trying to lessen what appears to be a political tsunami coming at the Democrats.
I was reminded of all this when reading a post by Jim, the PCV. You’ll remember that Jim and Emily are committed lefties, and so I was really surprised to see an insinuation on their blog (you can insinuate but not state the truth when you’re a PCV) that the Guatemalan government is stupid.
Of course, if the Guatemalan government really cared about helping their people, they would give incentives to businesses and NGOs to import goods, not tax them so as to make it prohibitive. But we’re talking about government here…
Now to a portion of Jim’s story, which basically involves getting people to donate their old computers in the US so poor children in Guatemala can use them and how government gets in the way:
Things are changing in Guatemala, and their government just changed its taxation approach to humanitarian aid. Starting this month, a new $16 import duty is to be charged on each computer. That’s if everything goes right. What’s worse, though, is that some international humanitarian aid is being held indefinitely.So, Don wants to know how Pedro feels about paying half up front and sharing the risk, since there is now the possibility that the computers will cost more than quoted… and they might never even arrive. Sigh. I don’t even want to ask Pedro. On the one hand, from the perspective of a former businessman, I understand the idea of risk sharing and don’t feel his request is unreasonable. But in this specific circumstance, the locals here have no extra money to gamble with. A good example is tiendas (little streetside stores): every tienda has three others next to it selling exactly the same thing, because it was a proven idea and to take a risk on selling something different is just too darn dangerous. A failure might mean starvation. To further complicate matters, Emily and I are the first Peace Corps volunteers in this entire part of Huehuetenango. The Mayans here have struggled under decades (centuries?) of broken promises and and being taken advantage of, and I want them to know that they can always trust the Peace Corps to deliver on whatever we say we’re going to do. If I took half of Pedro’s money and something went wrong and he got nothing, I (and the Peace Corps) would become just another name on that long list.
Update: China has responded to Obama’s ‘protect the unions at all cost’ ploy.
This Will Only Make Things Worse
Posted by: | CommentsThe World Bank is lending Guatemala $350 million dollars to throw away on programs like these:
…to contribute to the government’s efforts to improve macroeconomic stability, governance and transparency; to expand opportunities for vulnerable groups through a better focalization (Editor: what’s that?) of social programs and the promotion of growth and productivity to generate quality jobs.
If you told me that the World Bank was loaning money to Guatemala to provide safe drinking water for the population, I’d be all for the investment. If you said they were spending the money to put 500,000 kids through high school that otherwise couldn’t go, I’d be all for that. There are a lot of worthwhile programs I could see this money spent on that might generate a macro return for the country. But to borrow $350 million for ‘walking around money’ is insane.
When this is repaid it will cost the government twice what they borrowed, squeezing the government’s finances and putting pressure on (presumably), legitimate programs, and what will they have? Not safe drinking water, not cheap energy, not a better trained work force…just a bunch of bureaucrats with nicer cars. The World Bank has a history of making imprudent loans to poor countries, ensuring only that another generation of Guatemalans will grow up uneducated and impoverished, wage slaves to foreign banks because of the greed of their parents.
Blasphemy of the day: There Is A Reason This Is The Third World
Laissez Faire in Guate?
Posted by: | CommentsBanks in Guatemala are notoriously stingy. I suspect that is because they are still controlled by a single person who still thinks like a small businessman instead of a board of directors of a huge corporation whose primary interest is short-term share value rather than profitability in perpetuity. Despite what you Marxists think, this is a good thing because people naturally want to protect their self-interests, and these inclinations are diluted when your ownership is in the form of shares rather than an entity, such as a business.
Everywhere you go you will hear stories of how difficult it is to get a loan here, and often times it comes at a very high rate of interest, especially for small business loans. Clearly the banks have a way to go to maximize velocity of money, but one advantage of tight credit markets is the lack of ‘bubbles’.
If you look at the chart below, you’ll see the foreclosure rate on residential homes in the US represented by various shades of red (for blood, perhaps?). Areas that have seen huge growth in population and home values in recent decades are, naturally, those that are suffering the most. Also suffering is the rust belt, hit hardest by the bankruptcy/nationalization of the auto industry and state policies that have discouraged business development through high taxes and onerous regulation.
It is a basic rule of economics that something which is scarce and difficult to acquire is valued more highly. If virtually anyone can get a loan for a house, then the value of that house is less than if it can only be acquired through years of sacrifice and savings. The person who has deferred gratification in order to acquire an object values it more highly. Just ask a kid who has had to buy his own Playstation versus the kid whose parents simply gave him one.
Guatemala has been criticized for failing to act in response to the global financial crisis, and I hope this is a strategy on the part of the government, rather than simply apathy. You can no more borrow and spend yourself out of a crisis resulting from an excess of borrowing and spending than an alcoholic can overcome his addiction by binge drinking. If Guatemala resists the temptation to use the global crisis and the bad example set by the US and the UK to flood the country with worthless Quetzales, and instead lets the market purge itself of corruption and excess, it could grow from a strong foundation of natural resources and relatively open markets to future prosperity.
Wouldn't Obama blue be more appropriate?
H/T: The Black Box
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