The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Saturday, 21 May 2011

Wages and Subsidies: the Sri Lankan Case

I was talking before about a simple model of an economy with food as the basic component. I had said "... food fuels labour, labour fuels industry, industry fuels growth, and growth fuels the economy". It's totally simplistic, but when it comes to economic models, simplicity can be a blessing. Since any population increases over time, that population needs to bring more land under cultivation and requires more inputs to increase production. The prices of those inputs (under the current industrial farming paradigm) sadly track oil prices, so the cost of cultivating more land more intensively fluctuates. The tendency, as with all non-renewable and scarce resources that are being extracted more and more intensively, is always that price increases over time.

Food cost is a major consideration for a huge proportion of the global population. Excepting we in the super-rich West, people tend to spend the largest part of their salary dollar on food. A tiny increase can be telling. I remember during the War in Sri Lanka when the cost of coconuts rose drastically. I remember saying at that time that it didn't matter how many southern Sri Lankan sons died in the conflict up north, the next election would be decided on the price of a coconut. Coconuts, being a staple food in Sri Lanka, were a daily necessity. The careful shredding and use of coconut meat in such delicious (and ubiquitous) foods as pol sambol:
...necessitated a constant supply. When the price went up, news programs were filled with stories of ladies going to the market to purchase half a coconut where before they had easily bought a whole one. First of all, my mouth is watering just looking at that picture of pol sambol (that is some GOOD food). Second of all, hunger is a primordial signal to the human body that something's wrong. If you're hungry, you're motivated. You can even say that euphemistically: if someone is "hungry" it means they have an objective in sight and will do anything in their power to get it. Hunger is one of the things that can create unrest, so it's to be avoided if at all possible.

How did this play out in Sri Lanka? Let's remember that this is a country terminally short on capital. The basic and fundamental source of the value of the Rupee was (and likely still is) foreign currency reserves sent home from the Gulf States where Sri Lankan women work as housemaids and men work predominately as cooks. Without this influx of capital, the Rupee would be utterly meaningless. As a matter of fact, I was completely unable to exchange Rupees for dollars anywhere outside Sri Lanka. The Sri Lankan government was always short on liquidity and paying for war materiel is expensive, so, on 21 July, 2007, Ag Minister Nanayakkara announced a program to expand food production through land grants. No money was available, but the government could give up land for production so long as the companies gave back profits and financed the industries themselves. Food (and fuel) imports, it was understood, bled the economy dry of foreign currency reserves:
Sri Lanka spent US $ 2 billion only for food product imports during 2006. The country spent the same amount of money on petroleum imports, a commodity that cannot be produced locally.
The problem with Sri Lanka, as with so many other developing nations, is that it is a victim, to a degree, of its mercantilist past as well as the IMF's idiotic focus on cash crops for the purposes of economic development. On little island, stuff has to be imported. Better it be luxuries than staples. Luxuries you can live without. Staples, not so much. Sri Lanka got it backwards, exporting tea and workers for food, and keeping wages low locally to keep more seats at the local cotton-gins.

The land-for-profit-sharing under Minister Nanayakkara clearly wasn't getting the desired results in the pipeline because in November of 2007, King Dutugemunu himself announced further subsidies for rice farming and an elimination of VAT on rice purchases. Another problem was the breakup of prime coconut land (which is predominantly also scenic coastal sandy territory) which was also solved by fiat:
The government was also planning to ban the break up of coconut land and putting them to alternative uses. There is a strong political lobby to prevent coconut land being in fast developing areas for purposes which generate a higher economic value.
Still, in early 2008:
Coconut production rose by 3.0 per cent during the year benefiting from favourable weather conditions but the prices of coconut and coconut based products increased sharply reflecting the world trend of increasing demand for organic oils to produce bio-fuel as a supplement to expensive fossil fuel.
The concept of coconut price going up in response to biofuel production is a canard. The Rajapakse regime maintained a very tight control on the media, and dissenting presses found their machinery sabotaged if they dared violate lèse majesté. Some journalists have even been kidnapped or shot and hacked to death for these violations - so when reading SL media be certain to take the pro-government bias with a pound of salt. The cause and effect are plain: coconut prices rising, reliance on foreign currency for war materiel as well as oil and food, government attempts to stem the conversion of coconut plantation to luxury hotels by fiat, further increases in price of coconut. Would there be a wage increase commensurate to the cost of food?

That the government is forced to stave off hunger by subsidising the increase of agricultural input and subsidising the cost of food seems like a really unsustainable idea. As a matter of fact, that's how it played out in SL. Sure, you can offset the costs for a little while, but in the end, you'll run out of money. The sad part about all of this is that the reason for keeping food costs artificially low is to maintain wage competitiveness. Wage competitiveness is all about luring industry, and industry comes not to better the country it sets up in, but to exploit lower operation costs. Labour is a major consideration. China has been a great beneficiary of this as well. I know another government that is running out of liquid capital due to war expenditures, but at least it produces its own food. How much of that food is bought locally? How much of the cheap food is imported? What if there was to be a sudden down-valuation of the US dollar that increased the cost of that low-cost food? The knock-on effects of relying on food imports and low wages are rather profound.

So, when we are talking about industrial inputs, we are talking about raw materials, labour, and energy costs. Labour is a huge cost in the developed world, and a portion of the cost of labour is the cost of labour's input: food. If food prices go up (which they basically must... food production is finite), then labour costs should go up. The only way to stop this from happening is to intervene artificially in how the market sets prices. When labour says they haven't got enough food to live, and industry says they haven't got enough money to pay salaries, should it be government's place to perpetuate the low cost of labour by subsidising food production? Should it be government's place to allow the weak corporations to survive? Should we let the exploitation of labour and government continue at the hands of industry?

We need to stop subsidies. In the end, many subsidies simply perpetuate bad business practices by enabling industry to keep the cost of labour low. That sends the wrong price signals, and bases our economy on a dream rather than reality. As we all know, dreams come to an end.

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