[1656] Of shameless plug for my column

Dear Capz,

However, it is still needed in the short run, it would do a country no good if due to high oil and food prices, people start rioting and chaos ensues. Take for example in Malaysia. If the government today removes all oil subsidies and let the markets decide, I am sure that the price will increase significantly and that will definitely cause more unrest. Even with currently subsidized fuel Malaysians are still complaining about high prices.

Short run argument is not particularly enticing. The reason as I’ve stated, ten years later, the same argument could be used because we always live in the “short run” and never the “long run”. If we want to start, we have to start somewhere. Else, we need to throw away all the pretension of caring for the long run and admit to having instant gratification stance.

On high prices, it is one of the things that encourage innovation and development of new technology. It encourages searches for alternative. This is an opportunity to structurally improve the economy.

On unrest, everybody grumbles but it does not necessary lead to rioting and chaos. And we all complaint but it is part of the pain in life. We can’t be happy all the time.

The way I see out of this is a gradual approach to remove the subsidy while reducing the demand for it through other means, for oil, we will need to invest more money into GOOD public transport. Then once that is operating sufficiently well, the government should set congestion pricing around the city center to discourage driving and the money from there can be used to subsidize public transport.

I took agree subsidy should be removed gradually but judging by the current scenario, while there is some removal in one part, there are new and increased subsidy in another at the moment.

And those measures could run concurrently. There is no reason to have it done consequentially unless if you are referring to top-down approach.

However I disagree that by allowing markets to be free, poverty could be reduced through food production that you mentioned above. In undeveloped countries, their farm productivity is lower in comparison to non-farm industries and one of the reason is that most of the labor in the economy is involved in farming which causes 2 things: diminishing returns and down pressure on farm wages.

Are you saying African countries have comparative advantage in the non-farm industrial sector (manufacturing maybe?) in general? If not, what are those industries are you referring to?

Talking about diminishing returns, I doubt the farms in Africa have reached a scenario which the slope is zero. Reading from articles and news from the internet (for example, this report, I have a feeling that returns at the moment is positive by a large margin. These farms, especially in the more improvised countries have yet to be developed properly.

Talking about downward pressure on farm wages, I believe there is better something than nothing. But like I mentioned at the post on food production, a free market would increase the price for African foodstuff. Don’t trust me, Dani Rodnik said the same thing! It’s just positive economics espouse by trade models. This possibly could raise the livelihood of farm workers.

Furthermore, farming is highly dependent on weather, with global warming causing all kinds of extreme weather, it is likely to be a bumpy ride for farmers. To increase the country’s labor productivity and the wealth of its people it would be better to encourage the industrialization of the country and bringing labor to those industries.

I don’t think that is a legitimate argument. If that is so, why farming at other areas such as Southeast Asia, especially Vietnam a success? In fact, why Myanmar could do it (okay, production has been falling due to politics but this provide a clue of what going on, no?) Do these countries not suffer from climate change too?

And industrialization can occur but mind you, most countries, especially the one that does not have lands, starts from extraction to manufacturing to services. For Africans countries to start at manufacturing while skipping the extraction industries, it gonna take a lot of work. It can happen but I don’t see how that helps in boost food production. In fact, if the farming industry is neglect while boosting African wealth, I see another upward pressure on food prices.

I would also argue that high food prices is a double edge sword, although it encourages more farming, the flip side of that is that people will have to pay more for their food, for poor farmers in undeveloped countries like in Africa, the higher food prices could either negate the higher prices their crops are worth or worse reduce their real income.

It is a double edge sword but it doesn’t necessarily reduce these farmers real income. After all, they could buy these goods at the price they would have sold for it. Furthermore, while a majority of a poor’s expenditure is on food, not all would be spent on food.

I believe you have misinterpreted the term externality. Externality is about unaccounted cost or benefit. Those are really not externalities because the cost is clearly accounted.

Talking about externality, low crude oil price causes pollution which affects third party well-being.

In fact, high food prices is a reason to boost food production in Africa. This is a long term solution to poverty in Africa. Effort to artificially lower prices only kill that opportunity.

If prices had been freer, the opportunity to reduce poverty through food production will be greater. It gives clearer signal of a need to boost production. Subsidy which you advocate only aberrate the signal.

Lastly, welfare mechanism that you seek do not work in the long run and it is unsustainable.