Retirees: A guaranteed market

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I read in La Razon that the government of Evo Morales is thinking about expanding the subsidies for senior citizens in Bolivia (“Renta Dignidad”) by Bs. 50 (approximately $7). However, this increment will not be offered in cash but in kind (consumption goods). In fact, the policy will be designed in such a way that the consumption goods offered in the subsidy are exclusively national or “made in Bolivia.”

Evo Morales claims that such policy kills two birds with one stone. First, it strengthens the internal demand and, second, it provides a guaranteed market for national products.

Let’s point out the obvious problems with this policy:

  1. The government of Evo Morales has been loudly arguing that the apparent success of the Bolivian economy in recent years and its apparent strength against adverse international conditions resides on the strength of its internal demand. But that is only a political slogan. The truth is completely different. The supposedly strong internal demand has been always fueled by policies identical to this one for senior citizens. The government collects important revenues from natural gas exports, which it then redistributes to different groups of the population (subject, of course, to massive amounts of inefficiencies and corruption), who then turn to local markets demanding product and services. In other words, the internal demand has absolutely no intrinsic or “internal” strength. The minute the government stops collecting large revenues from natural gas exports, the minute the internal demand will stop on its tracks. The Bolivian economy does not have a strong internal demand because it does not have a strong internal supply. It all comes from the redistribution of natural gas exports (and, of course, drug trafficking money laundry).
  2. Imposing local groups to buy national products is a tremendous mistake. Of course it guarantees a “market” for national products but that is precisely what you don’t want to offer to any industry, national or foreign. With guaranteed markets there is no competition and, therefore, there is absolutely no incentives to improve products, reduce prices, etc.
  3. Economists have long shown that cash transfers produce always better results because individual consumers have the ability to maximize their idiosyncratic preferences.

 

The imprudent Evo Morales

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Evo Morales gave another unfortunate speech yesterday. According to this report from Los Tiempos, the Bolivian president called anybody using the telephone services provided by foreign companies in Bolivia, Tigo and Viva, “antipatriotas” (unpatriotic). He recommended that Bolivians use the services of Entel, the Bolivian public telecommunications company. Although this kind of ideas are too obviously absurd, let me just make three important points:

  1. The chauvinistic principle under which Evo’s argument rest is patriotism: the local or national always comes first. This principle is tremendously perverse and world’s history has shown how destructive it can be. There is absolutely no reason to favor local companies as a moral principle. Instead, the moral principle should be freedom: freedom to choose which company serves me better and freedom for foreign companies to compete on a level playing field (something that Bolivian companies also demand when they compete in foreign markets).
  2. Competition makes better companies. Entel benefits from the healthy competition with foreign companies and vice versa. The competitive pressure generates incentives for innovation, better customer service, etc. Blocking foreign companies with silly arguments like patriotism only generates inefficiency.
  3. As Los Tiempos also report, other public companies use the services of Tigo and Viva. Will Evo ask those public companies (like Papelbol) to cancel those service agreements. Why can’t the president exercise some prudence when he opens his mouth?

CBN sanctioned for anticompetitive behavior

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This is interesting. I just read in La Razon that Bolivia’s most important beer manufacturer, CBN, has been sanctioned by AEMP (the industry regulator in the country) for allegedly behaving in an “anticompetitive” manner. What was the sin committed? Apparently CBN priced their products below its competition (and supposedly below their own average cost) and used price discrimination for different geographical regions in Bolivia.

Why should CBN be sanctioned for charging less for their products? This is really weird. The idea, I suppose, is that by setting low prices, CBN can outcompete other beer manufacturers and potentially command a monopoly. If the prices set are below their own costs, regulators call it “dumping.” And this is seen as a terrible practice that distorts the competition in the market. I completely disagree. First, setting prices lower than the competition is what free market competition is all about. How you afford to set lower prices is completely up to your company and strategy. Second, if you set prices so low that you make a loss, how long can you sustain such strategy? Even if your bet pays off and your low prices outcompete everybody from the market only to be increased again once you are monopoly, how long can you sustain that monopoly? Wouldn’t the competitors you outcompeted (and new ones) be willing to re-enter the market once your prices are higher? In general, over time, dumping never pays off.

Regulators will never know better than the market what prices should be charged for a product.

The dictatorship that runs Bolivia – Part II

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A few days ago, Bolivia’s public prosecutor ordered the arrest of a journalist (photo) accusing him of interfering with the judicial process in a case of child abuse. The specific reasons behind the arrest were never very clear but it seems that the prosecutor considered that the journalist’s research on the case, and his interviews with the people involved, were somehow interfering with the official investigation. As expected, the press and other media outlets initiated a strong protest campaign against the arrest and the public opinion was that the apprehension of the journalist was a flagrant abuse against free speech.

Aware of the political costs that this arrest could provoke only two weeks before regional elections, yesterday, the party in power, the MAS, acted quickly and “coordinated” with the prosecutor the release of the journalist. Today, the journalist was, indeed, released.

Apart from any consideration as to whether the arrest was appropriate or not, what is truly amazing in the story is the political power of the executive branch. In just two days, the government “coordinated” with the judicial system (i.e. ordered) the release of somebody previously arrested with the order of a judge. How is this possible? Does the judicial system not have rules and procedures that are independent of any “coordination” or order from the executive branch? Where is the separation of branch powers? Is this the way justice works in Bolivia? If the government doesn’t like an arrest, can they just pick put the phone and “coordinate” the immediate release with the judges and prosecutors? This is truly pervasive and yet another example of the continuous abuse that characterizes the dictatorship that runs Bolivia.

The dictatorship that runs Bolivia

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President Evo Morales and his party, MAS, have been elected three times with important margins over opposing parties. While these results give the current administration formal political legitimacy, it is clear for anybody watching the political situation in Bolivia that the power that MAS has accumulated over time has led to a consistent abuse and violation of basic human and civil rights. Evo Morales and the MAS have violated basic democratic rules all over the place. The third term is fraudulent (they changed the Constitution to allow for it), the political power has co-opted the judicial system entirely and the public administration is corroded with incredible levels of corruption all covered by the political apparatus. And here are two more fresh examples of cynical political abuse.

First, the Vice-President publicly admits that he ordered (with public funds, of course) the publication of grave accusations against the governor of Santa Cruz (opposition) even though he has not been found guilty of any wrongdoing. The governor has been accused in several cases but has never been proved guilty. Why not let the judicial process take its course without political interference? Why is the Vice-President publishing accusations?

Second, Evo Morales, publicly said that he will not work with any mayor or governor elected that belongs to a different political party. Can you believe the abuse? Is he just the president of MAS sympathizers? What about the rest of the Bolivian citizens that could democratically elect somebody from a different political view? Disgraceful.

The Pope strikes again!

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Pope Francis, like most of our friends on the left, has good intentions. Since he took over the reigns of the Catholic Church he has always argued in favor of the poor and unprivileged and renounced himself to several “luxuries” that use to come with the job. Among other things, he has repeatedly argued that workers should receive a compensation package that can allow him/her and their families to afford a decent life and cover their basic needs. He has publicly mentioned this preoccupation in many occasions and demanded of all Christians to work toward that goal. In fact, he just did it again today. And again, as in many occasions before, he made an important analytical mistake. Why can’t he hire a good economics advisor?

Today, he asked if employers who make important donations to the church but don’t pay “fair” salaries or hire workers in the informal markets (without reporting the contract and, therefore, without paying benefits, insurance, taxes etc.) can be considered good Christians. In fact, he went further and said that those employers are committing a horrible sin by “using God to cover injustices.” Hmm…let’s see…

Let’s say that Pope Francis gets his wish and starting tomorrow all employers in Argentina (his native country) report all the labor contracts and pay the full amount of benefits, insurance, taxes, etc. In other words, say that, by way of a miracle, all labor markets in Argentina become formal and completely legal. Seeing this miracle, Pope Francis declares those employers not sinners anymore but perhaps saints. Sounds good right? In fact, too good…

Let’s think carefully about the results. Would employers hire the same number of workers as they did before? Now that they have to pay benefits, insurance and taxes, hiring a worker will be a lot more expensive. So, while employers will comply with all the legal requirements, they will hire less. That is a simple economic law: price goes, other things equal, quantity demanded goes down. Think now about the incentives for workers. Now that they know that every job will pay all the benefits and insurance, a lot more people would want to work. People will stop collecting unemployment checks and join the labor force to look for a job. In fact, lots of people from the rural areas will move to the city attracted by these benefits and look for a job as well. Another simple economic law: price goes up, other things equal, quantity supplied goes up. And so, what have we created? We created a situation in which quantity supplied of labor is higher than quantity demanded of labor. That is, unintentionally, the miracle has created unemployment.

When you think about it, therefore,those employers hiring in the informal markets should be called “super heroes” instead of “sinners.” They risk their licenses to hire workers and generate a mutually profitable outcome for the employer and employee. Because of this hiring in the informal markets, workers can have a job that otherwise they wouldn’t be able to find. Yes, they would prefer to earn more (just like the employer would prefer to pay less) but a job in the informal market is better than none.

The “fair-price” markets

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The Bolivian government regularly organizes “fair-price” markets in some of the most important cities in the country. In these markets or ferias one can buy agricultural products for significantly lower prices than in regular markets. This week, for example, you can buy a bag of potatoes for Bs. 35 in the “fair-price” market in La Paz when the price for the same item is Bs. 50 in regular markets. You can also buy a kilo of chicken for Bs. 13.50 when the regular price is Bs. 18. The Vice Minister of Rural Development argues very proudly that with these initiatives, “families will save half the money they would normally use in groceries.”

Sounds fishy, doesn’t it? It sounds too good to be true and so it probably is. If I am a producer or distributor of agricultural products, why would I take my product to the “fair-price” market when I can get a much higher price elsewhere? Doesn’t make sense, right?…unless…unless, somebody is covering my loss… If the government pays me the difference then, sure, I will sell at the “fair price” any day. And that is what I bet is happening: the government is subsidizing the difference between regular prices and “fair” prices. And voila, that is the magical trick about these “fair-market” ferias. They are just another transfer or subsidy paid with the taxes collected from everybody else in Bolivia.

More importantly, the idea of “fair prices” in itself (as opposed to regular-market-determined prices) is particularly revolting. Why are regular-market-determined prices not “fair” as well? This is an old and common misconception: if an entrepreneur makes profits, then the price at which he/she sells must not be “fair.” What proponents of this idea often forget is that in competitive markets (like agricultural markets) the only way to make money as an entrepreneur is by convincing customers to buy the product from you. And you can only do that if you offer good quality at a competitive price. Given that buyers are not obliged to buy the product from you, whenever they do one can conclude that it must be because they are better off after the purchase: they get the product they want at a price that makes the purchase worth it. In other words, a transaction such as the sale of a bag of potatoes makes the seller and the buyer both better off. There is nothing “unfair” about that.

What is truly unfair or, at the very least, deceiving, is to organize “fair-price” markets by subsidizing products with tax money paid by everybody else.