Palm oil boycott will hurt impoverished farmers

Over the past few weeks New Zealand-based green groups and activists have called for a boycott on Cadbury products because of the use of Malaysian palm oil in its chocolate.

The boycott was prompted after Cadbury clarified using palm oil as one of the total vegetable oils used in its products.

And doing so has whipped activists into a tizz.  Opponents of palm oil claim that farmers burn forest in poor countries to create available land for plantations.

The claimed cost is less forest, and threats to endangered species that rely on the forest for survival.  They also argue that plantations have a lesser capacity as a carbon sink to offset carbon dioxide emissions.

Because of these allegations Auckland Zoo removed Cadbury products from its shelves a fortnight ago, and anti-palm oil activists have established a "Boycott Cadbury" Facebook group arguing "Only d*cks eat Cadbury".

But in doing so they aren't seeing the palm oil plantation from the forest.

Palm oil is a produced all across South-East Asia because it is a sustainable, high-yield product that helps small farmers lift themselves out of poverty.  It is also a vital food supplement which can deliver up to a third of a person's daily Vitamin A requirements.

The benefits are so great that the anti-poverty Asian Development Bank (ADB) has a strong repayment rate from palm oil producers who take on loans.  And growing palm oil provides an export industry for developing economies like Malaysia into markets like Australia and New Zealand.

But international NGO, Friends of the Earth, has campaigned against the ADB's support for palm oil because it actually helps alleviate poverty.  According to a recent report they're "sceptical" about "a broad-based economic growth model lead (sic) by the private sector".

Rather than having evidence that growing palm oil won't increase living standards, FOE's reports expose that their agenda is motivated by ideology, not practical environmentalism.

And FOE's claims and motivations cannot be trusted.  According to a 2007 press release the palm oil industry is involved in "illegally logging rainforests, setting forests on fire and violating the rights of local communities".  The evidence they provide is a photo of a hilly area in Indonesia that "proves" a forest fire.  The problem is that the photo shows no flames amongst the trees, and based on the angle of the sun's reflection the photo was taken at either dawn or dusk, and the "smoke" could just be mist.

FOE might be right, but the evidence they provide is more of a misting, than smoking, gun.

And FOE's ideological opposition to the use of palm oil won't deliver environmental benefits.  The palm oil sourced by Cadbury is certified by GreenPalm -- an organisation that certifies the oil has come from sustainable sources.  And Cadbury is a member of the Roundtable on Sustainable Palm Oil which was founded in part by international environmental NGO World Wildlife Fund.

The supposed impact of palm oil on Malaysia's forest is questionable.  Of Malaysia's forest 16 per cent is zoned protected with sixty per cent of the country's total land mass allocated as forest.  By comparison the United Nation's minimum zoning target is 10 per cent and Europe's allocation of land mass to forest is only 25 per cent.

It is easy to be an armchair environmentalist from Australia or New Zealand.  What consumers are missing is that the financial saving of not buying a block of chocolate is costing Malaysian's their livelihood.

According to their corporate website Cadbury introduced palm oil to "soften (their) chocolate and maintain affordability".  Cadbury did so because it offered better value-for-money and that's good for business.  But their decision is also providing a development dividend for the world's poor.

If consumers don't like the taste of chocolate with palm oil then they can vote with their wallets.

But by boycotting palm oil what activists are actually doing is shutting down the industry in developing countries, and with it their opportunity to raise living standards and increase wealth.  And if you think you can do without chocolate because it goes straight to your hips, imagine the cost to an impoverished farmer's family who can barely afford to eat.

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Infrastructure spending unlikely to steer us out of doldrums

Over the past few weeks, federal government ministers have congregated in front of a selection of 35,000 construction sites around the country.  Looking out of place with suits and ill-fitting hard hats, they extolled to anyone who cared to listen the virtues of infrastructure pump priming for growth and jobs.

With a number of the government's "nation building" projects about to move into top gear, it is timely to ask what might be the economic impact of infrastructure spending?

Will it boost sufficient jobs and growth to steer us out of economic difficulties?  Is it likely that the projects will deliver a reasonable return for taxpayers, boosting our productive capacity?

There are grounds for concern that the public infrastructure boom, financed largely by the Federal Government and mainly delivered by state and local governments, will have a limited impact in stimulating the economy.

It must be borne in mind that not all infrastructure projects are created equal.  An examination of projects under the Rudd national building plan shows a clear hierarchy of spending in terms of its value-added attributes.

About 5 per cent of the total $42 billion economic stimulus is to be allocated to road and rail projects.  Most economists would argue that infrastructure developments that allow goods to be delivered more quickly and traffic congestion to be eased would improve our economic functioning.

Even so, it is troubling that there has been precious little information, if any at all, released by governments about the expected returns from these projects.

Next in line comes the wave of projects that are unlikely to create additional productive value in our economy to repay the initial expenses.  These include up to $26 billion for subsidised pink batt installation, new perimeter fencing, electronic whiteboards, cricket nets, canteens and plumbing under the National School Pride program, and toilet blocks under the Primary Schools for the 21st Century initiative.

Even school sector representatives who would normally welcome more money are questioning the merits of the government's stimulus package for schools.

Some of the biggest infrastructure boondoggles are reserved for the $800 million program for local governments.  This includes federally borrowed money for skate parks, iPod docking stations, athletics jump pits, garden beds, car parks, kitchens, retaining walls, reshaped creek banks and, aptly, a new home for a circus troupe.

The proponents of the big infrastructure spend might insist that the composition of infrastructure does not matter as much as their employment impacts.

Governments, unions and other vested interests are likely to see public infrastructure works as akin to a giant jobs creation machine.  According to this view, the sooner governments arrange for shovels to start digging the sooner that new jobs can flood into the economy.

ABS labour market statistics show that over 42,000 jobs in the finance, insurance, real estate and professional sectors have been lost since the middle of last year.  It is most unlikely that these accountants, finance brokers, real estate agents and supervisors will seamlessly move into jobs such as laying down bitumen for new roads or installing pink batts in houses.

The idea that labour are a homogenous service that can be prodded and moulded into whatever shape a central stimulus planner wants simply does not ring true in the real world.  This means that the capacity of the Rudd infrastructure stimulus to create tens of thousands of new, permanent jobs for those living in Australia is nothing short of fanciful.

The limited jobs potential of its nation building stimulus could well explain the significant increase in the number of 457 visas granted for the construction industry in recent months.

The outcomes of public infrastructure stimulus policies overseas also raise some concerns about the government's arguments.  Despite several attempts to pump prime its economy through infrastructure spending, Japan has only averaged economic growth of 0.6 per cent each year since the early 1990s.

According to Australian historian and East Asian analyst Gavan McCormack, Japan degenerated into a low-growth "concrete kingdom" that was vacuuming in the country's wealth, and using it inefficiently to produce debt, social and environmental devastation.

In the Depression-era United States, President Roosevelt went on a spending frenzy, including new capital works, yet the unemployment rate by the end of the 1930s remained over 17 per cent.  As the US Treasury Secretary Henry Morgenthau stated in 1939, "We are spending more money than we have ever spent before, and it does not work."

There is no question that federal, state and local governments are hoping that the seen outcomes of its infrastructure spending spike, such as the hastily laid construction sites and the feelgood political photo opportunities, will amount to something that delivers our way out of the economic doldrums.

However, it is more likely that the unseen misallocation of resources and destruction of economic value from wasteful capital spending will render more harm than good to the interests of current and future generations.

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Wasting our tax dollars on symbolism

Australian policy makers have an obsession with motor cars.  Australia, they say, should not only 'make things' -- as Kevin Rudd so simply put it during the election campaign -- but they should specifically make automobiles.

But Australia isn't very good at making cars.  Consider the evidence.  The Bracks Review into government assistance for the automotive industry indicated that the average fault per vehicle for Australian manufactured cars was well above the appropriate benchmark.  Furthermore, the proportion of domestic manufactured cars in the Australian fleet has declined over time.

But rather than face reality and allow the local automotive industry to survive or fail according to the dictates of the competitive market, the government is proposing more industry policy.

Industry policy has an entirely disreputable history with an appalling track record of failure -- it is amazing that politicians still think they can get away with proposing these sorts of winner picking ideas.  In essence it constitutes a supply side conspiracy of government and industry in order to collude against consumers.  As Adam Smith warned, "to narrow the competition must always be against [the public interest], and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens".

"NEW STYLE" INDUSTRY POLICY

The failure of old-style industry policy is plain to see.  Governments have rightly shifted their tack a little -- we now have "new style" industry policy.  Here the government proposes building a culture of innovation, focussing incentives, and accelerating the take-up of new technology.  Rather than imposing tariffs and quotas or throwing money at specific products, government now throws money at research and development (R&D).  This is widely accepted as being appropriate expenditure of public money.

Certainly, standard economic theory suggests that markets will undersupply basic R&D and the market economy will be less innovative than is socially optimal.  Government, by subsidising basic R&D, can correct for that 'market failure'.  This is especially the case in environmental issues.  Here, apparently, there is a double market failure.  The Stern Report makes the argument that the "climate is a public good" and as in the case of basic R&D the market does not ensure the optimal allocation of consumption and investment in climate.  Solutions to climate change involve a substantial investment in R&D and so government can correct a double market failure by investing in green technology such as the green car.

At face value that is a plausible argument.  Unfortunately, it does not stand up to close scrutiny.  The climate is not a public good despite having the characteristics of public goods -- it is both non-rivalous and non-excludable.  The climate is not produced in a market, it is not bought and sold in a market, nor can government subsidise the production of the climate.  The first component of the double market failure is simply not correct.

The second part of the story is also problematic.  The benefits of publicly funded R&D are remarkably difficult to pin down.  Even the Productivity Commission has failed to find a clear relationship between R&D and productivity.  In 2003 the OECD published an official report into The Sources of Economic Growth in OECD Countries, and as part of that analysis, the OECD disaggregate R&D into a private and public component.  As expected there is a positive relationship between overall R&D and economic growth, and also between private R&D and economic growth.  In contrast there was a negative relationship between publicly funded R&D and economic growth.  In other words, it is not at clear that government should be financing or subsidising R&D.

IMPORTING GREEN CARS

Looking specifically at the Green Car fund, additional problems arise.  Australian political elites and large sections of the population have a low tolerance for wealth and income inequality.  As the late Nobel Laureate Friedrich Hayek explained, new products and services are often expensive and initially are viewed as luxuries for the rich.  Over time, the prices of these goods fall and the less affluent can access them.  Before new products can brought to the market, however, there needs to be sufficient individuals with sufficient disposable income to buy them.  Australia's brutally progressive tax system substantially reduces the disposable income that may be spent on new luxury goods.  All this means that there are fewer profitable opportunities for Australian firms to trial new products at home before exporting them.

In short, Australia is very unlikely to efficiently develop a viable green car -- the domestic market is simply too small.  There are, however, a number of overseas markets where such a viable vehicle could be developed -- the European Union or the United States are obvious contenders.  Rather than waste Australian tax dollars on a symbolic gesture, those Australians who would buy such a vehicle should simply import them from abroad.  To ensure the take-up of such vehicles the government should consider totally abolishing the import tariff on cars and, of course, the luxury car tax -- these vehicles are unlikely to be cheap.

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Execs' salaries: you get what you pay for

The Business Council of Australia's support for a freeze on MPs' salaries inevitably raises the question of sauce for the gander.  Would the Business Council also agree that executive salaries should be frozen like those of MPs?

Reporting the BCA chairman's refusal to endorse similar belt-tightening by business executives to that advocated for MPs brought none-too-hidden suggestions of hypocrisy.

There is, however, a bit of a difference between remuneration for those in public office compared with those in the private sector.  Business executives receive remuneration that is agreed to by the owners of their firms (or rather the representatives of those owners who comprise the Board of Directors).

There is a strong discipline on the level of corporate remuneration since every dollar paid to those running the company is a dollar less for those owning it.  This means a neat tightrope is walked by the shareholders to ensure they get the right executives, which in the end comes down to them paying the appropriate remuneration in the context of a competitive market for management talent.

In principle they need to satisfy themselves that every additional dollar of expenditure for a valued management resource will provide more than one dollar in additional profits.  Their stipends are voluntarily given on the basis of what people are prepared to have skimmed off their returns in order to get greater returns.

Similar calculations, with in most cases a somewhat different notion of profit, are made by football clubs, top tennis players, theatre companies and so on.

In each case, remuneration levels are set according to what their owners or the board think the executives are worth to the firm or club.

Although mistakes are made, the decision is no different from that we make for everything we buy that is not of an homogenous nature.

We trade-off money for a quality differential and sometimes we are pleased with the outcome and at other times we are disappointed.  However, on the whole, making such decisions of our own volition provides a better outcome than any other means of making the choices.

In the case of the individual executive, as many will be learning right now, remuneration is not a sum of money that can be constantly ratcheted up.  The penalty for poor decisions or possibly bad luck can be economic ruin.

The salaries of politicians and other public officials are less subject to market tests.

The best-paid cabinet ministers in the world are reputed to be the Saudis ($5m a year) and among the world's worst paid politicians are the Swiss.  This is perhaps inversely proportional to the degree of their good governance (certainly to the degree of their citizens' liberty).  US Cabinet Ministers and public servants are less well paid than our own -- and have fewer perks -- and yet the US has as sound a government system as any in the world.

While this is not an argument in favour of lower levels of income for public servants and politicians, it underlines the difficulties of choosing the right levels of remuneration when the discipline of individual self-interest is absent.

Many politicians and public servants point to the often far superior remuneration conditions in the private sector as beacons that mark their own value.  Yet, hardly any actually make the shift to the private sector and those that do tend to do so in some variant of lobbyist.

This suggests a different skill-set between public and private sectors with no real correspondence between the two.  It probably also means that we are over-paying senior executives in the public sector because their next best employment opportunities, as revealed by their continuance within the sector many claim to be grossly underpaying them, is another public sector job.

Telco industry's "red tape" burden unfair

The telecommunications industry has never been as politicised as it is in 2007.

As a result of the ongoing fight between the Federal Government and Telstra over broadband regulation, there are few of Telstra's business decisions that aren't immediately pounced upon by politicians trying to gather potential votes.

One new target in this seemingly eternal stoush is Telstra's migration of its rural customers off its CDMA mobile telephone network, and onto the highly publicised Next G service.

Next G was launched in November 2005, and provides customers with a far superior service than the ageing CDMA network due to be switched off in January next year.

But doing so isn't that simple.

Communications Minister Helen Coonan and the Attorney General Philip Ruddock have argued that Telstra should be prevented from making the switch until the Next G network provides at least the equivalent coverage of the existing CDMA network.

The Government has imposed an additional licence condition upon Telstra to that effect.

However, Telstra argues that that level of coverage will be achieved later this month and therefore the new licence condition is redundant.

With so many marginal seats in rural areas, that the Federal Government would be paying attention to a new mobile network in the bush is not surprising.  But, by imposing a new condition on Telstra's CDMA licence, it indicates a willingness to intervene opportunistically in the affairs of a private sector company for political gain.

The Government has preached at length about the need to cut "red tape", but its continued regulation-making demonstrates that it is merely rhetoric.

The telecommunications industry has one of the highest regulatory burdens in the Australian economy.  The pages of legislation governing the sector has grown from 1,600 ten years ago to over 10,000 today.

For Telstra, this constitutes nearly 500 regulatory reports to government agencies a year.  The Australian Competition and Consumer Commission, which manages much of this regulation, has itself doubled in size since 1999.

Regulation diverts firms away from productive activity.  And the telecommunications industry is awash with regulatory affairs managers, communications and policy directors, consultants and lobbyists.

There are few sectors of the economy that require more innovation and flexibility than the technology sector.  But instead, the future of Australian telecommunications services is vested with governments and regulators, who operate at glacial speed.

When they do finally act, they frequently misunderstand the nature of what they are regulating, or act only to please political constituencies, or even act just to justify their own existence.

It is hard enough for the industry to keep up with Australian consumers' insatiable demand for new technologies.  So when it is deeply intertwined with politics and regulation, it is doubly unable keep up.

But taking a long-term view, this episode illustrates a major policy issue that the telecommunications sector has to grapple with.

The radio-frequency spectrum licences that are necessary to operate a mobile network like Next G or CDMA are ultimately controlled by regulators and the Government, not the firms which actually operate the networks.

This government control of spectrum licences leaves telecommunications firms susceptible to political manipulation.  Spectrum management has, since its last major reform in 1992, been overhauled to allow for greater flexibility and "ownership" of spectrum licences by firms.

As Senator Coonan has bluntly shown, these licences still have a long way to go until they can be free of arbitrary government intervention.

Governments need only to follow due process -- Telstra alleges that the Communications Minister in this case has not -- and they can alter the terms of those licences at their whim.

Licence holders are exposed to the political calculations of the government of the day.

Ideally, firms which held spectrum licences would be able to use those licences as they saw fit and make business decisions about how best to serve their customers.

But in an election year, and in an industry that is highly politicised and highly regulated, that ideal is still far away.

Tariffs the real barrier to HIV treatment

The close of the International Aids Society Conference in Sydney ended the publicity train of posturing activists and non-government organisations.  In the conference's wake, it is time to refocus on ensuring access to HIV/ AIDS medicines for the world's poor through real solutions, not political catchphrases.

Two groups particularly active last week in Sydney have provided poignant examples of how discussion about serious science and public policy can be outshined by ideological PR campaigns.

Oxfam Australia lays the blame on the increasing prevalence of HIV and AIDS in the developing world on the patent system and intellectual property for drugs.  The executive director, Andrew Hewett, argued in ABC News Online that Thailand provides a "model" for dealing with treatment of HIV/ AIDS

What exactly is that model?  The military junta which seized control of Thailand earlier this year has nationalised the patents of a series of vital drugs.  It has gone on to manufacture cheap, but extremely low-quality, drugs which have contributed towards a growing resistance to the medicine amongst the poorest Thais.

The danger of these medicines has become so apparent that the World Health Organisation recommended that they not be sold outside of Thailand.  Now many Thai HIV/ AIDS patients are unnecessarily reliant on second-line therapies that cost more and require more substantial health infrastructure to administer.

Indeed, the Thai Government's approach to health care has little to recommend it.  Since the beginning of the year, it has cut health spending by $US12 million per annum, increased the salaries of military leaders by $US9 million and defence spending by more than $US1 billion.

If Thailand provides a model for managing an HIV/ AIDS crisis, it is one to avoid, not emulate.  But Oxfam praises the Thai Government because the military junta has stood up to "Big Pharma".

Medecins Sans Frontieres (Doctors without Borders) released a report citing the high cost of second-line medicines as a barrier to effective treatment.  Their report also blames Big Pharma and their drug patents.  But were it not for the Thai "model", many Thai HIV/ AIDS patients would not need these second-line therapies.

Oxfam and Medecins Sans Frontieres are far too quick to blame the HIV/ AIDS crisis in the developing world on patents and intellectual property regimes.  But their concern does not match the facts -- patents are not the major barriers preventing access to vital medicines.

For instance, one recent scholarly survey found that of 18 single dose AIDS medicines available in developing countries, 14 patent-protected drugs were in a similar price range or cheaper than their generic counterparts.

The real barriers to access are unfortunately familiar.  Many developing countries impose high tariffs that can double the cost of medicine to patients.  Such trade barriers are illegal for developed countries like Australia and the United States, but not so for developing countries -- another sad result of the anti-trade mentality pushed in international forums by some misguided NGOs.

Other major barriers are also not surprising.  Poor medical infrastructure the limits effectiveness of drug regimens -- particularly where ineffective, or even counterfeit drugs are common.  Widespread government corruption raises the cost of medicine by necessitating bribery, and often prevents the medicines from reaching the patients at all.

Yet in their haste to blame drug companies, Oxfam and Medecins Sans Frontieres have ignored these factors.  While extolling the virtues of nationalisation programs like the one in Thailand, they wrongly dismiss the negative consequences of such radical measures.

The real tragedy is that the sufferers of HIV/ AIDS in Thailand are being used as political fodder in a campaign that ignores the real challenges of the disease.  Some NGOs may need to decide how serious they are about fixing this problem, and perhaps consider a reconciliation with private enterprise.

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