MSP Explained

 

Another look at India's performance

 

Confidence Tricks: Pakistan

Abdul Moiz Jaferi in The Dawn

By 2050, Pakistan will become the third most populous country in the world with 380 million mostly poor people. The Pakistanis working towards making those future millions a reality, are doing so today fuelled by largely imported foodstuff. Before you start screaming at the fromagers and the chocolatiers, they are not really to blame. Our daal is from abroad, and so is the oil it is cooked in. Our broiler chicken is fed foreign produce and even our naan dough is supplemented with imports.

We are already a food-insecure country, even though agriculture is supposed to be our backbone. Our once formidable cotton produce struggles to keep up with the region. Without investment in seed quality and technology, our cotton crop is now only fit to make coarse materials. Farmers have no incentive from the state to support essential crops, so they plant fields upon fields of water-hungry sugarcane, producing a crop which goes into a regressively controlled and speculative sugar industry and comes out as per the whims of billionaires with private planes. 

Pakistan earns about eight thousand billion rupees a year in tax and non-tax revenue. Let’s try and approximate this as a single naan. About half of that naan is put together with sales tax and customs duties — indirect and retrogressive taxation which extracts without discriminating between the poor buyer and the rich. An eighth of the naan is income tax, which is paid in large part by a million-odd poor souls caught in the net of ‘deductions at source’, who are either too weak or too caught in the net to get away with tax theft. These poor souls do silly things, such as subscribe to English-language print dailies like this one, whilst their trader neighbours rely on WhatsApp videos for their news stories, drive flashier vehicles, and write odes to their fictional poverty for the taxman and get away with it. A quarter of the naan is non-tax revenue; a final eighth is put on the table by federal excise duties and miscellaneous levies such as those on petroleum. 

When it comes to spending this money, Pakistan gives just under half the naan away to its provinces, who have many more responsibilities after the 18th Amendment but have not expanded their own revenue portfolios, nor devolved power or funding to local government. We then give away three-eighths to debt servicing. Those adept at math will guess that we have about an eighth left. Most of that goes to the military. We then borrow some more to run the actual government and pay pensions.

From the first day of work, we are in fresh debt, eating borrowed naan. Our economy is propped up by the sustenance sent home by unskilled labour, who toil to make foreign deserts green in conditions of modern-day slavery.

Countries break from such fatal cycles through improvement in their people — education and inclusion. Our basic public education system has been reduced to the worst possible state while our higher education system produces unnecessary degrees instead of focusing on skill-based diplomas. Our doctoral circuit is best known for being an elaborate diploma mill, where dummy publications print you onwards to hollow PhD glory.

If you consider the threat of violent force to be a commodity, it is our major produce and international bargaining chip. We bring to the table our possible nuisance value and take back whatever the world is willing to give us if we promise to keep it in check. At the head of the institutions which regulate our use of force are people who realise that their own powerful hand spins the roulette wheel which determines many fates, including their own.

Meanwhile, the pinnacle of the established order in our country enjoys millions of dollars’ worth of retirement packages and is bestowed with state land as service gifts and depreciated duty-free luxury vehicles as buy-offs. Golf clubs are carved out of mountains for their subsidised leisure; lakeside vistas become their sailing clubs.

Our country’s largest corporate players are owned and run by the military. I would say our country’s largest political player is also the military, but then this paper might not print it and, as penance, I might have to go to a seminar at Lums, where, a satirical publication noted, a management scientist recently turned up to speak for the whole day.

When you throw a no-confidence motion against a prime minister into this mix, it seems minor in scale. A sleight of hand compared to the larger circus that is the running of our country. When you factor in that the process through which he is being removed is itself riddled with the same interference from unelected quarters which had drawn condemnation from across the aisle when he was first brought in, the farce is highlighted further.

The opposition, previously being unable to remove the Sadiq Sanjrani pony from the merry-go-round that is our political arena, has now realised where the ticket booth is. Everyone is now jumping the queue to exchange their lofty slogans for a ticket on the ride, while the ringmaster promises larger and larger horses as long as the circus stays in town.

If I was part of the management science team which ran Pakistan’s circus, I would encourage my colleagues to wake up and smell the urgency in the air: the poverty which encircles the circus’s manicured boundaries. It is not long before the only solution to all evils will once again present itself as a gross permutation of religion and violence. Unlike last time, when we went after the Russians with it whilst taking American money (which ended up in Swiss banks), this time it threatens to burn without direction or order, and without a care for how much of the forest will remain when the flames are finally doused.

Farmers, Economists & Indian Democracy

 

MSP as Legally Recognized Entitlement?

 

Interpreting the Indian cabinet reshuffle

 

On the Indian Farmers' Agitation for MSP

By Girish Menon

In this article I will try to explain the logic behind the Delhi protests by farmers demanding a Minimum Support Price (MSP).

If you are a businessman who has produced say 1000 units of a good; and are able to sell only 10 units at the price that you desired. Then it means you will have an unsold stock of 990 units. You now have a choice:

Either keep them in storage and sell it to folks who may come in the future and pay your asking price.

Or get rid of your unsold stock at whatever price the haggling buyers are willing to pay. 

If you decide on the storage option then it follows that your goods are not perishable, it’s value does not diminish with age, you have adequate storage facilities and you have the resources to continue living even when most of your goods are unsold.

If you decide on the distress sale option it could mean that your goods are perishable and/or it’s value diminishes with age and/or you don’t have storage facilities and/or you are desperate to unload your stuff because for you whatever money you get today is important for your survival,

If one were to approach any small farmers’ output, I think such a farmer does not have the storage option available to him. Hence, he will have to sell his output to the intermediary at any price offered. This could mean a low price which results in a loss or a high price resulting in a profit to the farmer.

Whether the price is high or low depends on the volume of output produced by all farmers of the same output. And, no farmer is able to predict the likely future harvest price he would get at the moment he decides what crop to grow.

Thus a subsistence farmer, without storage facilities, is betting on the future price he could get at harvest time. This is a bet that destroys subsistence farmers from time to time when market prices turn really low due to a bumper harvest.

Subjecting subsistence farmers to ‘market forces’ means that some farmers will get bankrupted and be forced to leave their village and go to the city in search of a means of living. In many developed countries, governments have tried to prevent farmer exodus from villages by intervening and ensuring that farmers receive a decent return for their toils,

MSP is a government guarantee of a minimum price that protects farmers who cannot get their desired price at the market, The original draft of the farm law bills passed by the Indian Parliament has no mention of MSP. Also, in Punjab etc., some of these agitating farmers are already being supported with MSP by the state government and they fear that the new bills will take away their protection.

This is a simple explanation of the demand for MSP.

It must also be remembered that:

• Unlike the subsistence farmer, the middleman who buys the farmers’ output is usually a part of a powerful cartel and who enjoys more market power than the farmer.

• As depicted in ‘Peepli Live’ destitute farmers, if forced to leave their villages, will add to supply of cheap labour in an era of already high unemployment.

• These destitute may squat on a city’s scarce public spaces and be an ‘eyesore’ to the better off city dwellers.

• Some farmers may even contemplate suicide and this will produce less than desirable PR optics for any 'caring' government.

Perspectives on North Indian Agriculture

 

Is there any way for Pakistan’s Financial Bailout?

Is the Indian economy on Autopilot?

Pulapre Balakrishnan in The Hindu

The Modi government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario


As the Narendra Modi government inches towards its halfway mark, its economic philosophy stands revealed. This appears to consist of aiming at some ideal institutional architecture while leaving economic forces to play out on their own. The criterion of macroeconomic stability, defined mainly by inflation kept within a range, completes the picture. Underpinning such an approach is the premise that the potential of the economy, reflecting the chosen acts of private agents, not only cannot be improved upon by the government but its realisation could actually be stymied by intervention. This is a well-known position in the canon of Anglo-American economics tending towards the view that market outcomes are the best. The maxim ‘minimum government is maximum governance’ could legitimately claim to be its progeny.


Life in the slow lane

How, it may be asked, has this philosophy served the economy? We could start with growth. Since May 2014, growth has accelerated but at a much slower rate than that it already had commenced upon in 2013-14. India today is the world’s fastest growing economy but this we owe to the fact that China has slowed more than India has. India has not exactly surged to number one position. But more importantly, the government has not so far been able to achieve the substantial quickening of the economy that Mr. Modi had promised at election time. The government has on occasion extolled its record in maintaining macroeconomic stability. This is indeed correct. Inflation has declined but this only reflects a downward trend that had started in 2013-14. The government would also no doubt like to take credit for sticking to the pre-announced fiscal consolidation path. The fiscal deficit has steadily declined since May 2014. The Finance Minister’s public statements suggest that he treats this as a significant achievement of his government. Actually, it typifies the search for the ideal architecture without sufficient concern for outcomes. The truth is that this government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario. The promised resurgence has not materialised.

It is with respect to investment that the government’s record is uninspiring. Far from having been able to instil confidence among private investors, the government has been unable to stem a decline in capital formation — as a share of output — in progress for at least half a decade. On its part the government takes recourse to the figures on foreign direct investment (FDI) to signal the effectiveness of its policies. Data from the Department of Industrial Policy and Promotion show that in the year just passed, the economy attracted increased FDI up to 29 per cent in dollar terms. While this is impressive, and to be welcomed, it is important to have a sense of what it amounts to. In the year 2014-15, FDI amounted to a mere 4 per cent of total capital formation in India. So, while FDI is to be encouraged, its ability to make a significant contribution to growth is limited. On the other hand, over 75 per cent of capital formation is undertaken by the domestic private sector. Any significant change in the investment scenario would depend upon the actions of this segment.


Sticking to fiscal consolidation

Right now private investment is very likely being restrained by the weak balance sheet of firms. The flip side of this is the high level of non-performing assets (NPAs) of the public commercial banks. Forcing these banks to lend would be poor policy. But it is not clear whether everything that can be done to lower the lending rate is being done. After all, consumer price index (CPI) inflation, the Reserve Bank of India’s (RBI) preferred inflation index, is trending downward and there is a case for lowering lending rates. But the RBI has now been put into the straitjacket of inflation targeting and can no longer respond to considerations of output. This leaves fiscal policy as the only instrument with the government.

The government, however, is reluctant to use it to increase aggregate demand for fear of deviating from its fiscal consolidation path. It is of course possible to step up public investment by trimming subsidies. Here the National Democratic Alliance government’s approach is cravenly political, and no different from that of its predecessor, the United Progressive Alliance. It is reluctant to be seen as cutting subsidies even when it is clear that a rupee-for-rupee swap in certain subsidies for public capital formation is likely to be beneficial for both growth and welfare. The fertilizer subsidy presents the most obvious instance. It has done little to stem the rise in food prices while continuing to take up precious fiscal space. There is a strong case for reviewing its continuation, at least in the present form. Well-designed empirical research alone can settle the matter of its desirability, and one hopes the government will provide this in time for its third annual Budget.


Looking for inspiration


An object of this government’s admiration has been revealed to us in the choice of speaker for the first NITI Aayog Lecture on Transforming India. It chose Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore who was earlier its Finance Minister for close to a decade. A trained economist with considerable international exposure, Mr. Shanmugaratnam typifies the Singapore model, which recognises the value of high human capital in its leadership, something that India has not seen since the time of Jawaharlal Nehru. Prime Minister Modi is right to have invited this global leader to participate in a brainstorming on how to transform India, thus drawing much-needed attention to the achievements of Singapore. Though its cultural policies may not be to everyone’s taste, the economic transformation that this tiny state has so quickly wrought is most impressive indeed. There is an astounding presence there of public capital in the form of infrastructure, the most egregious of which is public housing which hosts over 80 per cent of the population. Along with its approach to political freedoms, Singapore’s record is closer to that of socialist planning rather than free-market capitalism. Its government has not hesitated to intervene in the economy but its interventions have been made with a finesse that has yielded substantial returns. It is ironic that a government that had so ceremoniously replaced the Planning Commission must simultaneously seek clues from the history of a country transformed by economic planning.

There is one specific area in which our own government may learn from the Singapore experience. The government there had instituted a provident fund to which all workers and employees have had to contribute. These contributions ensured a rise in the saving rate which in turn was a source of funding for public investment. In the muddled discourse on fiscal policy in India today, the reigning argument appears to be that a fixed private saving rate sets the limit for the attainable fiscal deficit. This overlooks the possibility of raising the private saving rate, which is precisely what the Singapore government had done early in its history, enabling it to achieve a scale of public capital formation that truly distinguishes it from India. All indications are that the present government of India is striving to replicate Singapore’s institutional architecture, as in laws governing business, rather than the transformative role of public investment that turned a fishing village into a global destination for FDI. What other conclusion can be drawn from the fact that in the Budget for 2016-17 the increase in the allocation for capital expenditure amounted to a mere 2.3 per cent, with inflation running at around 4 per cent per annum?


Bleak agricultural landscape

A sector that is unlikely to be well served by the philosophy than an economy left to its own devices will achieve its potential is agriculture. Three of the past five years in India have been years of poor agricultural performance, reflected in persistent food price inflation. We are very likely witnessing creeping climate change with direct consequences for production. The advisory from most funds in the financial sector is that the economic outlook this year will depend upon the monsoon. It is surprising that the imperative of drought-proofing an increasingly vulnerable Indian agriculture hardly figures in the public discourse on the economy when it is of no less importance than rolling out the Goods and Services Tax. Nothing short of a transformation akin to the Green Revolution can achieve this, and the States would have to be on board. The present government has had little to say on the matter so far. By disbanding the Planning Commission, the Centre has lost a long-standing conduit to the States whose planning boards did have at least a titular connection to the former.

Keep the pause button on GM pressed

JACK A. HEINEMANN in The hindu

  

 

Questioning a technology, especially of the kind that has serious unknowns and lacks clear social benefits, is not an attack on science

Jairam Ramesh, former Environment Minister for India, made the brave decision in 2010 to tell his then apex regulator of genetically modified organisms (GEAC) that it had failed to properly use available science to determine the safety — to human health and the environment — of Bt brinjal, created using genetic modification (GM). His decision followed careful evaluation of the science.

I was involved in Ramesh’s review. I read first hand the scientific evidence in my area of expertise provided to the GEAC and its responses. I was heartened to see that his decision was validated by the esteemed scientists that made up the Supreme Court Technical Expert Committee who have advised the Court on the need for better research and better process before continuing to release GM crops into the environment or using them as food.

Creating confusion

G. Padmanaban (“Sow the wind, reap a storm,” The Hindu, September 2) believes that the events surrounding the evaluation of Bt brinjal and now extending to other kinds of GM plants is an assault on science. He confuses science with technology. Science is the process of knowledge creation (or discovery) whereas technology is the means of knowledge application. This confusion causes some scientists to defend technologies that are questioned because they perceive questions on the technology as an attack on science. It is not.

There is much knowledge discovered or to be discovered that cannot be applied wisely — at least not now. GM plants are among the technologies that have both serious scientific unknowns and lack a clear social benefit — at least for now.

For over 30 years, GM has been promised to produce plants that will resist the stresses of drought, heavy metals and salt, that will increase yield, reduce the use of toxic pesticides and even fix their own nitrogen. To be fair, some GM crops have reduced the use of some toxic insecticides for a brief period. To be precise, though, none of these promises has been sustainably delivered to farmers.

Why not? Well, it isn’t complex regulation holding them back. By the year 2005, over 1,000 applications were approved to field trial stress-tolerant GM plants in the United States alone. None ever progressed out of the testing phase. The explanation for this is likely because stress tolerance is not a solution to the causes of stress. No matter how tolerant you make the plant to drought, using it in soil low in organic matter and unable to hold water will eventually further deplete the soil of moisture and the plant will struggle or die. GM is an attempt to use genetics to overcome the environment. This never works for long. That is why some call GM a distraction from investing in real solutions to the problems faced by real farmers.

A symptom

Herbicide use is increasing in the U.S. since it adopted GM maize (corn), soybeans and cotton. Insecticide use is down by a small bit, but extremely high compared to countries such as France which do not use GM crops. Western Europe’s maize yields match or exceed the U.S.’ yields using less pesticide. The yields in wheat and oilseed rape are increasing at an even faster rate in Western Europe than in the U.S. and Canada. This indicates a dangerous trend: those countries choosing to innovate in agriculture using GM are demonstrating lower productivity increases and greater dependence on chemical inputs in all crops compared to economically and environmentally comparable countries choosing to not use GM crops.

What is it about investing in GM products that seems to undermine other technologies in agriculture? GM products attract the strictest intellectual property (IP) rights instruments possible in agriculture (e.g., process patents). The use of those instruments concentrates investment and drives out simple but even more effective technologies.

Now every government research centre and public university seeks to compensate for the fall in direct public investment through licensing royalties from IP and the creation of partnerships with the private sector. This necessarily changes the kinds of questions they favour being asked by their researchers, the kind that will be supported by institutional resources or rewarded with promotion. With these policies in place we shouldn’t be surprised that every problem looks like it has a GM solution even to researchers who claim to have no entrepreneurial motivations.

Prof. Padmanaban’s ambition for a crop that provides all nutritional needs and grows everywhere demonstrates the poverty of the GM approach to hunger and malnourishment. Such a crop would quickly become obsolete as it would also serve as a wonderful meal for every conceivable form of pest. Meanwhile, it would undermine both biological and agricultural diversity as it became a weed in its own right.

Instead of that approach, supporting communities with education on nutrition and farmers with technologies that build up their soils, manage pests with little or no application of pesticide and manufactured fertilizers gives them the means and independence to grow a variety of crops and livestock to meet their dietary needs and sell their surplus in local markets.

This investment in agriculture is not as good at making intellectual property, but better for growing food. To properly support India’s mainly small holder farming requires removing the penalties and incentives on the public scientist to develop primarily technologies that bring direct revenue to their institutions. Instead, invest in them with public money and measure their success by the yields of farmers, the reduction of pesticides and fertilizer they use, and the increase in their wealth and health.

No missed opportunities

India is not missing out on the benefits of GM. So far, there haven’t been any proven to exist, or proven to be sustainable. GM crops are not designed to increase intrinsic yield and the largest scale and longest term studies bear out that they don’t yield more. Meanwhile, the cost of GM seeds is the fastest growing expense for U.S. farmers who are simultaneously suffering from weeds resistant to the herbicides excessively used on GM crops and pests resistant to the insecticides over-used in Bt crops. That likely would be India’s experience had it commercialised Bt brinjal which was developed with the least effective form of Bt for the target pest.

In addition, the safety issue still lingers over these products. It shouldn’t. The science needed to establish their safety exists and is affordable but it must be applied dispassionately and transparently. That is all Jairam Ramesh asked.

Claiming that GM crops are demonstrated safe by the absence of specific health claims from Americans is glib. There are no validated health surveillance programmes in the U.S. which could both detect and diagnose the cause of the most likely manifestations of harm if they do exist.

Meanwhile, more research studies accumulate with evidence of adverse effects, some quite serious. These studies require replication, but they run into roadblocks or fail to find new funding. Most often these studies report low level health effects using animal feeding studies, so it is not clear whether the effect would be the same, more or less in humans and more or less likely to be caused using GM plants cooked and processed, as humans eat them, rather than raw or processed the way they are provided to test animals.

Hunger, pestilence, and economic failure are the images of fear increasingly being used to drive acceptance of GM crops. Ignorance, anti-science, ideology and hypocrisy are the insults used to counter questions about the safety of GM crops coming from scientists and the public. What is right for India’s agriculture is too important a question to leave to fear and insult to decide. I think that both Ramesh and the scientists of the Technical Expert 

Committee knew this when they asked India to pause on the use of GM products. Pause so that all voices can be heard. Reflect on what the problems are and whether technologies solve them or mask them for a time, or even make them worse later.

Farming subsidies: this is the most blatant transfer of cash to the rich

As the British government cut benefits for the poor at home, in Europe it fought to keep millions in subsidies for wealthy farmers

• 
• • George Monbiot
  • The Guardian, Monday 1 July 2013 20.30 BST

‘Most of the land in Britain is owned by very rich people, including millionaires from abroad who pay no UK taxes.' Illustration by Daniel Pudles

It's the silence that puzzles me. Last week the chancellor stood up in parliament to announce that benefits for the very poor would be cut yet again. On the same day, in Luxembourg, the British government battled to maintain benefits for the very rich. It won. As a result, some of the richest people in the country will each continue to receive millions of pounds in income support from taxpayers.

There has been not a whimper of protest. The Guardian hasn't mentioned it. UK Uncut is silent. So, at the other end of the spectrum, is the UK Independence party.

I'm talking about the most blatant transfer of money from the poor to the rich that has occurred in the era of universal suffrage. Farm subsidies. The main subsidy, the single farm payment, is doled out by the hectare. The more land you own or rent, the more money you receive.

Since 1999, more progressive European nations have been trying to limit the amount of public money a farmer can capture under the common agricultural policy. It looked as if, this year, they might at last succeed. But throughout the negotiations that ended last week, two governments in particular resisted: those resolute champions of the free market, Germany and the UK. Thanks to their lobbying, any decision has yet again been deferred.

There were two proposals for limiting handouts to the super-rich, known as capping and degressivity. Capping means that no one should receive more than a certain amount: the proposed limit was €300,000 (£250,000) a year. Degressivity means that beyond a certain point the rate received per hectare begins to fall. This was supposed to have kicked in at €150,000. The UK's environment secretary, Owen Paterson, knocked both proposals down.

When our government says "we must help the farmers", it means "we must help the 0.1%". Most of the land here is owned by exceedingly wealthy people. Some of them are millionaires from elsewhere: sheikhs, oligarchs and mining magnates who own vast estates in this country. Although they might pay no taxes in the UK, they receive millions in farm subsidies. They are the world's most successful benefit tourists. Yet, amid the manufactured terror of immigrants living off British welfare payments, we scarcely hear a word said against them.

The minister responsible for cutting income support for the poor, Iain Duncan Smith, lives on an estate owned by his wife's family. During the last 10 years it has received €1.5m in income support from taxpayers. How much more obvious do these double standards have to be before we begin to notice?

Thanks in large part to subsidies, the value of farmland in the UK has tripled in 10 years: it has risen faster than almost any other speculative asset. Farmers are exempted from inheritance tax and capital gains tax. They can build, without planning permission, structures which lesser mortals would be forbidden to erect, boosting both their capital and income. And they have a guaranteed income from the state. Yet all we hear from their leaders is one long whinge.

I have yet to detect a word of gratitude from the National Farmers' Union to the hard-pressed taxpayers who keep its members in such style. The NFU, dominated by the biggest landowners, has a peculiar genius for bringing out the violins. It pushes forward small, struggling hill farmers. The real beneficiaries of its policies are the arable barons hiding behind them.

An uncapped subsidy system damages the interests of small farmers. It reinforces the economies of scale enjoyed by the biggest landlords, helping them to drive the small producers out of business. A fair cap (say of €30,000) would help small farmers compete with the big ones.

So here's the question: why do we keep deferring to Big Farmer? Why do its sob stories go unchallenged? Why is this spectacular feudal boondoggle tolerated in the 21st century?

Here are three possible explanations. A high proportion of the books aimed at very young children are about farm animals. There is usually one family of every kind of animal, and they live in harmony with each other and the rosy-cheeked farmer. Understandably, slaughter, butchery, castration, separation, crates and cages, pesticides and slurry never feature. The petting farms that have sprung up around Britain reify and reinforce this fantasy. Perhaps these books unintentionally implant – at the very onset of consciousness – a deep, unquestioned faith in the virtues of the farm economy.

Perhaps too, after being brutally evicted from the land through centuries of enclosure, we have learned not to go there – even in our minds. To engage in this question feels like trespass, though we have handed over so much of our money that we could have bought all the land in Britain several times over.

Perhaps we also suffer from a cultural cringe towards people who make their living from the land and the sea, seeing their lives, however rich and cossetted they are, as somehow authentic, while ours feel artificial.

Whatever the reason, it's time we overcame these inhibitions and confronted this unembarrassed robbery of the poor by the rich. The current structure of farm subsidies epitomises the British government's defining project: capitalism for the poor and socialism for the rich.

Europe's €50bn subsidy that enriches landowners and kills wildlife

The EU's farm subsidies are a modern equivalent of feudal aid. As Europe suffers under austerity, it's right to call for reform

• 
• • George Monbiot
  • The Guardian, Monday 26 November 2012 20.30 GMT

'Not long ago, farm payments were justified on the grounds that world demand was low. Now they are justified on the grounds that world demand is high.' Photograph: Andrew Matthews/PA

There's a neat symmetry in the numbers that helped to sink the European summit. The proposed budget was €50bn higher than the UK government could accept. This is the amount of money that European farmers are given every year. Britain's contentiousbudget rebate is worth €3.6bn a year: a fraction less than our contribution to Europe's farm subsidies.

Squatting at the heart of last week's summit, poisoning all negotiations, is a vast, wobbling lump of pork fat called the common agricultural policy. The talks collapsed partly because the president of the European council, pressed by François Hollande, proposed inflating the great blob by a further €8bn over six years. I don't often find myself on their side, but the British and Dutch governments were right to say no.

It is a source of perpetual wonder that the people of Europe tolerate this robbery. Farm subsidies are the 21st century equivalent of feudal aid: the taxes medieval vassals were forced to pay their lords for the privilege of being sat upon. The single payment scheme, which accounts for most of the money, is an award for owning land. The more you own, the more you receive.

By astonishing coincidence, the biggest landowners happen to be among the richest people in Europe. Every taxpayer in the EU, including the poorest, subsidises the lords of the land: not once, as we did during the bank bailouts, but in perpetuity. Every household in the UK pays an average of £245 a year to keep millionaires in the style to which they are accustomed. No more regressive form of taxation has been devised on this continent since the old autocracies were overthrown. Never mind French farmers dumping manure in the streets: we should be dumping manure on French farmers.

It would be unfair to stop there. There are plenty of people in the UK who deserve the same treatment. Last year the House of Commons environment, food and rural affairs committee, in a bizarrely unbalanced report, maintained that the farm subsidy system does not go far enough. It wants to supplement payments for owning land with a resumption of headage payments: money for every animal farmers cram into their fields.

This nonsense outfrenches the French. There were excellent reasons for phasing out headage payments in 2003. They provided an incentive to load the hills with as many animals (mostly sheep) as possible, regardless of the impact on the natural world and the welfare of the sheep. The extra sheep flooded the market, bankrupting the farmers whom the payments were supposed to protect. The committee's proposal accords with a longstanding and idiotic European principle: the less suitable a region is for farming, the more money is spent to ensure that farming persists there. This is the rationale for such extra subsidies as less favoured area payments.

This approach is justified by a groundless claim: that farming, particularly in the uplands, is required to protect the environment. The European commission maintains that farming is essential to "combat biodiversity loss" and reduce emissions of greenhouse gases. The parliamentary committee claims that fewer cattle and sheep in the hills has led to "undergrazing", causing such horrors as the growth of bracken. How nature managed to survive for the 3 billion years before humans arrived to look after it is anyone's guess.

These statements are seldom accompanied by anything resembling a scientific reference. They reflect a biblical view of human stewardship. It would be lovely to believe that hill farmers, the landholders with whom it is easiest to sympathise, are delivering only blessings, but this is pure wish fulfilment.

Flooding of the kind now blighting the UK is exacerbated by grazing in the hills, which prevents trees and scrub from growing. The sparser the vegetation with which the hills are clothed, the faster the water runs off. Woodland and scrub preserve more carbon – both above and below ground – than pasture does. There has been a catastrophic decline in farm wildlife in the past few decades, as a result of grazing, drainage, sheep dip residues poisoning the streams and farmers' clearance of habitats. Last week's shocking report on the state of the UK's birds shows that while 20% of all birds have been lost since 1966, on farmland the rate is over 50%.

The subsidy system doesn't just encourage this destruction: it demands it. A European rule insists that to receive their main payment farmers must prevent "the encroachment of unwanted vegetation on agricultural land". In other words, they must stop trees and bushes from growing. They don't have to grow crops or keep animals on the land to get their money, but they do have to keep it mown. All over Europe essential wildlife habitats are destroyed – often on agriculturally worthless land – simply to expand the area eligible for subsidies.

The European commission maintains that subsidies are required to help farmers "contribute to growing world food demand, expected … to increase by 70% by 2050". But if world food demand is expected to grow by 70%, why do we need subsidies? Not long ago, farm payments were justified on the grounds that world demand was low. Now they are justified on the grounds that world demand is high. The policy comes first, the justifications later.

While David Cameron is right to press for major cuts, he is simultaneously seeking to goldplate the injustice by opposing the only vaguely progressive measure in the commission's proposals for reform: capping the money farms can receive, at a maximum of €300,000. This, our government complains, would discourage the "consolidation" of land. Britain already has one of the highest concentrations of land ownership on earth. How much more "consolidation" do we need? And how much more brazenly could Cameron favour the interests of his aristocratic chums?

Europe is in crisis. It is in crisis because the money has run out. Essential public services are being cut (often unjustly and unnecessarily), but at the same time €50bn a year is being paid to landowners. This spending is so gross, so nakedly indefensible, that it's hard to understand why it does not obsess activists across the political spectrum: from UK Uncut to the TaxPayers' Alliance. Seldom in the field of human conflict was so much given by so many to so few.

What if Britain left the EU?

Eurosceptics want a vote on the ultimate question – and the PM does not seem entirely opposed. Ben Chu in The Independent examines the consequences of saying bye bye to Brussels

Exports

The European Union is easily Britain's biggest single export market, with 53 per cent of our goods purchased by our fellow European nations in 2011. This sector of our economy, directly and indirectly, supports three million jobs, according to Sir Iain Begg, a professorial research fellow at the European Institute of the London School of Economics. Without export growth last year, we would have fallen back into recession much earlier. If we were to leave the EU, we would almost certainly still be allowed to sell goods into the single market. Norway, Iceland and Switzerland already do so through a free-trade agreement. The difference would be that the UK would not be able to set the rules that govern the European single market. It would, of course, have to implement those rules to keep selling into those markets though. The argument sometimes deployed by those who want out of the EU is that leaving would, somehow, encourage British manufacturers to concentrate on exporting to the likes of China, Brazil and India.

Imports

Britain also imports a great deal from other nations in the EU – more than it exports, in fact. In 2011, we exported £159bn of goods to the EU and imported goods worth £202bn – an annual trade deficit of £42bn. Some argue that this deficit gives us leverage to demand more opt-outs and budget rebates from our European partners. The argument is: "They need us more than we need them." The problem is that we import a lot of European goods, not because we are doing the Europeans a favour, but because our people want to buy things that cannot be produced at home – think of all those German cars and French luxury goods. If Britain were to leave the EU, the Government might decide to impose large tariffs on European imports, but this probably wouldn't prove very popular. The likelihood is we would still run a trade deficit with the EU, but, as with imports, we would have no say over the rules governing the single market.

Growth

Would foreign capital still want to invest in the UK if it were not part of the EU bloc? Some economists say overseas investors would be put off. The National Institute of Economic and Social Research, for example, estimates that foreign direct investment would fall. And, mainly for this reason, it argues that our GDP would permanently be 2.25 per cent lower if we left the EU. However, Capital Economics argued last month that, because of the eurozone crisis, levels of foreign investment in the UK could actually go up if we left the EU, because we would seem like a safe haven.

Immigration

If Britain left the EU, the Government would not be required to permit the free movement of all citizens of the 27 nations of the union into Britain, nor their right to work here. About EU 165,000 citizens migrated to the UK in the year to September 2011, after 182,000 arrived in the 12 months to September 2010. Proponents of withdrawal argue that stopping such flows would improve quality of life because there would be less strain on public services and infrastructure. Opponents argue that immigrants are an economic benefit for Britain, filling holes in our labour market and boosting overall productivity. But the free movement of people is two-way. An estimated 748,010 Britons live or work in the European Union. Many have holiday homes in France and Spain. If we decided to restrict inflows of EU citizens to Britain, the European Union would be likely to respond in kind.

Budget

The UK makes an annual gross contribution to the EU budget of £15bn and it gets a rebate of €6bn in various subsidies – mainly agricultural. This makes an annual net contribution of €9bn. Ending those payments by leaving the EU would help to reduce the UK deficit, but these are not transformative sums. Our EU contributions are equivalent to 0.6 cent of GDP. We presently have a deficit of 8.3 per cent of GDP. Plus, one has to consider the benefits of those contributions. Structural funds – as payments into the common EU budget are known – are used to develop post-Soviet bloc countries in Europe, building up their infrastructure and making them bigger potential markets for British goods and services.

Business

A study by the British Chambers of Commerce has estimated that the annual cost to the UK of EU regulation is £7.4bn, but costs must be set against benefits. The EU has forced the mobile phone networks to stop ripping of customers when they use their handsets abroad. It has tackled Microsoft and airlines about over-charging. Britain outside the EU would have to rely on British competition authorities alone to protect customers from the malfeasance of corporations.

Banking

This is a complex relationship. The UK actually wants to impose higher capital requirements on its domestic banks than the rest of Europe does. Yet Britain is also fighting a Financial Taxation Tax, something that much of the rest of Europe

supports. British bankers, for their part, are generally in favour of staying in the EU. They fear that their access to lucrative European capital markets could be impeded if Britain left the bloc. And both banks and businesses calculate that Britain's EU membership is in their interests because the EU can help to open foreign markets such as China up to them more effectively than the UK acting alone.

Agriculture

The EU's Common Agricultural Policy is almost universally considered a wasteful mechanism that encourages over-production and undermines African farmers. Between 2007 and 2013, the UK will contribute £33.7bn to the Common Agricultural Policy (CAP) and get back £26.6bn, according to the Open Europe think-tank. That works out as a net contribution of £7.1bn. If the UK left the EU, our Government could scrap these subsidies at home and save the money. But it already has discretion at home about what to do with the payments – enabling ministers to channel the money to conservation, rather than production. And, within the EU, it can push for badly-needed reform of the CAP. Outside the EU, it would have no influence.

Politics

Europe is more social democratic than the UK. Even countries with centre-right governments tend to tax more, spend more on welfare and are less laissez-faire when it comes to markets. Those on the left in Britain tend to be in favour of the UK's continued membership because they feel it will help to move the country in this direction. Those on the right tend to be opposed for similar reasons; they feel Europe is helping to undermine Britain's social and economic freedoms. Yet there are global politics to consider, too. The right wants to rely on Britain's "special relationship" with the US, but Washington prefers Britain to work in closer partnership with the EU. Rising Asian giants such as India and China also seem to regard Britain's membership of the EU as a good reason to build economic and diplomatic ties with us.

Its Asian prosperity that's undermined dysfunctional Arab states

 Food and failed Arab states
By Spengler

Even Islamists have to eat. It is unclear whether President Hosni Mubarak of Egypt will survive, or whether his nationalist regime will be replaced by an Islamist, democratic, or authoritarian state. What is certain is that it will be a failed state. Amid the speculation about the shape of Arab politics to come, a handful of observers, for example economist Nourel Roubini, have pointed to the obvious: Wheat prices have almost doubled in the past year.

Egypt is the world's largest wheat importer, beholden to foreign providers for nearly half its total food consumption. Half of Egyptians live on less than $2 a day. Food comprises almost half the country's consumer price index, and much more than half of spending for the poorer half of the country. This will get worse, not better.

Not the destitute, to be sure, but the aspiring and frustrated young, confronted the riot police and army on the streets of Egyptian cities last week. The uprising in Egypt and Tunisia were not food riots; only in Jordan have demonstrators made food the main issue. Rather, the jump in food prices was the wheat-stalk that broke the camel's back. The regime's weakness, in turn, reflects the dysfunctional character of the country. 35% of all Egyptians, and 45% of Egyptian women can't read.

Nine out of ten Egyptian women suffer genital mutilation. US President Barack Obama said Jan. 29, "The right to peaceful assembly and association, the right to free speech, and the ability to determine their own destiny … are human rights. And the United States will stand up for them everywhere." Does Obama think that genital mutilation is a human rights violation? To expect Egypt to leap from the intimate violence of traditional society to the full rights of a modern democracy seems whimsical.

In fact, the vast majority of Egyptians has practiced civil disobedience against the Mubarak regime for years. The Mubarak government announced a "complete" ban on genital mutilation in 2007, the second time it has done so - without success, for the Egyptian population ignored the enlightened pronouncements of its government. Do Western liberals cheer at this quiet revolt against Mubarak's authority?

Suzanne Mubarak, Egypt's First Lady, continues to campaign against the practice, which she has denounced as "physical and psychological violence against children." Last May 1, she appeared at Aswan City alongside the provincial governor and other local officials to declare the province free of it. And on October 28, Mrs Mubarak inaugurated an African conference on stopping genital mutilation.

The most authoritative Egyptian Muslim scholars continue to recommend genital mutilation. Writing on the web site IslamOnline, Sheikh Yusuf al-Qaradawi - the president of the International Association of Muslim Scholars - explains:

The most moderate opinion and the most likely one to be correct is in favor of practicing circumcision in the moderate Islamic way indicated in some of the Prophet's hadiths - even though such hadiths are not confirmed to be authentic. It is reported that the Prophet (peace and blessings be upon him) said to a midwife: "Reduce the size of the clitoris but do not exceed the limit, for that is better for her health and is preferred by husbands."

That is not a Muslim view (the practice is rare in Turkey, Iraq, Iran and Pakistan), but an Egyptian Muslim view. In the most fundamental matters, President and Mrs Mubarak are incomparably more enlightened than the Egyptian public. Three-quarters of acts of genital mutilation in Egypt are executed by physicians.

What does that say about the character of the country's middle class? Only one news dispatch among the tens of thousands occasioned by the uprising mentions the subject; the New York Times, with its inimitable capacity to obscure content, wrote on January 27, "To the extent that Mr. Mubarak has been willing to tolerate reforms, the cable said, it has been in areas not related to public security or stability.

For example, he has given his wife latitude to campaign for women's rights and against practices like female genital mutilation and child labor, which are sanctioned by some conservative Islamic groups." The authors, Mark Landler and Andrew Lehren, do not mention that 90% or more of Egyptian women have been so mutilated. What does a country have to do to shock the New York Times? Eat babies boiled?

Young Tunisians and Egyptians want jobs. But (via Brian Murphy at the Associated Press on January 29) "many people have degrees but they do not have the skill set," Masood Ahmed, director of the Middle East and Asia department of the International Monetary Fund, said earlier this week. "The scarce resource is talent," agreed Omar Alghanim, a prominent Gulf businessman. The employment pool available in the region "is not at all what's needed in the global economy." For more on this see my January 19 essay, Tunisia's lost generation. There are millions of highly-qualified, skilled and enterprising Arabs, but most of them are working in the US or Europe.

Egypt is wallowing in backwardness, not because the Mubarak regime has suppressed the creative energies of the people, but because the people themselves cling to the most oppressive practices of traditional society. And countries can only languish in backwardness so long before some event makes their position untenable.

Wheat prices 101 and Egyptian instability
In this case, Asian demand has priced food staples out of the Arab budget. As prosperous Asians consume more protein, global demand for grain increases sharply (seven pounds of grain produce one pound of beef). Asians are rich enough, moreover, to pay a much higher price for food whenever prices spike due to temporary supply disruptions, as at the moment.

Egyptians, Jordanians, Tunisians and Yemenis are not. Episodes of privation and even hunger will become more common. The miserable economic performance of all the Arab states, chronicled in the United Nations' Arab Development Reports, has left a large number of Arabs so far behind that they cannot buffer their budget against food price fluctuations.

Earlier this year, after drought prompted Russia to ban wheat exports, Egypt's agriculture minister pledged to raise food production over the next ten years to 75% of consumption, against only 56% in 2009. Local yields are only 18 bushels per acre, compared to 30 to 60 for non-irrigated wheat in the United States, and up 100 bushels for irrigated land.

The trouble isn't long-term food price inflation: wheat has long been one of the world's bargains. The International Monetary Fund's global consumer price index quadrupled in between 1980 and 2010, while the price of wheat, even after the price spike of 2010, only doubled in price. What hurts the poorest countries, though, isn't the long-term price trend, though, but the volatility.

People have drowned in rivers with an average depth of two feet. It turns out that China, not the United States or Israel, presents an existential threat to the Arab world, and through no fault of its own: rising incomes have gentrified the Asian diet, and - more importantly - insulated Asian budgets from food price fluctuations. Economists call this "price elasticity." Americans, for example, will buy the same amount of milk even if the price doubles, although they will stop buying fast food if hamburger prices double. Asians now are wealthy enough to buy all the grain they want.

If wheat output falls, for example, due to drought in Russia and Argentina, prices rise until demand falls. The difference today is that Asian demand for grain will not fall, because Asians are richer than they used to be. Someone has to consume less, and it will be the people at the bottom of the economic ladder, in this case the poorer Arabs.



That is why the volatility of the wheat price (the rolling standard deviation of percentage changes in the price over twelve months) has trended up from about 5% during the 1980s and 1990s to about 15% today. This means that there is a roughly two-thirds likelihood that the monthly change in the wheat price will be less than 15%.

It also means that every so often the wheat price is likely to go through the ceiling, as it did during the past 12 months. To make life intolerable for the Arab poor, the price of wheat does not have to remain high indefinitely; it only has to trade out of their reach once every few years.

And that is precisely what has happened during the past few years:



After 30 years of stability, the price of wheat has had two spikes into the $9 per bushel range at which very poor people begin to go hungry. The problem isn't production. Wheat production has risen steadily - very steadily in fact - and the volatility of global supply has been muted:



The line in Chart 3 above marked "production volatility" is the five-year standard deviation of annual percentage changes in world wheat supply (data from US Department of Agriculture). During the 1960s and 1970s, it hovered around the 3% to 5% range, but fell to the 1% to 3% range.

It shows an approximately two-thirds likelihood that world wheat supply will change by less than 3% each year. Wheat supply dropped by only 2.4% between 2009 and 2010 - and the wheat price doubled. That's because affluent Asians don't care what they pay for grain. Prices depend on what the last (or "marginal") purchaser is willing to pay for an item (what was the price of the last ticket on the last train out of Paris when the Germans marched on June 14, 1940?). Don't blame global warming, unstable weather patterns: wheat supply has been fairly reliable. The problem lies in demand.

Officially, Egypt's unemployment rate is slightly above 9%, the same as America's, but independent studies say that a quarter of men and three-fifths of women are jobless. According to a BBC report, 700,000 university graduates chase 200,000 available jobs.

A number of economists anticipated the crisis. Reinhard Cluse of Union bank of Switzerland told the Financial Times last August:

"Significant hikes in the global price of wheat would present the government with a difficult dilemma.

Do they want to pass on price rises to end consumers, which would reduce Egyptians' purchasing power and might lead to social discontent?

Or do they keep their regulation of prices tight and end up paying higher subsidies for food? In which case the problem would not go away but end up in the government budget.

Egypt's public debt is already high, at roughly 74% of gross domestic produce (GDP), according to UBS. Earlier this year the IMF projected that Egypt's food subsidies would cost the equivalent of 1.1% of GDP in 2009-10, while subsidies for energy were expected to add up to 5.1%.
...
Tensions over food have led to violence in bread queues before and it wouldn't take much of a price rise for the squeeze on many consumers to become unbearably tight."

One parameter to watch closely is the Egyptian pound. Insurance against Egyptian default was the London Interbank Offered Rate (Libor) +3.3% a week ago; on Friday, it stood at Libor + 4.54%. That's not a crisis level, but if banks start reducing exposure, things could get bad fast. In 2009 Egyptian imports were $55 billion against only $29 billion of exports; tourism (about $15 billion in net income) and remittances from Egyptian workers (about $8 billion) and other services brought the current account into balance. Scratch the tourism, and you have a big deficit.

Egypt has $35 billion of central bank reserves, adequate under normal conditions, but thin insulation against capital flight. Foreigners hold $25 billion of Egypt's short-term Treasury bills, for example. It would not take long for a run on the currency to materialize - and if the currency devalues, food and fuel become all the more expensive. A vicious cycle may ensue.

Under the title The Failed Muslim States to Come (Asia Times Online December 16, 2008), I argued that the global financial crisis then at its peak would destabilize the most populous Muslim countries:

Financial crises, like epidemics, kill the unhealthy first. The present crisis is painful for most of the world but deadly for many Muslim countries, and especially so for the most populous ones. Policy makers have not begun to assess the damage. The diplomatic strategy of the industrial nations now resembles a James Clavell potboiler, in which an earthquake interrupts a hopelessly immured plot. Moderate Islam was the El Dorado of the diplomatic consensus.

It might have been the case that Pakistan could be tethered to Western interests, or that Iran could be engaged peacefully, or that Turkey would incubate a moderate form of Islam. I considered all of this delusional, but the truth is that we shall never know. The financial crisis will sort them out first.

I was wrong. It wasn't the financial crisis that undermined dysfunctional Arab states, but Asian prosperity. The Arab poor have been priced out of world markets. There is no solution to Egypt's problems within the horizon of popular expectations. Whether the regime survives or a new one replaces it, the outcome will be a disaster of, well, biblical proportions.

The best thing the United States could do at the moment would be to offer massive emergency food aid to Egypt out of its own stocks, with the understanding that President Mubarak would offer effusive public thanks for American generosity. This is a stopgap, to be sure, but it would pre-empt the likely alternative. Otherwise, the Muslim Brotherhood will preach Islamist socialism to a hungry audience. That also explains why Mubarak just might survive. Even Islamists have to eat. The Iranian Islamists who took power in 1979 had oil wells; Egypt just has hungry mouths. Enlightened despotism based on the army, the one stable institution Egypt possesses, might not be the worst solution.