Some time ago, the story of Martin Shkreli, an entrepreneur who made the news as a candidate for “the most hated man in America” (thus the BBC), caused a stir: he bought the intellectual property rights needed to produce a life-saving anti-AIDS drug, and immediately afterwards raised the price by 5,000%.
Beyond the merits of the affair, what caused the most stir was the unapologetic attitude of this businessman, who did not care about the criticism of moralists and defended his right to maximize profits for himself and the investors of his hedge fund in a contemptuous manner.
The recently updated European Markets in Financial Instruments Directive, commonly abbreviated as MiFID II, is supposed to enhance consumers’ protection. Adjustments of regulatory background questions aside, the EU aims to improve “protection of investors by prohibiting the acceptance of commissions, protecting independent consulting, introducing new regulations regarding product monitoring”. This intention seems laudable, especially given the presence of some black sheep among investment advisors. However, a well-meaning policy is not necessarily also good for consumers. While the providers of financial services now legally safeguard themselves using elaborate documentation, clients do not necessarily receive better guidance. In fact, extensive documentation could possibly scare customers off.
Summer is not only the season of swimming trunks and barbecues, but also of vociferous politicians. One of the warhorses of this year’s silly season are bans. Whether it is plastic cutlery, oil heating or domestic flights, calls for bans are becoming louder across the political spectrum. Bans, however, are usually not the best way to deal with negative externalities. Politicians can find calling for bans attractive regardless, provided the requested prohibitions match the preferences of their voters, or signal serious engagement. Moreover, by resorting to extreme positions policymakers try to expand their power and authority. Yet, although the demand for bans is frequently used as an instrument to gain votes, we maintain that the state should actually use them only on rare occasions.
The Joint Committee of the three European Supervisory Authorities (European Banking Authority, European Insurance and Occupational Pensions Authority, European Securities and Market Authority) publishes a quarterly report on risks and vulnerabilities in the European financial system. This report offers hints on how current concerns likely translate into regulation. The Autumn 2019 edition highlights three themes: Brexit, low interests rates, and climate risk. I shall focus on the second topic, which heralds a heavier regulation and a less competitive environment.
On September 10th, California lawmakers have passed the much disputed Assembly Bill 5 that targets a change in the status of gig economy workers, from freelancers to actual employees. The bill allegedly aims to protect workers that are treated unfairly by companies which avoid paying for unemployment benefits, social security and disability insurance. While the bill specifically stipulates that:
„Nothing in this act is intended to diminish the flexibility of employees to work part-time or intermittent schedules or to work for multiple employers.“
It still remains unclear how this bill will affect the business models of collaborative businesses, the status of Uber & Lyft drivers, and the prospects for innovation within the gig economy. Uber’s top lawyer announced that Uber won’t be treating their drivers as employees despite the new law. The reason for that is the fact that Uber does not provide rides, but rather a technology platform for digital marketplaces. The legal battle will be long and costly, just like the one in the UK, where the court ruled that drivers are staff and hence entitled to holiday pay, paid rest breaks and the minimum wage.
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In mid-January, the European Parliament voted a resolution to phase out the use of palm oil as a component of clean diesel by 2021. This is a ban only on one ingredient, all other diesel “cleaners” are not treated. In particular, the Parliament asked the Commission “to take measures to phase out the use of vegetable oils that drive deforestation, including palm oil, as a component of biofuels, preferably by 2020”, so that the “contribution from biofuels and bio liquids produced from palm oil shall be 0 % from 2021”. The reasons: deforestation of rainforest in palm oil exporting countries, and the parliamentary ambition to fulfill the Paris accord on climate change and the UN 17 sustainable development goal. The resolution was promoted by Czech MEP Katerina Konecna of the European United Left/Nordic Green Left, originally a member of the Communist Party of Bohemia and Moravia.
The Committees’ attitude towards the ban was mixed. The 225-page file of parliamentary debate reveals the following positions. The lead committee on Environment, Food Safety and Health was most radical, insisting that “the progressive and long-term development of human society is one of the cornerstones of the EU, and it must therefore also be an aspect of our decision-making process in cases such as the palm oil issue.”
The consulting committees (on International Trade and Agriculture and Rural Development) had a more elaborate opinion, especially the Trade Committee: it de facto opposed the ban, suggesting a wait-and-see approach, provided “sustainable forestry” is maintained.
The EU policy to promote clean diesel was justified about ten years ago again by considerations of clean environment and managing the climate change. It resulted in the adoption of the Renewable Energy Directive 2009/28, which introduced a subsidy for the use of biofuels and set a goal of 10% “clean” diesel usage in the Union by 2020. As shown by the Index Mundi statistics, the incentivized demand by the EU led Indonesian, Thailand’s and Malaysian farmers to more than double the production of palm oil.
The graphs below shows that prior to the Directive, prices went up almost exponentially, but then fell due to growing supply. Since 2009, they have never reached again the 2007-2008 level (above $ 1,000 per metric ton), and in the last five years have fluctuated at around $ 700 per metric ton, with a declining trend.
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The Parliament now blames palm oil production as cause for deforestation, thus incurring “high cost of cultivating the cheap vegetable oil”. However, since the oil is used in diesel fuels, it is logical to assume that its price is correlated to that of diesel. Here is the correlation from 2006 to present day. The coefficient is relatively high (0.39).
The deforestation was, arguably, partially caused by the EU policies. By 2013, the EU has become the second largest importer of palm oil for clean diesel.
The surge in demand stimulated supply, and thus, allegedly, led to more plantations. But deeper background analysis suggests that the cutting of the rain forest has been linked to technological development and that the solution to the “problem” depends on markets and on the allocation of property rights.
The logging of rain forests in palm-oil exporting countries (the combined sale of the three countries mentioned earlier is 90% of the world total in 2017) started 100 years ago, when trees were cleared for rubber plantations, then for mining and resettlement of poor households (in 1950 and 1960s), and it went on until 1980. After 1980, the production of palm oil started, and was hailed as a “global cornerstone”, a “progressive and long-term development of human society”.
Ten years ago, Malaysia adopted a plan to increase the acreage of protected forest by 5%. According to a World Bank report of November 2017, “despite the complex legal and institutional structure, Malaysia is a success story in delivering efficient land administration services”. The WWF admits that the rain forest currently covers almost 60% of the country’s territory. Yet. It argues that it is not enough.
There is little progress in forest user rights in Indonesia. But in 2015, the Center for Indonesian Policy Studies, proposed to fight deforestation by strengthening communal and private property rights.
Once again, the current motion of the European Parliament to phase out palm oil from biofuels, championed by Ms. Konecna and Green and Left MEPs, has unintended consequences. For example, it bans only palm oil in bio fuels, but keeps subsidizing all other ingredients of biofuels. This approach raises issues about political discrimination and lobbying in favor of suppliers of other ingredients, at the expense of the palm oil producers, supposedly about 1.2 mln farmers globally.
The resolution of the European Parliament violates the WTO principles, and it may discredit the difficult balance of global trade rules. Deforestation, the key justification for the resolution is not properly analyzed, it is short-sighted and it takes into account neither the market forces, nor the diverse situations in palm oil producing countries. The proposed policy is likely to hit many farmers in not-so-rich countries. Sooner or later, those very EU lawmakers and central planners, like Ms. Konecna, will complain about global inequality and propose subsidies to compensate for the damage they had imposed on others.
The silver lining is that Parliamentary resolutions are not binding. One hopes that the European Council will opt for a no-policy-change approach, and leave the matter to be resolved by itself, by market forces and property rights, like the Indonesian institute suggests. Eventually and gradually, the entire policy of subsidizing diesel, or any other similar policy, will be abolished.