‘Subsidies are just like circulating blood from the left arm to the right’Ken Schoolland is an Associate Professor of Economics and Director of the Entrepreneurship Centre at Hawai‘i Pacific University in Honolulu.
Schoolland served as an international economist in the US International Trade Commission, the US Department of Commerce, and on assignment to the Office of the Special Representative for Trade Negotiations. Schoolland has authored two books: The Adventures of Jonathan Gullible: A Free Market Odyssey, now published in 53 languages; and Shogun's Ghost: The Dark Side of Japanese Education, in two languages. The Post’s Sangam Prasain caught up with Schoolland last week during his visit to Kathmandu to discuss the global economy in the context of rising costs and war, and the initiative of poor countries like Nepal to tackle the situation. Excerpts:
How do you assess the current global economy?
Certainly, the crisis is hitting throughout the world. The coronavirus was bad enough, but the lockdown was worse because it turned the global economies downward in such a way that it further impoverished people and made it harder to cope with the disease and other problems. And then it was compounded with the Russia-Ukraine war, which had a huge impact on oil, food and fertiliser prices.
That’s having a big impact, especially in Asia and Africa. At the same time, I need to say, many countries, including the US and Europe, have been inflating their currencies. Because the coronavirus has been phased out, they think that problem will be resolved by printing lots of money. That is causing horrendous inflation, which is the most damaging thing to low-income people.
That’s devastating to the family who loses 12 to 15 percent of their income to inflation. But it doesn't hit everybody the same. The impact is really hard on poor people. I fear this is the beginning of a recession in the US and Europe. This will impact other countries like Nepal and India too because the demand for products would drop. The demand for labour would also drop when the economy goes down. The situation is troubling.
Higher fuel prices, against the background of recovering demand following the Covid-19 pandemic, have already caused high inflation around the world. How would it impact countries like Nepal that are fully dependent on imports, mainly fuel?
This is just the beginning. I think many countries are already in recession. There would be a downturn but the timing is uncertain. We will probably be in the worst situation that we expect. In the US, there is a housing bubble, the interest rates are soaring, I think that the bubble could be pretty bad when it pops out. In my view, there is always a good and responsible solution to the problem. But politicians don’t want to. Politicians usually look into the problem whenever there is a problem. The government, in fact, is the cause of the problem in the first place.
The solution is to free up the economy. There are many many taxes. There are many many controls and regulations on the economy that cripple the economy. That’s why people leave the country because it’s too hard to find prosperity at home. The solution is right in front of them. If the politicians open up the economy and remove the restrictions and controls on productivity activities, there will be a burst of economic activities.
New Zealand was the slowest growing economy in the industrial world after World War II, growing at 1 percent a year. They lost their export markets. They borrowed lots of money from around the world to subsidise the farmers. Soon they become the top country to subsidise the farmers. They finally ran out of credit because no one would fund them.
What they did was they held an election. The labour party, the socialist New Zealand party came into power and implemented the most radical free-market reform of any industrial country in the post-World War II era.
They removed farm subsidies in three months. The highest subsidy in the world started to give nothing in just three months. They started to farm smartly. Instead of flat land, they started to farm on lean land. They started to serve the best restaurants in the world. They started to earn more money on less land. They started to end subsidies in all economies. They did massive disinvestment of government property.
The government used to own so many things that were inefficient and cost enormous subsidies and lost money. All ports, airlines, telecoms and railways were sold through competitive bidding that ended the subsidies and earned money from them. They became very productive. Instead of consuming taxpayers' money, the government enabled private agencies. They became fast economies because of being productive and efficient.
Should Nepal end subsidies on oil, fertiliser and others?
Yes. I believe deregulation would attract foreign investors. Deregulation and a low-cost market will definitely attract investors. It will become a great place to invest if the controls are removed. Reduce taxes and regulations if you want to be an attractive destination.
Is a politician wiser than an entrepreneur? I would say no. Politicians try to win favour by giving subsidies and incentives. What he does is he hands over the money from one person to another.
The person who receives feels good because his costs go down because of subsidies, but where does the money come from? It’s obvious from the other. The first takes twice as much from another person. So by doing this, you are crippling other industries that are invisible to the politicians. Subsidies are just like circulating blood from the left arm to the right.
Lots of politicians are squandering, not only in Nepal but worldwide. They don’t determine the market potential. Politicians have a different mindset. They are looking at votes, campaign contributions and payoffs. This makes corruption rampant, not only in Nepal but everywhere. Politicians always find ways to increase their power by providing solutions. When, in fact, if you diminish their power controls, you have a much better solution.
China’s move to curb fertiliser exports is being felt around the world. India banned exports of some food items. These situations, obviously, have exacerbated global prices, particularly in low-income countries like Nepal. Is that an unjustified restrictive measure in the free market economy?
I am not a fan of the World Trade Organisation. It is a deal-making organisation. The World Trade Organisation is based on the idea that “me producing my trade barriers is only good if you reduce your trade barriers”. Protectionists say we are a better economy when we are upstream. The free traders say we are a better economy when we are downstream because it is easy to get to. The natural history of trade shows that many prosperous cities were once easy to get to downstream not upstream or on mountain tops which are difficult to get to. Henry George, an American political economist and journalist, says protectionism does to our own nation in peacetime, but the enemy does to us in wartime.
When Russia invaded Ukraine, every country in the world said we have to block their trade. The protectionists said you are then doing a favour to Russia. The free traders said you are crippling Russia. Free traders say trade barriers are harmful. The protectionists are putting trade barriers against their own countries. You don’t have any justification.
People only favour protecting certain and favoured industries, and that’s crony capitalism which will hurt the general population. The things India and China are doing are not the right approach. All countries are trying to manipulate the trade.
The Russia-Ukraine war has made everything expensive. Food and goods prices are reaching record levels. How should Nepal tackle these multitudes of threats?
Russia has shut down the huge productive capacity of food and fertiliser. There is a huge crisis. There is stagflation globally. Governments around the world are printing money to tackle the situation. The inflation is huge. It is rising. This will impact the poor country's growth aspiration largely for the long term. The interest rate should be between the supply and demand for money. The interest rate should not be manipulated by the central bank when inflation is rising.