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Too grave a cost

  • Published at 12:31 am October 1st, 2017
Too grave a cost
Did you know that everyone in Bangladesh was paying a tax to keep the jute industry going? No, I hadn’t either, not until we got the announcement from Commerce Minister Tofail Ahmed that the tax will be suspended for three months. It’s a substantial tax too, as much as 10% of the long term price of rice – a tax which quite obviously falls hardest on the poorest. You and I might not worry too much about 10% on the cost of rice but for the truly poor that’s a substantial part of the family income – for rice is a substantial part of the monthly budget. Of course, no one actually says there is such a tax but this is what the effect of policy is. Ahmed has announced that it will be possible for importers, in this time of rising prices, to bring in rice in plastic bags instead of jute. This is a lifting of the 2014 law which insisted that goods must be packaged in that jute rather than anything else. The importers say that this will knock perhaps Tk2 off the price of a kilo of rice and before those recent price rises that was something like 10% of the cost of the coarse grade. It is thus really true to say that the insistence upon using jute is a tax upon rice, a tax carried hardest by those most poor. Use jute, the price is higher, don’t use jute the price is lower, it’s a tax. As to why this happens that’s obvious.
Using jute is therefore more expensive. It’s a tax on everyone’s rice consumption in order to support the jute industry, a tax that weighs more heavily upon the poor than anyone else
There are many jute farmers they’ve all got a vote. The jute mills are all state owned so there’s a constituency within the bureaucracy as well. There’s a minister for jute (who has other responsibilities as well) and that’s therefore just the way that things will work out. The system will be manipulated to please those three constituencies. Which is exactly what happened. Everyone must use jute because. Now, there were all sorts of reasons given. Plastic bags get ruined if you use hooks to haul them about. Jute can be used four times rather than just the once for plastic. Jute is natural which is of course lovely. But those are all justifications, the reason is simply that the jute industry has political power, enough to insist that everyone must use jute. It’s even possible that those justifications have some power. But what if people don’t in fact use hooks to move bags around? And to use the bag four times it has to be collected from that retail point and sent back to the packaging plant, which has some cost. The truth here being that we can have the most lovely arguments about what is the balance of all of those costs and benefits, pluses and minuses. But we’ve only got just the one way of actually calculating the end result. Which is as Hayek said in his Nobel lecture: “The pretence of knowledge.” It simply is not possible for the centre, or any single group of people, to have enough information, enough knowledge, to be able to decide such things in the chaos that is an economy. What is that cost of getting re-usable bags back? That cost is going to depend upon where the bags end up of course, in Dhaka central or in some village market up country? How do we even begin, centrally, to decide this? We can’t – the only thing we can use to calculate the economy is the economy itself. If the costs of getting the bags back to reuse are low enough then people will take them back to reuse them. We’ve no need of a law that says people must. Indeed, if we’ve a law that says people must, then that’s evidence that people think the cost is too high, isn’t it? Which is where we do find ourselves overall here. Not using jute is Tk2 per kg of rice cheaper. Using jute is therefore more expensive – that’s the result of that calculation by that economy. It’s thus a tax on everyone’s rice consumption in order to support the jute industry, a tax that weighs more heavily upon the poor than anyone else. We really shouldn’t be taxing in that manner of course, for we’re really not out to make life more expensive for those poor. But more than that, this is a crazily bad way of supporting the jute industry. Assume that we do indeed want to support the incomes of those in the industry. Which we probably do. What we want is the most efficient method of doing that. And making everyone else use an expensive product isn’t it. Instead, we should be encouraging all those people to go and do something which adds value to peoples’ lives instead of costing them. It is possible, of course it is, that incomes will fall among the jute workers as this happens. It might be a permanent fall, it might be a temporary one as they learn new ways. OK, so we want to support their incomes anyway. Great, we should simply go and support their incomes, not impose a disguised tax on the rice consumption of everyone in the country. That is, we should always, if there are going to be subsidies, subsidise people, not things. One estimate of Bangladesh’s rice consumption is some 35 million tonnes a year. At Tk2 per kg, the subsidy to jute bags is therefore Tk70 billion a year. That’s the extra money that rice consumers must pay in order to support the jute industry through the mandatory use of jute bags. No, it’s going to be a lot, lot, cheaper to slip ex-jute farmers and workers a bit of money while they learn to do other things, isn’t it? Which is why that is what we should be doing. Actually, we should in fact be grateful for the recent rises in the price of rice. For it’s only with that, and the attempts to deal with it, that it has become apparent how much it costs to support jute. Something we can now stop doing permanently.   Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.