Good incentives are fragile

Two articles today show how difficult it is to maintain good incentives in poor countries. The first was from Madagascar, one of a handful of countries in Africa which was exempt from U.S. tariffs under a special program, the AGOA program. The textile industry in Madagascar was thriving, employing over 100,000 workers and also employing hundreds of firms that supplied the raw inputs to the textile shops. The AGOA ran out at the end of 2009, forcing thousands in Madagascar and the surrounding countries to find other work. The results have not been pretty; there have been riots in the streets, and increased stress on profits in other professions, like street sales. Ostensibly, Congress ended Madagascar's inclusion in the program because of a military coup in March. But there isn't really much evidence that imposing sanctions on the workers has had or will have any effect on the authoritarian leadership. Indeed these sanctions tend to hit the working classes much more than they hit the people in charge. Growth and good governance go hand in hand, but it doesn't make sense to kill a country's growth because the government changed.
Robert Strauss, head of the American Chamber of Commerce in Madagascar, told IRIN that a quarter of the jobs in the formal economy were dependent on AGOA, and the reintroduction of US import duties of up to 34 percent had made keeping factories open unprofitable. The rapid decline of the textile industry was also having a knock-on effect in other countries in the region, including Mauritius, Swaziland, Lesotho and South Africa, where many of the materials used in Madagascar's textile factories, such as zips, were produced, Strauss said. [...] Fabien Rakotonirina, a textile factory machinist who lost his job in December 2010, told IRIN: "Here on the street there is not enough profit. In the factory I earned 10,000 ariary ($4.65) a day, now I earn 6,000 ($2.80)."
The second story is from India, whose farmers this year will produce less rice per hectare than Pakistan, Sri Lanka and Bangladesh. The Indian government has long subsidized the use of different types of fertilizer in agricultural production, which has by and large stimulated crop yields and reduced India's need to import food. As government revenues wax and wane, subsidies have gone up and down - but the urea (a type of fertilizer) manufacturers are politically powerful and have prevented the urea subsidy from being touched. Because urea is so much cheaper than other fertilizers and nutrients, farmers are spreading way more urea on their crops than is recommended (32-to-1 ratios of nitrogen to potassium, which should be about 4-to-1) and the soil quality is deteriorating. As a result India may soon have to increase its dependence on importing food.
India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year...Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts...The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.
These are both examples that demonstrate the fragility of good incentives and growth, and the power of special interests and far away people to destroy it. Throwing money or sanctions at these problems is not very helpful, but encouraging trade and denying special interests are. Politics always has winners and losers; the winners here are textile manufacturers in America and other countries, and urea manufacturers, and the losers are producers in Madagascar, taxpayers in the US (who bear the cost of the subsidy as well as the market price of the food) and farmers in India.

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