Rare earth - no case for government intervention

China has officially restricted exports of rare earth for several years and announced this year it will further tighten exports. Rare earth is a group of 17 different metals, usually found clustered together. These metals have hundreds of different industry applications. For example, they are used in certain high capacity magnets, batteries and lasers. As the rare earth elements are used in sectors that are assumed to have an over-proportionate growth potential (eg. green-technology), policy makers are paying particular attention to them. In the policy debate, the different elements are considered jointly, as they are typically clustered together. But each element has its own supply and demand characteristics. Consequently, prices for the individual elements might differ by factor 20 (in mid 2010, Samarium was quoted at $32 per kilogram while Terbium was quoted at$600). As China is currently the predominant producer of rare earth (>95% of total production), the reduction of Chinese rare earth exports will have effects on global supplies. Thus, rare earth elements have been very actively covered in the media and various G20 policy makers (secretary of state Clinton, chancellor Merkel, etc.) have expressed their concern. Business interest groups want to put rare earth on the official G20 agenda â?? regardless, the issue will be unofficially discussed in Seoul. But should policy makers really care? This depends on what China wants to achieve by restricting rare earth exports. Chinese export restrictions for rare earth could be interpreted in five different ways: (1) China wants to save rare earth resources for future generations. As rare earth elements are abundant in both China and the rest of the world, this is a rather unlikely explanation. But even if easily produced sources are rare, a slow exploration for fear of overexploitation should not merit political concern, as the Chinese interest of a stable, long-term supply would be aligned with the global interest. (2) China uses rare earth to exercise political influence. The current case-in-point is a supposed freeze in exports to Japan, allegedly due to political disputes. In Foreign Policy, Tim Worstall argues convincingly that rare earth elements are an unlikely tool for exercising political pressure as they cannot be effectively monopolised by China. The reason is, that rare earth can be produced in many different countries (China only holds about one third of the known resources), admittedly at higher cost. (3) China is trying to reduce the ecological impact of rare earth production. The production of rare earth in China is very environmental unfriendly and hazardous for the corresponding workforce. Consequently, Chinese export reductions might be a move to reduce the price paid by workers and the environment for growth going elsewhere. In this context, export reductions might be an important tool to gain control of production in illegal mines. Even though paying higher prices for rare earth would not be appreciated by the Western industrial consumer, correctly pricing pollution and labour are well-accepted principles in Western countries. (4) China tries to maximize the profits from exporting rare earth. As in the short-run Chinese rare earth could only be replaced by producers with significantly higher costs, China is currently able to increase its profits by restricting exports of rare earth as the decreased export volumes are offset by the increased prices. Numbers quoted in the press, arguing that in 2010 a 30% decrease in exports occurred while prices increased threefold, would be consistent with a profit maximisation strategy. Extracting monopoly rents on natural resources is common around the globe. Most oil producers for example employ duties on oil exports to ensure that the fuel is exported at prices above the production cost. Such a profit maximisation is constrained by the entry of new suppliers. If China raised the price above a certain level, profit seeking mining companies would start producing non-Chinese rare earth resources (eg. in the US or Australia). Consequently, either China keeps the price slightly below the entry threshold or a limited number of producers would secure stable supplies of rare earth at prices supposedly somewhat above the production cost of the most expensive supplier. (5) China is using export restrictions for domestic industrial policy reasons. Restricting exports lead to a de facto double pricing. Domestic prices of rare earth would drop, while foreign prices would rise. This would give domestic high-tech producers a cost advantage over their foreign competitors. This last point has been the most discussed in recent months, as it seems to be in line with Chinaâ??s mercantilist economic policy. This raises the question: Could such a strategy be successful? And would this harm Western economic interest? Subsidizing Chinese high-tech companiesâ?? by double-pricing rare earth could of course be effective in increasing these companiesâ?? world market share or profit in the short run. This does not mean, however, that such an intervention is efficient. First, higher world market prices will make other rare earth sources available. Consequently, the current cost spread between China, which is producing on a large scale, and the rest of the world that currently is not, will not persist. High prices will thereby not only drive the exploitation of new non-Chinese resources, but also encourage the development of new technologies for exploring, producing and processing rare earth (the separation of the different rare earth elements is one of the most costly parts of the production process). Consequently, market forces are likely to drive down Western production costs in the mid-term. Second, due to the export restriction, the demand for Chinese rare earth would be artificially low. This would lead to the intended lower price for rare earth. Chinese investors would make their decisions with respect to the internal price, as Chinese companies would need two commodities for exporting: the rare earth valued at the domestic price and the export rights valued at the price differential between internal and external market. Therefore, it should play no role, whether the export rights are allocated for free to some companies or auctioned off. The low Chinese rare earth price, however, would distort the incentives to invest in new resources and technologies in China. Third, in many applications, rare earth elements might be replaced. If, for example, the cost of certain rare earth magnets became too high, companies might decide to use lesser quality magnets. Thus, wind turbines will continue to be built in Western countries, even though replacing the rare earth magnets might imply some efficiency losses. This is reflected by the rather small share of the rare earth cost in the value of most total products. The total market value of separated rare earth is several billion dollars (USD), while the value of iron ore is a few dozen billions and crude oil several trillion. Thus, the price of rare earth is unlikely to be a key driver for the location of most downstream value chains. Fourth, a subsidisation of rare earth would be intended to allow lower prices at the next stage of the value chain (eg. rare earth magnets). To achieve the industry policy goal, it would be necessary, however, to also ensure that these intermediate products (magnets) are not exported in order to allow cheaper products at the subsequent stage (eg. generators) and so forth. Thus, an entire sector would be created on incorrect relative prices. In other words, it is more profitable to use a cheap machine that wastes some of the rare earth than to install a more expensive machine. The corresponding overuse of rare earth and rare earth products would make the entire value chain uncompetitive as soon as rare earth cost inside and outside China converge. Double pricing will lead to opposing effects in China and the West. In China, the underinvestment in mining and the wasteful use of rare earth will increase demand and decrease supply. In the West, the overinvestment in supply and the substitution of rare earth in some areas will decrease demand and increase supply. Consequently, markets alone will force rare earth prices in the West and China to converge. [Furthermore, double pricing is difficult to sustain as it implies internal redistribution. When double pricing is effective, the right to export becomes very valuable. In this case, the worse-off companies would oppose the scheme and might find ways to circumvent it.] Therefore, restricting the export of rare earth is unlikely to prove an efficient tool for attracting highly-skilled and capital-intensive, high-tech industries. So what do Western companies have to fear? Companies in all sectors know that depending on only one supplier of a crucial input can be very painful. Thus, companies can chose between vertical integration, contracts that reduce the risk of hold-up or diversification. The first two options are not very viable, as Western companies are unlikely to either strike renegotiation-proof deals with Chinese companies or even integrate Chinese suppliers. Thus, diversifying supplies by either contracting some volumes with alternative suppliers, building up stocks, financially hedging against increasing prices or even buying into rare earth production projects should be the answer for industrial users of rare earth. The optimal degree of diversification can only be delivered by the market. The reason is that the willingness to pay for diversification largely depends on private information about the individual companiesâ?? cost of decreasing rare earth consumption. Furthermore, the large number of consumers from different countries should assure the development of a sufficiently liquid market for rare earth. Thus, the market will provide a close-to- optimal level of production capacity and stocks. [As for most natural resource markets, there will be some concentration on the supply side due to the high optimal size of the mines leading to prices above production cost.] Therefore, government support to rare earth consumer, administrative stocks to smooth market prices or government support to increase non-Chinese production would make things worse by punishing companies that invested in risk mitigation. As double pricing will be an inefficient industrial policy and markets will deliver sufficient rare earth supplies outside China, Western governments should restrain from protectionist countermeasures or unjustified counteroffers. That being said, trading the opening of the Chinese rare earth sector against the opening of another G20 or WTO market (eg. agriculture) would be a win-win situation.

Government Intervention to Encourage the Increase of Innovation Activities: the Case of Automotive Component Industry

The increasingly globalizing and very tight competition in the world market nowadays requires companies to increase their competitiveness to maintain and strengthen their position. One of the efforts has to be taken into consideration by companies is innovating sustainably. Evidence shows that companies characterised by innovation have above-average productivity and become leader in the industry. Firms innovate either to produce technologically new products or services, or to produce technologically improved products or services. To produce technologically new and improved products or services, firms need to undertake some innovation activities. Innovation activities are all those scientific, technological, organizational, financial and commercial steps, including investment in new knowledge, which actually, or are intended to, lead to the implementation of technologically new or improved products or processes. Small and medium enterprises face some problems to innovate. Government. intervention is needed to manage the problems, and is expected to increase innovation in the industry.Innovation activities discussed in this paper are focused on those occurred in small and medium enterprises in the automotive component sector as one of the sectors will be developed by the government. In the first part is the introduction which presents problem background. Then, the explanation about methodology and followed by the purpose of the study. The next part is results and discussion. Finally, the paper provides recommendation on intervention necessarily to be taken by the government in order to increase innovation activities in the industry

The overconfidence problem in insurance markets

Adverse selection has long been recognized as a rationale for government intervention in in- surance markets and for the adoption of public compulsory insurance. A different rationale for compulsory insurance is that overconfident individuals may underinsure because they underes- timate the relevant risks. We show that government intervention is not a Pareto improvement in an adverse selection model with a significant fraction of overcon�dent agents. We underline that behavioral biases need not be the basis for government intervention. In fact, behavioral biases may overturn existing compelling reasons for intervention in the economy. Our model also delivers novel positive implications on aggregate variables that have been at the center of recent empirical investigation

The Case against Government Intervention in Energy Markets

Many politicians and pundits are panicked over the existing state of the oil and gasoline markets. Disregarding past experience, these parties advocate massive intervention in those markets, which would only serve to repeat and extend previous errors. These interventionists propose solutions to nonexistent problems. This Policy Analysis reviews the academic literature relevant to these matters and argues that the prevailing policy proposals are premised on a misunderstanding of energy economics and market realities. The interventionists do not distinguish between problems that government can remedy and those that it cannot. They ignore lessons that should have been learned from past experience. They embrace at best second- and third-best remedies rather than first-best remedies for the alleged problems. Moreover, they ignore the extreme difficulty associated with ensuring efficient policy response even when it seems to be theoretically warranted. Fear of oil imports is premised on pernicious myths that have long distorted energy policy. The U.S. defense posture probably would not be altered by reducing the extent to which oil is imported from troublesome regions. Fears about a near-term peak in global oil production are unwarranted, and government cannot help markets to respond properly even if the alarm proved correct. Market actors will produce the capital necessary for needed investments; no "Marshall Plans" are necessary. Price signals will efficiently order consumer behavior; energy-consumption mandates are therefore both unwise and unnecessary. Finally, more caution is needed regarding the case for public action to address global warming. The omnipresent calls for more aggressive energy diplomacy are misguided. Economic theory validated by historical experience implies that the diplomatic initiatives are exercises in futility because they seek to divert countries from the wealth maximization that is their goal. Similarly, the search for favorable access to crude oil is futile. Despite their popularity, rules to force reductions in energy use lack economic justification. Attacks on American oil companies and speculators seek to shift blame to those subject to U.S. government control from the uncontrollable foreign oil-producing governments that are truly to blame

The Role of Government in Collective Bargaining: Scandinavia and the Low Countries

This article compares the role of government in collective bargaining in five small West European countries. For the period until the second half of the 1970s, a distinction is made between countries in which government often interfered in wage bargaining, e. g. Denmark and The Netherlands, and countries in which government refrained from intervention, like Sweden. Belgium and, to a lesser degree, Norway. In all countries the tradition of (non)-intervention had already started before the Second World War. The article reviews some explanatory variables: in Scandinavia centralization of labour relations is crucial, in the Low Countries the nature of political verzuiling. Recent developments show that government intervention has become a characteristic of labour relations in all but one country.\ud \u

Government Intervention as an Optimal Response to Government (not Market!) Failure

This paper provides a theory of government intervention, such as government ownership, regulation, mandatory public schooling, subsidies, and industrial policy, as an optimal policy response due to the inability to commit not to expropriate private investment or bail agents out. If the government cannot commit not to expropriate the capital of private firms expost, private firms may not invest ex ante. The government may hence need to undertake investment itself. Thus, government ownership may be optimal, and, indeed, may be optimal even if government owned firms are less efficient. Public enterprise as a remedy for lack of private investment due to the threat of expropriation by the government should be particularly important in capital intensive sectors such as manufacturing, extraction of natural resources, and services which require large infrastructure investments, which is consistent with the data. Similarly, if the government bails out households which do not invest in schooling or save for retirement ex post, the government has to enforce universal schooling and force agents to save through social security systems ex ante. Government intervention may thus primarily be a response to government failure rather than market failurePublic enterprise, time inconsistency, optimal policy

Forest fires: Evaluation of government intervention measures

The purpose of this paper is to examine the relation between government measures, volunteer participation, climate variables and forest fires. A number of studies have related forest fires to causes of ignition, to fire history in one area, to the type of vegetation and weather characteristics or to community institutions, but there is little research on the relation between fire production and government prevention and extinction measures from a policy evaluation perspective. An observational approach is first applied to select forest fires in the north east of Spain. Taking a selection of fires with a certain size, a multiple regression analysis is conducted to find significant relations between policy instruments under the control of the government and the number of hectares burn in each case, controlling at the same time the effect of weather conditions and other context variables. The paper brings evidence on the effects of simultaneity and the relevance of recurring to army soldiers in specific days with extraordinary high simultaneity. The analysis also brings light on the effectiveness of two preventive policies and of helicopters for extinction tasks.Forest fires, policy evaluation

The Size and Role of Government Economic Issues

[Excerpt] The size and role of the government is one of the most fundamental and enduring debates in American politics. Economics can be used to analyze the relative merits of government intervention in the economy in specific areas, but it cannot answer the question of whether there is “too much” or “too little” government activity overall. That is not to say that one cannot find many examples of government programs that economists would consider to be a highly inefficient, if not counterproductive, way to achieve policy goals. Reducing inefficient government spending would benefit the economy; however, reducing efficient government spending would harm it, and reducing the size of government could involve either one. Government intervention can increase economic efficiency when market failures or externalities exist. Political choices may lead to second-best economic outcomes, however, and some argue that, for that reason, market failures can be preferable to government intervention. In the absence of market failures and externalities, there is little economic justification for government intervention, which lowers efficiency and probably economic growth. But government intervention is often based on the desire to achieve social goals, such as income redistribution. Economics cannot quantitatively value social goals, although it can often offer suggestions for how to achieve those goals in the least costly way. The government intervenes in the economy in four ways. First, it produces goods and services, such as infrastructure, education, and national defense. Measuring the effects of these goods and services is difficult because they are not bought and sold in markets. Second, it transfers income, both vertically across income levels and horizontally among groups with similar incomes and different characteristics. Third, it taxes to pay for its outlays, which can lower economic efficiency by distorting behavior. Not all taxes are equally distortionary, however, so there are ways of reducing the costs of taxation without changing the size of government. Furthermore, deficit spending does not allow the government to escape the burden of taxation since deficits impose their own burden. Finally, government regulation alters economic activity. The economic effects of regulation are the most difficult to measure, in terms of both costs and benefits, yet they cannot be neglected because they can be interchangeable with taxes or government spending. There are many different ways to measure the size of the government, making its economic effects difficult to evaluate. Budgeting conventions are partly responsible: tax expenditures, offsetting receipts and collections, and government corporations are all excluded from the budget. But some governmental functions, like regulation, simply cannot be quantified robustly. Discussions about the overall size of government mask significant changes in the composition of government spending over time. Spending has shifted from the federal to the state and local level. Federal production of goods and services has fallen, while federal transfers have grown significantly. In 2008, nearly two-thirds of federal spending is devoted to Social Security, Medicare, Medicaid, and national defense. Thus, there is limited scope to alter the size of government without fundamentally altering these programs. The share of federal spending devoted to the elderly has burgeoned over time, and this trend is forecast to continue. The size of government has increased significantly since the financial crisis of 2008 as a result of the government’s unplanned intervention in financial markets and subsequent stimulus legislation. Much of this increase in government spending could be reversed when financial conditions return to normal, although critics are skeptical about how easy it will be for the government to extricate itself from the new commitments its made

Government intervention in the foreign exchange market

This article offers a survey of the literature on foreign exchange intervention, including sections on the theoretical channels through which intervention might affect exchange rates and a summary of the empirical findings. The survey emphasizes that intervention is intended to provide monetary authorities with an means of influencing their exchange rates independent from monetary policy, and tends to evaluate theoretical channels and empirical results from this perspective.Foreign exchange administration

Less government intervention in biodiversity management: risks and opportunities

n a changing global environment, with increasing pressure on ecosystem goods and services, biodiversity conservation is likely to become increasingly important. However, with the current global financial crisis, governments are increasingly trying to stabilise economies through spending cuts aiming to reduce national deficits. Within such an economic climate, the devolution of governance through public participation is an intrinsically appealing concept. We outline a number of challenges that explain why increased participation in biodiversity management has been and may continue to be problematic. Using as a case study the local stakeholder-driven Moray Firth Seal Management Plan in Scotland, we identify four key conditions that were crucial to the successful participatory management of a biodiversity conflict: a local champion, the emergence of a crisis point, the involvement of decision-makers, and long-term financial and institutional support. Three of the four conditions point to the role of direct government involvement, highlighting the risk of devolving responsibility for biodiversity conflict management to local communities. We argue that without an informed debate, the move towards a more participatory approach could pose a danger to hard-won policy gains in relation to public participation, biodiversity conservation and conflict management