By Nicholas Burnham on the 11th of December, 2008
Daewoo Take Liberties in Madagascar
Daewoo predict not having to pay anything for the farming of maize and palm oil in Madagascar. The farmland the size of Belgium is under "free" cultivation by Daewoo after they agreed to sign a memorandum with the Madagascan government. Food exports are "Said to be a weapon in this world" claims Hong Jong-Wan, a manager at Daewoo, the car firm.
The 99 year leasing of 1.3m hectares to help produce more oils and foodstuffs for Korea, I suspect, will have a notable impact on the economy, even though the market for Oil is not monopolized. Such a big potential supply for such a large company, lowered production costs not included, could really mean that this valuable resource will earn Daewoo a foreseeable future, even considering the growing concerns about the world’s economy. The good thing is that the oil market is incredibly inelastic.
The demand for oil is too high for people just to not buy it if its prices are raised. It has become more of a necessity in the modern world for all the cookers and the ever expanding middle class. Human being could live without oil, but it would be a major step backwards for most countries. It was very lucky that the firm has been offered this opportunity, because it is not a common one.
On the other hand, this deal will also become profitable for the Madagascan authorities as well. Although it might seem like a bad move giving free cultivation rights to the Korean business, the Madagascans have actually thought this one through. By allowing them to harvest the maize and palm oil on their land, they are opening up nice new job opportunities for the unemployed citizens in the country. In the long run, when employment is up, so is the productivity of a nation. The economic growth for each country will be appreciated in times such as these, when the prices of oil have been rising due to dwindling supply. Also the food element that comes out of it will give the Koreans the upper hand.
Increasing the "Food security" of Korea with the large amounts of corn that will be shipped there is something the country will look forward to feeling the benefits of. Korea says it will export very little of the said corn. Supposedly the quantity demanded for corn in Korea would help achieve a higher equilibrium price if the quantity supplied were to increase.
The growing Korean population would aid in the increase of demand for basic foodstuffs. Obviously, in the case of food and of oils, the increase in supply means a fall in price and therefore to increased demand for both goods respectively. A large increase in demand for one good will lead to a notable decrease in demand for substitute products, whether the good is inferior or not. People will be more inclined to buying corn as opposed to wheat products now that corn is cheaper. Fallen price generally equals increase in demand for the product.
Interestingly, if the situation has been read well, we will see a really positive outcome come from government intervention in the economy. Both economies are profiting from the deal, and even though neither market is directly under a command economy, the help of the Madagascan government is prevalent. This exception to the general rule that involvement with the government will have negative returns makes this article exceptionally interesting. The fact that they did not implement a price floor or ceiling probably helps, since that would increase the dead weight loss and decrease the consumer and producer surpluses, which undeniably is not a good thing.
Demand for food and oil will always be high but regardless, expanding worldwide markets is important in the way of necessary goods. Keeping in mind that this plan works best with a developing country and a developed one, the world economies would benefit from more deals like these. Hopefully the full potential of this great idea will be actualized and both economies will feel the effects soon.
