Interview with economist Carmelo Ferlito:
Carmelo Ferlito holds a PhD in Economic History from the University of Verona in Italy. From 2004 to 2009, he worked as researcher with several Italian universities, including University of Verona, Salento University and University of Macerata. His research activity is devoted to further expand free market economics as taught by the Austrian School of Economics, with particular reference to business cycle analysis, capital theory and entrepreneurship. Carmelo is not only a scholar. In the past ten years he developed a strong business background, working in Southeast Asia, enhancing the regional business for multinational companies producing equipment for the poultry industry.

Recently, BR Research had an opportunity to have a quick chat with Ferlito over a cup of coffee. Here are some edited excerpts of the conversation:

BR Research: What’s your outlook on the global economy in general?

Carmelo Ferlito: I am quite convinced that in a way, the recession has not ended. The heavy impact of the so called quantitative easing has delayed the necessary readjustment process.

It’s quite well recognised that credit expansion was one of the main factors in generating the crisis that started in the property sector but then expanded as a domino to the rest of the economy. But the key role was played by how credit policies from the banking system supported expectations allowing for unsound economic initiatives to take place, which in the end prolonged the situation. I believe that the world is not really post crisis; the world is still in a crisis.

BRR: How do you reconcile with the various indicators that show improvement in the US economy?

CF: The question is how much of these positive signals are the efforts of the sound recovery and how much are simply the result of the QE (Quantitative Easing).

Once the economy touches a very low point, the engine needs a restart. Employment will have a rebound after touching a very low point. But how much of this is a result of QE, and how much of this is the result of sound restructuring of the economic system, and whether QE’s force and impact is temporary – that is something for which the jury is out. I, for one, am not convinced.

BRR: Specifically, could you list down key measures in terms of restructuring that would have convinced you?

CF: The abolishing of the authority of central banks in fixing the interest rates. This is quite radical, but I will like to explain why I am an advocate of such a measure. We believe that free markets address problems better than the government intervention. And in general, prices reflect intentions of consumers and producers when they are generated by free interactions of consumers and producers in the market. The price best conveys information, preferences, and expectations.

In this regard, what happens with central banking is that one of the key prices is not determined by the market but is fixed by the government authorities. The interest rate function is much beyond what we would usually imagine. It is in general the measure of what in certain economic schools is called the inter-temporal structural of preferences; it measures, at a certain moment, how much of an economic society is future oriented or present oriented. If economic institutions were such that the interest rate would emerge through the market mechanism as all other prices, this price would work in a way to allow a higher degree of coordination between consumer’s and investor’s plans.

BRR: In one of your journal articles, you wrote that developing economies are not on the right path, they are going towards technology adoption from the West. Instead they should develop their intellectual capital and come to homegrown ideas because innovation in effect is a product of that thought process. Is that practical in today’s hyper globalization?

CF: What I had in mind when I wrote that article is that if developing countries really want to move toward the status of developed nations, a simple quantitative GDP growth will not be enough. The real transformation is to be able to generate innovative processes; this is, of course, the great puzzle of economics: why are certain nations rich and others poor? As Adam Smith put it, we should investigate the causes of the wealth of the nations.

However, innovative processes cannot be imposed and Schumpeterian entrepreneurial spirits cannot be created overnight. It is a process that cannot be accomplished in 10 years, and involve the evolution of mentality, education and institutions.

The spirit of innovation is generated in historical processes that are influenced by so many things that it is difficult to find a formula. I believe that there are many important factors, such as the educational framework, religious beliefs, the accidents of history, geographical conditions, and institutions and so on.

BRR: What are your thoughts on Chinese PSE debt risks?

CF: Actually the amount of private debt in China is much higher than the government debt in terms of percentage of GDP. Recently Reuters explained that Chinese corporate debt compared to earnings, as represented by a group of 1189 mid- to large-cap companies who reported net debt in 2008 and 2016, paints a bleak picture. The net debt/EBITDA (a ratio used to show how many years it would take for a company to pay back its debt if current metrics remained constant) shows that the number of companies with a ratio between 0 and 5 - a measure usually considered healthy - has fallen by 31.7 percent. The number of companies making a loss or companies with an unhealthy ratio above 5 has risen.

BRR: How much of the problem is from the corporate sector and how much from household and public debt?

While it seems that household and public debt still both amount at around 45 percent of the GDP, a big problem stems from the corporate sector. BIS data shows that China’s non-financial sector debt grew at an annual rate of 18.1 percent between 2010 and 2015 to more than 160 percent of GDP. Even if state-owned enterprises (SOEs) were the major borrowers, many private-sector property developers were also among the highest leveraged Chinese companies.

Most of the Chinese development, thus, was financed by credit in huge amount. The concern is that companies that are heavily in debt cannot last long. Sooner or later they have to pay back. Depending on which course of strategy there is in the market when the credit sinks, how can the companies continue if they don’t have strong balance sheets? Official 2016 data show a 54 percent year to year growth in the number of bankruptcy cases accepted by Chinese courts.

We have to add that China is involving other countries in its debt spiral, by financing infrastructures in many developing countries. Trying to get orders abroad for its own companies, China is de facto trying to shift on other countries the burden of its own debt.

BRR: We should pivot to the poultry business. Given your background, what is your understanding of Pakistan’s poultry industry in terms of its potential to grow and where it stands in relation to the peer economies?

CF: Pakistan poultry consumption is around 7 kg per year per person on average. In Malaysia, it has reached almost 50 kg. This means that the potential growth for the poultry business in Pakistan is huge. Pakistan poultry consumption is close to that of Indonesia, and both countries have a similar number of citizens. Of course, the potential growth of the poultry business will be strongly influenced by the general economic performances: while poultry consumption can for sure experience a growth. Such a growth will depend on the ability to spend of the Pakistani population.

From a technological perspective, Pakistan poultry industry experienced over the past decades a significant leap toward mechanisation and automation, which is important in order to guarantee not only better quality meat but also to meet international standards in terms of biosecurity and animal and human health. We observe an important degree of integration, in particular in the chain breeder farms – hatcheries – broiler farms. On the other hand, automation is still limited at the end of the chain, at processing level, where the so-called live market still plays an important role. However, key players like K&N and Sabirs Poultry successfully entered the processed food business, setting a new benchmark for the local poultry market.

BRR: What is your view on the state of Pakistan’s packaged chicken players? What is the state of their technology? Do you think they have the right technology to penetrate global packaged poultry trade?

CF: In the short run, I don’t see Pakistan as an exporter for poultry meat because there is still a huge room for growth in the domestic market. Pakistani companies that already decided to invest in automated processing plants meet the regional standards; in general, all the big players are investing in modernisation and adoption of western technology at different stages of the production chain.