December 2012

Establishing and Managing a Philippine Sovereign Wealth Fund

This is the second part of a series on this topic. In the first part, I discussed why we need a sovereign wealth fund or SWF in the first place. My main contention was that the Philippines is currently suffering from “Dutch disease” or the adverse effects of a sudden rise of income from its export of labour and from a rise of confidence in its domestic economy. In this second part, I will discuss how we could govern and operate our own SWF.

The Santiago Principles established by 26 countries with SWFs known as the International Working Group or IWG  in 2008 lays out a number of generally accepted principles and practices or GAPP to ensure that “the SWF arrangements are properly set up and investments are made on an economic and financial basis”. One of the main reasons for this is that as government-owned  entities, as SWFs continue to grow in importance to global capital markets and perform a bigger role in corporate governance, they need to demonstrate that their investment decisions are not politically motivated.

Traditionally, SWFs took the surplus foreign reserves accumulated within a resource exporting nation and invested them in long-term projects overseas. This allowed recipient countries that were often capital constrained and developing to benefit from such investment flows. The size and relative lack of transparency of some SWFs however caused many actors in the international community to cast a suspicious eye at these funds.

In the Philippine context, as discussed in the first part of this series, I propose that our SWF be confined to funding projects within the country given our chronic underinvestment in infrastructure and need to resuscitate our industrial sector. Given however our historically poor track record at ensuring that government owned and controlled companies manage their assets in a prudent manner, the main concern in establishing a SWF would be to ring-fence it from the influence of politics.

The Santiago Principles help to define a set of best practices for us in establishing our own SWF in the Philippines. The Carnegie Endowment for International Peace talked about what the effect of signing up to these principles is by saying that

(b)y voluntarily submitting to the Santiago Principles, IWG members ceded their autonomy to establish governance arrangements in line with their individual needs and preferences. In a way, they made a conscious decision to limit the reach of their “sovereignty.”

You might be tempted after reading that to draw an analogy between the IWG to the World Trading Organisation or WTO which implements the General Agreement on Trade and Tariffs or GATT. Unlike that body, the IWG and its successor the International Forum of Sovereign Wealth Funds or IFSWF is purely voluntary and has no powers to sanction its members. The Carnegie Endowment does draw this distinction. What our Philippine authorities should do in drawing up the framework for its SWF would be to hard code “the Principles” in its charter.

As shown in the table below, the Principles may be divided into three distinct parts. These cover the legal and macroeconomic policy framework of the fund, its institutional and governance arrangements and structures, and finally its methods for managing investment decisions and handling risk. I am adapting the Carnegie Endowment’s description of these parts here.

Table 1: Santiago Principles*

Section What “the Principles” state there should be GAPP #
Legal framework, objectives, and coordination withmacroeconomic policies
  • disclosure of legal framework
  • definition and disclosure of policy purpose
  • public disclosure of funding and withdrawal arrangements
Institutional framework and governance structures
  • clearly defined roles and responsibilities of the principal/owner (the government) and the agent (SWF’s governing body, officers and executives)
  • a limited role for the principal which is to set the broad  objectives, appointment of governing body or board, and oversight of operations
  • a clear mandate to the fund’s governing body to set strategy for achieving its objectives along with being accountable for its performance
  • delegated authority for independently implementing strategies and handling operations for officers and executives under clearly defined roles and responsibilities







Investment and risk management frameworks
  • disclosure of investment policies
  • information about investment themes, investment objectives and horizons, and strategic asset allocation, including:
    1. disclosure of investments that are subject to non-economic and non-financial considerations
    2. whether they execute ownership rights to protect the financial value of investments
  • a framework that identifies, assesses, and manages the risks of its operations and measures to track investment performance employing relative and/or absolute benchmarks
GAPP 18 



GAPP 19.1




*adapted from Sven Behrendt (2010). Sovereign Wealth Funds and Santiago Principles: Where do they stand? Carnegie Papers No. 22, Carnegie Endowment for International Peace.

The policy aims of setting a SWF in the Philippines are clear: to channel excess foreign reserves in a productive way and to cope with the developmental needs of the country. As I stated in the first part of this series, existing legislation tasks the Bangko Sentral with ensuring an adequate supply of currency to meet our international obligations. It does not contemplate our current predicament where the annual flows of remittances and portfolio investments have made our gross international reserves (GIR) rise rapidly.

This has caused the appreciation of the peso which has put a strain on our exporters. Even our burgeoning business process outsourcing industry is beginning to feel the pinch of the currency’s upward trajectory. As I previously stated, the GIR is now sufficient to cover twelve months of imports and to meet all our external obligations with a comfortable buffer left over.

And it will keep rising especially if our government earns an investment grade credit rating as is expected next year. Our GIR should only be allowed to rise in proportion to our external commitments. As our economy becomes less dependent on foreign borrowing these external debts won’t rise as rapidly as they have in the past.

Once a targeted level has been reached, the Bangko Sentral should be authorised to declare any additional funds in excess of its requirements. The existing Central Bank Act should be amended to explicitly state this. The monetary board should be given the task of setting the appropriate benchmarks for making such declarations and for transferring excess funds into a SWF.

The nature of such a transfer, as I have suggested, should be in the form of a sovereign loan issued to the national government, which will own the SWF. This would help ensure that the projects which the SWF invests in will have a sufficient return to cover its borrowings and operating costs. It would also ensure that the value of the Bangko Sentral’s assets is preserved.

As to the appointment of its board and officers, the SWF would be subject to the same rules covering government owned and controlled corporations or GOCCs. The reforms carried out by the new GOCC law which created a commission that regulates the appointments, compensation and accountabilities of such officers would apply as well. This would include the need to provide audited financial statements and management reports.

In terms of the type of projects it would fund, I have suggested four potential areas or themes. This includes public infrastructure (such as the ones eyed for Public-Private Partnerships) aimed at both social and economic development, joint minerals exploration in consortium with private mining firms, industry cluster development projects, and clean, renewable energy projects.

The allocation of resources across these themes could be based on national priorities. Let’s be clear: the main purpose of this SWF would be to support the development priorities of the nation, and that should be stated unapologetically. But for specific projects, a set of solid business cases needs to be presented. When entering into joint ventures or consortia with private players, the SWF should also be allowed to exercise ownership rights over the project to protect its investments.

Just as with government financial institutions or GFIs, the SWF should be guided by proper prudential management principles that would monitor its risk exposure. Unlike the conservative treasury management practices of government banks and pension funds, the risk-return equation is different for an equity investor like the SWF. The risk tolerance would be higher while its returns need not necessarily be as big given its lower cost of borrowing. Its risk adjusted return on capital would thus be lower compared to commercial banks.

Some PPP bidders have expressed concern over political interference in the Philippines affecting their ability to set fees independently of the government. This has limited the appetite for actually managing the operations of the utilities and transport oriented projects. They have therefore chosen to participate only in building contracts. Takashi Ishagami of Marubeni Corporation has been quoted as saying that “the Filipino PPP is far away from our standard”. It has partnered with a local firm to jointly bid for a $1 billion railway project in which it would be merely supplying equipment.

That’s fine. If the SWF were to finance such partnerships, our excess foreign reserves would leak out of the country (as intended) through the purchase of foreign equipment. This will help temper the peso’s rise since these projects will no longer be financed through overseas assistance or equity from abroad. What could leak in, however, is foreign technology and know-how because as an equity investor, with a long time frame, the SWF would also have greater leverage to request that suppliers provide technology transfer to local partners. This should unapologetically be part of its investment prioritisation framework.

An Alternative to Charter Change

Rather than relaxing the maximum capital requirements on foreign participation in certain industries contained in our constitution, the government should instead be looking to accelerate the flow of funds into productive activity with the SWF as one of its prime vehicles. Where private players are too small to generate sufficient scale to participate in large projects, the government should encourage them to form a cluster and fund them to be able to compete with multinationals.

This incidentally was the vision of the late-Senator Benigno “Ninoy” Aquino for the Philippine economy which he explained in a speech delivered in Los Angeles back in 1981 while he was in exile. He sought to counter the Marcos regime’s formula of encouraging multinational firms to engage in extractive activities and to commercially fund projects like the Bataan Nuclear Power Plant. Juxtaposed to Marcos’ “crony capitalism”, Ninoy termed his philosophy “Christian socialism”.

Don’t be turned off by the name. As his remarks suggest, what he really meant was essentially a form of capitalism more akin to Northern Europe’s brand than to the English version as espoused by Adam Smith. The last time I checked, the German and Scandinavian economies seemed to be weathering the present crisis well, while maintaining one of the highest levels of income and social well-being compared to their Anglo-American counterparts.

Under President Benigno “Noynoy”Aquino’s rubric of good governance, the stage is now set to pursue that economic philosophy and vision for the country.  As the Carnegie Endowment for International Peace found, sound democratic institutions best explains a nation’s compliance with the Santiago Principles.

With the government now facing the prospect of receiving investment grade status in the coming year, it must prepare for any unintended adverse consequences this might have as more short-term investors flock to our shores, boosting the peso’s value and putting more of an already unbearable strain on our exporters of goods and services.

For good governance to yield economic benefits to the people, it needs to be used to address the developmental challenges facing the nation. If we act soon, we won’t have to face these same challenges in the future. The country is already in a gradual demographic transition that will lead us from an excess supply to an excess demand for labour over the next decade.

While we still send our surplus workers overseas, we need to channel the wealth they are creating for our nation into projects that would increase economic opportunities for our people back home. This presents our policy makers with a once in a generation opportunity to get things right. Given the discussion covered in this series, it would seem apparent that a SWF would be the way to go.

What is patriotism?

“Everybody’s got to believe in something. I believe I’ll have another beer.” ― W.C. Fields

Last November Bacolod City’s lone representative, Cong. Anthony Golez, filed House Bill 6689 – “An Act Strengthening National Pride by Mandating the Playing of the National Anthem Three Times a Day in All Malls, Commercial Centers, and Government Offices”. 

Golez explaining his bill to a Bacolod newspaper intoned, “I believe that playing the Lupang Hinirang in prominent public places will make Filipinos more nationalistic, more sympathetic to the plight of less fortunate Filipinos and more participative in activities that concern our nation. Playing the Lupang Hinirang three times a day in public places can be considered as equivalent to saying I love you, Philippines!” Don’t laugh. Golez is serious.

His bill says the National Anthem must be played “loudly and clearly” three times a day everyday – at 10 AM, 1 PM, and 4 PM – in “the premises of their offices” in the Office of the President, the Senate of the Philippines, the House of Representatives, and the Supreme Court; “within the premises” of all government offices the President shall designate; and “within the corridors and hallways” of all malls and commercial centers when they are open. 

Furthermore, all persons inside the above locations “shall be required to stand still, listen, and stop what they are doing every time the Lupang Hinirang is being played.” Violators will be punished. 

“All heads of government offices or the division of a particular government office, tasked with making sure that the provisions of this Act shall be properly implemented, shall be charged with serious neglect for non-compliance with the requirements of this Act and shall be removed from office with forfeiture of all retirement and separation benefits.”

“Owners of malls and commercial centers” will be fined P25,000 Pesos every time they fail to play the anthem at the designated hours and “all persons” inside the malls and commercial centers who do not “stand still, listen, and stop what they are doing every time the Lupang Hinirang is being played” will be imprisoned for one month and fined P1000 Pesos. I know what you are thinking but don’t do it. Slashing your wrists will leave a mess that you won’t be able to clean up afterwards.

Golez filed his bill while Congress was preoccupied with the RH and Sin Tax bills. It escaped my attention until a few days ago when some Batasan members issued a call to declare pop star Justin Bieber persona non grata for making fun of Rep. Manny Pacquiao’s knock-out courtesy of Mexican fighter Juan Manuel Marquez. 

Why ban Bieber? “Banning him will show how seriously we take our national pride,” declared  Yacap party-list Rep. Mary Jane Lopez, the congresswomen leading the Batasan’s patriotic charge on Bieber. 

Chauvinism is not new to politicians. Several years ago, the City of Manila declared Oscar-awarded actress Claire Danes persona non grata and banned all her movies from being shown in the city after she described Manila as a “ghastly and weird city” that “smelled of cockroaches, with rats all over.” 

Danes later apologized for her observation by putting it in context, ”Because of the subject matter of our film Brokedown Palace, the cast was exposed to the darker and more impoverished places of Manila. My comments in Premiere magazine only reflect those locations, not my attitude towards the Filipino people. They were nothing but warm, friendly, and supportive.” But her apology was not accepted.

Councilor Kim Atienza who sponsored the resolution against Danes said it was “an excuse made by Hollywood press officers and not a genuine apology. We are not hard to appease, but we know if an apology is true or not. We will lift the ban only if we are satisfied.”

Danes also raised the patriotic hackle of former president Joseph Estrada, “Her remarks were uncalled for. She should not be allowed to come here. She should not even be allowed to set foot in the country.”  As a senator Estrada showed his patriotism by voting against the US bases but he tempered it after he became president and championed the Visiting Forces Agreement and finally forgot all about it when he committed plunder, a crime for which he earned both a life sentence from the Sandigan Bayan and a presidential pardon from Gloria Arroyo. 

Patriotism is not the chauvinism espoused by Rep Lopez and her colleagues and it is not “liberating” your fellow countrymen from foreign “occupation” only to rob them afterwards. It is certainly not something to be indoctrinated through music as Rep. Golez believes. Patriotism is so simple and straightforward that it was summed up in one sentence by the late syndicated columnist Bill Vaughn, “A real patriot is the fellow who gets a parking ticket and rejoices that the system works.” “Yun lang.

Out of our bedrooms, almost

Antipolo Bishop Gabriel Reyes, a staunch opponent of the RH Bill, unwittingly stated what the Church’s position on artificial contraception should have been from the very start, “We will tell Catholics ‘even if you are given free contraceptives, do not use them’.”

That position would have spared the country a decades-long political fight over an issue that is essentially a religious matter. It would have also spared bishops the animosity and contempt for the hysterical and at times downright dishonest arguments they used to rally support against the RH Bill.

A paper by Leslie Woodcock Tentler then a professor of history in the Catholic University of America traced the marginalization of the American Catholic Church in the area of sexual decision-making to its stand on artificial contraception. “A substantial majority of today’s Catholics reject the notion that Church authority alone – i.e. that of the Pope and bishops – should guide lay Catholics in moral decision-making.” He added, “Particularly with regards to sexual ethics, most Catholics appear to believe, the locus of moral authority is properly the conscience of the individual believer.” The native bishops should have learned from the American experience and of many other countries that the official Church position against artificial contraception would undermine rather than further their moral authority over their flock.

The bishops just lost the battle over contraception and already they are raising alarm over an impending divorce bill. That will be another bitter and drawn-out fight on yet another issue where you have a religious group wanting to continue the imposition of the law of its God on a secular republic. “What God has joined together let no man out asunder”. But legal separation and annulment is allowed under certain circumstances.

What is the difference between legal separation and divorce other than one does not allow for remarriage while the other does?

No doubt the bishops will once again manage to create fine distinctions as to why legal separation and annulments are okay but divorce is not, even though the end result of all three actions – the separation of irreconcilable couples and the breaking up of families – is the same.

The divorce bill will be billed like the battle over the RH Bill – a battle between good and evil – when in fact it is merely the never-ending struggle for supremacy between Church and State. Those against divorce will draw heavily on biblical sources and church doctrine and they will raise the specter of moral decline while those on the opposite side will argue that the inhumanity of trapping couples in a bad marriage, its consequences on children and society as a whole are valid reasons enough to end the farce of legal separations and annulments as alternatives to divorce.

The Church must stay out of politics. Bishops must resist the temptation of becoming power players and brokers, a role that has gotten the Church into trouble time after time over its 2000 year history. Instead of using their clout to meddle in politics hoping to create an environment friendly to their belief and teachings, they should focus on forming consciences that will guide their flock into creating a better society. Heck if there is moral decline, promiscuity, corruption and all that everywhere, all I can say is children are not born that way so don’t blame modernity, as the former Archbishop of Manila did, for failing to form good consciences.

The primary role of the Church is to form good consciences not to play politics. That way if a divorce law does happen then all the Church has to do to save the world from eternal damnation is rephrase the unwitting advice of Bishop Reyes, “We will tell Catholics, even if you are given a divorce law, do not use it.”

So both the Church and the government can do their respective jobs without interference from the other. And we ordinary folks can finally enjoy some peace and privacy in our bedrooms.

Political Stability

The Philippines is now reaping political stability. In 2012, the Aquino Administration pursued several key reforms. The impeachment of Renato C. Corona, the passage of the Sin Tax measure, the Reproductive Health Bill, and the Cybercrime Prevention Act of 2012 and the impending passage— hopefully— of the Freedom of Information Act, which passed in the Senate the same day Congress passed the RH Bill. These are all key reforms in the third year of President Benigno Aquino III’s presidency. With the exception of the Cybercrime Prevention Act, these reforms are important, and proceeding towards the right direction. On the economic front, the government is reporting growth in Gross Domestic Product. And things seem to look up for importers with the strong peso, and exporters reeling at it.

All this of course is marked by relative political stability. The high popularity of the President— insane approval ratings— by far the strongest showing of any President at least in the last 30 years. And with the passage of the Reproductive Health Bill, will certainly lead to an even stable popularity rating. And the reform agenda continues.

Yet on the horizon is the 2013 mid-term elections. And if surveys hold true— this popularity by the president doesn’t extend to his party. In fact, the high marks the President is getting doesn’t seem to have a halo effect.

The insane debate in the Senate— highlighted by livestreaming and the Internet and cable news— hasn’t tickled down to the rest of the electorate. They seem satisfied with the name recognition of the likes of Enrile, Estrada, Honasan, Pimentel and others. And the President’s party members, including his own cousin isn’t getting anything.

Does this political reality highlight the aristocracy-like setting of our nation’s politics? With the Golden-Lion Throne that is the President of the Philippines versus the Royal Houses of the Landstradd in the guise of the Philippine Congress? That the President dictates the moral, and political direction of the country, and no matter who is in both chambers of Congress, so long as the guy on top is running the show, then it reflects the government as a whole?

How then is this important as we inevitably must head towards 2016? Does this mean, we must shop around for a candidate with President Aquino’s moral compass, but with much more gravitas, and youthful vigor? What then does this tell us if we vote otherwise?

Kill Bill!

Kill Bill is the name of a film with two parts directed by the multi-awarded, creative and unconventional director, Quentin Tarantino. The film is about revenge, bloody but just. The Bride or Black Mamba (Uma Thurman), after surviving a massacre, she being the target, and after being in coma for several years, becomes the avenger. She embarks on a mission to eliminate all those involved in the murderous plot, masterminded by the father of her daughter, named Bill (David Carradine).

The Kill Bill series came out in 2003-04. In 2012, Kill Bill is being resurrected in the Philippines.  But this variant is not an extension of the legendary movie. It is a manipulation.

“Kill Bill!” is the title of a recent full-page ad to discredit the sin tax reform that has been ratified by both Houses of Congress. The ad likewise mocks some of the champions of the reform, namely Finance Secretary Cesar Purisima, Senator Frank Drilon, and Representative Isidro Ungab. The ad caricatures the three champions as killers, using Japanese swords to slash the Filipino masses.

The vested interests, especially the tobacco manufacturing monopoly whose super profits will be slashed because of the reform, are behind the ad. They use as conduit the “people”—the so-called People’s Coalition against Regressive Taxation—to spread deceiving propaganda.

The Kill Bill ad peddles the lie that the sin tax reform is anti-tobacco famer, anti-worker, pro-smuggling. Lies, in short.

The vested interests want to pit the tobacco farmers and workers against the Filipino people who will benefit from the sin tax reform. The farmers and workers, like all Filipinos, will benefit from the reform. The sin tax reform will save thousands of lives from the dangers of smoking and excessive drinking. It will generate the financing to provide universal health coverage, again mainly for the benefit of the poor. Smoking prevalence is highest among the poor, yet the poor cannot shoulder the costs of smoking-related diseases and in the same vein have little access to health care.

Further, the new sin tax law will earmark 20 percent of the incremental revenues (in the first year of the reform, this will be equivalent to approximately 6.5 billion pesos) for the welfare and alternative livelihood of tobacco farmers and workers.

Elsewhere, the reform advocates have argued that the tobacco industry’s claim of adverse impact on tobacco farmers and workers is exaggerated.  Scholarly and evidence-based studies point out that the majority of tobacco farmers are not dependent on domestic tobacco consumption, since 70 percent of the produce is for export.

According to the World Bank, in a worst-case scenario, around 7,200 to 12, 000 farmers, those dependent on domestic consumption, will experience a significant decline in their sales of tobacco.  This is still a small percentage of the total number of tobacco farmers, equivalent to between 13 percent and 22 percent of the 54, 337 farmers. Even then, research and practice show that the farmers can easily diversify products or shift from tobacco production to other cash crops.

Furthermore, the earmarking of 20 percent of incremental revenues for tobacco farmers provides a big buffer to the small percentage of farmers who will bear the burden of adjustment.

Contrary to the claim of the Kill Bill! ad that the sin tax reform is insensitive to the plight of workers, the bill that the Senate and the House of Representatives has ratified includes a provision to provide adjustment support for those workers who face possible displacement.

The ad also makes a wrong claim that the reform will encourage smuggling.  In fact, it contains anti-smuggling measures. These are the posting of bonds for both import and export of tobacco products and the adoption of unique, secure and non-removable identification markings on tobacco products and distilled spirits.

That Philip Morris and allies continue to spend huge resources to discredit the sin tax reform even after the ratification of Congress is a sign that they are badly hurt. They thus have every incentive to sabotage the reform.

Part of their revenge is to portray the champions like Purisima, Drilon, and Ungab in a bad light.

The tasks now of advocates is to preserve the gains from the sin tax reform and defeat the counter-attack of vested interests.  In this regard, we rise up to defend the honor and integrity of our government champions.

We salute Messrs. Purisima, Drilon, Ungab and the other government champions for their firm leadership, deep conviction and exceptional courage to have the sin tax reform passed. They epitomize the kind of government leaders that the country needs to realize the hardest of reforms.

Bill in the movie Kill Bill symbolizes not the good but the villain.  Kill Bill does not target the good and the just.  Kill Bill should slay vested interests that harm the public good, The Bride in Kill Bill stands for the good guys—Purisima, Drilon, Ungab, Abads, Ona, Henares, and a cast of thousands.

They are the good Avengers.   Just like the movies, the Bride or the Avengers will again prevail in the next war.

A Philippine Sovereign Wealth Fund

The Philippines is suffering from a rare form of “Dutch disease”, the negative consequences of a rapid rise in income normally associated with the export of natural reserves. In our case, the income comes from our export of labour. Overseas remittances rising every year swell our foreign currency reserves. The peso appreciates as a result. This diminishes the global competitiveness of our manufacturing sector with adverse implications for domestic employment.

Meanwhile government keeps borrowing from international markets to finance its chronic budget deficits. This contributes to the upward pressure on the domestic currency as more dollars flow in to purchase government securities. To keep its borrowing down and make credit rating agencies happy, government constrains its spending. It wants to rely on public-private partnerships (PPP) to provide infrastructure which are both time-consuming to arrange and limited in scope.

As it postpones development spending credit rating upgrades keep coming. Each time this happens, fund managers around the world increase the flow of “hot money” into the stock market, thus contributing to more upward pressure on the peso. Property developers also cash in as the value of residential and commercial assets appreciates with the rising peso, which creates even more demand for new development.

The families that receive remittances on the other hand suffer as the purchasing power of the dollar declines. And due to their dependence on these transfers, the income that families receive goes mostly to household expenditures. Very little is invested in productive activity. And when it is, the investment normally goes into retail or transport enterprises, which earn very marginal returns.

For the rest of the population, finding a job is a struggle. Life is hard as there are not enough opportunities that come by due to a dearth of fixed private capital expenditures on plant and equipment let alone research and development. Most of the inflows go to short-term investments, i.e. the stock market, or to fund property purchases, which results in very little job generation outside the construction industry which demands casual employment due to the seasonality of its activity.

This in a nutshell is the problem that confounds the Philippines.

Foreign remittances for the twelve months to January 2012 hit $20 billion according to the World Bank. Remittances for the first ten months of 2012 have already equaled that amount according to central bank figures (with the Asian Bankers Association estimating the real amount to be in the order of $27 billion). This was close to 90 per cent of the Bureau of Internal Revenue”s total tax collections for 2011, and would have been enough to finance that year’s budget deficit four times over. As of November 2012, the country’s gross international reserves (GIR) stood at $84 billion exceeding the BSP’s full year estimate of $78 billion.

This was enough to cover our imports for a full year or to settle all short-term debt obligations 12 times based on original maturity and 6.8 times based on residual maturity (that is short-term loans based on original maturity plus principal payments on medium- and long-term loans of both private and public sectors falling due in the next 12 months).

In fact back in June 2012 when the GIR stood at $76.1 billion, the country’s external debts belonging to both the public and private sectors stood at $62.5 billion. That means the BSP had enough to settle all external obligations and still have roughly $14 billion left over.

The two charts below show what has happened over the past decade. The first one shows that after a rocky first half, the country has been producing consistent balance of payments (BoP) surpluses averaging about 3.8 per cent of GDP from 2005-2011. That is the inward flow of foreign currency exceeded the outward flow by the said ratio. A quick rule of thumb is that 1 per cent of GDP is roughly $2.5 billion or Php100 billion.

So on average, the annual surplus has been about Php380 billion during the past six years. The average BoP surplus is therefore more than enough to accommodate government’s annual revenue shortfall averaging 1.11 per cent a year. The second chart shows the effect these surpluses have had on our GIR. From 2001 to 2011, it has grown on average by 16.7 per cent. Up until 2005, you can see that the line is pretty flat. Afterwards it rises steeply. This means that a tipping point in the flow of overseas remittances occurred back then which placed our BoP structurally in surplus territory from that point on.

Surpluses and deficits, in per cent of GDP

No wonder bond markets have had such confidence in the Philippines. As the saying in business goes, banks will only offer you credit when you don’t need it. The question is do we just keep accumulating these reserves knowing the problems they create for our economy? Or do we actually put the excess funds to good use by investing in the country’s development?

As the title of the piece suggests, we could set up a sovereign wealth fund (SWF) with our excess reserves. The $14 billion mentioned above, which by the end of the year will probably be $15 billion would be the seed money. That is enough to double our infrastructure spending which is currently 1.5 per cent of GDP to 3 per cent, much closer to the recommended 5 per cent, over the next four years. With that added spending, the government could easily meet its aspirational stretch target of growing the economy by 7-8 per cent a year.

Every year, depending on how well our balance of payments performs, we could just keep adding to the SWF. Assuming that the government’s new revenue measures and fiscal consolidation will mean an annual deficit of about 1 per cent of GDP and that the annual BoP surplus remains at 3 per cent of GDP, there would be enough to fund government’s deficit and set aside another 1 per cent to augment the SWF, with the remaining 1 per cent going to GIR.

But we are getting ahead of ourselves. Let us first define what is a SWF? According to the Sovereign Wealth Fund Institute, it is

a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, governmental transfer payments, fiscal surpluses, and/or receipts from resource exports.

The Institute cites some “interesting facts” about SWFs, namely that some of them “invest indirectly in domestic industries” and that “they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves. Most often SWFs receive their initial capital through “commodity exports, either taxed or owned by the government” or through “transfers of assets from official foreign exchange reserves”.

There are about US$5.1 trillion invested in SWFs globally. About three of every five dollars come from oil and gas exports, the remainder from other sources. The size of funds varies from as little as US$300 million for Indonesia to as large as US$664 billion for Norway. Of the 64 SWFs that currently exist, 39 were established since 2000.

Some have argued that the Bangko Sentral is restricted by its charter, RA 7653, the Central Bank Act, from investing in instruments other than Triple-A rated bonds of foreign governments. At the time this law was passed, the problem facing the country was chronic balance of payments deficits. More transfers out rather than in were being made.

The BSP is tasked under the law with maintaining international monetary stability in the country. Part of this according to Article II, Section 64 of the law is “to preserve the international value of the peso and to maintain its convertibility into other freely convertible currencies”.

To maintain such stability, Section 65 says that “the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies”. It would have to judge for itself the adequacy of these reserves based on “prospective receipts and payments of foreign exchange by the Philippines”.

Finally, Section 66 lays out the composition of such reserves which it says “may include but shall not be limited to” gold and other assets that took the form of “documents and instruments customarily employed for the international transfer of funds; demand and time deposits in central banks, treasuries and commercial banks abroad; foreign government securities; and foreign notes and coins”.

So why did the central bank governor offer in September of 2011 to purchase Philippine treasury using its dollar reserves given that these notes are not Triple-A rated? Well, he had probably realised as I had back in November 2010 that the Bank already had an adequate supply of reserves to meet international obligations.

Given that the law says nothing about what to do if the Bank were to have more than a sufficient level of reserves we can say that the Bank is sailing in unchartered waters. If the law does not specify what it should do in such a situation, then it should be left to the discretion of its board to decide on how best to deal with it.

Currently, the return on short-term US treasury notes is between 0 and 0.25 per cent, negative in real terms, meaning that the Bank is paying the US government to borrow from its reserves. And the Fed has said that it plans to keep interest rates as low as they are for the foreseeable future until the US unemployment rate goes under 6.5 per cent (it is currently at 7.7 per cent). If the BSP lent its excess reserves to the Philippine government, it would gain a better return and preserve the value of its assets.

Now that we have cleared the financial viability and legality issues, what would be the purpose of a Philippine SWF? The nature and purpose of SWFs are varied, but in the Philippines it might be to do the following (as adapted from the SWF Institute):

  • Protect and stabilise the budget and economy from excess volatility in revenues/exports
  • Diversify our industry sector to make growth more inclusive and robust
  • Earn greater returns than on foreign exchange reserves
  • Assist monetary authorities dissipate unwanted liquidity
  • Increase savings for future generations, or
  • Fund social and economic development.

Given the need to boost productivity and improve competitiveness, addressing the infrastructure backlog would be the most obvious answer. The public-private partnership projects would be a good initial source of demand for funding as these projects are designed to earn a market rate of return for the investor. Another possibility would be for the SWF to enter into joint-ventures with mining firms for the joint-exploration and production of oil and other commodities. This would ensure that we received a larger share of the benefits from such operations.

A third possibility would be to fund innovation through government procurement, business incubators, industry clusters, and competitions aimed at the commercialisation of ideas. Government could serve as a catalyst in the germination of new activity around key areas of specialisation that the country has already exhibited proficiencies in. The expansion of our semiconductor and electronics industry into higher value adding activities could be one priority. The growth of agribusinesses into higher yield crops and again value adding processes could be another. A fourth priority could be the generation of clean technology and renewable energy.

Finally, beyond just the economic, financial, legal and commercial viability, there is the political viability of doing this. Creating a Philippine SWF would be politically astute as it would be seen as the Aquino administration’s unique contribution to the development of the country. The vice president has also expressed his support for the concept of using foreign reserves for development. This means that the measure would have the support of both leaders and their coalition partners in both houses of Congress.

Beyond that, the consensus formed by our leaders would mark the first time a remittance dependent nation’s government deliberately leveraged the income derived from its work force overseas to channel resources into highly productive activity back home. It would be a shift in the development paradigm of such countries and provide a model for them to follow. Just as conditional cash transfers were forged through a consensus among Mexico’s and Brazil’s leaders as a way to alleviate poverty, the Philippine consensus would provide a path for low income households out of poverty and into the middle class by providing jobs to people of low skills through the fruits of their countrymen’s sacrifice overseas.

If we don’t recognise the opportunity that lies before us in this regard, then when our overseas workers return home, all their hard work may come to nothing as their children will then have to go abroad because there would be no jobs left for them here. With the Aquino government’s good governance credentials, it should be able to shape the probity and prudential measures needed to ensure that the SWF is properly managed and its funds transparently and judiciously utilised for public benefit. This would prove that good governance is indeed good economics and that the righteous path can create in the Philippines opportunities not just for some but for all.

Awards and Abuses

Promised dinner at a nearby fast food restaurant, around a dozen male street children from the Vito Cruz area let themselves be whisked off to the Multi-Purpose Hall of the Cultural Center of the Philippines (CCP) by two young men one April afternoon.

The boys were going to play a game, and the instructions were simple: at the appointed time, the kids would enter a makeshift enclosure in pairs and the objective of each, in emulation of professional wrestlers, was to eject his opponent from the ring. As the children began fighting, the men acted as commentators, egging the combatants on.

Awards and Abuses (Contemporary Art Philippines Magazine Issue 24)

Although the wrestling appeared to be no more than rough-housing at the outset, it quickly escalated: the blows became more forceful; the contenders were suddenly all inside the arena; and one of the boys, twelve-year-old Marco Ramirez (a pseudonym) , found himself trapped in a corner, attacked by several assailants.

Rather than attempt to bring the situation to order, however, the men continued to yell their lungs out.

Alarmed, an audience member jumped into the fray, trying to distract the kids by offering his own body as a target for their aggression. Another hit the lights, plunging the hall into darkness. A third shouted at the commentators, denouncing the proceedings as exploitative.

As the frenzy subsided, someone cried out for a first-aid kit: while all the children were sore, if not bruised, from the experience, Ramirez had sustained a wound on his foot.

Precisely what had the boys gotten themselves into? They have said that it was never really explained to them, but they had participated in Criticism Is Hard Work, a performance piece staged by poet Angelo Suarez and visual artist Costantino Zicarelli for the opening day of Tupada Xing: Social Contract. Organized by the Tupada art collective, it was also known as the Tupada Action and Media Art Fourth International Action Art Event 2007 (TAMA ’07).

Five years later, artist Alwin Reamillo, the viewer who had loudly decried the piece as exploitation, is still outraged. “You don’t do that in a performance,” he said in an interview, believing that Criticism, which he compared to a cockfight or a dogfight, was a case of child abuse. Republic Act No. 7610, the Special Protection of Children Against Abuse, Exploitation and Discrimination Act, defines “child abuse” as the maltreatment of a child, habitual or otherwise, including “any act by deeds or words which debases, degrades or demeans the intrinsic worth and dignity of a child as a human being”.

[Read the rest of the article in Issue 24 of Contemporary Art Philippines magazine or here.]

The Binary World of James Robinson: a rebuttal to Why Nations Fail

He came at the invitation of the Angara Centre for Law and Economics to present his ideas from the book Why Nations Fail which he co-authored with Daron Acemoglu. This pair along with Simon Johnson had originally published back in 2001 an article in the American Economic Review entitled The Colonial Origins of Comparative Development: An Empirical Investigation.

Their book could be seen as an essay expounding on the themes uncovered by their earlier research which credits economic development to the institution-building conducted during the colonial era between the fifteenth and nineteenth centuries. It begins by drawing our attention to the differences between Nogales, Arizona and Nogales, Sonora, towns on opposite sides of the US-Mexican border.

The basic thesis of the book is that nations with institutions that promote greater inclusion in both political and economic spheres prosper while those that foster extractive or predatory policies wind up becoming impoverished and backward. The seminal moment in history, according to the book, happened in England back in 1688 during the Glorious Revolution.

For those not familiar with this event, I provide a brief background here. The basic argument goes a little like this: security of ownership and property rights is essential to investor certainty; investor certainty is needed to foster capital markets, and a set of political checks and balances that guarantee this is best suited for capitalism to flourish.

These principles were essentially what The Glorious Revolution was supposedly fought on and why the Industrial Revolution subsequently took place first in Britain, rather than in Continental Europe. The rights and ideals that Englishmen fought for were transplanted to their American colonies and became the basis for the American declaration of Independence in 1776.

Acemoglu, Johnson and Robinson (AJR) sought to prove empirically that institutions mattered to development. Previously, it was argued that climate and geography had a lot to do with it, i.e. that the industrious, temperate, northern states of Europe were more prosperous than the sluggish states in the southern Mediterranean and the tropics.

AJR sought to dispel this using colonial history. Why was it that not all colonised countries developed along the path of the United States? The difference lay in institutions. Their article demonstrated that in places where diseases led to high mortality rates among early European settlers, and where consequently hardly any permanent settlements were planted, centuries later, the lack of institutional legacy was found to be significantly correlated with low development.

The main lesson was that geography was not destiny, and that even history was not destiny. Less developed nations could begin adopting the institutions that promoted greater inclusiveness and discard extractive policies that left them in squalor. This dove-tailed with the agenda promoted by Washington on good governance, as it searched for a way to rescue the failed Washington Consensus from repudiation.

What came about was the augmented consensus that said free markets and good governance promote economic growth and development. After decades of telling less developed countries to shrink the role and capacity of the state and let markets rip, they were now saying that government needed to be strengthened once again.

The liberal democratic states of the West act as an ideal to which other societies need to aspire to. No other path leads to sustainable economic growth other than this. Just as Calvinist preachers of old would proclaim that no one cometh to the Father, but by His Son, these economists present a case that no other path leads to economic Nirvana, but through the Market (with Institutions performing the role of the Holy Ghost).

This rather binary view of the world is actually contradicted if you go deeper into the colonial history of the Americas which is what John H. Elliott did in Empires of the Atlantic World: Britain and Spain in America 1492 to 1830.

Here he wrote that it was actually the exclusionary racial policies fostered by the English settlers that led to greater social cohesion among settlers around Enlightenment principles of individual rights and liberties, which in turn led to greater independence and prosperity.

Meanwhile in the Southern hemisphere, the Spanish settlers had an “organic conception of a divinely ordained society dedicated to the achievement of the common good” which was “more inclusive rather than exclusive in approach”. The granting of rights both economic and political to natives consisting of mestizos, creoles and freed slaves led to a mixed-race society prone to greater divisions than existed in the North.

The irony here is that a more inclusive colonial policy led to greater exclusivity as subsequent societies were stratified and organised into “pigmentocracies” which made it harder to achieve the egalitarian principles espoused by the Enlightenment. In the Philippines, the outpost of New Spain, the situation was worse in that apart from developing this multi-racial caste-like system, the facility of a common language was not provided as it was in the Americas.

This is the difficulty of using colonial history to prove or disprove that institutions matter in the way attempted by the authors of Why Nations Fail. They do matter, but in different ways, which is the point I highlighted previously in this column (see here).

Secondly, there is the anomaly of the benign dictators of East Asia and the desarollista states of Latin America. Robinson has taken the view that the East Asian growth formula, what is termed the BeST Consensus (BeST consisting of Beijing, Seoul and Tokyo), represent a unique moment in history that cannot really be duplicated or sustained.

Peter Evans disputes this saying that just because the East Asian miracle emerged from a unique blend created by the Cold War policy of the United States, it does not mean that we cannot distil a few basic principles and emulate them today. Just because these states were predominantly autocratic does not mean that weak democratic states cannot adopt the policies that made them succeed in fostering rapid industrialisation (see here for a deeper discussion).

What’s more is that both Germany and the United States, late industrialising Western nations after Britain and France, followed the same industrial policies a century earlier. It was just that after scaling the development wall, they felt the need to “kick the ladder” away to prevent others from following them up because not doing so would disadvantage them.

In Latin America, the record of developmental or desarrollista states of the 1970s and 1980s in Brazil and Mexico is more spotty than in Chile but nonetheless more successful than in Africa or South Asia as these countries made their way into middle income status ahead of countries like Malaysia, Indonesia and Thailand. This is the evidence that Robinson conveniently sidesteps.

Another point James Robinson makes in the book and in interviews is that collective action, which he equates to people power, is key to expanding opportunity for people if the system is closed. He cites the experience of the Philippines and of the Middle East a la Arab Spring to underscore his point. Again, the use of people power is problematic. Why?

Well as Elliott points out, people power features in Spanish colonial traditions as well because

(b)y the laws of medieval Castile the community could, in certain circumstances, take collective action against a ‘tyrannical’ monarch or minister.

Cortes in fact used this against governor Velasquez who ordered him to survey and not to invade the territory of Montezuma in the Yucatan peninsula. It was based on the notion of a social contract between the prince and his subjects which if broken gave the right of the governed to say, “I obey, but I do not comply” (se obedece pero no se cumple).

From time to time, commoners or comuneros resorted to acts of dissent bordering on revolution. But these were simply seen as a way to get the authorities to the bargaining table. Once their grievances were heard and the tyrannical laws or ministers were replaced, they would go back to living as loyal subjects of the monarch. Direct democracy rather than representative democracy ruled until very late in the piece, which left them with very little in terms of a genuine parliamentary tradition.

This swinging of the pendulum from uprising to dictatorship and then back again is exactly what we are witnessing in Egypt today. The problem with equating collective action, i.e. people power, with greater openness, is that the relationship does not always hold.

Finally, let me address the fallacy that only the Anglo-American form of capitalism works well. Francis Fukuyama is right to point out that this is not the only successful Western model that exists. Scandinavia demonstrated another path, which did not require revolts against oppressive monarchs. Theirs was more along the lines of an enlightened, benevolent monarch based on egalitarian religious rather than secular beliefs.

What I hope to point out through this discussion is that the world that we live in is more complex, more multifaceted than what Robinson tries to portray. While it is easy for him to be parachuted into the Philippines to spread his brand of institutional economics, we don’t necessarily have to buy into his whole message.

I agree that the Philippines needs greater openness and participation in political and the economic life, and that collective action to widen the sphere of participation probably needs to be organised, because elites won’t surrender their privileges willingly, but that is as far as I would go.

We don’t need a whole theory based on a faulty or perhaps selective reading of history to back this up. We have seen how people power can be hijacked or used for narrow political ends. We need to guard ourselves against simplistic arguments that say unseating this corrupt ruler here or that autocrat there is going to bring about nirvana for us. Institution-building is not accomplished by this alone, but through a sustained, deliberate, evolutionary process.

The social innovation of Oportunidades and Bolsa Familia more widely known as conditional cash transfers which have been credited with reducing poverty in Mexico and Brazil were not developed by the World Bank or the IMF.

They were experiments conceived by indigenous policy makers who were thinking ‘outside the box’. The East Asian industrial policies responsible for creating economic prosperity and convergence were pursued against the advice of international economists from the IMF and the West. Japan’s Ministry of International Trade and Industry sought to deceive their Western minders that they were complying when in fact they were doing their own thing.

Similarly if the Philippines were to find its way in the world, it will have to be by taking into account its own unique blend of ideas, capacities and institutions. It won’t be by applying some universal one size fits all formula promoted by a Western economist armed with some statistical regressions, a few case studies and a loose reading of history.

Since the era of Martial Law we have had technocrats sing from the same hymn sheet as their Western counterparts while ironically supporting a system that undermined the very principles they were espousing. We need to be smarter and wiser this time around.

We need to accept that the world is not a binary system, comprised of dummy variables that say you are either inclusive or exclusive, free or unfree, open or closed. We need to admit that we live in a multi-polar world, where things are not as clear cut, as some experts would have us believe, and that many paths lead to development. Ours in fact still needs to be found.

The knockout: Wa’ happened?

“Everyone has a plan ‘till they get punched in the mouth” – Mike Tyson

Wa’ happened? Manny Pacquiao walked head first into an incoming train, the Marquez Express. That’s wa’ happened.

The next question is: Why?

Trainer Freddie Roach forgot to remind Pacquiao that blocking a right straight with one’s jaw is never a good idea. Not even if you’re convinced that your jaw can break your opponent’s fist. The only time the tactic is worth considering is if you’re an insomniac and you’re desperate for a good night’s sleep.

Ronnie Nathanielz the boxing pundit blamed it on Manny’s lack of conditioning. He said Manny sparred and jogged and hit the bags which were fine for the cameras but not good enough to face a boxer like Marquez and who went all out on strength conditioning. Like Pacquiao used to do. He added Pacquiao should have done extra hard conditioning specially since he lost his last fight with Marquez. But he didn’t. And so what could have been only a fender bender with a speeding bus turned into a train wreck.

Mommy D thinks there was more to it than just an oversight by Roach or a lack of conditioning. She said her Manny lost because he stopped wearing a rosary around his neck and making the sign of the cross. Hmmm…

And my brother reminded me that December 8 is also the Feast of Mary’s Immaculate Conception so not wearing a rosary could have made her mad enough to blind Manny to the incoming missile from Marquez. Hmmmm again.

Both would have been plausible explanations if Manny were not against the RH Bill. But he is. Strongly. He is so strongly against RH that he conducted his interpellation of the bill’s sponsor in English. So that, not just his foray into english, should have cancelled out the rosary thing. But it didn’t. Manny still kissed the canvass. At any rate, I reminded my brother that Dec. 8 is also the day of the Japan’s surprise attack on Pearl Harbor and the Philippines. That’s my hmmm…

So is there a theological explanation for the knock-out? We await Bishop Broderick “God is angry over the RH Bill” Pabillo’s insight on the matter. By the way, we must also ask the good bishop if Typhoon Pablo’s u-turn towards Ilocos has something to do with the Northern Alliance’s opposition to the Sin Tax.

Politicians, as usual, had to weigh in with their airhead platitudes about rising from defeat, none of which will change the fact that Pacquiao was knocked out and Filipino boxing fans are inconsolable.

What the hell are those politicians doing equating national pride with having a champion in a bloodsport? And really – “If at first you don’t succeed try and try again” – is not sound advice for tight-rope walkers or boxers who just got their brains bashed.

While waiting for fight experts to sort things out and for more idiot politicians to offer more inane platitudes, I decided to go to Sting’s concert at the Araneta Coliseum. It’s the best thing I’ve done all year. If, like me, Manny Pacquiao had gone to the Araneta instead of Las Vegas, he would have been serenaded by one of the greatest musicians ever instead of a bunch of birds circling and tweeting songs around his sorry head.

Manny Pacquiao has made his mark on a sport that like dog and horse fighting should have been banned years ago. He has nothing more to prove. And he has made enough money to kiss Bob Arum’s ass goodbye. It’s time he enjoyed the fruits of his labors full-time.

Unfortunately, he is still surrounded by people who have everything to lose if he retires and so he will most likely allow himself to be talked into one last fight. For redemption. And one more last fight. To erase any doubts about his greatness. And one more last fight. And one more last fight. Until his brains turn into mush.

Well as Mike Tyson once said, “I’m a dreamer. I have to dream and reach for the stars, and if I miss a star then I grab a handful of clouds.” Except that instead of having your head in the clouds, a fistful of clouds ends up inside your head.

No sympathy for me. This mindless adoration of boxing champions must stop. There are no heroes in a bloodsport. ‘Yun lang,