Aquinomics

Spend More, Talk Less

With the release of third quarter GDP figures upsetting all but the most ardent economic apologists for this administration, the time has come for it to re-think its priorities.

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The situation is nearing a critical level. As the whole of Europe is placed on credit watch and as recovery in the US struggles for momentum, the vibrancy in the domestic economy is being sucked out by government’s poor infrastructure spending rate just at a time when it is needed. Cabinet officials throughout the year have been promising a more rapid deployment, but this has so far not materialized.

The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?

(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).

That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?

Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.

Market analysts have already pointed out and the Bangko Sentral agrees that stimulating greater demand to address the slowdown in growth lies not in the hands of monetary authorities at this point but with fiscal managers. What this means is that the government has to spend more and talk less. Or in the words of Jerry Maguire, it has to “show me the money!

All talk, no action

The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply”  is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.

P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.

When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.

And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf  the growth of the CCT or conditional cash transfers which cost about thirty billion.

Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.

That third option which I had first written about late last year which then got echoed by no less than the BSP Governor a few months back is for the government to issue infrastructure bonds to the BSP which is at present earning negative returns on its foreign currency reserves.

Better returns

By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.

The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:

  1. Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
  2. It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
  3. Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
  4. It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
  5. It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
  6. Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
  7. It will help prop up employment and growth which will spur increased tax collection.
  8. It will reduce the cost of doing business for most firms, not just exporters.
  9. It will help achieve the government’s growth target of 5-7% in the medium term.
  10. It will fulfill the government’s own development plan and set us on a higher growth plane.

Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.

But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.

Making daang matuwid work

In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”

The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.

The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”

That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.

Back to the Future with Aquinomics 101

Perhaps PNoy should trade his Porsche for a Delorean.

In his self-appointed role as guru of the new Aquinomics, Prof Cielito Habito of the Ateneo Graduate School of Business alluded to the Reaganomics of the 1980s which preached that less government and lower taxes would promote growth through private investments.

Habito builds the case for an “economics of business confidence” where he points to the revival of private domestic investment which more than offset the drop in public and foreign direct investments during the first three quarters of the PNoy presidency. The hidden messaeg in all this is that when government gets out of the way, private investment soars.

He defends the underspending by the government in its first year by calling it the “economics of fiscal responsibility”. Here is how he explains it:

Some observers now fault the new administration for “underspending,” for indeed, not only has it spent less than it did last year, it has also spent even farther less than what had been programmed to be spent by this time. But before casting this government as inept and lacking absorptive capacity, one must remember that this year’s budget was still drawn up by the previous administration [emphasis added-ES]. And if the current government has been more prudent about spending the money, it could well be because they have found that they don’t have to spend as much as the former government would have, to accomplish as much.

And it seems they have. The Department of Public Works and Highways is one of the biggest “culprits” in the underspending. It turns out that the agency has made dramatic changes in the way public works projects are costed out, leading to substantial savings. For one thing, Public Works Secretary Rogelio Singson has significantly reduced allowable “indirect costs,” including contractors’ profit margins (and quite likely the so-called “bukol”), in public works projects. Coupled with a strict policy on transparent public bidding, the agency boasts of more than P2 billion in savings from 2,797 projects over the past year.

It seems quite astounding that Habito could claim that this year’s budget was drawn up by the previous administration. It beggars belief given that the president’s men spent the first six months engaged in a zero based budgeting process to weed out undesirable projects left behind by Mrs Arroyo.

While his explanation for the delays in DPWH disbursements remains plausible, it does not explain the delays in all the other departments. It would also appear dubious or incomplete when stacked against the DBM findings that delays in DPWH were due to re-alignments requested by regional offices.

But the more disturbing problem is that Habito conveniently disregards the evidence regarding spare capacity in the economy for capital spending. At a time when unemployment is rising, he has the audacity to suggest that it was a good thing for government to put its foot of the accelerator.

Habito like most of our economists seems to be taking his cue from the West where austerity measures seems to be taking hold as deficit hawks seem to gain ascendancy in the debate in both Europe and America.

Nobel Laureate Prof Paul Krugman who argued for a much larger stimulus under Obama back in 2009 and has been proven right by recent events with the stalling US recovery notes how the “Triumph of Bad Ideas” (referring to Reaganomics) has taken place. He is not alone in this, another Nobel winning economist Joe Stiglitz backs him up.

The same sort of triumph seems to be taking place in Aquinomics with the Palace announcing it has no plans to introduce any new tax measures in 2012 despite its intentions to increase spending to 1.8 trillion pesos from the current 1.6. The hubris of this plan is that they believe efforts to improve collection will work wonders in their second year when it clearly has not happened in the first.

Despite Prof Winnie Monsod’s calls for higher tobacco taxes and Prof Ben Diokno’s proposal for fiscal adjustment plan, Malacanang seems to be confident in its Aquino doctrine that “no new taxes” are needed. This makes the fulfillment of its 2012 expenditure program a pipe dream, just as the 2011 one led to “trickle down” economics with social expenditures actually dipping while military and police spending increased.

We need to recall that it was the result of tax reforms adopted under Cory Aquino for whom Monsod and Diokno are proxies that revenues from taxes as a share of the economy went up, and those under Fidel Ramos for whom Habito is a proxy that they gradually got eroded. The problem however is that in the battle of ideas, it seems the argument of Habito trumps that of Diokno and Monsod.

Explaining Aquinomics

Cielito Habito wrote a very good op-ed on the Inquirer today explaining what Aquinomics is— Aquino’s economic policy is.

“What defines “Aquinomics,” then? One description that comes to mind is “economics of business confidence,” as that has been the driver of the economy under Aquino’s leadership so far. Over the past four quarters, growth in private domestic investment has been consistently surging, based on the quarterly National Income Accounts. This investment surge comes after many years of relative stagnation. Cross-country data from the Asian Development Bank reveal that in 2002-2007, our annual growth in total investment—that is, putting public and private, and foreign and domestic investments together—averaged zero percent. In contrast, our neighbors posted positive investment growth ranging from 3 to 19 percent per year. For most of the past decade, then, our neighbors were leaving us behind in building even greater productive capacity in their respective economies.

What is remarkable about the investment growth we are seeing lately is that it comes in the face of a significant drop in foreign direct investments (FDI). Latest Bangko Sentral ng Pilipinas data report that actual net FDI inflows so far this year are 17 percent lower than in the same period last year, a steep drop by any standard. Similarly, latest data on foreign investment approvals by the different investment bodies taken together (namely the Board of Investments, Philippine Economic Zone Authority, Subic Bay Metropolitan Authority and Clark Development Corporation) report a 53 percent drop from last year. And yet, overall investment has jumped 37 percent, implying that domestic investments must have jumped by much more, far overcoming the foreign investment decline.”

Habito says, in a nutshell, Aquinomics is “economics of fiscal responsibility”.

 

Photo credit: Malacañang Photo Bureau

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