ASEAN

The Philippine Growth Spurt: will it last?

Image credit: NSCB.gov.ph

The latest release of GDP growth figures showed an upward growth spurt for the country. From a growth of 6.8 per cent for 2012 (revised up from initial estimates) to an unexpected year-on-year growth of 7.8 per cent in the first quarter of 2013, the numbers seem to provide both a strong signal to the world that the country now is back in business and a platform for the government to claim that its policy of pursuing clean, honest governance is paying off.

Having outpaced the growth of countries like China (7.7 per cent), Indonesia (6 per cent), Thailand (5.3 per cent) and Vietnam (4.9 per cent), and having done so on the back of an expansion of manufacturing and construction, has led some commentators to claim that the country has turned a corner or reached a “tipping point” from where it would now be on solid footing on a higher growth path.

There are only three things to point out here.

The first is the blindingly obvious: one quarter’s performance does not make up a trend. We cannot make any projections regarding future prospects based on this single observation. I would argue, not even the performance of the last 18 months proves anything. Remember 1997 when we thought we were about to take off? For those who were old enough to recall, remember what happened next? The same thing can be said of today’s situation.

Second is for us not to downplay the effect of the recently concluded elections. Malacañang has stated that this was an unusual GDP growth result for a non-presidential election year. You would expect them to say that, but the problem with their argument is the automation of elections, which makes campaigns more expensive by all accounts as cheating can no longer be achieved centrally at the provincial or municipal levels, as was the case prior to automation, but has to be done at the retail, grass roots level through vote buying.

We cannot discount the fact, particularly in this election which was dominated by entrenched political families, that money might have flowed massively unlike previous midterm elections. This would have meant that provincial and municipal incumbents hit the pork barrel pretty hard in the opening months of the year in a bid to prove to constituents that they were hard at work.

Government spending and construction growth were consistent with this view, along with financial intermediation, which again could have been linked to this. That does not necessarily mean that all this spending went to waste. It just means that a large component of the first quarter growth was seasonal in nature: determined as it was by the political-business cycle.

The third and final point I would make is that the Philippines becoming the fastest growing economy in the region is more about China decelerating than it catching up to China. The two are interlinked though. Let me explain.

During the last decade, China was the workshop of the world. It basically drained the swamp for ASEAN sucking in much of the foreign direct investments in manufacturing. During this time, the Philippines suffered a hollowing out of its industrial base, what little of it that it had.


At some point in this period, China’s income per capita overtook the Philippines’. Demographically, China also started to face the consequences of their one child policy as labour started becoming scarce as investments in China’s interior slowed the migration of workers out to the prosperous coastal regions.

The newly installed Chinese president has also indicated that the government would not sacrifice the environment in pursuing economic growth. Much social unrest now stems from pollution. They are seeking to transition the country away from its dependence on exports and investment. China has basically lost its cost competitiveness and will now have to grapple with the challenges of being a middle income economy.

Early this year, it was reported that inward foreign investments into ASEAN have for the first time equalled that of China. A structural realignment is now taking place. Bangladesh, Vietnam, Myanmar and Cambodia are now the new Chinas. The Philippines could perhaps be benefiting from this trend as well. It probably has less to do with what the government is doing, and more to do with external factors, as I have just mentioned.

All this now puts the onus on government, however, not to “muck things up”. Recall how it inadvertently pulled down growth back in 2011 when it pursued a de facto austerity policy? Let me take the opposing view now and say that this could be the start of a trend, a structural break in economic parlance. In that scenario the one thing that could potentially derail it is the “noise” that we create. Happily for the administration, it won a rare majority in the Senate and kept control of the house (assuming its alliances hold).

The mystery now is what it plans to do with that majority. The ball is in its court. If this sudden growth spurt is to be maintained, then for the next three years, the Aquino government will have to work hard to unclog the investment pipeline in infrastructure, skills and energy that are needed to power its economy through.

Will things like charter change, the proposed Bangsamoro autonomous region, territorial disputes with our neighbours or some completely unexpected Black Swan event throw us off course? That I suppose is the burning question of the day.

Trapo Alert! Detecting political pandering, part 8

Panderometer

 

Featuring Nancy Binay, Tingting Cojuangco, Jamby Madrigal, Mitos Magsaysay and Cynthia Villar.

This is the eighth part in a series on the candidates for the senate in 2013. Just a recap: I am attempting through this series to have a serious discussion of the aspirants and their political platforms (or lack thereof). These are put through what I call the pander-o-meter to determine whether the policy detail they have released so far places them in either the reformist or populist columns. The following table details the range of possible scores a candidate can get and the equivalent meaning of each reading:

Introducing: the ‘Pander-o-meter’ or Trapo Scale

A reading of… …is equivalent to…

1-2

Low levels of pandering detected, generally reformist in nature

3

A mixed bag of proposals aimed at both pandering and reforming

4

Trapo alert! Approaching dangerous levels of pandering

5

Could be likened to a vote buying trapo

In part 1, I covered Juan Edgardo Angara, JrBenigno Aquino IV and Alan Peter Cayetano. In part 2, I covered Francis Escudero, Risa Hontiveros and Loren Legarda. In part 3, I covered Aquilino Pimentel IIIJoseph Victor Ejercito and Juan Ponce Enrile, Jr. In part 4, I covered Gregorio HonasanErnesto Maceda and Juan Miguel Zubiri. In part 5, I covered Teodoro Casiño, the candidates of Ang Kapatiran Party (John Carlos delos Reyes, Lito David and Mars Llasos), and the candidates of the Democratic Party of the Philippines (Bal Falcone, Christian Señeres and Greco Belgica). In part 6, I covered Grace Poe LlamanzaresEddie Villanueva and Richard Gordon. In part 7, I covered Jun Magsaysay, Edward Hagedorn, Antonio Trillanes, Samson Alcantara, Ramon Montaño and Ricardo Penson.

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Nancy Binay (PDP-Laban-UNA)

The erstwhile assistant of the vice president is gaining the spotlight as she runs for public office for the first time. Having served on the board of her parent’s foundations, Ms Binay is planning to push for health and education services in the senate. Her television ads contain three pledges, which include:

  1. Providing better prenatal and post natal services
  2. Free medicine and nutritional supplements
  3. Education to employment services

It is not clear how her proposals would work. She has not released a detailed policy statement. Her web presence is fairly limited. Her Facebook page contains mostly photos of her and a guy I presume is her partner on the campaign trail. What knowledge we have of her policy prescriptions come from ads and news items.

Ms Binay is banking on the franchise of her family name to assure voters that her promises are backed up with years of assisting her parents in their charities and public service work. Much has been made of her unwillingness to debate Risa Hontiveros on health issues.

While Risa talks in the abstract of making healthcare “more universal” through a systemic reform of the health system, Nancy is using very specific and perhaps targeted health programs that “make it real” to voters. That and the very tangible example of what the Binays have done in Makati is why she seems to be appealing to voters despite the fact that this is her first time to claim the public spotlight.

Unfortunately, we do not know how her programs would be funded and how costly they might turn out to be. It is feasible to do these things in the City of Makati with its rich taxpayers footing the bill for their programs, but doing the same throughout the country will be a major challenge, something that the traditional media has not confronted her with. Indeed, the mainstream media have in a way given Ms Binay a free pass.

I am not saying that her programs cannot be done. All I am saying is that someone will have to foot the bill for them. And without sufficient information regarding how big these programs are intended to be and how they will be funded, we have to take her proposals with a grain of salt.

Pander-o-meter: 4 out of 5

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Margarita “Tingting” Cojuangco (UNA)

This former governor, a history and national security buff, is running to create a peaceful end to the conflict in Mindanao and the settlement of the Sabah issue, her long-time passions. After listening to over forty minutes of her being interviewed on cable news regarding her plans, however, it is still not clear to me as to what her roadmap is for bringing this about.

It is such a shame, given her knowledge gained from scholastic and personal pursuits and involvement in the decades’ old peace process, that she is unable or unwilling to articulate a coherent roadmap for a long-term settlement of the conflict in the south. Pity as even her inclination as expressed in the interview tends to veer away from the current course taken by the administration in revamping the Autonomous Region of Muslim Mindanao. Does that mean the present set up is fine? If so, then why is it that there still is no real peace in the south? What is her alternative plan?

These are serious questions that remain unanswered. She sort of excuses herself for not enunciating a response by saying that ordinary Filipinos are simply not interested in hearing it. That is simply condescending. If one is going to treat voters like children, so that instead of sharing the harsh realities and stark choices, one offers ear candy or things which they presumably want to hear as self-interested individuals, then one shouldn’t be surprised if they return the favour with an equal amount of disdain.

Pander-o-meter: 4 out of 5

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Jamby Madrigal (Liberal-Team PNoy)

Up to now Ms Madrigal’s website has a non-functioning tab for her “Platform”. In other words, she has not even bothered to inform us what her legislative agenda would be if she were to be given another chance to serve in the august chamber of the senate. What are we to make of this?

The only bit of information that exists is her stand on a number of issues from reproductive health to the promotion of eco-tourism. But that really is not nearly enough for us to know what exactly her plan is. Like I have said countless times in this space—it is not acceptable to merely mouth slogans or buzzwords in this campaign. For members of the voting public to support you, you have to provide very concrete measures to address important public policy issues. We know from the bills she has previously authored that Jamby stands for protecting the rights of women and children as well as the environment, so she should lay down an agenda to further those causes over the next six years.

It is not proper to merely use celebrities or gimmicks through social media to gain traction in a bid for a senate seat. There has to be substance. Unfortunately, despite taking some principled stances on certain issues, Ms Madrigal has failed to provide direction to her campaign by laying down a platform. It does not help that her party, the LP and Team PNoy has not come out with a unified stand on issues and a coherent agenda to implement over the course of the next congress. That has left a vacuum for each candidate to fill, which unfortunately Ms Madrigal to this day has failed to attend to.

Pander-o-meter: 3.5 out of 5

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Mitos Magsaysay (PMP-UNA)

This feisty representative from Zambales prides herself with being a “fiscalising” critic of the administration in Congress and vows to do the same if she reaches the upper house. In her bid to attract attention to herself, she runs the risk of being identified as a demagogue with no policy substance whatsoever.

But in fact, if you look at her record in Congress, you will find she has authored a number of significant bills that were passed by the lower house. One of these is an act creating a national student loan board to benefit poor students. If you study this bill closely, you will find that it has some very interesting features. The planned student loan system would be funded by a wage-based levy similar to Philhealth and SSS of anywhere from ½% to 4% of salaries based on a progressive scale (the higher the income, the larger the contribution which sounds complicated to administer). Student loans would be charged 5% annually and have a loan term of 5 years to pay.

I wonder which country Mrs Magsaysay had patterned her proposal after. If she had studied the Higher Education Contributions Scheme or HECS in Australia, she would have learned that five years is too short for student loans accumulated over four years of studies to be paid back. The cost of human capital should be amortised over the working life of an individual, which is at least 20 years.

Another thing is the interest rate. HECS does not charge any interest, or at least commercial rates of interest. It does however index the balance of the loan by about 2.5 per cent every year to keep up with inflation. In addition, a discount is offered for up-front payment of student fees.

The Australian model does not finance student loans with contributions from the working population, but from general appropriations and from repayments of students previously enrolled in the system. Repayments are conditioned on subsequent incomes being commensurate to what is expected of a university graduate. Payments are collected through the tax office in the form of mandatory deductions to one’s personal income. If the person earns less than the threshold, then no repayments are required.

(The recently concluded conference sponsored by the ASEAN and Australia was a forum where Philippine policy makers could have gained a better handle on these issues. Unfortunately, we did not participate in it.)

For this program to work, adequate funding has to be pumped into the coffers of the loan administration equal to the annual student fees collected by state universities and colleges for a number of years. This is until loan repayments from previous cohorts are sufficient to finance the loans of subsequent cohorts. Then the system could potentially be expanded to cover courses offered by private higher educational institutions. When years 11 and 12 are introduced in 2015 and 2016, and there are no incoming freshmen to SUCs, it would be an ideal time to bank some funds in preparation for the launch of the student loan board. I have detailed all this in a previous post.

Mrs Magsaysay has drawn much attention to herself as a firebrand, criticising the administration’s priorities at every turn. She criticises the president’s emphasis on Pantawid Pamilya which encourages primary school enrolment, while she says not enough money is spent boosting tertiary education. The two need not be in conflict, and she should realise this.

Pander-o-meter: 3 out of 5

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Cynthia Villar (Nacionalista-UNA)

Mrs Villar’s record in the lower house shows that she espouses the cause of the vulnerable in society, including seniors, children and women. She has also worked on updating the charters of UP and modernising the Philippine Normal University. When asked about the congressional investigation into nursing education in which she took the side of poorly performing providers rather than the needs of hapless graduates who could not meet the minimum requirements of the profession, she stumbled by denigrating the aspirations of those students, for which she later apologised.

Her platform consists of promoting livelihood programs for women and tree planting activities for environmental conservation purposes. She points to the work that she and her husband Senator Manuel Villar have started in their city in which she served as mayor as evidence that such programs work. It is not clear though exactly how these programs would work at the national level. Does she intend to mandate all local governments to imitate her own pet projects in Las Piñas? Or does she intend for a national agency like the DSWD to manage it? If so, where would the money to finance these programs come from?

This has been a recurring theme in this series. Candidates for the most part are not forthright about the intended size and scale of their proposals. My feeling is that we would need a fiscal sustainability law to force them to cost these and determine the source of funds for them. This would discipline candidates and parties when crafting their policies to provide full transparency and accountability. Without such information, the policies and programs that candidates present are simply pandering to the interests of targeted voters without any care given to their fiscal impact or sustainability.

Pander-o-meter: 4 out of 5

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The final instalment of this series will come in the form of a summary. Stay tuned!

Jammed

Does public infrastructure represent the best use of private investment?

It seems that our corporate titans have nothing better to do with their excess cash than to pour it into the growing public utilities and infrastructure sector. Whether it is San Miguel the beverage giant which went heavily into power or the Metro Pacific group a major player in telecoms which operates the NLEX-SCTEX road networks, there does not seem to be anything which competes for their attention than this sector.

About one-and-a-half trillion pesos is sitting in Special Drawing Accounts with the BSP deposited by banks which are unable or unwilling to lend them out. With a country as underdeveloped as ours, one would think that such excess savings could be put to better use. Why for instance isn’t San Miguel investing to develop coco juice exports which it has the capital and expertise to do?

Since our lost decade in the 1980s when a banking crisis followed by a political upheaval reduced our economy to tatters, manufacturing has never really recovered from the heights it once achieved by the end of the 70s and early 80s (see chart). Meanwhile, our ASEAN neighbors Indonesia, Malaysia and Thailand overtook us in moving their economies towards industry. Our gross capital formation as a percentage of GDP is the weakest in the region as a result.

Vietnam, a relative latecomer in the game has seen its manufacturing sector grow by leaps and bounds, while Singapore cannot be held up as an example for us to follow since it is a city-state with a tiny population and workforce. It can afford to de-industrialize its economy, while we can’t. While some would argue the high value services sector is nothing to sneeze at, it still cannot be relied on to provide the kind of jobs that match the skills held by our bulging population. The answer lies with manufacturing.

The Philippine Development Plan identifies infrastructure as the “binding constraint” to speedier growth. The reason it claims Philippine goods remain uncompetitive is our inability to bring them to market efficiently. Apart from that there is the implicit “tax” that comes by way of corruption which increases the cost of doing business and the unfair competition from smuggled or pirated goods that discourages domestic manufactures, the result of weak rule of law.

With its low tax collection rate and chronic fiscal deficits, partly to do with an aggressive liberalization policy pursued since the 1990s, the government was more than willing to let the private sector fill the breach in public infrastructure.

Since private business seems so gung-ho about providing public goods, it seems the identification of infrastructural bottlenecks was the correct diagnosis of the problem of underdevelopment. One wonders, however, if these firms are moving into such projects because there is no attractive alternative in other sectors, or is it because of higher returns now currently on offer from public-private partnerships?

Also, if indeed there are “bottlenecks” causing the cost of doing business and cost of living to skyrocket, then one would expect the public would be willing to absorb the fees charged by private operators under existing PPP arrangements. That is not what has been observed though (think MRT and LRT). One would then have to conclude that either the private operators have negotiated prices above the market-clearing level or that the demand for such infrastructure was not sufficient to begin with.

Investing in public goods by their very nature would often produce a private return lower than the commercial rate of return. That is why it is often financed in capital scarce countries through “concessionary loans” from foreign governments and multilateral institutions. If private operators borrow at prevailing market rates, then they cannot possibly make a profit unless the government provides a subsidy to pay for the spread between the “risk free” government borrowing rate and the commercial lending rate.

Turnaround

The sudden flash of insight Sec Mar Roxas used to interject into the president’s faltering public-private partnerships roll-out was that it would be better for the government to borrow at the risk-free rate and contract out the construction phase of some projects in effect passing on the cheap cost of capital to contractors. It could then auction off the operations and maintenance contract separately minimizing the need to subsidize fees charged to customers.

The question then is can government afford to borrow more in order to finance its infrastructure roll-out? It could if it chooses take-up the BSP’s offer to borrow against the country’s excess international reserves that accumulate each year. The state would effectively be borrowing against itself. Given the total cost for the original projects of about one hundred billion pesos, the surplus of reserves flowing into the country each year of four to five billion dollars is enough to cover these projects twice over.

If the public sector is then able to deal with the cost of providing infrastructure, how can it stimulate complementary investments needed in the private sector? If the lack of domestic capital and skilled labor are not responsible for the observed underinvestment, neither are low rates of return (low taxes and labor market flexibility are found in special economic zones), then what else could it be?

There are a number of candidates. Government failures which include corruption or weak property rights and rule of law are one option. A second possible candidate is market failure due to inabilities to coordinate investments in complementary upstream and downstream sectors or to internalize the benefits of innovation and experimentation.

The first has been identified by the National Competitiveness Council and the government as an area of concern. The decline of the Philippines ranking in the latest Ease of Doing Business survey by the World Bank reflects the country’s inability to address government failure. On the other hand, if these are the causes for underinvestment, why is it that manufacturing has suffered a decline relative to services in terms of investment and output? Shouldn’t they all be suffering the same fate?

This leads me to identify the problem of market failures as well. The systematic break that occurred in the mid-80s when the country turned away from industry policy and underwent an aggressive reduction of tariffs unilaterally ahead of WTO commitments left our manufacturing sectors at a disadvantage vis-à-vis our ASEAN neighbors. This is perhaps the reason services have oustripped manufacturing since it represents non-tradables which can only be provided domestically. Think retail, housing, commercial property and yes, utilities. Mining is a similar story. How then could the government begin to stimulate activity within the tradable industries? The following five measures would represent the most important steps.

  1. Partially rollback tariffs to within acceptable levels still within WTO commitments targeting in particular greenfields. Sustainable technology is one example of greenfields. To partly offset the modest rise of inflation that would come with this, tax cuts and (conditional cash) transfers should be directed to low income families.
  2. Finalize the list of investment priorities to signal the areas that government wants growth to occur in. Government must consult with business groups in compiling this list, but it must also exert some independence and take the lead in some areas and not simply take a market follower approach.
  3. Rationalize fiscal incentives and gradually fine-tune the selectivity of sectors for promotion. This has already been initiated by the BOI, but follow through and institutional capacity building needs to occur, which leads to the next item.
  4. Strengthen the economic bureaucracy to solve investment coordination problems across related sectors. Improve the ability of state agencies like the BOI, PEZA, DTI and other government agencies to undertake a consultative and promotional role.
  5. Create a research and innovation fund jointly run by public and private enterprise to encourage commercialization of ideas. Given the excess foreign reserves cited earlier, the state can also afford to undertake this strategy in partnership with academe and the business community.

Compared to the strong-arm tactics being employed by Argentina and Brazil which like us bought into the liberal free trade argument in the 1990s and have like us seen their manufacturing sectors stagnate (see chart), these measures would be considered rather tame.

From 1949 to 1959, the Philippines used heavy handed trade and industry policies similar to what LatAm countries pursued from the 1930s to the 1980s. This led to the fastest growth ever sustained in our history (and theirs). Unfortunately, it did not last long enough for investments to expand beyond light industries as Paul D Hutchcroft notes. The direpute to which import-substitution subsequently fell was the result of the Filipino First policy instituted in 1958 towards the end of the decade of growth, an over-reach of the “elite” nationalists. The poor administration and outright corruption that the policy bred stymied it and led to the liberal policies of the 1960s supported by the landed agricultural exporters.

Pres Marcos tried to weaken the landed aristocracy and revive our nascent industry sector in the 1970s, but the lack of checks to the predatory nature of his regime led to its collapse. The Philippines has been following the liberalization paradigm ever since. The stagnancy of our manufacturing and overall weak economic performance is hard to explain given the structural reforms undertaken from the late-80s. The Philippines since the early 2000s has become a net saving country due to overseas remittances and is rapidly accumulating foreign reserves (it has more than enough to pay off all our external debts). With some tweaking, we can unlock this capital and put it to better use.

So far from encouraging private investors to get into public utilities, the government should actually follow Sec Roxas’s advice to break-up build, operate and transfer contracts to lower their cost to the public. Finally, the government must look to revive investments in the industry sector (which includes high value agricultural and services too) through pragmatic policies. It must create as much policy space within existing WTO arrangements to maximize the benefits of industrialization. Without this its vision for a rapid, sustained and inclusive pace of development might simply come to naught.

Budget 2012: How it all stacks up

Among the nations in the developed world that follow in the Westminster parliamentary tradition, the most eagerly anticipated policy speech by the government is not the state of the nation address but the budget speech.

The budget tackles not only the spending side, you see, but the tax side as well. On budget night, citizens find out if they are to get some form of tax relief. They also look for any additional spending on things they directly benefit from, like schools, hospitals or infrastructure.

The rich nations that make up the OECD (Organization of Economic Cooperation and Development) have varying levels of taxation. The Scandinavians typically tax more and provide a high degree of social insurance and welfare. The Anglo-American nations of the UK, US and Ireland tend to have lower taxes but provide a smaller safety net for their people.

Australia, the nation I am most familiar with seems to have the best of both worlds, with a tax take much lower compared to the Nordic countries but providing a level of social insurance and welfare comparable to them. That is because its tax and spend policies are some of the most progressive in the world.

Australia spends about 16 per cent of GDP on cash benefits (pensions, unemployment insurance, healthcare and community services) compared to an OECD average of just over 19 per cent. It is able to keep this expenditure down by means-testing benefits enabling it to target spending on those that most need it. Its tax take is about 27 per cent of GDP compared to an OECD average of close to 35 per cent. It is the sixth lowest-taxing country in that group.

Rich country, poor country

It is perhaps in this light that we need to focus on the Philippine tax and spend situation. Most poor countries are able to generate only as much as 20% of GDP from their tax systems. Yet the demand for public service is much higher than in advanced economies. The Philippines is no exception.

In 2012, the government projects it will generate about 1.5 trillion pesos worth of revenue out of a domestic economy that is expected to reach 11 trillion or about 13.6% of GDP. In the current year 2011, the government projects to earn 1.4 trillion out of an economy of 9.9 trillion or 14.2% of GDP. In 2010, the ratio was 13.3% (based on DBM papers).

In 2012, due to its low tax take and with a budget of 1.8 trillion, the government will incur a deficit of 286 Billion (up from the original 260 B) or 2.6% of GDP. That is compared to its projected deficit in 2011 of 300 Billion worth 3% of GDP and 314.5 Billion for 2010 or 3.5% of GDP.

Social services which include education, health, housing and land distribution are programmed to consume 556.2 billion pesos or 30% in 2012. That compares with 529 Billion in the current year equal to 31% of the budget in 2011 and 399.3 billion in 2010 worth 26.2% of that year’s total spend.

Among the social services, education takes the largest share. Next year it will amount to 309 billion or about 2.8% of GDP. This is up slightly from 2011 which was 272 Billion or 2.7% of GDP and from 2010 which was 225 billion or 2.5% of GDP. By contrast, Singapore and Thailand spend anywhere from 3.5-4% of GDP on education. Malaysia spends from 5-6%. If we were to match Thailand’s education to GDP ratio, we would need to spend an additional 70 billion on education.

As for health, next year’s budget includes 59 billion or 0.5% of GDP, up from 48 billion in the current year (0.48%) and 36 billion last year (0.39%). In contrast, Singapore spends about 0.9-1.5% of GDP, while Malaysia spends 1.8%, and Thailand 1.2-3%. If we were to match Singapore’s ratio, we would need to spend about 40 billion more on health.

Finally in housing, the 2012 budget contains 14.5 billion worth of spending or 0.13% of GDP compared to the current year’s 21 billion (0.2%) and 12 billion (0.13%) from 2010. Singapore by contrast spends about 1.8-2.5% on housing. Malaysia spends 0.3-0.6%, and Thailand spends 0.5-1%. If we were to simply match Malaysia, we would need to double our current spend by another 14 billion.

Living within our means

Judging from the magnitudes and ratios alone, we can plainly see that the country will continue to lag behind its neighbors in the region when it comes to providing basic social services for its citizens. As a result, it has much higher levels of poverty and inequality and lower levels of human development among the ASEAN-5.

If you take out the possibility of tax reform, “living within our means” confines the budget department to look for savings and improve the structure or mix of spending to improve the quality of the spend rather than the quantity. Past studies have shown that our education spending is already quite progressive, while that of our health sector tends to be regressive with its focus on the tertiary hospitals in urban centers rather than on primary healthcare in the community.

Certainly, there are opportunities to improve the progressivity of our spending program in health. One problem is that our health system follows the model in the US, Europe and Japan which relies of specific contributions. Those who earn more tend to receive higher reimbursements. While in Australia, health expenditures are financed from income taxes, but then are spent in a more egalitarian way by means-testing recipients so that those who earn more tend to pay more out of pockets than those who earn less.

Can afford more

The orthodoxy of constraining the budget because we have to live within our means can of course be challenged by simply asking the question, can society afford to pay more?

From his State of the Nation Address, the president hinted that we probably could afford to pay more when he cited to his own disbelief the close to two million self-employed entrepreneurs and professionals who declare incomes beneath the minimum wage. The BIR has said subsequently that it believes that the current 10 billion raised from these individuals should actually be about 100 billion.

Aside from professionals and self-employed individuals, the corporate sector might also afford to pay more. That is according to a five year old study by Dr. Renato Reside. His work showed that a very low correlation between investments approved by the BOI and PEZA with actual capital formation in all regions except Regions 4 and 7. He concluded that since investments did not materialize companies were simply using their fiscal incentive privileges to engage in tax avoidance. The recipients of such incentives read like a who’s who of Philippine business elite according to Dr Ben Diokno.

Because companies under this scheme are also allowed to sell as much as 50% of the goods they produce to the domestic market, Dr Reside also believes that much revenue is lost. According to him, back in 2004, we were losing as much as 59 billion pesos from revenues on imported capital goods, 135 billion on imported raw materials, 10.5 billion on the use of domestic capital goods, and 44 billion on income tax holidays provided to these so called exporters. If even half of these were recoverd, it would be an additional 125 billion in revenues.

Another form of tax incentive is provided to sin products because of the non-indexation of taxes imposed on them. It is an incentive because every year the prices of these products go up, but the taxes imposed on them don’t. Government revenues are eroded over time. By gradually increasing the taxes along with the rise of prices in general, the additional revenues from sin products estimated to be as much as 70 billion annually could help beef up our infrastructure which in 2012 will be 270 billion a mere 2.5% of expected GDP.

Indeed, from the combined tax breaks given to entrepreneurs, professionals and corporations, our society could afford to bridge the gap in social as well as economic infrastructure. We could become a more inclusive society. With a combination of better policies and stricter enforcement in revenue and incentive granting agencies, by renovating our economic bureaucracy, we could produce a more progressive tax and spend system.

Different Perceptions of a Rising China

The China-Philippines relations are extremely problematic. Popular sentiments could swing Manila’s policy from one pendulum to the other in no time. Manila’s current frustration over its relationship with China, especially their territorial disputes in the South China Sea are highly visible. Latest announcement of joint oil and gas exploration between Hanoi and Manila would serve as a litmus test of Beijing’s tolerance. Inevitably, it will affect the existing equation of China-Asean on ongoing negotiations and hamper discussions over the overlapping claims. Read more

International Programs are open for applications

The National Youth Commission is inviting anyone interested to apply for the following international events.

1. ASEAN + 3 Young Inventors Expo 2011
2. Asian Forum on Global Governance
3. International Conference on Youth Development

ICYD

Asian Forum on Global Governance

ASEAN+3 Young Inventor’s Expo 2011

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Policy Choices for the Philippines on the Spratlys

Chinese President Hu Jintao told participants of the on-going Boao Forum for Asia* (Asia’s version of World Economic Forum) that China will play a constructive role in resolving regional hotspot issues and take an active part in various forms of regional security dialogue and cooperation in order to preserve a regional environment conducive to peace and development in Asia. Most importantly he mentioned that his country will remain committed to seeking peaceful solutions to disputes with neighbours over territory and maritime rights and interests through friendly negotiations. Reacting to the statement of the Chinese statesman, Philippine President Benigno Aquino III through his spokesperson said that his government agrees with China’s call to Asian nations to resolve peacefully territorial claims over the Spratly Islands.

Spratlys, a chain of more than 100 islands or reefs lying in the busy maritime commercial path of South China Sea, contested by Brunei, China, Malaysia, the Philippines, Taiwan, and Vietnam. These islands are rich fishing grounds and believed to have vast deposits of oil and natural gas. In a 1968 official Chinese government white paper, it was estimated that Spratlys holds oil and natural gas reserves of 17.7 billion tons surpassing than that of Kuwait.

Spratly Islands is a very possible flashpoint of an armed conflict in the near future between China and other Southeastern Asian nations with the backing of the United States. Let’s take a cursory look at the history of conflict involving Spratlys. In 1971, Philippine President Ferdinand Marcos ordered the removal of Taiwanese military base occupying the largest Spratlys island, Itu Aba, but were repulsed. In 1974, China decimated South Vietnam troops holding Paracel island in the Spratlys. In 1975, North Vietnam seized six islands from South Vietnam forces holding several other more islands in Spratlys. In 1983, Malaysia occupied Swallow Reef, followed by two other formations nearby. In 1988, China and Vietnam fought the Battle of Fiery Cross Reef, in which 75 Vietnamese were killed or missing and three of their vessels set ablaze. In 1995, China temporarily occupied Mischief Reef angering Philippine President Fidel Ramos. In 1999, Vietnamese soldiers reportedly shot a Filipino fisherman. In May 1999, a Chinese fisherman died involving his fishing boat and a Philippine Navy vessel. In July of the same year, another Chinese fishing boat sank after colliding with a Philippine naval vessel trying to apprehend it. That same year as well, Vietnam reportedly fired on reconnaissance aircraft of the Philippines, which also accused the Chinese of shooting at one of its patrol planes. In 2000, the Philippine Navy boarded two Chinese fishing boats in Scarborough Shoal, at 128 nautical miles from the country, well within Philippines’ Exclusive Economic Zone. In 2010, United States Secretary of State Hillary Clinton announced in Vietnam that the U.S. has “national interest in the South China Sea” and supports a multilateral, regional solution to the dispute. The statement from the United States angered China and considered it as an “an attack on China”. This year, last March, the Philippines government send its miniscule military troops after Chinese marine patrols “intimidated” a Philippine seismic research vessel along an in the Spratlys claimed to be an official part of the Philippines.

What can the Philippines do in pursuing its national interest vis-à-vis the Spratlys dilemma and China? I’d like to offer three policy choices for my home country, the Philippines. Policy Choice #1: Multilateral approach and a more America-aligned policy. Policy Choice #2: Bilateral approach and a more Chinese-aligned policy. Policy Choice #3: The ideal and nationalist approach.

Policy Choice #1: Multilateral approach and a more America-aligned policy. The Philippine government’s initial diplomatic move to send a “Spratlys expert” to Beijing after the March incident in Spratlys is a not very well thought of move. I wonder what would the non-Mandarin speaking Filipino technocrat do in Beijing. Why should the Philippine government send someone in Beijing? It should be the other way around. Is it not that the Chinese patrol vessel “intimidated” a Philippine vessel on its territory? This is unprecedented. Other countries claiming possession of the Spratlys have had never sent anyone to Beijing to clarify some matters concerning Spratlys. China is in the position of strength if we deal with them bilaterally – we are economically and militarily weak and we have citizens in China on death rows. In addition, who can forget the gruesome death of Chinese held hostage in Luneta last year? Needless to say, China has a lot of “aces”. Instead of dealing with China bilaterally, Philippines may consider doing it multilaterally with ASEAN. Philippines should once and for all do all the necessary means to mobilize ASEAN to press China to upgrade  the non-binding 2002 Declaration on the Conduct of Parties in the South China Sea, signed by Asean and China in Cambodia, the upgrading of this declaration would result to a legally binding agreement on avoiding confrontation and peacefully resolving disputes in the South China Sea.

Now this legally binding agreement is a complicated because of the presence and expressed interest of the United States in the South China Sea. China mentioned several times that the United States should not meddle with the regional issue and should not make it an international issue. China is willing to have a legally binding agreement if and only if United States is not involved in the process. However, when Philippine President Banigno Aquino III and other ASEAN leaders met with US President Barack Obama in New York last September, they called for an implementing rule of the 2002 Declaration and the forging of a US-included formal code of conduct in the South China Sea. A US-included and a China-less code of conduct would result to a South China Sea with American navy policing the high seas. And this is the last thing that China would like to see. A China-included and a US-less formal code of conduct is what China desires. Hence, for the sake of peace and security in Spratlys, the signing of an upgraded 2002 Declaration is of utmost importance.

As history would tell us over and over again, men’s words and agreements can easily be revoked and broken. Another dimension of policy choice #1 is for the Philippines to beef-up its military to safeguard its territorial integrity. And how can the economically-challenged Philippines do it? The Philippines can allocate more budget to its armed forces and ask for more military support from its long-time ally, the United States (I can now hear the marching sound and angry shouts of Filipino Leftists in Mendiola). Philippines and United States have an existing Mutual Defense Treaty (MDT) between the Philippines agreed upon in 1951. US has been very active also in supplying defensive weapons to the Philippines and  military exercises under the Visiting Forces Agreement (VFA). The United States with its economy not on top shape might be very much willing to enter into “arms business” and partake in the “fortune” that might befall on them as they actively engaged in the affairs of South China Sea.

 

Policy Choice #2. Philippines may agree on a bilateral agreement with China’s proposition for a joint exploration by claimant countries of the oil and natural gas resources in the Spratlys. Quietly dropping Philippines’ claim over Spratlys, as the Philippines did with the Sabah, in favor of exploring and sharing the great wealth that lies beneath the South China Sea with China opens a window of great economic opportunities for the Philippines. Instead of spending huge amount of money for the defense of its legal and claimed territories, it might be practical for the Philippines to ally with China in sharing the bounty of Spratlys. Of course, with this bilateral moves comes a more China-aligned policy and we would be expecting a Chinese version of VFA and MDT (I wonder how would Filipino Leftists react, would they also shout and march in Mendiola?).

Policy Choice #3. This is the most ideal and I should say improbable for the time being. Philippines would neither be American-aligned nor Chinese-aligned. Philippines would build on its own its own strength the mechanism, ways, and means on having its troops and military hardware beefed-up to effectively assert and defend its legal and claimed territory. This policy choice would also made the Philippines find ways and means  in pursuing on its own or on its lead the exploration and exploitation of untapped natural resources beneath the high seas. In this case, Philippines would do what the weak but united and nationalistic Vietnam did to France and United States in its history of struggle for independence and sovereignty. In this policy choice, Philippines would have to pray for heaven’s manna to fall to finance such gargantuan endeavor. Highly improbable indeed given the status quo.

What policy choice would the Philippines most likely to pursue? Last week the Armed Forces of the Philippines said it would use new US-made Hamilton-class patrol crafts to boost patrols in disputed South China Sea waters. Several weeks ago, the Philippines Foreign Affairs Department and Philippine President Benigno Aquino III himself said that United States is the sole and strategic partner of the Philippines. Do I need to say more? Philippines appears to be choosing policy #1. Let’s wait and see then in the coming years what fortune or misfortune Spratlys would bring to my home country.

 

*Boao Forum for Asia (BFA) was co-founded by Former Philippine President Fidel V. Ramos in 2001. Ramos also served as BFA’s first chairman.

 

Filipino local brands celebrate foray in China-ASEAN trade fair

The Manila Bulletin wrote:

The Philippine delegates to this year’s China ASEAN Expo generated US$ 3.688 M of consolidated sales in their CaExpo stint last October 20-24 – a testament that Philippine made products charm discerning buyers around the globe.

“The Philippine participation in the 7th China ASEAN Expo 2010 was a big success.” This is the feedback gathered from the RP delegates of this major event in China.

“We are very satisfied because our efforts caught the attention of many interested buyers,” said Leonardo Natividad, National Sales Manager of Camellia Food Manufacturing, one of the top sellers in the recently concluded event.

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