Benjamin Diokno

Pork to the parties, not the polies!

Why giving money to political parties not politicians is a better idea than scrapping their pork.

It’s been in the headlines for over a week, after the Inquirer broke the story of a scam allegedly involving 23 congressmen and 5 senators and Php10 billion of Philippine Development Assistance funds (aka pork barrel) being siphoned off over more than ten years by a syndicate known as JLN which stands for the initials of the lady accused of heading it.

A member of the syndicate, a close relative, blew the whistle on the boss after a row between them turned ugly. It blew the lid off the issue whether we as a nation still want to maintain the practice of pork barrelling in Congress. If these allegations are proven, it would simply confirm what a lot of Filipinos intuitively know, and that is that these funds or a significant proportion of them, which are meant to benefit local constituents of politicians simply go into their re-election kitty.

Some efforts through the years have been made to make it harder for or limit the amount of corruption or kickbacks from contractors to solons in exchange for awarding projects to them from taking place. The alleged conspirators have been able to defraud Filipino taxpayers by setting up ghost projects involving dummy recipient NGOs issuing fake receipts to help fulfil audit requirements and make everything seem above board with the imprimatur of the legislator who endorses the so-called “development” project.

The Palace, which understandably is concerned, given its reputation for clean and honest government has ordered a full and exhaustive probe through the Department of Justice spearheaded by the National Bureau of Investigation. This would inform and provide evidence to the Ombudsman which has started looking into it. The person accused by the whistle blower appears ready to front the enquiry.

As this developed, public support for abolishing PDAF has mounted. Senator Franklin Drilon, the man expected to assume leadership of the upper house has appeared to welcome the idea. The question will be whether the budget to be approved by Congress will still contain these allotments to its members or not, and whether Malacañang would be able to control the legislative agenda without them.

The opposition for its part considers the investigation a political ploy designed to bash it in the lead up to the 2016 elections.  Three of the five senators linked to the scam, Senators Jinggoy Estrada, Bong Bong Marcos and Bong Revilla seem set to run for higher office. Prior to the 2013 midterm elections, a number of senators from the opposition bloc were engulfed in a similar scandal. The results of the elections seem to indicate that the issue swayed voters not to vote for their kin who were running to join them.

To be fair, the issue is not just about Congress and pork. It involves funds from the Malampaya project which along with the proceeds of the PCSO and PAGCOR Prof Benjamin Diokno describes as “shadowy funds” that are not subject to the usual process of budget scrutiny and deliberations by Congress. For as long as they are hidden, Diokno believes they will always be prone to corruption and a source of patronage and rent-seeking.

Here is how Prof Winnie Monsod weighs the pros and the cons behind the issue of pork:

In sum, what are the benefits of the pork barrel system in the Philippines? One, it gives the executive branch tremendous leverage over the legislature, which is supposed to provide checks and balances (the executive branch can withhold the pork). Two, it gives incumbent legislators an unfair advantage over their electoral opponents, because of the projects (if successfully implemented) they bring, or the money (if pocketed) they can use to buy votes. And what are the costs? At least P21 billion a year of taxpayers’ money that arguably could have been more efficiently and equitably used for the welfare of the Filipino people.

The problem with the abolishing pork is that you need the endorsement of the very people who benefit from it to succeed. This is exactly the same impediment to getting Congress to abolish political dynasties. Pork may be seen as the vehicle for the network of patronage emanating from the Palace to Congress to the people. In the past it has been indispensable in getting significant bills involving painful economic reform to pass. Some say even the impeachment of the Chief Justice would not have taken place without it.

Pork is then used to help solons get re-elected either through the projects they fund or through amassing some form of rents that then get used for their campaign. What’s more, this tacit arrangement seems to exist with the grudging consent of the public who don’t believe that public servants can afford to live on their salaries and run for office based on them alone. There is therefore a trade-off or deal with the devil being made here. Economic reforms are not costless to produce–they require some form of corruption in a developing economy.

The problem with that is it perpetuates a system of patrimonialism which many say lies at the heart of our problem of underdevelopment, i.e. we would not have to resort to this form of “transactions costs” if we had a strong party system in which policies mattered, where elected members toed the line or faced the consequences from their own caucus.

The problem with our system is that political dynasties control the parties, or stated in another way, parties are merely a front for the family franchise, and they are financed largely through a system of patronage that emanates from the presidency, who requires their support to push his agenda through. It is a co-dependent arrangement of patronage and rent-seeking that perpetuates itself.

How then do we untangle this web? Do we simply abolish pork? That presents a number of challenges as well. How will Malacañang push its legislative agenda? What forms of illegal activities would congressmen resort to to raise campaign funds?  But we are getting ahead of ourselves here. How would we get congressmen and senators to act against their own self-interest in the first place?

The answer lies in campaign finance reform: by using the PDAF to finance political parties. The amount involved, Php21 billion a year or Php63 billion per term, is a lot of money. With that kind of money parties could become professionally run organisations that would endorse candidates and provide seed money for their campaign. This system would still favour incumbents who presumably would still be high ranking members of their parties. It would still be subject to the audit and accountability rules of the Comelec and the Commission on Audit, since they are public funds.

The good thing about giving money to the political parties not the elected politician to disburse is that it gives their executive committees greater power to influence and discipline their members who will be relying on their endorsement to seek re-election. It will still be rife with influence peddling, factionalism and perhaps patronage, but that is the nature of politics. Some parties will do a better job of managing their affairs and that will be their selling point to the electorate.

The downside of this proposal is that rather than the money or at least a good proportion of it going to fund development projects that benefit constituents, all of it would now go to the political parties. Of course the way in which parties use these funds would be up to them. They could presumably still engage in development projects, but that would be a matter for them to decide. They may decide to keep all of it to manage their affairs and fund election campaigns of their members.

My answer to that objection would be to say that although shifting pork to parties does come with a cost to the constituent community, it does bring some benefits as well in the form of better policies and programs, with less padding for corruption, as parties are strengthened and get weaned off the system of patronage and rent-seeking. This would not happen if we simply abolished pork. These benefits would accrue to society and presumably outweigh the costs.

Some might say this is too risky. Even if we give money to parties, they will still be run by politicians, and every time you hand money to a politician you are courting disaster. Well, perhaps it does involve some risk, but it is a risk we should be prepared to take if we are to develop a different set of political institutions in our country, one that provides incentives to stronger parties, rather than the current arrangement which degrades them.

The next step after that would be to allow equal access to non-dynastic members of the party through legislation that would allow campaign funds to be disbursed by the state to political parties subject to their meeting certain requirements that allow greater access and participation to party members that do not belong to any established political family. That will be the subject of a subsequent post.

At last, some sen$e!

Monetary officials have finally learnt how to deal with the rising peso–something I have been advocating they do since late last year.

When I flagged the problem of an appreciating peso back in November 2010 (see What Should be Done About the Rising Peso?) and suggested some ideas on how to remedy the situation (setting up a sovereign wealth fund), I was met with more than a little bit of skepticism by readers. At that time, our foreign reserves climbed to $44 billion from $33 billion a mere eighteen months earlier.

In January this year, I pointed out the strategies of similarly situated Latin American central banks and finance ministries (see What Should be Done with a $14.4 billion BoP Surplus?). My advocacy for us to turn to methods outside the traditional toolkit of monetary policy seemed far-fetched as Bangko Sentral officials then were expressing satisfaction with the effectiveness of their interventions in the currency market. Again, my ideas were met with a bit of scorn by some readers.

And then in July this year, when our gross international reserves for the first time exceeded our external debt obligations, I made the following policy pitch in Crediting the Upgrade:

To prevent the peso from rising, what the government could do is coordinate with the BSP so that it could issue treasury notes and have the BSP purchase them (much in the same way the US Federal Reserve bought US treasury securities under Bernanke). This would lower the borrowing cost of the government given the BSP’s views that the country is actually of investment grade.

The proceeds of this could either go to funding the fiscal deficit, or as we reach a balanced budget over the next two to three years be used to set up two funds. The first could be called the Philippine Enterprise Innovation Fund or PEIF. The second could be called the Regional Philippine Infrastructure Fund or RPIF.

I had honed the idea from suggesting a sovereign wealth fund that would look at investment opportunities both domestic and overseas to more inward directed investment opportunities. The channel through which the fund would be created was to be through the BSP purchasing sovereign debt issued by the National Government (in effect becoming a creditor of the government). This would reduce our need to borrow from abroad, which would lower the pressure on the peso to appreciate.

With this last pitch, I thought I had a winner, although not much in terms of reader response occurred. Also, as the storm clouds seemed to gather on the horizon, I found the BSP’s response to be similar to the government’s–a wait and see strategy, which I felt needed to be more pro-active (see Bullet-proofing the Economy and A Full-Blown Economic Storm). The government was still banking on its credit upgrade and private partnerships to save the day.

The policy space just seemed sterile with worn out mantras and textbook formulas. Then today, I gained some level of comfort in discovering that our officials might have finally “seen the light” by reading Benjamin Diokno’s column. In it, he describes the offer made by Bangko Sentral Governor Armando Tetangco to loan the government dollars and be repaid in pesos as a “Win-win Move“!

What might have tipped the conservative monetary authorities over was the Philippines attaining its full-year gross reserves target of $75 billion in the middle of the year. Diokno highlights the precariousness of maintaining current fiscal and monetary policies by saying,

(F)or every peso appreciation, BSP stands to lose P75 billion. Isn’t that awful? Hence, Mr. Tetangco is not offering the government out of the goodness of his heart; he’s doing it because it’s the prudential thing to do. It’s a win-win solution to our economic woes: it helps BSP in its war against peso appreciation and, at the same time, it helps the government pay for its foreign debt without incurring serious foreign exchange risks….

In hindsight, it was not even necessary for the Philippine government to borrow from the World Bank and the Asian Development Bank to finance its conditional cash transfer (CCT) program. Floating five-year Treasury bonds would have been a better way of financing the program.

At last, even traditional economists are beginning to realize what a golden opportunity the Philippines was sitting on! Ah, yes! There are times when it just feels good to be right. And this is definitely one of them. Let us hope our finance officials are able to learn the “policy catch-up” game just as our monetary officials have finally learned to. It’s about time they gained some sense.

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.

SOCIAL CONTRACT MY A@#!

The spending pattern of the PNoy administration in the first five months of the year reveals what its real priorities are; and it is not what you think.

Ben Diokno in his column for yesterday’s Businessworld analyzes the actual spending pattern of the government under its own budget for the first five months of the year and comes up with a very strange answer to the question that he poses:

Has government spending really improved as claimed by the Department of Budget and Management (DBM)? The answer is a mixed bag. For public spending that makes a lot of difference in job creation and poverty alleviation such as public works and social welfare, the answer is NO. For other social spending such as education and health there was a slight improvement. And for DPWH, DoH, DA, DSWD, and DoTC, actual public spending from January to May, appropriately measured, was only half of planned spending.

Surprisingly, it was spending for the military and police where actual spending has exceeded programmed spending — DND by almost half, DILG by about 20% (empasis added).

Now given everything that the president has said he would do from the campaign with his Social Contract, to his inaugural, to his first SONA, budget statement, right down to the Philippine Development Plan you could be forgiven for not thinking that the president’s first priority would be the military and police, but that is exactly what his spending pattern has shown.

Indeed, PNoy might have taken the lessons from his mother’s presidency to heart that you neglect the men in uniform at your peril. It is they after all who nearly toppled his mother’s regime several times after they found her to be pandering too much to the progressive movement. Aside from castigating the policy of forced disappearances citing the son of Joe Burgos, Jonas’s case, the president has for the most part stayed clear of any other pronouncements that would be seen as siding with the left.

In fact the president in his brief stint so far has managed to upset different institutions and sectors of our society including the opposition in Congress (that is understandable), the Catholic bishops as a result of the RH debate, labor unions by not vigorously supporting their cause on May Day, and the media (no, sorry the commentariat) by complaining that their coverage of his presidency has been skewed to his personal life.

For the military however the president has reserved the right to partake of the “first fruits” of his reforms to government spending by allocating the additional revenues amounting to close to 30 billion pesos generated by the now streamlined GOCCs to provide military housing and accommodation. This he proudly announced during the Independence Day celebrations.

Not that there is anything wrong with that. Soldiers do put their lives on the line for the country, and it is only fitting that they share in any proceeds of efficiencies generated by any reform. However, it appears that they alone have been singled out in PNoy’s first year to receive the reform dividend.

As highlighted by Diokno, education, agricultural support and social welfare are not picking up. Here’s what Diokno noted

DepEd has performed the best although it continues to spend below its programmed level. DA continues to spend less than half of its programmed budget, though improving. DSWD, contrary to claims that its disbursements has jumped impressively, continues to struggle in spending what Congress has authorized it to spend. The latter is meeting only half of its goals as of May 2011.

Given the start of the school year was in early June, it is dismal for the DepEd to be below its programmed level of spending as of the end of May. And also contrary to the statement by the Palace that the DSWD was on track to spend its allotted budget, the actual data seems to say otherwise. Perhaps Mrs Arroyo was right after all, that the absorptive capacity of this agency was not sufficient to handle the sudden surge. I can already hear her thundering through the chamber with the words, “I told you so.” Followed by an evil laugh MWAHAHAHAHA! AHAHAHAHAHA!

And as far as employment generating public works and infrastructure construction, these were the most badly savaged. Here is what Diokno found

The two infrastructure agencies — DPWH and DOTC — are stuck in their mediocre performance level. Faced with a sharply reduced infrastructure budget, DPWH’s ratio of actual to programmed spending remained unchanged at 0.53. For DOTC, the ratio barely moved, from 0.44 (January to April) to 0.45 (January to May).

…DBM further adds: “The DPWH also attributed the delay in project implementation to the influx of requests for realignments from regional and district offices and other stakeholders even after bidding activities had started, the magnitude of which was estimated to be more than 40% of the line-item projects released.” Incredible!

What happened to zero-based budgeting?

Indeed contrary to the claims by finance and budget officials that they had fast-tracked the release of project funds after the first quarter, the results do not seem to appear two thirds into the second quarter. The current pattern of spending is definitely not programmed, nor does it seem deliberate or intentional on the part of Cabinet. In a word, it means “chaos”.

If I were in charge, I’d be pressing the panic button yesterday!

This is truly appalling, and what it signals is the potential for the government to have significantly underspent its overall allocations by the end of the year given the high season of construction months to have passed it by. As a development planner, I shudder to think what this means for social welfare, investment, employment, livelihood and growth in the last two quarters of the year.

In a fortnight, PNoy’s first year in office will come to an end. There will be many statements released at that point from the Palace about his accomplishments. Unfortunately, if we inspect the financial statements as opposed to the spin doctored ones, we might come to a different conclusion from what they want us to have. If the first fruits of reform have gone solely to the military and police, then it demonstrates which institution the president holds most dear.

This reveals that far from repeating the instability suffered by his mother, PNoy intends to keep a close watch over the guardians of the state. And if that means abandoning the economic and social reform agendas temporarily or waiting for the fruits of reform to “trickle down”, then I guess what he is saying is “so be it.” Somewhere in the big blue yonder, I can hear the ghost of Don “Chino” Roces crying, “Social contract, my ass!”

Lies, Damned Lies and Statistics: Or why De Quiros is a bit of a crank

In his two most recent op-ed pieces published successively in the Inquirer between Monday and Tuesday this week, Conrado De Quiros proves why his writing should be taken with a grain of salt.

Apologist

In Repetitions, Mr De Quiros talks of parallels between the two Aquino administrations and uses the argument that history may be repeating itself against those who despair at the current lackluster performance of PNoy in his freshman year. The implicit parallelism here is between the Marcos and Arroyo loyalists who claim that life deteriorated under their successors.

De Quiros uses a number of “lies, damned lies and statistics” in making his case. These fibs undermine his credibility. He states first of all that

(o)ne year after he came to power, the Gloria Macapagal Arroyo (GMA) loyalists are out saying how things have gotten worse from GMA’s time. Proof of it is that unemployment is rife, prices are higher and the hungry are getting hungrier. And they have the figures to show it.
What they forget to say is that Gloria borrowed more than Tabako (President Fidel V. Ramos) and Erap (President Joseph Estrada) combined in the course of her long, vicious and illegitimate rule from January 2001 to May 2010 which did not keep prices from soaring anyway, and which debt has added immeasurably to an already gigantic one the people are paying during P-Noy’s time and will continue to pay well past P-Noy’s time.

Ok, let us subject the first part of the argument to the Truth-o-meter. What was the level of external debt during the presidencies of Messrs Ramos and Estrada in contrast to Madame Arroyo? The chart below is taken from World Bank data which is hosted on Google Data Explorer.

It shows that the total external debt stock in 1991 prior to the election of Pres Ramos stood at 32.5 billion current US dollars. In 2000, the year before Mrs Arroyo succeeded Mr Estrada in office it rose to 58.3 billion dollars. That is a jump of about 25.8 billion. In 2009, the year before Mrs Arroyo handed power to Mr Aquino, the total external debt stock was 62.9 billion dollars or an increase of a mere 4.6 billion!

So on point one, Mr De Quiros’s claim that GMA had borrowed more than Messrs Ramos and Estrada combined is not only untrue, it misses the truth by a longshot. The growth of debt during the latter was 5.6 times more than under the former.

Let us examine the second part of the argument about price inflation under the Arroyo administration. The chart below shows inflation from the same data source. I am afraid that again in this case, the data conflicts with De Quiros’s claim. It shows that under GMA, inflation was tame. The country experienced some of the lowest price rises that it experienced since the 1970s, much of this is a result of the economic reforms instituted since the mid-80s of course.

So on point two, once again Mr De Quiros is caught fiddling with the truth.

Moving on to the rest of his argument, De Quiros states that

The economy Gloria left to P-Noy is not a rundown restaurant that has been sold to a new owner who with unlimited funds can renovate it and open with the sign, “Under new management.” It is a horse that has been starved and flogged to near-death and bequeathed to an impoverished nephew by a good-for-nothing aunt upon her death. You cannot make that horse spring back to life overnight, especially when it’s all you can do to keep body and soul together. It will take a great deal of nursing to make it so. Along with a great deal of cursing the departed.

You can’t blame everything that is wrong with the economy on Gloria. But you can, and ought to, blame her for a great deal. The people of this country did not start getting unemployed during P-Noy’s time, they started getting unemployed during Gloria’s time. Hell, they started getting hungry—yet another statistic a few months ago said people had gotten hungry of late—during Gloria’s time, as a result of abandoning the farmers completely and relying on importations of rice. And stealing billions of bukols along with the rice.
Gloria is the cause, this is the effect.

So, to verify these claims, let us look first of all at the level of income during Mrs Arroyo’s presidency. The chart here shows that per capita incomes grew quite rapidly and consistently for the most part during her term from $899 in 2001 to $1,752 in 2009, an increase of about 95%.

In a comparable period from 1991 to 2001, GDP per capita only rose from $710 to $899 or an increase of a mere 27%. Again, it seems that calling the economy a rundown hand-me-down does not seem appropriate.

Well, you might say, De Quiros is really talking about the hardships suffered by the most marginal sectors of society getting worse under Mrs Arroyo. So, let us examine the income share of the poorest quintile of the population in the following chart.

We find here that the lowest 20% of the population had a 6.5% share of total income in 1988 and this dropped down to 5.36% in 1997 and remained steady at 5.37% in 2000. From there it rose to 5.6% in 2006 where the time series stops. So it seems that for the greater part of GMA’s term, the decline was arrested. The time series unfortunately ends there, right before the surge of rice importation.

As a sidebar, it is worth noting that the economic liberalization instituted since the mid-80s as prodded by the Washington Consensus may have moderated inflation but failed to provide protection to the most vulnerable. Mrs Arroyo’s rice program was also aimed at limiting the effects of price rises, but may have impacted the farming sector adversely. In that case, it was simply extending the existing policies further.

Revisionist

In Visions and Revisions, the second thesis of De Quiros is a stab at economic revisionism. His very first line exposes him to this charge:

P-noy isn’t making things worse, economically or otherwise, but he’s missing a lot of chances to make things better.

Unfortunately, the first quarter results say otherwise. The latest 4.9% GDP growth figure reported by the National Statistical Coordination Board, while nothing to sneeze at, was at the lower end of the expected range that analysts had predicted of between 4.8% and 5.6%. It was almost half the 8.4% growth registered in the same period of the previous year under Mrs Arroyo and a far cry from the government’s own target of 7-8% for the year. Given the recent tweaking of the way GDP is computed, the growth rate of 4.9% is actually higher than it would have been under the previous method.

PNoy tried to remain upbeat and blame the less than targeted performance on economic headwinds coming from conflicts in the Middle East and North African region as well as natural disasters closer to home. He also sought to paint a favorable picture by comparing it to the milder growth experienced by our ASEAN neighbors.

What he conveniently failed to mention was that the growth could have been higher had his government not contracted spending by 17%. Today’s banner headline of the Businessworld says it all, Underspending Curbs Growth. What this means is that the higher unemployment, hunger and poverty reported during the period is partly the government’s doing.

None other than Budget Sec Buth Abad confirmed that the first quarter was “not regular” in that government spending slowed as a result of project costings being reviewed. While he claims they can play catch up during the remainder of the year, Prof Ben Diokno, a former budget secretary, and Gov Joey Salceda, a former analyst and political advisor to Mrs Arroyo think otherwise.

Unfortunately, not only is “PNoy missing a lot of chances to make things better”, he is also “making things worse, economically”. No amount of economic revisionism can change that fact.

In bolstering his claims, Mr De Quiros needs to steer away from using spurious statistics. He has failed the truth-o-meter on all counts. Such flagrant misrepresentations do not aid his cause one bit. They merely expose the hollowness of his arguments.

The Surplus Fetish

Both the economics and the politics of current fiscal policy seem flawed.

Yesterday the Department of Finance trumpeted the news that the government in April posted the largest fiscal surplus in 25 years. The PDI reports today that

The Aquino administration posted a budget surplus of P26.26 billion in April… more than 10 times the P2.6-billion surplus a year ago, Finance Secretary Cesar V. Purisima announced Monday.

The fiscal performance for the month of April brought the record for the first four months to a surplus of P61 million, documents from the Bureau of the Treasury showed.

Good news, right? To use a popular phrase, the government seems to be “living within its means.” This is certainly the impression DoF wants to create. After last year’s poor fiscal performance led to a 6.3% of GDP blowout, Finance officials seem fixated on reining in the budget once again this year. So this should come as a bit of a respite from the constant talk about deficits for them.

Unfortunately when one digs deeper into the figures, a very unappealing picture emerges. Let us start off with the January to March figures for 2011. According to the department’s official website, expenditures for the first quarter declined by 12.7% compared to the same period in 2010 (Php349 B in 2011 v Php400 B in 2010).

You might argue that this Php 50 billion “underspend” was due to the elections last year and so you might be excused for thinking that costs would recede to normal levels in a non-election year. So what were the programmed expenditures for the first quarter of 2011? The answer is Php431 billion. That means that the real underspend amounts to Php82 billion!

Now why should that be shocking, you might ask. Well, consider it from the point of view of program recipients not receiving their promised benefits or public infrastructure projects that did not get funded in the first quarter. Budget experts will tell you that the non-rainy months in the first semester are critical for infrastructure projects. This is especially true this year with the early rains coming in May.

If a government is unable to spend its budget in a timely manner, it speaks unfavorably of its abilities in fiscal management. This government credited itself with getting its first budget approved by Congress early prior to the start of the year. It had plenty of room to get its ducks lined up to see spending out the door. One would expect a new administration to be quite anxious to see this happen to differentiate itself from the previous one.

Unfortunately, that didn’t happen.

From reform budget to deformed budget

The government got itself “back in the black” by contracting expenditures (experiencing “strong yet below-target revenues”). The government under-spent 18.8% of its programmed budget and incurred a much smaller deficit in the first quarter amounting to a mere Php26.2 billion down from the expected Php112 billion (note: that is why it’s January to April surplus was 61 million after posting a surplus of 26.26 billion during the fourth month).

Was this to paint a rosy picture for:

  • the bond market?
  • credit rating agencies?
  • the public at large?
  • all of the above?

One wonders at this point, what has happened to the “reform” budget? Has it turned into the “de-formed” budget? This lies at the heart of its “credible commitment” problem.

Indeed for the so-called economic managers in charge of steering the course not only of the budget but the economy at large, does this approach seem rational? Or have they been overtaken by their passions, influenced by the fetish for surpluses?

This not only makes for bad policy, it consists of poor politics as well. Not only will the government not contribute to the economic and social infrastructure needed for a thriving economy, if it seeks to pass new revenue measures next year, it will be undermined by the false impression created that these new measures are not urgently needed.

The public once accustomed to hearing that the government is in surplus will find it hard to accept the need for new taxes. Indeed, it wouldn’t make sense to the ordinary man on the street reading these news reports.

Once again, the story the government intends to weave will somehow get it entangled down the track because it does not portray the true picture. This is not what you might call “strategic communication”. If it wants the public to become apprised of the real situation concerning the structural deficit in our budget, it needs to allow spending to commence as it should.

By accepting poor policy and misreading the politics, the benign one’s fetish with surpluses could prove detrimental to the country in the end.

Are Filipinos over-taxed?

The answer often depends on who you ask.

If you ask a wage employee whose taxes are automatically withheld, the answer might be, “yes, Filipinos are over-taxed.” But if you ask an entrepreneur or a professional, like a doctor or lawyer, the true answer might be no. This is because there are a lot loop holes for misdeclaring one’s tax returns for the latter under the present system.

Again, if you examine our tax rates and compare them with other countries, you might come to the conclusion that we are a high-taxing economy. But then when you consult the data on tax collections, you will probably come to a different conclusion.

The chart below relates the general government revenue to GDP ratio of the Philippines to other similar countries courtesy of the IMF World Economic Outlook published in April this year (note: it includes forecast figures until 2016).

In 1997, we attained a 19% tax-to-GDP ratio, the present level of the ASEAN 5 (includes Singapore, Malaysia, Thailand, Indonesia and the Philippines). After the 1997 Comprehensive Tax Reform Program changed the way our sin taxes were assessed and allowed for a lot of exemptions to businesses, this ratio deteriorated.

In 2010, the Philippine tax-to-GDP ratio reached its lowest point at 14.19%, even lower than it had been in 2004. Although this is expected to pick up to 16.6% by 2013, without new tax measures, it will still significantly underperform our four ASEAN rivals and that of Developing Asia which includes India and China.

This limits the level of government spending that can occur. To answer the question whether Filipinos are over-taxed, we have to also consider the levels of spending required. We will find that the level of revenues generated will not be enough to pay for our expenditures, with the Philippine government accounting for around 18% of GDP from now until 2016. That means about a 2% structural deficit or imbalance in our tax and spend system.

If you require further proof of this structural imbalance, just take a look at our levels of general government debt as a percentage of GDP here. It shows that our level of debt at 47% of GDP in 2010 is nearly ten percentage points higher than the ASEAN 5. We are more akin to Latin America and the Carribean in this regard.

So if we look at these figures, we will conclude that there is a problem. I would like to state it as a series of imbalances which I shall now tackle.

Imbalance #1: Undertaxed and over-borrowed.

The chart below is indicative of the problem. It depicts government deficit as a percentage of GDP for the Philippines and other similarly situated countries coming out of the Global Financial Crisis. The country’s chronic deficit will remain at 2% even as the rest of the developing world narrows its deficits to less than 1%. A lot of this is due to interest payments for previous borrowing.

As part of the debate over whether this imbalance is due to a deficit of trust on the part of citizens in their government, I turned to the World Values Survey. Here I found that the proportion of Filipinos who expressed “quite a lot” to “a great deal” of confidence in government was 50% about the same for the world average. Those who expressed “not very much” confidence was at 38% compared to 30% for the world, and “none at all” was at 10% compared to 18% for the world.

This means that Filipinos exhibited about the same if not a greater level of confidence in government than the rest of the world back in 1999/2000 when the survey was conducted. Another question that asked whether people agreed to the statement, “most people can be trusted” however yielded interesting results. The sample for the Philippines which numbered over a thousand showed that a low level of trust in others prevailed with a mere 8.4% agreeing to the statement compared with 28.3% for the world.

So in terms of arguing for an improvement in integrity and transparency in government as a way of engendering more honest tax declarations, the data does not support the case. We do not have it seems a disproportionate lack of faith in our government, but instead we seem to demonstrate an unwillingness to trust others (we have more faith in government than in civil society?).

We have to look elsewhere to answer the question why the Philippines does not generate enough taxes.

Imbalance #2: Over-consuming, under investing.

One thing that amazes me whenever I visit the Philippines is the lifestyle that people enjoy and are accustomed to. It is not as if I did not participate in this once, which is why I always look forward to coming back. But in a predominantly Anglo-Saxxon country where I now reside, despite the influx of migrants, what the sociologist Max Weber called the Protestant work ethic still persists. People are much more accustomed to squirrel away any savings they might have either in real or financial assets.

It is not just me. Colegagues and fellow migrants tell me that in Asia, there is more of that bazaar culture (invented by the moors) which dominates. So much so that in the East shopping malls, restaurants and bars remain open until late even on weekdays.

In spite of the presence of a consumption tax which was increased to 12% in 2005, the Philippines continues to be a consumer-driven economy with about 70% of its GDP accounted for in this way. As a result, the capacity to invest is very limited. If we look at the gross savings rate of the country, it is much lower than other similar countries (about 20% in 2010 compared to 31% in emerging and developing economies).

Our investment rate has similarly deteriorated from about a quarter in 1997 down to 14.6% in 2009. It is expected to rise, though not by much, to about 16% in the coming years. In emerging and developing countries, the ratio is expected to hover around 30-32%.

Imbalance #3: Overheating property bubble, over-concentration of investments

The next source of imbalance has to do with where we are investing as a nation. Benjamin Diokno on our over-investment in the housing and property sector said:

The present tax system favors property ownership over other assets. As a country, the Philippines has spent more money in real estate investment than in agricultural modernization and industrial expansion. No wonder, unemployment and underemployment continue to worsen.

The reason for this according to Diokno is that “we’re only collecting 1% to 2% in real property taxes. That’s why investments in our country are biased towards real property.”

The relatively low property tax rates for owners coupled with generous tax holidays for developers are the right conditions for a speculative property bubble to form. Many discount the possibility for this bubble to burst given the ongoing remmitances of OFWs, but what if for some reason remittance flows suddenly become constricted as a result of growing instability in the Middle East and slowdowns in East Asia and Europe?

Many will say taxing property investments will hurt the families of OFWs, but a distinction has to be made here between mass housing and upscale property development. Means-testing of the property tax by exempting properties that fall below a threshold can address the equity issue.

Think of all the property owners, including the owners of malls, housing developments and haciendas that pay minimal taxes at the moment. Then think of the unmet demand for agricultural land and mass housing for the poor. Certainly a large imbalance exists there.

Imbalance #4: Private affluence, public squalor

This leads me to one final observation. The deficit in socio-civic consciousness and faith in others, the low levels of taxes, the over-consuming nature of our economy and over-concentration of investments in property all point to a condition that the American-Canadian economist John Kenneth Galbraith first coined as “private affluence, public squalor.”

This in my view aptly describes the situation in the Philippines. It becomes evident the moment you arrive in the country. As you enter the airport, you immediately become aware of how decrepit and outdated it is. As you alight on to your vehicle and drive through the streets, you become aware of the lack of public housing and parks as many street children greet you.

The congestion of the streets from motor vehicles that pligh them at all hours of the day and night simply is astonishing. You then step into the gleaming malls and are amazed by the opulence of private spaces. The flashy cars that you will find in the car parks will also make you question whether you are in a developing country. The quality of vehicles found is incomparable to the quality of roads though.

You get tired of the city with its pollution and garbage after a while and shop around for a place to spend a nice quiet weekend with your family. You are shocked by the rates and swallow hard as you swipe your credit card thinking to yourself that this is your way of helping the local tourism industry.

You are then greeted at the domestic airport by a long queue at the door. The security baggage checks

weren’t part of the original design. You then go on to take your “holiday from the holidays”. The resort you booked is depending on your tastes either posh or adequate. You find the trip quite relaxing and enjoyable except for the inconvenience of travelling through rugged terrain to get there. You try to convince yourself that poor accessibility is part of the allure.

Back in Manila you are invited to a few homes and dinner parties. Once again, you marvel at the lifestyle of your peers. Their ability to spend on the latest gadgets that you yourself haven’t found the money or the time to spend on amazes you.

At some point in your trip, you begin to wonder about life in the Philippines. It’s not too bad. Why did you leave to begin with? Then you remember things like health care, eduation, safety and opportunities for your children.

The government which is responsible for providing these things is in a state of disrepair. You gather as much from reading the papers and talking to friends. You do see a lot of improvements from the last time you came. A new bridge, flyover, skyway, and better tollways–that’s about it.

The “public square” remains in squalor amid the affluence and opulence within the private sphere.

Correcting these imbalances

We need to re-think the role of the state particularly in a developing economy such as ours. A growing economy brings with it pressure on publicly provided goods and services. As the country becomes a middle income country, it will have to address the gap between public and private spaces.

The imbalance of tax incidence where the honest wage earner pays a fair share of income taxes while the wealthy professional or entrepreneur gets away with paying very little of his income needs to be corrected as well.

Over-consumption, over-congestion, and over-concentration need to be addressed through tax measures. A re-balancing of the economy needs to occur. The tax system has to support participation in employment, the creation of jobs through investments and the achievement of greater equity.

The lack of trust and confidence not just in government institutions but in society at large is a source of worry. Perhaps we are creating a society where “to each, his own” becomes the norm. In the final analysis, the adage of “I obey but do not comply” needs to be reformed along with the tax code.

Update: a paragraph about the foreign business community supporting the abolition of tax perks was deleted for being factually incorrect.

That Vision thing

What the president needs is a roadmap that focuses on the big picture and provides substance beyond the spin, something which is sorely lacking at the moment.

For a president whose meteoric rise on the back of wall-to-wall coverage and fawning over by the media delivered him instant rock star political status during the campaign, the complaint that the media has now turned from doting parent to vengeful god, is rather questionable.

For the first time in our political history, a triumvirate (someone called it a three-headed beast) weaves and spins the yarn concerning the goings on in the palace. If three heads are better than one, then why should the Benign One not be receiving more favorable coverage from the echo chamber? The problem has got nothing to do with the messaging and all to do with the message itself.

Without vision, people perish,” so the biblical proverb goes. Every occupant of the Palace knows that after a while, the daily grind of official duties prevents him or her from thinking about the broad frame. It is easy to get lost in the day-to-day political tussle to get on top of the 24 hour news cycle. The most precious commodity for any leader is time to think and reflect. They say, the minute that goes, you’re basically a goner.

So it seems now with the Benevolent One, in his first year, his communications group has successfully come up with a plethora of platitudes that are an instant hit with the public. Kung walang kurap…, Daang matuwid, Bawal ang wang-wang: these make for good slogans and rallying cries. The problem is that the administration lacks a coherent roadmap that would convert these into the kinds of meaningful results that people have been craving.

Approaching the first full year in office, three alarm signals are flashing. They point to a lack of crispness in the strategic frame hampering this presidency. These signals involve a mix-mash of mental models to guide the broad philosophy of governance that defines the role of the state; personality-driven factionalism that breeds organizational dysfunction, and an absence of credible commitment to deliver on its promises. Together, these signals flag the need for Palace insiders to re-group and re-think their strategic priorities.

Outmoded mental models

When the president made his “no new taxes” pledge before the Makati Business Club forum during the 2010 election campaign, he was evoking a theme often presented during the 1980s and 90s by the Washington elite that espoused a limited role for government or the “magic of the Market” as a formula for development. This meant that the best state was a reduced one. Economic development could proceed if countries followed the mantra to “stabilize, liberalize, privatize.”

This dovetailed neatly with the post-EDSA-I contempt for anything to do with the state apparatus and crony capitalism fostered under the deposed dictator. The Aquino-I regime promised to honor all loan contracts entered into by the Philippine government regardless of whether they were tainted with corruption as a way to maintain its creditworthiness. To make room for debt repayments, it practiced fiscal austerity and reduced the state’s role in performing many of its social obligations.

In the breach, the (big M) Market would step in to provide public infrastructure and jobs that would reduce social dislocation. This was the underlying philosophy that prevailed at that time. To complement this strategy and to make good on its promises to meet its financial obligations, a comprehensive adjustment to the tax system was implemented in 1986.

This re-structure according to one of its chief architects allowed the tax-to-GDP ratio to steadily climb, so that by the early 90s, when Aquino-I stepped down, the fiscal situation was on a sound fiscal footing. The administration that succeeded it sought to bring about the full blooming of the Washington world view on local soil by accelerating trade liberalization and expanding fiscal incentives to foreign investors.

The early success in the 1990s of this formula eventually bred euphoric overconfidence. After reaching a high-water mark in the mid-90s of 19% (high for a developing economy with a limited tax base), the tax-to-GDP ratio began a steady decline as a result of the comprehensive tax reform package of 1997. Meanwhile the Asian Financial Crisis intervened and began challenging the mental frame of the policy elite.

From 1998 onwards, a new post-consensus consensus was being formed. Market liberalization was necessary but insufficient, it declared. State capacity had to be built up to ensure that the right institutions would govern market transactions to prevent “exuberance” of the kind that led to market crashes. It also had to provide social safety nets to protect those adversely affected by market reforms and business cycles.

This became evident to the Philippine elite, whose business interests escaped relatively unscathed from the Asian flu, but saw them subsequently threatened by a number of anomalies involving the Securities and Exchange Commission and the Office of the President which nearly short circuited the banking system and local bourse. Meanwhile the costs of a war in the south began to hurt the bottom-line and a fiscal crisis loomed.

Corrective measures had to be put in place to raise personal and corporate income tax rates (temporarily) at a time when other nations in the region were cutting theirs. Meanwhile, the government was treating its sin taxes (which had switched from being a fixed percentage to a fixed level not indexed to inflation in 1997) as a sacred cow and began enacting numerous and redundant fiscal incentives and tax rebates that caused revenues that resulted from an increase to the consumption tax rate to erode.

The conservative Heritage Foundation which ranks countries based on their ability to provide economic freedom often gives a more favorable score to less developed nations in the area of fiscal freedom given their low level of tax collection as a share of the economy. The Philippines over the past decade having a low tax-to-GDP ratio would have fared better under  the Foundation’s scoring method but for its “relatively high” income tax rates.

The simultaneous presence of high income tax rates and low tax collections could only mean that either the tax base is too narrow, in which case the solution would be to flatten the rates and widen the base, or that many tax leaks exist and dishonesty in declaring income abound, in which case a closing of those loopholes and going after tax cheats is needed.

Enter the Aquino-II regime which re-branded the privatization model adopted under Aquino-I while expanding the state’s role to deal with a growing social agenda. Unfortunately, it failed to see that this expanded role required a shift in the tax structure. The “no new taxes” pledge was based on the idea that renewing the public’s trust in government would lead to better tax compliance–a view that is increasingly seen as untenable.

Even with a highly competent, honest and dedicated finance team going after tax cheats, the tax take as a share of GDP has fallen. Perhaps the notion that public trust in government engendering proper tax declarations is going to suffer the same fate as the idea that economic growth naturally lowering the incidence of poverty. The Philippines seems to be the graveyard of many grand theories on development.

Missed opportunity

Having declared during the campaign that there would be no new taxes has meant that any reasonable time table for tax reform would be at least until after the 2013 mid-term elections. That in turn would mean that any structural adjustment involving taxes (raising it from the current 13% back to about 19%) would only bear fruit during the latter two years of this presidency and that many of the Millenium Development Goals will be missed.

Having staked all his eggs in the Daang Matuwid basket, the president now is facing the distinct possibility of failing to deliver on much of his social compact: the result of relying too blindly on an unproven theory that makes for a good sound byte, but lacks a grand vision.

Even with the capitulation of the ombudsman opening up the prospect of jail time for the Inglorious One and her henchmen, the sad fact of the matter is that even if that were to occur, it would not help improve the finances of the government substantially nor bridge the yawning social divide that exists.

Before the president gets locked-in to a kind of group-think paralysis that eventually occurs when one hops on the treadmill of public office, he needs to find a way to re-assess the situation and come up with a strategy that will act as a game changer before it is too late. Key to this would be discarding some of the mental models that act as blinkers and prevent him from seizing opportunities for change.

>>> to be continued…(see part 2: Curing dysfunctionalism)

So much for public trust

It appears that when it comes to tax revenue, it is better to be feared than loved.

Improved faith in government was meant to improve the public’s willingness to pay the correct amount of taxes. That doesn’t seem to have happened.

The analysis of an economist on the tax collection effort of the Aquino administration over its first 10 months in office seems to have yielded a key finding: that relying on anti-corruption efforts to raise tax revenue was naive and illusory. Indeed the analysis showed that while tax revenues grew in response to an expanding economy, it fell as a proportion of it. In fact, despite the highly publicized legal cases of alleged tax cheats hitting the headlines during the period, the tax to GDP ratio actually declined in the second half of the year (the period under the present administration).

So it seems despite the astronomically high public approval rating enjoyed by the Benevolent One during most of this period, the public was not willing to pay his government its due. In fact, they were even more willing to pay a greater percentage of their income to the most distrusted administration since records of public trust were kept. As this reality began to dawn on the hapless economic managers of the current president, they announced that new taxes may be on the horizon.

True: the most benevolent one may have uttered the words, “no new taxes” during a campaign speech, but that was based apparently on the myth that an honest government would inspire reciprocal honesty from its citizenry in paying their taxes correctly. Having not lived up to their end of the bargain, the eunuchs in the Palace have found reason to renege on that campaign pledge made to the public. But not yet, at least not in this year. Perhaps in the next, 2012, a year before people go to the polls.

Such a timetable would appear to be political suicide for any congressman or senator up for re-election, but not for the politically tone deaf players in the Palace. It would seem strange for them to enunciate such a plan a year in advance. Is this their way of signalling to the public and the tax agents that this is their last chance to hold up their end of the deal? Well so it would seem. But what if the public calls their bluff?

This government doesn’t seem to be good at playing ‘the game’. It blinked in the run up to the LEDAC with the withdrawal of the RH Bill when the prelate began making noise. It could blink in the lead-up to the 2013 election campaign. It is a well-known fact that an election year is the worst time to conduct tax policy. The likelihood that perverse outcomes result is very high. It was back in 1997 when the government had finally posted a net surplus for the third year in a row that a major tax overhaul was churned through Congress. The result was a gradual erosion of revenues that have led to the current predicament: all because 1997 was a pre-election year.

What is worse is that the eunuchs announced that they intend to target the tobacco and liquor industries. Such hubris! The pockets of these merchants are deep. So deep they have resisted attempts, most recently in 2005 when economic and fiscal conditions were most bleak, to have taxes raised on them. The palace seems unwilling to go for the big ticket items like raising the VAT rate or taking out many of the exemptions introduced back in 1997.

Such a move would be truly unpopular given the rising food and energy prices of late, but it may be inevitable if the administration ever intends to make good on its other campaign pledges (it would cost roughly Php350 billion a year to close the budget gap and another Php150 billion to meet its Millennium Development Goal targets). Doing so would raise the tax to GDP ratio to around 18.5%, back to the same level it had reached in the mid-90s.

Perhaps for these economic managers, the most sensible thing they could do would be to delay new tax measures until after the mid-term elections of 2013. Having gained a fresh mandate, congress could then approach the tax system with greater freedom and flexibility. The important thing would be to prepare the tax proposals in the interim and connect them to the president’s social reform agenda.

That way, they could go to the election with the question, what kind of Philippines do we want? One that is fairer and more equitable, or one that is not. If we desire the former, then here is the price tag. Having exhausted all attempts to raise revenues, they could be warranted in posing that choice. In the final analysis, we should not just demand for the kind of government we want, we have to be willing to pay for it as well.

Update: the original piece incorrectly made mention of the mid-term elections being held in 2012 instead of 2013 which is what the current version contains.

Open Budget Partnership Forum: Understanding Government Revenues

Here are copies of presentations made during the Open Budget Partnership forum.

1. “Revenue Generation through Good Governance and Public Participation,” by Finance Secretary Cesar Purisima (PDF)

2. “Tax Revenue Management Plans and Policies,” by BIR Commissioner Kim Jacinto-Henares (PDF)

3. “Customs Revenue Challenges and Reforms,” by Angelito Alvarez (PDF)

4. “Public Revenue Reform,” by Benjamin Diokno (PDF)

 

Source: TG Guingona III