Corazon Aquino

Succeeding Aquino

Political succession is the key to long-term economic growth.

The Philippines has been hailed as a rising star among emerging markets in 2013, but sustaining this strong performance will require a good succession plan for the Aquino presidency. Political succession as it turns out has been a crucial driver of long-term economic growth among emerging economies over the past fifty years.

A study conducted by Tim Kelsall for the Overseas Development Institute of Britain comparing the growth experiences of countries in the rapidly growing regions of Southeast Asia and sub-Saharan Africa has found that,

Contrary to currently fashionable ideas about ‘inclusive institutions’ and ‘golden threads’, (we find) that crucial to combining succession with growth is the embedding of policy-making in strong institutions of one of two types: 1) a dominant party with a tradition of consensual decision-making and leadership succession, or 2) a strong, organic bureaucracy, effectively insulated from changes in political leadership.

Sub-Saharan Africa, which today is the fastest growing region in the world, did experience respectable growth rates in the 1960s and 1970s. What prevented this region from sustaining its economic performance in the long-run was the failure of many countries to manage political succession well.

The same could be said of the Philippines. From the 1950s to the 1970s, the country experienced solid economic growth rates averaging between 4.9 to 6.4 per cent (see table below). Of course this was still well below the growth of Malaysia or Singapore, but it was respectable, nonetheless.

Source: NSCB

The 1980s spelled the end of this sustained growth as the Marcos regime, which had been in power since 1964 collapsed. The upheaval began with an international debt crisis and the assassination of Senator Beningo Aquino, Jr in 1983. “Ninoy” as he is popularly known was returning from exile in the United States where he was granted furlough by the regime to undergo heart surgery, after spending close to 8 years in prison. The then leader of the opposition was hoping to convince President Marcos to accept a power-sharing deal that would allow for a smoother transition to democracy.

Unfortunately, due to the ill-health of the former dictator (he was not totally in command of the situation), the conciliatory offer was not taken. Instead, the death of Senator Aquino led to massive street demonstrations and the eventual fall of the Marcos regime. They say that authoritarian governments offer a tradeoff: higher economic growth, in exchange for a higher risk of economic collapse when they fail to manage succession smoothly, and that is exactly what happened.

The 1980s saw a diminution of growth to 1.8 per cent. This was lower than the population growth rate, meaning per capita incomes retreated during this decade. The transition from Ferdinand Marcos to Corazon Aquino was marked by a series of coups, natural disasters and a power crisis. It is clear from the chart above that the Philippines never fully recovered from the trauma of this fall until the 2000s when growth averaged 4.8 per cent, roughly where it was in the 1960s.

Of course, the political transition was not the only factor that influenced economic growth during this period. The country was also making a transition away from protectionist industrial policy towards a more liberal economic position. The former had played into the hands of crony capitalists under the Marcos regime. Much of the debt that was accumulated during this time was illegally siphoned off. That was economically unsustainable.

Political economists Emmanuel De Dios of the UP School of Economics and Jeffrey Williamson of Harvard took a candid look at the possible factors that could have been responsible for us deviating from our upward path since the 1980s. They list the following as possible candidates:

  • political instability at a critical time in the 1980s
  • a subsequent failure to exploit the move of Japanese manufacturing FDI [foreign direct investments] into the region
  • an institutional weakness benign in the pre-1982 past but made more powerful since
  • some liberal policy package that penalized manufacturing when it was already on the ropes
  • emigration surge in the 1980s that stripped the work force of industrial skills
  • some massive Dutch Disease created by subsequent huge emigrant remittances.

They conclude that no single factor determined the outcome, but that all of them may have come together to create a ‘perfect de-industrializing storm’. I tend to agree with their findings although, the originating event is clearly the political instability that occurred as the dictatorship was in its death throes. The fact that Marcos or his party did not have a succession plan to manage a transition locked the country into a path of low growth in the subsequent decades.

Whatever the cause or causes of this, the authors acknowledge that the resulting pattern of growth has been less than ideal:

The path followed has led to a new stable equilibrium where a largely liberalized trade in goods coexists with a recurrent current account surplus built on remittances and strong (skill‐intensive) service‐sector exports. The peso is under steady pressure to rise in real terms, which leaves little room for (lower‐ skill) manufacturing to compete and expand. A considerable rise in the investment rate—still low by East Asian standards—would relieve the current account pressure for real appreciation and create more jobs. But the low investment rate may be part of an equilibrium where capital requirements are low simply because a significant share of the urban labor force is already abroad. [emphasis added]

In the first half of the current Aquino presidency, growth has averaged 5.8 per cent, close to where it was in the 1970s. Severe weather and economic conditions globally are not expected to knock it off its current path. As noted above, the trajectory is due to a combination of income flows from abroad and investments in the modern services sector. This has led to the criticism that it is not broad based.

A number of factors however seem to be lining up that could spell an end to this current “equilibrium”. The first is the slow but gradual demographic transition which could lead to an “economic sweet spot” where labour demand exceeds supply. A debate among technocrats is currently underway as to when exactly we will reach this tipping point. Central bank officials predict this could be as soon as 2016, while the more conservative economic development agency estimates for this to happen in the 2020s. I foreshadowed this debate in a post from two years ago.

The second factor is the gradual build-up of foreign reserves in excess of our external obligations, which is driving up the peso and convincing monetary and fiscal officials to consider setting up a sovereign wealth fund to address the investment gap that is hindering job creation. I have been advocating for this wealth fund as early as 2010.

The third factor is the “systemic vulnerability” from external threats to our national sovereignty and security, particularly from China, which could motivate the development of a national agenda towards building a better, stronger economy, to face these challenges from abroad. The same sense of vulnerability from both external and internal threats was what motivated Japan, Korea, Taiwan, Singapore and Malaysia to forge a national developmental agenda.

The key to all of these factors in producing the desired outcome is the ability of our political system to fashion a solid policy making capability from one of two sources: either through stronger political parties or a professional economic bureaucracy insulated from political interference. The continuity of a sound, stable policy making capacity with the ability to set the national agenda allows for considered, adaptive economic policies despite a number of political successions. This is the crucial element that would ensure sustained, rapid growth in the long-run.

Some further reading:

  1. The new Philippine political architecture: a blueprint for strengthening political parties.
  2. The national development project: Renovating the bureaucracy

 

The Tyrrany of Cousins

Altruism towards other people of the same blood-line is widely practiced and literally embedded in our DNA. The Hamilton Rule named after the British evolutionary biologist William Hamilton states that we are pre-disposed to behave altruistically to those with with whom we share a greater proportion of genes. This biological imperative to pass on our genetic code to the next generation is quite powerful.

Hunter gatherer societies tended to exhibit a high degree of inter-locking marriages based on kinship. Alliances between tribes were sealed through bridal exchange allowing genes to be distributed across a wider area. This had implications for early rulers and states. As agricultural societies gew within a defined space, its rulers found it more and more difficult to govern independently sufferering what is called the “tyranny of cousins” which puts the needs of the tribe above the rest.

China is credited with forming the first modern state to address this problem. The Qin and Han dynasties (221 BCE-220 CE) instituted a civil service staffed based on a rigorous examinations process. It was tasked with raising taxes used to secure the populace against enemy invasion or domestic exploitation as distinct from local lords who extracted rents from their serfs. China’s political history from then on can be told on the basis of how this tension arose between the state and elite families. Following a few “bad emperors” it eventually succumbed to repatrimonialization.

Medieval Islamic rulers sought to counteract tribal rivalry by erecting a warrior caste made up of slaves. The Mamluk slave warriors and their Ottoman Janissary counterparts were responsible for the administration and protection of Islamic civilization because they acted as a coherent ruling class looking after the broader interests of society and not any one particular tribe. Just as in China, however, the integrity of this institution began to erode over time.

Altruism based on reciprocal relationships rather than kinship played an active role in the modernization of East Asia. The Japanese keiretsus were organized on the basis of inter-locking boards led by former bureaucrats who were parachuted into senior executive positions. Korean chaebols had a reciprocal relationship with state finance and grew into large corporate family-owned entities with high debt-equity ratios. The management style of these conglomerates was based on consensus between parties. Life-time employment was the norm.

In communist China, investors partnered with local Township and Village Enterprises to gain access and participation in China’s economy. Going to bed with local governments protected assets from expropriation for as long as they continued to reciprocate with profitable performance. There was no formal recognition of property rights or an independent judiciary to enforce contracts, just a tacit agreement based on reciprocity and credible commitment based on mutual interest.

Guanxi a term denoting close networks has been behind informal credit markets supplying start-up capital to Chinese entrepreneurs the world over. Again, no formal agreements eforceable through the courts operates here. Trade and credit has been made possible through closely linked networks built on family and kin relations or reciprocal relationships based on one’s honor and reputation.

From trust to contracts

The West took a very different more protracted route. After the conversion of Germanic tribes to Christianity in the sixth century, the church promoted changes to interlocking marriages based on kinship. This tended to weaken in the long-run political and economic ties based on kin selection. They moved away from trust to contracts through the centuries.

In the twelfth century the English common law administered by the king’s court to which subjects could appeal the decisions of local lords established a system known as “the rule of law” to which eventually even the monarch was made subject by the nobles who feared expropriation by the state. Contracts became enforceable and property rights made more secure without the need for personal connections or networks.

Across the English Channel, the Dutch established the first stock exchange in the early seventeenth century. This made corporate management distinct from its owners and spread risk through tradable certificates lowering their average exposure and leading firms (such as the Dutch East India Company) to be less conservative in business expansion. Capital-raising went through an impersonal market rather than through personal networks.

Management in the West tended to be more individualistic than consensual motivated by incentives rather than trust. Short-term, risk-taking behavior leading to rich rewards and bonuses became more prevalent. Maintaining reputation continued to be important, but only in terms of improving one’s value in the impersonal labor market rather than protecting one’s “word of honor” within a tightly knit community.

Where to begin?

The Philippines is obviously stuck in transition. Many formal institutions have been transplanted from the West, but they remain weak and porous to the tyranny of cousins. It has been difficult for a strong central state to emerge where one’s loyalty to the country ends where one’s loyalty to one’s family begins. The thick network of kumpadres, kamag-anak, and kaibigan (now augmented by kaklase, kabarkada and kabarilan) makes it difficulty to determine where to even begin the reform process.

Getting to Denmark” is the problem to be grappled with: how to emulate Scandinavia which has the highest levels of human development and cleanest governments in the world. It almost sounds tautological. In order to gain the living standards of the West, we need to adopt their political and economic institutions including a strong state, rule of law and democratic accountability. If our society had the means to create and maintain such institutions, it wouldn’t be poor to begin with.

Earlier in a separate post, I commented on the preponderance of avowed bachelors or males with no offspring holding sensitive posts in the current government, the president being one of them. This harks back to the time of Mamluks, Jannisaries and Imperial Chinese eunuchs. This is purely coincidental and fleeting in the broad scheme of things.

Prescribing Western-style political institutions again might have its pitfalls. Public finance of parties does not necessarily weaken the influence of campaign donors even in the US where it is practiced. It might dampen but not eliminate it. And, at any rate, the need for donors features more at the national level. At the local level, political and economic dynasties are one and the same.

A majority of seats in Congress is dominated by dynasties including within the president’s Liberal Party (albeit by a smaller majority). Rather than decoupling the political from the economic classes or dismantling dynasties, shouldn’t we like Japan, Korea and Taiwan find a way to make this coupling work for our country by directing it to more productive ventures?

Yes, we can

The problem is not reform incapacity by our leaders. I would argue that under Mrs Aquino, the state exhibited a considerable degree of efficacy in achieving substantial economic reforms under difficult situations. From tax reform to foreign investments deregulation, flexible currency exchange to trade liberalization, wage decentralization to monetary independence, privatization to democratization, the list is quite impressive from a Western perspective.

The problem was that the agenda was perhaps too comprehensive instead of building one reform on the proven success of another. We shouldn’t blame Mrs Aquino for this. Her government was put in an institutional strait jacket by the IMF which today is imposing a heavy burden on some weak European countries. What EDSA-I demonstrated is that the country can achieve a consensus over a broad set of reforms and pursue it diligently.

The difficulty of governing in the shadow of one so revered as Mrs Aquino is much like the dilemma faced by the successor to Apple’s visionary CEO Steve Jobs. His mission now is not to “stuff up” the legacy. The overly cautious approach this breeds could prevent the sort of imaginative thinking that led to success in the first place.

East Asia didn’t buy into the comprehensive reform package that international donors, aid agencies and multilateral organizations were foisting on them. It opted to target areas that were more appropriate for its needs and developed its own recipe based on local ingredients. It caught up with Western living standards and then reformed some of its earlier idiosyncratic institutions which had by then become less useful.

Rather than applying the “second generation” reforms of the augmented Washington Consensus, following the “first generation” reforms tackled by Aquino I, the policymakers in advising Aquino II need to escape the poverty of ideas this represents. They should develop imaginative arrangements that will immediately unlock the productive capacity of our country. Only then can the son escape another sort of tyranny that seems to be afflicting us…the tyranny of low expectations.

Guanxi diagram courtesy of: China Australia consult

Where’s the beef? On the missing “spoils” from P-Noy’s second US trip

Does good governance mean good economics?

In an earlier piece last week meant more to mark the 39th anniversary of martial law in the Philippines, I tried to downplay expectations regarding the “spoils” that P-Noy’s US trip would bring describing the situation there as dire and nearly on the boil.

As P-Noy was to deliver a report to the World Bank, Mr Olivier Blanchard, Chief Economist of the IMF gave an uncharacteristically downbeat outlook for the world economy saying that the global recovery had stalled, revising forecasts of growth down to 4 from 5% (a more significant slowdown for advanced economies with growth prospects halved from 3 to 1.6% and less drastic cuts for emerging economies whose growth prospects decline slightly to 6.1 from 6.4%–the Philippines has seen its growth prospects slashed from 6-7% down to 4-5%).

Sure enough, on the day he arrived back from the US, the Dow Jones plunged nearly 400 basis points undoing the Federal Reserve’s measured response to prop up confidence. This was in reaction to what has been going on in Europe where Italy, the third largest economy received a credit downgrade from S&P and where a Greek default on sovereign debt looms. Meanwhile the Washington elite remained at odds over how to keep the government running with a measure to keep the lights on until November 18 passed literally at the eleventh hour.

With that as an unfitting backdrop, the president remained upbeat upon planting his feet back on home soil. Unlike his more recent trip to China which was expected to yield 2-7 billion dollars worth of investment of which 1.3 billion dollars was realized in firm commitments and cost the Filipino taxpayer 25 million pesos (a return of 52 dollars worth of investment for every peso spent), there were no numbers to be quoted this time around.

The president instead spoke of the keen interest and enthusiasm of US investors who were “lining-up” to come to the Philippines. Strange that the president did not even mention the figure of $15 million over the next four years the only firm commitment to come from Pepsi to be invested in developing a coconut juice processing facility.

That after all would be good news for the struggling farmers the intended beneficiaries of the Marcos era’s coco levy fund which was meant to provide them support in exporting their crop, but instead went to a bank which then lent to the fund’s manager, P-Noy’s once estranged uncle, who because of that now owns a controlling stake in San Miguel the food and beverage giant thanks to the high court’s ruling earlier this year.

So why the omission, which is so uncharacteristic of arrival statements; could it be because the spoils of this trip are so meager when compared to the nearly 25 million pesos spent on it? It would depict it as representing less value for money by producing a mere 6o cents for every peso spent.

This should not detract from the overall mission of the trip which according to the president was fulfilled by him reporting to the World Bank the advances of his administration this past year and greeting the Filipino community there. There was also the side trip to credit agencies to try and convince them to boost the ratings of the country. After all, the budget deficit no longer seems to be a problem with a surplus reported in August bringing the cumulative deficit for the year to be 85% below its ceiling, right?

This is what the president trumpeted as a success in his drive to stamp out corruption. In the spirit of transparency and openess, which were the themes of the Open Government Partnership that P-Noy inaugurated at the Waldorf Astoria (which incidentally means more foreign trips in the near future to Brazil, Chile, UK, Tanzania and Latvia), the Palace should have at least acknowledged that perhaps the Americans were in no position given the state of their economy to be exporting their capital and jobs to countries like the Philippines.

Never gonna happen

That transparent recognition of the state of affairs of course was never going to happen, for the simple fact that doing so would expose the president to accusations of junketing which given the nature of his presidency is something his entourage wants to avoid. For if the question were really to be asked, what would be the real urgency of making this trip to the US a second time in a row within the space of a year, what would be the answer?

His remarks at the World Bank was like that of a star pupil performing a didactic exercise of parroting his tutor. His visit to Fordham University was a sentimental journey mirroring his mother’s footsteps (similar to his visiting an ancestral hometown in China). His co-inaugural of the OGP lent legitimacy to an initiative sponsored by the World Bank which has struggled to make itself relevant.

Finally, his trip to the IMF was unnecessary given that the Philippines exited their program right before he entered office. The only point of this trip it seems was to highlight the advances of his young presidency in proving that “good governance is good economics”.

Unfortunately, the jury is still out on that. For one, the US haul was a pittance compared to the Chinese catch. And China has not really been deterred from investing because of perceived corruption or lack of openness. In fact, China’s development spending in emerging countries devoid of any concerns about corruption in the recipient nation is the main reason why western aid agencies have been struggling to maintain their relevance.

That and the fact that their anti-poverty programs have proven to be inconsequential. So much so that they have jumped on the bandwagon in supporting ideas developed independently by their clients. Programs such as Bolsa Familia which is now called “conditional cash transfers”. Yet as shown in an earlier post, the Philippines could have funded its own variant of this scheme without resorting to multilateral financing.

Second, the “interest” from US companies to invest was sparked not because of a greater sense of openness but from the relative advantages the Philippines has in a couple of areas. One is in the form of coconut plantation; and, two is in the form of a call center industry that has grown from strength to strength even during the period in which corruption supposedly reigned.

Now before you start arguing that the austerity exhibited by P-Noy in his travels is in stark contrast to the “impunity” demonstrated by his predecessor, let me say first of all that this habit of constantly bringing up ex-president Gloria Arroyo as the benchmark for this president’s conduct in office is not really very useful (although I am sure her supporters would be happy to have that conversation). I would prefer to think he should set the bar much higher.

The proper benchmark

Before questions of efficiency and effectiveness are raised, it is important to cross the threshold of appropriateness. How appropriate was it to make the trip at all? If as the president says it was important to send a message about the reforms undertaken by his country, then perhaps it would be pertinent to look at Indonesia’s example. The president of Indonesia the only other Asian country in the steering group of the OGP has trodden the path that P-Noy has just embarked on.

After the anti-corruption campaign started under Susilo Bambang Yudhoyono’s first administration, Indonesia has clearly effected a change in its image abroad. It is sometimes accorded “BRIC” status with  gross capital formation as a ratio of GDP about double and foreign direct investments several multiples of that in the Philippines in recent years. This was another successfully home grown program not driven by donors, the main reason it went from being seen as a basket case after the fall of Suharto to joining the Group of 20 nations.

Yet after accomplishing all this, its president felt no compelling reason to preach the virtues of his nearly decade long administration to other world leaders choosing instead to send a “trusted aid” to the event. Our president on the other hand felt so convinced that his administration after just over a year in office was performing sufficiently well that he saw the need to share his country’s “success story” with people abroad.

Unlike the case of Indonesia where the anti-corruption campaign supported growth, the Philippine government’s attempts to rein in corruption seem to have detracted from that growth as the latest four quarters of GDP reporting have shown (ironically it is in the area of growth where the Philippines over the last decade has not performed too badly against its southern neighbor–but never mind that, lest this statement of fact be interpreted as me giving “props” to the previous dispensation).

While it is understandable for the president acting as Salesperson-in-Chief to present a positive image abroad of our country and his administration, it is equally important for that image to be translated into tangible results over a sustained period of time. Only then will the image correspond to reality. Until then, we can only keep asking, “Mr, Presidentwhere’s the beef?*

*Fresh from his US trip, the president rushed off to Japan for four days. The contrast between the East Asian and North Atlantic nations could not be more stark with one billion dollars expected to be signed off with a taxpayer’s bill amounting to 20 million pesos.

How long is a piece of string?

What yardstick are we using to measure P-Noy’s performance?

The arbitrary, rule of thumb of the first year in office is about to come and go for this administration. The obligatory journalistic pieces assessing the president’s performance have consulted the usual suspects.

Political analysts, polling firms and pundits, the business community and the average man on the street express varying degrees of satisfaction, from impatience on the part of Conrad de Quiros for instance, to a more sanguine position on the part of Mon Casiple. Regardless of their positions, they are essentially in agreement that while one year is too brief a period to expect major change, some demonstrably concrete level of progress or achievement is lacking in the president’s first 365 days in office.

As expected the president’s men were engaged in a charm offensive to address these complaints with Undersecretary Manolo Quezon of the Communications Group appearing on ANC, Deputy Spokesperson Abigail Valte on Twitter, and Budget Secretary Butch Abad polemically addressing the issue of economic management. The to-ing and fro-ing has been at times entertaining as in the case of the Valte-Magsaysay twitterverse exchanges and insightful as in the case of Quezon’s revelations about the president’s love life.

The advocates of the president (both in and out of government) say that much has been accomplished. The emphasis on government frugality and public spending restraint has created domestic private investor confidence and a credit ratings dividend according to Cielito Habito. Plugging the leaks in infrastructure spending has generated fiscal space to expand social spending by the end of the year according to Abad. Public private partnerships are “on track” to be consummated this year according to Finance officials.

That in essence is the shortlist of accomplishments brandished by Malacanang. Judging by his poll numbers, the public seems to give P-Noy the nod of approval with 64% expressing satisfaction with his performance.

Is that it, then? Should we give the president a pass too?

Unfortunately, what is missing is a solid discussion over, well…what sort of yardstick is appropriate for measuring the president’s performance. For instance,

• Shall we judge him on what he said he will do?

Based on the president’s anti-Gloria campaign theme, De Quiros now questions why the former president and her ilk have not been brought before any court to answer for her alleged transgressions. Based on his anti-corruption platform, the Management Association of the Philippines now asks why there have been no measures like the Freedom of Information bill or any meaningful reductions in business redtape progressed.

Civil rights advocates wonder what has happened to Jonas Burgos and many other like him. Women’s groups are still waiting for the RH Bill to be passed. Farmers are wondering what happened to the resolution of Hacienda Luisita. The ordinary man on the street wonders where the jobs are and the relief from the rising cost of living. These were issues PNoy promised to resolve once in office.

• On the other hand, should we judge him based on his ability to prudently modify or alter what he said he would do?

Those with a nationalist agenda like Teddy Casino say P-Noy is delivering more of the same as far as economic policy goes, and hopes he will re-think his developmental economic strategy. The anxiety felt by Casino and others like him (Walden Bello for instance) is that the quality of growth is poor and insufficient to make a dent on unemployment.

Budget analyst Ben Diokno is looking for a two-step tax reform process that will make the system fairer and more effective at raising revenues. Both of these policy prescriptions run counter to the “steady as she goes” pronouncements that PNoy made during the election season.

Measuring up

The answer to the question, what yardstick do we use, depends on whether you are a strict contractualist or not. Some will say, we should evaluate the president plainly on what he said he would do, and nothing more. For me, however, I believe that given the tenor of the campaign, there were promises that were bound to be made in the spur of the moment, which need to be reconsidered.

The problem for the president of course is, whether you adhere to the strict contractual sense or not, he has failed to register meaningful progress on many fronts. So the question then becomes, how much time should we give him before we start downgrading his performance assessment? How long before we start saying that the president has either reneged or foolishly forged ahead down a dead end path?

Should we give him another six months? A full year? Two years? It’s like asking the question, how long is a piece of string?

After all, for the marginalized groups awaiting resolution to decade’s old injustices, their well-being has been put on hold for far too long. The well-healed chattering classes may feel aggrieved that bringing justice to Arroyo has been delayed, but their grief is nothing compared to what farmers and human rights abuse victims have suffered.

Similarly for those denied access to education, healthcare, sanitation and protection from the elements, the experiment to improve tax collection without a root and branch reform process would prove to be the most costly of all, if it fails. Is it therefore worth the gamble?

Perhaps, it is in addressing the needs of the least of our brethren that the president ought to be judged. In his “Back to the Future” moment, the president like his mother in the mid-1980s seemed to have prioritized the needs of rich creditors and bondholders over that of poor and marginalized stakeholders. Private investments have improved the skyline, but public investment failed to raise more out of the poverty line.

How long is a piece of string? Well we will have to wait and see…

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 [email protected]#!

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!”

The LABAN-Liberal rivalry

Remnants of the progressive struggle are locked together in a dance of mutual political survival.

As the news dailies ran stories on the increased scrutiny being placed on the presiden’ts pals, some within the movement that elected him have begun to voice some reservations or outright indignation at the way he has handled the situation so far. Following the Luneta incident and the firing/resigning of Secretary Jose De Jesus, many cannot reconcile the behavior of their “white knight” towards those in his camp that have not acquited themselves all that honorably.

It will one day make for an interesting study to look at the rivalry between the Balay and Samar factions, or what I would like to call the LABAN-Liberal rivalry. Although as Manolo Quezon once put to me commitment to political parties has yet to take root in the Philippines, these parties come close to approximating such a tradition. They were borne out of the struggle against martial law and the two opposing poles of how to bring it to an end.

To understand how or why the Aquinos behave in relation to these rivaling camps, you have to first go back in time to the 1970s, to 1978 when the imprisoned Ninoy Aquino was “abandoned” by the LP and left without a party to run in the parliamentary elections scheduled that year. Having none of the stalwarts of the party like Jovito Salonga or Gerry Roxas to provide a stiff challenge to Marcos, Ninoy turned to more junior people. This is how LABAN was formed.

Explaining the Aquinos

The man who helped create the name, Lakas ng Bayan, the late Alfonso Policarpio, in his book Ninoy: The Willing Martyr coined a very poignant phrase to capture the mood of the Aquinos during this period of their struggle. A caption of a photo of Ninoy and Cory standing together during his military trial reads, a time when so few cared. This perhaps is one of the reasons why the Aquino children have gravitated more to the Samar group, the ones that had supported the “Noy-Bi” ticket. They had been there during their darkest days. To quote a once popular beer ad iba ang may pinagsamahan.

Secondly, one has to go to the early days of the first Aquino presidency to discover why PNoy took the unpopular decision to support his close friends. In The Aquino Management of the Presidency: In the Face of Crisis (1992) published by the presidential management staff, one finds a vivid recount of those early days from the point of view of palace insiders. According to the document, Cory convened her cabinet on July 9, 1986 to assess the aftermath of the “Manila Hotel incident” the first coup of her several months’ old presidency. After their deliberations, Presidential Spokesman Rene Saguisag was quoted saying

In hindsight (Minister of Local Governments), Nene Pimentel was correct about removing the incumbent local chief executives and replacing them with OICs. Had the duly elected Mayors of Metro Manila been retained, they would have been able to mobilize in support of the Marcos loyalists. There would have been a greater likelihood that the government would have fallen.

In response to a reporter’s query on why he had not accepted in full DOJ Sec De Lima’s recommendations in the aftermath of the “Luneta incident” regarding Mayor Alfredo Lim and Usec Ricardo Puno, PNoy gave a very cryptic remark about sticking with your allies because of counter revolutionary moves to unseat them. Using the preceding bit of history you can easily decode his message.

This siege mentality on the part of PNoy can also be understood by recalling that Noynoy was ambushed and nearly perished in 1987 during the “God Save the Queen” rebellion staged by renegade RAM soldiers that nearly toppled his mother from office. His appreciation for allies and the need for self-protection led him to the firing range where he no doubt established strong bonds with his shooting buddies.

Thirdly, to understand the accommodation of Binay’s faction within cabinet, one has to go back to the local government elections of 1988. In the book From Marcos to Aquino: Local Perspectives in the Transition in the Philippines (1991) by Ben Kerkvliet and Resil B Mojares, one gains a “street-level” view of the rough and tumble world of politics immediately following EDSA I.

The OIC’s appointed by Interior Minister Nene Pimentel were made to defend their positions a mere 18 months after their appointment. Many of them were novices (like PNoy’s inner circle) but had replaced long-standing provincial and municipal warlords. The strategies for bringing the fruits of people power to the grassroots as observed by Kerkvliet and Mojares in the book either took the form of a hard-line approach or a soft, conciliatory one.

To illustrate their point, they turned to the experience of one OIC governor in Central Luzon, a PDP-LABAN member (in the interest of full disclosure, that man was my father Noli), who had employed the soft approach in the face of repeated assassination attempts. After the election, he along with many of Pimentel’s party had been decimated through the ballot either legitimately or illegitimately . In contrast, Mayor Binay whose house was strafed with bullets in the run up to the elections survived by employing tough ward politics in Makati.

The social experiment involving the soft and hard approaches and the lessons learned from that period help to define the philosophy of the PDP-Laban to this day. The Pimentels themselves have suffered at the hands of “dagdag-bawas”. Like some battle-weary revolutionaries that later get accused of employing the same tactics that they had once raged against, the idealism of these players has been tempered by real world events. PNoy knows this, and he knows he can count on them when the going gets tough.

Where to from here?

Finally we ought to consider where this rivalry is likely to lead. Having formed a coalition ticket back in 1992 (Salonga-Pimentel), will its current incarnation be counter-productive or supportive of the president’s agenda?

Vice president Binay with his vast experience in providing effective government service at the local level and who has had one year to settle into his new role might have a head start. DOTC Sec Mar Roxas might struggle at first. He has never been in this type of role before, nor does he have a technical background.

The handing over of the DOTC to a politician may not necessarily have been an astute move from the policy angle given the pricing and subsidy schemes that it involves. Being more sensitive to public opinion with regard to fare rate hikes might cost the government more than it can afford.

On the other hand, both the housing and the transportation and communications portfolios rely on private financing; and both involve projects that are labor intensive and employment generating. Their managerial abilities in moving investments through the project pipeline and securing local content for projects will determine their success at generating employment. Here perhaps Mar Roxas will have an advantage having worked with big investors at the DTI.

The developmental state’s dual role

If we are to use the developmental state as a model for what the Philippines should be striving towards, then apart from delivering services to the socially disadvantaged, the other, and often neglected role of the state, which is to channel resources to the more productive ones, has to be attended to. The growth sectors of the economy are after all the main sources of additional taxes used for expanding redistributive programs.

If one looks at the Philippine Development Plan, the main objective of which is to generate faster, deeper and broader growth, one finds a succinct diagnosis of the current situation:

Low growth is due to low investment and slow technological progress because of inadequate infrastructure, as well as glaring gaps in governance. Narrow growth, meanwhile, is largely attributed to lack of human capital formation among the poor and the failure to transform output growth to job creation.

To address this, the Plan aims to unlock investments in infrastructure through PPPs and better governance frameworks and re-distribute the growing revenues from a more productive economy through social development. If one looks at the 2011 budget, this intent is backed up to some extent by an increase in allocation to the secretaries of transport and communication (of about P14 billion), education (about P20 billion) and social welfare and development (about P20 billion).

To manage these resources and implement the Plan well will require dedication and perseverance from all the president’s men. Let us hope that this rivalry within his cabinet produces the kind of healthy competition or constructive engagement required to produce positive outcomes. If it doesn’t, it could spell the end of the people’s faith in their brand of governance.

BFFs, NO! Developmental State, YES!

For all its talk of good governance and economic reform, PNoy’s government seems to be struggling at both. It needs a circuit breaker to change its current trajectory.

Last week, two surprise announcements were made. Well perhaps one was a surprise, the other was to be expected, but shocked a lot of people nonetheless. The first had to do with the resignation of Jose “Ping” De Jesus as secretary of the DOTC (Transport and Communications). The second was the less than stellar growth rate recorded in the first quarter of the year of 4.9%.

According to “Mareng Winnie” Monsod, Ping De Jesus her former colleague in Cory Aquino’s cabinet resigned due to his distaste for the shenanigans of his assistant secretary, Virgie Torres, a political appointee and shooting buddy of the Benign One himself. It appears that Mrs Torres who was already on the nose for two scandals involving her alleged abuse of authority was causing interference in the way Sec De Jesus wanted to run things at the department.

What’s more is that the DOJ Sec Leila De Lima, another highly esteemed member of PNoy’s cabinet had recommended suspension for Mrs Torres pending investigation of her latest infringement. What broke the proverbial camel’s back for Sec De Jesus, was PNoy’s decision to just ask Torres to go on leave for awhile, disregarding the DOJ’s recommendation.

A pattern emerges

This case mirrors the treatment of Sec Jesse Robredo, a highly decorated public official. In that instance another shooting buddy of PNoy in the person of Ricardo Puno was appointed undersecretary and was preventing Robredo from running the agency effectively. Despite the Luneta debacle involving Puno, who again was found liable by the DOJ secretary for mishandling the rescue of hostages, PNoy once again came to the aid of his BFF (best friends forever!).

At some point surmises Mareng Winnie, Robredo and De Lima might follow De Jesus and leave the PNoy administration.

It could not happen at a worse time as the economy seems to be slowing as a result of government underspending by a magnitude of 70 billion or three and a half conditional cash transfer programs in the first quarter alone. This according to the nation’s chief statistician NSCB Sec Gen Virola dragged the growth of the economy down from 5.1% supposedly to 4.9% effectively causing the NEDA to rethink its growth forecasts for the year.

Despite the approval given by Congress before the start of the year and the zero based budgeting approach instituted which presumably cleansed the roster of projects of wasteful anomalous spending, the current administration still found itself stumbling at the gate with a review of costings delaying its spend. Senator Ralph Recto a former NEDA director general says, “Use it, or lose it.”

Unfortunately, these two events are just symptomatic of a dysfunctional state and set of institutions that continue to hound the Philippines.

The BFF phenomenon

Ferdie had his cronies. Cory had her kamag-anaks (close relatives or Kamaganak Inc), Eddie had his fellow generals. Erap had his drinking kumpadres, Ate Glo had her husband’s classmates, and Noy has his shooting barkada (update: or Kaibigan Inc as the Inquirer has put it). It’s a BFF phenomenon replicating itself with each successive administration. Despite their rhetorical flourishes, they just can’t help but stick to the same playbook.

What’s the reason for this?

Well it goes to the heart of what institutions are about, which in economic theory is all about reducing transactions costs. Let me break it down for you…

In a nation like the Philippines, where business transactions are lubricated through personal relationships and kinships, using close friends and connections are one way to minimize costs associated with screening and monitoring business contracts, partnerships and joint ventures.

So it is in running a government, the sheer size of it makes it necessary for the one appointing to efficiently select appointees to help him share the burden. So often the shortest possible route to that is appointing BFFs.

The use of personal ties does not always lead to dysfunction. In post-war Japan where the top graduates from the premier law schools were often recruited into the economic bureaucracy, a member of an incoming “cohort” would often rely on school ties to forward his or her career. In fact, companies were wont to recruit graduates from the same universities mainly because of the close connections they had with public servants in these powerful agencies.

Todai Law School, University of Tokyo: has one of the most powerful of school cliques in Japan. Alumni are well-placed in the upper echelons of government, banking and industry.

The term they used for this was gakubatsu or school cliques which are ensconced in the upper echelons not only of government, but banking and industry. Within this batsu, is the Todaibatsu, or the “bastu of all batsus” which refers to alumni of the University of Tokyo Todai Law School, whose education features a heavy dose of public administration, more like political science, and economics.

This mixture of a merit based appointment and school/class based loyalty system enabled these bureaucrats to work cohesively and professionally, which in turn permitted policy to be developed independent of local as well as international pressure or influence, to strengthen economic policy and manage public-private cooperation.

The developmental state model

In his widely celebrated book on the powerful Ministry of Trade and Industry, MITI and the Japanese Miracle, the late Prof Chalmers Johnson outlined how the Japanese bureaucratic model worked

The first element of the model is the existence of a small, inexpensive, but elite bureaucracy staffed by the best managerial talent available in the system…they should be educated in law and economics, but it would be preferrable if they were not professional lawyers or economists, since as a general rule professionals make poor organization men…

The second element of the model is a political system in which the bureaucracy is given sufficient scope to take initiative and operate effectively. This means, concretely, that the legislative and judicial branches of government must be restricted to “safety valve” functions…to intervene in the work of the bureaucracy and to restrain it when it has gone too far…

The third element of the model is the perfection of market-conforming methods of state intervention in the economy. In implementing industrial policy, the state must take care to preserve competition to as high a degree as is compatible with its priorities. This is necessary to avoid the deadening hand of state control and the inevitable inefficiency, loss of incentives, corruption, and bureaucratism that it generates.

The fourth and final element of the model is a pilot organization like MITI. The problem here is to find the mix of powers needed by the pilot agency without either giving it control over so many sectors as to make it all-powerful or so few as to make it ineffective.

What Johnson was describing is basically the East Asian economic model based on the developmental state or the BeST Consensus (BeST stands for Beijing, Seoul and Tokyo). The Commission on Growth and Development in its findings covering the factors that gave rise to rapid and sustainable growth gave a tip of the hat to the fourth element. Its term for this is “reform teams”. According to the report

The business of “feeling for stones” in fast-growing economies was often carried out by highly qualified technocrats in small, dedicated “reform teams”. Singapore had its Economic Development Board, Korea its Economic Planning Board, and Japan its Ministry of Trade and Industry.

Reform teams were not burdened with adminstrative duties, but they were given direct access to the top of the government. Malaysia’s Economic Planning Unit reported directly to the prime minister. Taiwan, China’s…Council for Economic Planning and Development, reported directly to the president. Indeed, several future heads of government sprang from their ranks: the second chairman of the Council later became president of the country.

From this unique position…the reform teams helped coordinate the government’s efforts and overcome administrative opposition and inertia.

Although technocrats unchecked by political forces can fail to balance economic with political and social concerns, political forces unchecked by technocratic knowledge can be disruptive.

In the Philippines, the closest resemblance to a “reform team” is the NEDA which creates the revolving five year medium term plans and screens development projects. The latest roll-out is the Philippine Development Plan 2011-2016.

Unfortunately, while the director general of this agency does sit within cabinet, his stature is often relegated to a planning or “secretariat” function. We also witnessed in the case of Sec Romulo Neri how the clout of the NEDA chief could get superceded by political players and personalities outside of government.

The NEDA in its original design was meant to perform the function that the cabinet cluster under EO#43 sets out to do. Under this over-arching framework, the NEDA’s sole job is to act as secretariat for one of the clusters, on economic development leaving social development, climate change, governance and justice to be handled by other lead agencies.

The Philippine reform experience

If we look at our own track record at performing economic reform, the reform teams have traditionally been held by players close to the president, a Joe Almonte under Mr Ramos or a Joey Salceda under Mrs Arroyo.  Love them or loathe them, the reforming credentials earned by their presidents (whether you agree or disagree with the type of reform is immaterial) can be credited to them and the teams that worked with them.

Following in that tradition, I formed the view that the person best placed for this role would be Mar Roxas, the president’s failed vice presidential running mate. Although EO#43 has been branded a power play on the part of the opposing faction to “cluster out” the incoming chief of staff, I believe that it has the exact opposite effect. A reforming team requires a strategic “helicopter view” of the world.

Had the E.O. pigeonholed the chief of staff like it has the NEDA chief, the occupant would be unable to move out of this administrative strait jacket. Perhaps the strongest suit of Mar is his being a former DTI secretary, which puts him in good stead with the various industry groups and the economic bureaucracy. Given his skill sets, he should be able to drive a number of key reforms across all five cabinet clusters.

It is reported in today’s Inquirer that his rivals within the office of the Executive Secretary want Mar Roxas to take the DOTC secretaryship supposedly to keep him away from the Palace. Given the shambolic state that the administration currently is in, with its rookie student council style of governance, the presence of a veteran like Roxas might help steady the ship and keep it on course.

Conclusion

If the government of the Benign One ever hopes to dig itself out of the rabbit hole it has dug itself in, now is the time to do it. It will have to show its reformist credentials soon. The paternalistic state was one where BFFs thrived. It was compatible with the misplaced faith in “the Market” to deliver its citizens into the promised land of economic prosperity wherein the state played a diminished role.

As inconsistencies between the outcomes of this model and what it predicts has become apparent, perhaps our leaders will realize that the responsibility for charting our own path lies in our hands and not that of foreign aid donors and advisors. Perhaps this “re-awakened sense” of self-determination is the vision lacking in all our plans.

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.

Promises Promises (you knew you'd never keep)

Yesterday, it was reported that the Finance Department was preparing a new raft of taxes for next year’s budget. Having promised “no new taxes” at a speech to prominent businesspersons and having by and large kept to that declaration during his first year in office, the president apparently has given the go ahead to pursue new ways of raising revenue.

With the conflicting policy goals of increasing the years of basic education to 12 from 10, creating universal health coverage, expanding social safety nets via the conditional cash transfers while at the same time reducing the deficit and bringing the budget within 1-2% of GDP, the Cabinet has finally come to the conclusion that intensifying tax collection efforts simply won’t be enough.

Here is the full transcript of the president’s speech at the Makati Business Club back in January 2010 during the heat of the campaign. It was in this speech that the then candidate Aquino declared, “We will refrain from imposing new taxes or increasing tax rates.” During the Q&A that followed, he clarified that this meant no new taxes were intended and were to be used as a last resort.

Even the MBC executive director at the time Alberto Lim hinted (if you read between the lines) that he did not believe this was even appropriate. Evidently that pledge has been interpreted by Cabinet to mean “no new taxes at least during the first eighteen months of his administration.” It appears that the Run After Tax Evader (RATE) and Run After the Smuggler (RATS) schemes cannot be expected to raise revenues by the required margins as the experts had predicted.

The sad thing is that the short window of opportunity for undertaking tough fiscal reforms may have passed by the time they introduce such measures in Congress. Next year, 2012 is an election year. With the proposals on the table being:

  • an increase in the excise tax on tobacco and alcohol,
  • an increase of the VAT rate to 15%,
  • the scrapping of redundant fiscal incentives to smugglers businesses operating in special economic zones,
  • a national real property tax assessment coursed through local government units and deducted from their Internal Revenue Allotments,

it does not seem likely that our representatives will have the appetite to enact them. Sen TG Guingona III who hosted the Open Budget Partnership forum on Tuesday seemed to admit that the measures though “sensible” were politically unpalatable. Never mind that in exchange for the “pain” of these measures, the public will “gain” through reduced corporate and income taxes. The dream of every tax economist is for a flatter simpler system to administer. This is seldom ever achieved in the lobby-ridden halls of Congress.

Window Closed

The time according to former Budget Sec Ben Diokno for instituting such tough measures would have been early in the term of a president (first six months), when his public support is at its highest and a few years from the next election to allow the sting of reforms to wear off and the public benefits to set in. Unfortunately this president chose to delay doing the hard yards until now.

This puts his spending programs at risk. Either way, something will have to give. The government will be forced to either scale back its social services spending or say good-bye to any possible credit upgrade. In all likelihood, it will end up somewhere in-between with half baked spending programs and a mediocre budget position. Society will not gain from an optimal level of social service, and the business sector will not benefit from lower costs of borrowing.

If only candidates were made to cost their campaign promises (as I had advocated during the campaign season), the President would have realized early in the day that a “no new taxes” pledge would be the undoing of his social compact. I recall during the campaign season being challenged on this issue in Manolo L Quezon’s blog site during the unveiling of the Liberal Party’s (LP’s) platform.

My claim was that party platforms usually came with budget impact statements. If you make a campaign pledge to introduce two more years of high school for instance, you need to estimate how much additional spending will be required and how you will finance it. I was told that being in the opposition prevented the LP from performing such an exercise. I challenged this view based on the fact that the LP had a former education secretary (Butch Abad) as an advisor, a recent NEDA secretary general (Ralph Recto) among his senatorial line-up, and the presidential candidate himself who claimed to be knowledgeable of the budget..

Just like Aquino I before him who promised to “honor all debts” whether they be tainted with corruption or not, the pledge of “no new taxes” by Aquino II might have bound the hands of this administration and caused unnecessary damage to its social reform agenda.

My concern was that such platforms turn into sweet nothings after the election, and that issuing such promises without costings was irresponsible. In the previous UK elections for instance, the Liberal Democrats under the now Deputy PM Nick Clegg which for a time was tipped to upset the major parties, prepared a fully costed first year’s budget in their manifesto hoping to project an image of a party ready to govern. Of course after having formed a coalition agreement with the Conservatives, they had to backtrack on some of these pledges, but the point is, in these mature democracies, if you want to be taken seriously during the campaign, you need to engage in serious pencil pushing and numbers crunching before formalizing your manifesto.

(Note: The reason why this is possible under the parliamentary system is that during the formal campaign when the government goes into caretaker mode, the bureaucracy is made accessible to the Opposition. So any costings for any planned effort can be run through the treasury department. But even so, under the presidential system in the US, a number of think tanks and advisors proliferate that would allow for such calculations to be made. The same applies in the Philippines.)

The other problem for me was that certain party nominees for the Senate had not signed on to the LP platform. If you for instance adopt responsible parenthood as one of the key planks in your program of government, then all those who run under your banner must sign on to it. How can you endorse someone opposed to it? It should be a condition of joining the team that each nominee must commit to support the proposed policies embodied in the document. The fact that they weren’t required to do so (TG Guingona and Ralph Recto oppose the RH bill or have serious reservations), shows how “airy fairy” these pledges become.

Aquino I and II: uncanny similarities

Just like Aquino I before him who promised to “honor all debts” whether they be tainted with corruption or not, the pledge of “no new taxes” by Aquino II might have bound the hands of this administration and caused unnecessary damage to its social reform agenda. A similar parallel can be drawn in the case of the CARP and the RH bill. Under Aquino I the legislation on agrarian reform was stalled until the more conservative forces in  congress could water it down. The RH bill seems to be suffering a similar fate due to the weak support being received from the president in the face of stiff opposition from the conservative Catholic bishops conference.

So as we approach the final quarter of P-Noy’s first year in the Palace, we probably should load up the karaoke and sing along with Naked Eyes. This is probably the only solace we will find in the wilderness of broken promises.

[youtube]http://www.youtube.com/watch?v=2D7GVyTtH1M[/youtube]

C’mon sing along!

Never had a doubt
In the beginning
Never a doubt
Trusted too true
In the beginning
I loved you right through
Arm in arm we laughed like kids
At all the silly things we did

You made me promises promises
Knowing I’d believe
Promises promises
You knew you’d never keep

Second time around
I’m still believing words that you said
You said you’d always be here
“In love forever”
Still repeats in my head
You can’t finish what you start
If this is love it breaks my heart

You made me promises promises
You knew you’d never keep
Promises promises
Why do I believe

Arm in arm we laughed like kids
At all the silly things we did
You can’t finish what you start
If this is love it breaks my heart

You made me promises promises
You knew you’d never keep
Promises promises
Why do I believe
All of your promises
You knew you’d never keep
Promises promises
Why do I believe

Promises
Promises
Promises
Promises
Promises