In its latest release of The World by 2050 report this month, HSBC elevated the prospects for the Philippines projecting it would be the 16th largest economy by mid-century. This is in stark contrast to where the country was positioned last year, outside the top 40, a remarkable leap in the space of a year. What fundamental change occurred to merit such a fantastic rise of 27 places from 43rd to 16th place?
Actually, the upgrade in the country’s prospects began in 2005 with the publication by Goldman Sachs of a paper, which included the Philippines among the “Next 11” or N-11 countries whose GDP would rival some of the advanced G-7 nations by 2050. Earlier this year, Citibank published a paper extolling the virtues of the Philippine economy by including it among a group of “3G countries” that have the “global growth generators” or 3G’s.
From an interview with the ANC (since the bank has yet to publish its report online), the head of the Philippine country office pinned it down mostly to monetary and fiscal settings. The healthy balance of payments position, complemented by the conservative fiscal position alongside a vibrant domestic economy and positive demographics or population growth all combined to place the country on the map.
Regardless of how accurate these projections are (in the case of HSBC, the numbers look dubious, with seven percent growth on average expected from now until mid-century), there can be no doubt as to their effect on capital flows.
‘Tis the Season
As the Bangko Sentral adjusted interest rates downward as a signal to the local economy to start investing or consuming more, there was talk of yet another credit upgrade in the offing for the Philippines. We could be the next country following Indonesia to be given investment grade status by these agencies. The outlook for the country was recently upgraded from stable to positive signalling such an upgrade.
If this trend continues, it would mean a steady stream of “hot money” into our local stock market which is already soaring. It would also mean lower borrowing costs for both our government and corporations seeking to raise capital from international bond markets.
But as the ironic maxim goes in the financial community, it is when banks are willing to lend that you don’t need to borrow. As investment banks queue up to lend to the national government, it is time that they begin to assess whether they need to borrow from abroad at all, or whether it would help the local economy to utilize the excess foreign reserves of the Bangko Sentral to finance its fiscal deficit.
For one, it would enable the BSP to earn a higher rate of return compared to purchasing US treasury notes which are earning close to zero percent. Two, it would help temper the peso’s strength and help the families of overseas Filipinos and exporters. Three, it would reduce the need for the BSP to purchase dollars in the spot market to dampen the peso’s appreciation, helping the bank maintain profitability.
Bragging or bargaining rights?
The government might take all these positive developments as a seal of good housekeeping on its part. The series of credit upgrades which occurred only after the 2010 elections might certainly be construed as the market’s faith in the capacity and competence of the administration to manage its affairs.
But apart from simply bragging about being mentioned in such publications, the government, particularly the finance department, must begin to heed the growing clamor among our central bankers, leading economists, exporters and ordinary Filipinos to plan a sustainable path of development as it seeks to balance its own books.
Regardless of how the world in 2050 might appear to its financiers, it needs to demonstrate the independence and autonomy required of it to plot a course in line with the nation’s interests. HSBC and other global investment banks might simply be positioning their products to our finance people. It takes courage and resolve on their part to either use our strong position as leverage or simply walk away from the table.
Reality checks are always needed by over-confident governments.
Martin Seligman the founder of positive psychology uncovered a pattern of behavior that he believes is responsible for greater resilience and happiness among born optimists. Whenever something good happens to the subject, that person will often attribute it to him- or herself, will tend to view the outcome as something that was within his or her control, and will regard the event as part of an ongoing streak of success.
The reverse happens when something bad happens. The subject will explain it as resulting from a specific, temporary event, and won’t regard it as part of an ongoing chain of similar defeats. This way of explaining things allows individuals to persist when others would have given up and allows them to remain confident in their abilities despite facing rejection or failure.
There are advantages to having such a positive mental attitude. CEO’s take their companies to new heights, salespeople persist despite facing rejection and eventually make their quota, and athletes remain motivated to train despite facing physical and mental challenges.
Filipinos seem to be a very optimistic lot. They tend to report higher levels of life satisfaction in surveys, higher than their income per capita warrants. Regardless of how terrible the past year might have been, they will often express hope and hold a view that things will be better in the coming one. The tagline, ‘It’s more fun in the Philippines’ seems to express this innate optimism.
Such a positive view becomes quite useful for the government which will often claim credit for successes that come as a result of good fortune and blame other factors outside its control whenever things turn sour. They say every cloud has a silver lining. Despite the economic storm clouds that engulf the nation, there are many positives that may be gleaned.
The business community remains quite bullish despite the slowdown in the pace of the economy last year. The flipside of weaker growth is lower inflation, which is providing the Bangko Sentral with enough elbow room to maneuver. The expected easing of interest rates is already fuelling a spike in the local bourse.
Expect the government to claim credit for engineering this by not spending the allotted budget last year. The contraction in fiscal spending allowing for policy space for monetary authorities will be spun as a stroke of genius on the part of this government despite the fact that it was unplanned.
Similarly as our exports decline owing to weaker demand from a troubled Europe and North America, as legislative proposals in the United States threaten our budding business process outsourcing industry, and as the Iran nuclear standoff dampens tourism because of higher fuel costs, expect the government to fall back on consumer-led growth propped up by overseas remittances.
Indeed as investors seek to put their money in developing countries with internally driven domestic economies, the Philippines has been deemed ‘the economy to watch in 2012’ having weaned itself off the need to propel itself through exports or direct foreign investments, unlike China which is still managing that transition.
You can see this when you visit places like Subic Bay Freeport as I have during a recent trip. In its efforts to stamp out illegal smuggling outside of the Freeport of liquor and automobiles entering the port duty free for repackaging or re-assembly and shipping to the rest of ASEAN, the government has resorted to taxing everything that has gone in and given rebates to products moving out of the port. As a result, bottling and car assembling activities have left.
The ACER laptop plant, the main operator in the Taiwan Industrial Estate, closed shop and moved to Mexico, while Federal Express relocated its logistics hub to Mainland China. It was the main user of the airport which is now open only to chartered flights as international and domestic flights have been re-routed to the Diosdado Macapagal International Airport due to low traffic volumes. Similarly the port is below its capacity owing to the fact that most shipments still go through Manila.
Only a few positive stories remain like the Japanese pinewood fabricating plant that I saw which ships in timber from New Zealand and re-exports them as processed wood to Japan (which has a ban on logging), the Korean shipbuilder Hanjin (shipbuilding being the only heavy industry left apart from oil refining which could I am told suffer a similar fate as the bottling and car assembling), and the dock where Brazilian ships split up their cargo of iron ore into smaller vessels that then deliver these to China. As a result of the thinning industrial base, the industrial estates barely break even.
The only thriving and growing sectors seem to be in hospitality, retail and healthcare. As a source of mine who now serves in a sensitive post in Subic Bay and I reflected on this situation, we pondered how much more output a worker in the shipbuilding industry makes and earns for the country as opposed to a staff member at an espresso bar where we had convened. This is why manufacturing is much preferred as an engine of growth compared to services.
But it seems the government is no longer in the habit of picking winners. It is more focused on bringing erring justices and former presidents to trial, which brings me back to the topic at hand, of learned optimism. Despite the biological advantages of being an optimist (it is related to longer life and happiness), there are still some evolutionary reasons why pessimism as a trait still remains.
It is often the role of pessimists to protect their tribe from irrational exuberance. CEOs without the restraints of prudent accountants and risk managers could run their companies into the ground with grand visions and plans. Rogue traders with unbridled confidence in their own abilities could bankrupt centuries’ old institutions. Governments run by wide-eyed idealists could implement unrealistic policies ill-suited for local conditions.
This is perhaps one of the dangers facing this young administration as it seeks to work out its priorities in the coming year.
The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?
(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).
That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?
Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.
The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply” is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.
P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.
When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.
And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf the growth of the CCT or conditional cash transfers which cost about thirty billion.
Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.
By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.
The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:
Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
It will help prop up employment and growth which will spur increased tax collection.
It will reduce the cost of doing business for most firms, not just exporters.
It will help achieve the government’s growth target of 5-7% in the medium term.
It will fulfill the government’s own development plan and set us on a higher growth plane.
Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.
But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.
Making daang matuwid work
In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”
The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.
The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”
That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.
That is not how the government acted in seeking to put Mrs Gloria Arroyo behind bars. Rather than keep the former president guessing as to the date when formal charges against her would be laid, President Aquino announced back in September what the timetable for it would be. Here is how he phrased it,
We will start filing the cases before the end of this year and with a little cooperation from the judiciary, maybe we can put some of these people in jail next year.
This signalled to Mrs Arroyo that she had to make travel plans as soon as possible, which then forced Justice Secretary Leila De Lima to take it upon herself to place the congresswoman under a departure watch list to keep her in the country even before preliminary investigations were concluded. This according to one justice meant that De Lima was now “more powerful than the court“ which can only do the same “after the filing of the information and the issuance of an arrest warrant“.
“With a little cooperation from the judiciary”: those words of P-Noy now seem ominously prescient of events as they unfolded because straight after thwarting an attempt by the former president to leave by disregarding an injunction from the high court on the watch list order, the government then turned to a joint panel between the Comelec and the DOJ set up to look into electoral fraud to file a case before a regional trial court against Mrs Arroyo. This timeline shows that within the space of a few hours upon receiving their case files which numbered several thick ring binders, a judge issued an arrest warrant.
Had this judge not been so “cooperative”, Mrs Arroyo might have successfully fled the scene since the Supreme Court had by then thrown out the government’s appeal to have its injunction on their watch list order lifted. And so despite the fact that it had foolishly forewarned the former president of its intended moves, the government somehow managed to keep her in the country long enough for an arrest warrant to be served.
In the process of doing so, however, the government may have committed a few grave mistakes. These might come back to haunt its case. Certainly if it is found that it acted inappropriately, the president needs to own up to it because it was he who set the wheels in motion that eventually landed the government in a whole heap of trouble. Particularly with respect to his campaign promise to uphold the rule of law, P-Noy will be ultimately responsible if it is determined that his government usurped judicial powers or acted in contempt of court.
(O)ur lawyers all know that it takes the Supreme Court 10 days, normally, to attend to motions, and it decides to issue a TRO for Mrs. Arroyo in three, who can avoid wondering what she did to merit such speedy relief?
And yet the president doesn’t see the irony of his position because the government was quite happy to get a lower court judge to issue an arrest warrant on his adversary in a matter of hours, which was a far more difficult decision to make. Certainly, when it comes to fostering the rule of law, what this government has in mind is something quite different from the standard.
Like a thief in the night–that is how the Hacienda Luisita decision was handed down by the high court in the midst of all this. Oral arguments had been heard and the judgement of the court had been pending. No one knew the day or time when it would materialize. Suddenly either by coincidence or by design the justices rendered a unanimous vote in favour of the farm worker beneficiaries to have the Aquino-Cojuangco estate title transferred directly to them.
Having justified its bold and decisive actions against the court’s injunctions because of the ensuing confusion surrounding it, the government through its spokesman immediately informed the public that it would respect this particular decision as public support had been mounting in favour of it. The only caveat was for the determination of ‘just compensation’ for the president’s relatives and other issues that the court still has to settle.
The initial action by the Arroyo government to revoke the stock distribution option taken by the Cojuangcos in complying with the agrarian reform law was suspect according to US officials based on confidential diplomatic cables as a form of retaliation by Mrs Arroyo on the matriarch of the Cojuangco clan for supporting calls for her ouster back in 2005. What the Supreme Court ruling now does is open up the possibility for a counter-retaliatory move on the part of Mr Aquino against the Macapagal-Arroyo clans who also own sugar plantations.
This tantalizing opportunity could reverse the destructive pattern of competition by ruling elite factions to accumulate wealth through landholdings using the weak system of property rights in the country in order to consolidate power. Now in a bid to weaken each other, these same ruling elites might now work to dismantle each other’s landholdings. Given that one faction controls the executive and another holds the sympathies of the judiciary, this feud might actually produce something positive for the country.
Like a thief in the night—that is not how events overtook this government on the economic front. For one, the debt crisis in Europe was unravelling like a train wreck in slow motion for several years now. The seeds of this crisis were actually sown during the last one when governments pumped liquidity into their banking systems and engaged in stimulatory fiscal spending. It was only a matter of time before bond holders began to raise the cost of public debt.
The government had ample time to prepare the nation for this crisis, to bullet proof it by sustaining demand through public construction and investment. The early warning signs that its fiscal consolidation was going too far and actually dampening growth in demand were quite evident during the end of last year. The government had ample opportunity to correct its course and make the necessary adjustments. It may turn out in the end that a transition to a new government may have caused unnecessary disruptions to patron-client networks in the bureaucracy. Reconfiguring these networks took too much time.
Finance officials might have taken this as a welcome blessing as the slow spend rate allowed them to limit the fiscal deficit while sticking to the president’s no new taxes pledge. Meanwhile,with the fiscal space it had from fiscal consolidation, it cut tariffs on certain industries. It balanced this decision by removing power subsidies to exporters in special economic zones. These could threaten the growth of some industries and lead to the closure of others at a time when global demand for our exports is already weakening or restructuring as some economists have noted.
The biblical phrase “like a thief in the night” comes from the parable of the ten virgins found in the canonical gospels of the New Testament. It is also known as the parable of the wise and the foolish virgins. The five virgins who were prepared for the bride-groom came to his wedding feast, while the other five who weren’t were excluded. It has an eschatological message: to be prepared for the day of judgement. The final reckoning.
With the second coming of the Aquino dynasty, will the country be prepared to pass the test? Or will it simply slip into oblivion? The day of judgement is nearly at hand!
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.
Among the nations in the developed world that follow in the Westminster parliamentary tradition, the most eagerly anticipated policy speech by the government is not the state of the nation address but the budget speech.
The budget tackles not only the spending side, you see, but the tax side as well. On budget night, citizens find out if they are to get some form of tax relief. They also look for any additional spending on things they directly benefit from, like schools, hospitals or infrastructure.
The rich nations that make up the OECD (Organization of Economic Cooperation and Development) have varying levels of taxation. The Scandinavians typically tax more and provide a high degree of social insurance and welfare. The Anglo-American nations of the UK, US and Ireland tend to have lower taxes but provide a smaller safety net for their people.
Australia, the nation I am most familiar with seems to have the best of both worlds, with a tax take much lower compared to the Nordic countries but providing a level of social insurance and welfare comparable to them. That is because its tax and spend policies are some of the most progressive in the world.
Australia spends about 16 per cent of GDP on cash benefits (pensions, unemployment insurance, healthcare and community services) compared to an OECD average of just over 19 per cent. It is able to keep this expenditure down by means-testing benefits enabling it to target spending on those that most need it. Its tax take is about 27 per cent of GDP compared to an OECD average of close to 35 per cent. It is the sixth lowest-taxing country in that group.
Rich country, poor country
It is perhaps in this light that we need to focus on the Philippine tax and spend situation. Most poor countries are able to generate only as much as 20% of GDP from their tax systems. Yet the demand for public service is much higher than in advanced economies. The Philippines is no exception.
In 2012, the government projects it will generate about 1.5 trillion pesos worth of revenue out of a domestic economy that is expected to reach 11 trillion or about 13.6% of GDP. In the current year 2011, the government projects to earn 1.4 trillion out of an economy of 9.9 trillion or 14.2% of GDP. In 2010, the ratio was 13.3% (based on DBM papers).
In 2012, due to its low tax take and with a budget of 1.8 trillion, the government will incur a deficit of 286 Billion (up from the original 260 B) or 2.6% of GDP. That is compared to its projected deficit in 2011 of 300 Billion worth 3% of GDP and 314.5 Billion for 2010 or 3.5% of GDP.
Social services which include education, health, housing and land distribution are programmed to consume 556.2 billion pesos or 30% in 2012. That compares with 529 Billion in the current year equal to 31% of the budget in 2011 and 399.3 billion in 2010 worth 26.2% of that year’s total spend.
Among the social services, education takes the largest share. Next year it will amount to 309 billion or about 2.8% of GDP. This is up slightly from 2011 which was 272 Billion or 2.7% of GDP and from 2010 which was 225 billion or 2.5% of GDP. By contrast, Singapore and Thailand spend anywhere from 3.5-4% of GDP on education. Malaysia spends from 5-6%. If we were to match Thailand’s education to GDP ratio, we would need to spend an additional 70 billion on education.
As for health, next year’s budget includes 59 billion or 0.5% of GDP, up from 48 billion in the current year (0.48%) and 36 billion last year (0.39%). In contrast, Singapore spends about 0.9-1.5% of GDP, while Malaysia spends 1.8%, and Thailand 1.2-3%. If we were to match Singapore’s ratio, we would need to spend about 40 billion more on health.
Finally in housing, the 2012 budget contains 14.5 billion worth of spending or 0.13% of GDP compared to the current year’s 21 billion (0.2%) and 12 billion (0.13%) from 2010. Singapore by contrast spends about 1.8-2.5% on housing. Malaysia spends 0.3-0.6%, and Thailand spends 0.5-1%. If we were to simply match Malaysia, we would need to double our current spend by another 14 billion.
Living within our means
Judging from the magnitudes and ratios alone, we can plainly see that the country will continue to lag behind its neighbors in the region when it comes to providing basic social services for its citizens. As a result, it has much higher levels of poverty and inequality and lower levels of human development among the ASEAN-5.
If you take out the possibility of tax reform, “living within our means” confines the budget department to look for savings and improve the structure or mix of spending to improve the quality of the spend rather than the quantity. Past studies have shown that our education spending is already quite progressive, while that of our health sector tends to be regressive with its focus on the tertiary hospitals in urban centers rather than on primary healthcare in the community.
Certainly, there are opportunities to improve the progressivity of our spending program in health. One problem is that our health system follows the model in the US, Europe and Japan which relies of specific contributions. Those who earn more tend to receive higher reimbursements. While in Australia, health expenditures are financed from income taxes, but then are spent in a more egalitarian way by means-testing recipients so that those who earn more tend to pay more out of pockets than those who earn less.
Can afford more
The orthodoxy of constraining the budget because we have to live within our means can of course be challenged by simply asking the question, can society afford to pay more?
From his State of the Nation Address, the president hinted that we probably could afford to pay more when he cited to his own disbelief the close to two million self-employed entrepreneurs and professionals who declare incomes beneath the minimum wage. The BIR has said subsequently that it believes that the current 10 billion raised from these individuals should actually be about 100 billion.
Aside from professionals and self-employed individuals, the corporate sector might also afford to pay more. That is according to a five year old study by Dr. Renato Reside. His work showed that a very low correlation between investments approved by the BOI and PEZA with actual capital formation in all regions except Regions 4 and 7. He concluded that since investments did not materialize companies were simply using their fiscal incentive privileges to engage in tax avoidance. The recipients of such incentives read like a who’s who of Philippine business elite according to Dr Ben Diokno.
Because companies under this scheme are also allowed to sell as much as 50% of the goods they produce to the domestic market, Dr Reside also believes that much revenue is lost. According to him, back in 2004, we were losing as much as 59 billion pesos from revenues on imported capital goods, 135 billion on imported raw materials, 10.5 billion on the use of domestic capital goods, and 44 billion on income tax holidays provided to these so called exporters. If even half of these were recoverd, it would be an additional 125 billion in revenues.
Another form of tax incentive is provided to sin products because of the non-indexation of taxes imposed on them. It is an incentive because every year the prices of these products go up, but the taxes imposed on them don’t. Government revenues are eroded over time. By gradually increasing the taxes along with the rise of prices in general, the additional revenues from sin products estimated to be as much as 70 billion annually could help beef up our infrastructure which in 2012 will be 270 billion a mere 2.5% of expected GDP.
Indeed, from the combined tax breaks given to entrepreneurs, professionals and corporations, our society could afford to bridge the gap in social as well as economic infrastructure. We could become a more inclusive society. With a combination of better policies and stricter enforcement in revenue and incentive granting agencies, by renovating our economic bureaucracy, we could produce a more progressive tax and spend system.
Strange but true, the cat calls made by Mrs Arroyo and her allies have goaded the P-Noy administration to return fire.
Over the weekend, as the country suffered from the effects of yet another powerful cyclone, there was a different kind of disturbance inserted into twitterverse with Congresswoman Mitos Magsaysay and Deputy Presidential Spokesperson Abigail Valte quareling over the economic legacy of Mrs Arroyo.
The tempest in a teacup was over whether P-Noy was up to the task of maintaining the momentum. Today, the Cabinet’s chief ideologue, Budget Sec Butch Abad joined the fray. From the government’s official gazette, Abad was quoted as saying
It is amusing at the same time galling for Congresswoman Gloria Macapagal-Arroyo to lecture President Noynoy Aquino about building on the gains of her government. The first question that comes to mind is what gains? The people’s gains, or her gains? …Prudent expenditure took a back seat to political survival and political patronage during the previous administration.
It is worth noting that whenever the opposition bring up Mrs Arroyo’s glowing economic credentials, the administration can only point to the waste and alleged corruption in her government as a counterargument.
In its second year, having made good on its promise to clean up processes for procurement, the government is now prepared to make good on its promise to bring about better economic outcomes. It is hoping to do this with an 8-12% boost to its budget in 2012 (after a nominal growth of 2% last year) and a re-alignment of physical infrastructure spending to social spending for the remainder of 2011 (having missed the chance to spend on the former during the dry season).
At this point, the administration seems vulnerable on two fronts, the first being that it has not delivered on its clean government completely having fallen victim to potential charges of cronyism, the so called KKK (kaibigan, kaklase, kabarilan). The second one has to do with the less than stellar employment and growth figures in its first year.
The real subtext of the opposition’s attack is that P-Noy’s government has been inept at delivering both good governance AND growth. With stiff economic headwinds from a souring world economy over the next twelve months resulting from austerity measures in Europe and the US, the government’s growth target of 5-6% may be difficult to attain given the weak first half of the year.
Key to the attainment of the government’s growth projections will be its ability to attract foreign direct investments as fund managers look to emerging markets to offset the bleak outlook in the West. The problem is that during the first three quarters of his presidency, investments from abroad have sunk. While the slack may have been made up for by domestic investors, the same cannot be expected to hold true in the future after domestic pent-up demand for new plant and equipment runs out.
Should the public private partnerships fail to gain traction in a timely fashion, it could spell the end for investment prospects in the latter part of the year. Having staked all its eggs in the PPP basket, the big risk is that the absence of an alternative economic strategy or Plan B could lead to a loss of public support for this government. Having refused to look at new taxes, the government’s revenues and spending capacity are totally dependent on the economy growing as expected.
From psychology we have learnt that the mind can only distinguish things in contrast to others. That is why we can relate to stories that use binary opposites (good versus evil, light versus darkness). Our eyes are not trained to see a black strand when it is set against a black canvass. We need to see things in black and white.
The same goes for the narrative of this government. Its legitimacy came from distinguishing itself from the previous administration in terms of honesty and integrity. Its continuing popularity is based on its ability to make that contrast.
When it was in opposition, it claimed that Arroyo’s economic record was tarnished because it was not able to translate economic growth to the welfare of its citizens. It claimed it alone could do that through a good government agenda. Now that it is in government, it is finding that its own economic management is being called into question.
The nationalist legislator Teddy Casino, an ally of the president has stated that the main reason why the economic performance of the Aquino administration does not differ from the Arroyo regime is not because it has failed to address good governance, but because it has failed to set a different economic agenda. He may not be too far off the mark.
In the end, the tendency of governments to turn to patronage as a form of political survival is not due to their failure to bring about good governance, but because of their failure to make economic growth felt by the broader community. For this reason, the charge that P-Noy is doing nothing new, may be the most damaging of all.
The book examined the EDA, an agency that still exists today and is located within the US Department of Commerce to show how policies conceived with the best of intentions at the top, get corrupted and bungled on the way to implementation. It is a cautionary tale on the limits of idealism and noble intentions, a vivid exposition of that oft repeated phrase that the road to hell is paved with good intentions.
There can be no more apt way to depict the manner the PNoy presidency has conducted itself during its first year in office. The Filipino equivalent, which goes, maraming namamatay sa maling akala (or many perish because of false assumptions), also rings true. The president to be sure entered the Palace with nothing but the best of intentions propelled by the highest hopes of the people with a vision for
a re-awakened sense of right and wrong, through the living examples of our highest leaders…a collective belief that doing the right thing does not only make sense morally, but translates into economic value as well (from the Liberal Party’s Social Contract).
The movement that had pushed him to enter the derby wanted a person whose reputation would contrast with the existing field. The election was to be framed as a contest between Good and Evil, Light and Darkness, anchored on the moral superiority of their cause.
When he announced his candidacy, Benigno “Noynoy” Aquino used the words of an admirer to capture the moment, in that “we can finally dare to have hope once more.” He was declared the Philippine equivalent of Barrack Obama, whose book The Audacity of Hope inspired the 2008 presidential campaign slogan, Change We Can Believe In.
(t)hrough good governance in the coming years, we will lessen our problems. The destiny of the Filipino will return to its rightful place, and as each year passes, the Filipino’s problems will continue to lessen with the assurance of progress in their lives.
During his first formal address to Congress, the president stated that the nation faced a fork in the road. On the one hand was the quick and easy path that led to destruction, while on the other was the long and arduous one that led to deliverance. He pledged to take the nation straight down the Righteous Path or Daang Matuwid.
In his first budget statement, he fulfilled a campaign pledge to institute a zero-based budgeting approach to weed out anomalous projects and programs. Only those considered necessary and above board would receive funding. On balance it was a frugal budget, less than 2% above the previous year’s before accounting for inflation, which meant that he had effectively shrank the government. This was meant to give himself a fighting chance to fulfill his “no new taxes” pledge to businessmen at the big end of town.
All of this was in keeping with the vision for a country with a new set of morals that would translate into economic value.
Well it seems that in their bid to control government waste and corruption, the administration has unintentionally created a situation where much of its programmed spending was held back (up to 20% in the first quarter alone). The massive withholding of spending amounting to close to 70 billion pesos in the first four months of the year (which when we factor in negative multiplier effects is really around 100-150 billion pesos or 1-1.5% of GDP) appears to have had an adverse impact as contractors stopped hiring and in fact layed off more workers.
This occurs at a time of rising cost of living presssures and as a fresh batch of new graduates are about to join the labor market. Despite spending more on conditional cash grants to alleviate the plight of the poor, the actions of the palace seems to have made life much worse for many of them. The government in effect seems to be giving with one hand while taking away with the other.
It seems that in seeking to treat the symptoms of moral degradation and heal the body politic, PNoy forgot the first maxim of the Hyppocratic Oath, which is to do no harm. Indeed as it nears the end of its first year in office, the government of the Benign One appears to have very little to show for its posturing on institution building and bringing about greater economic benefits of a cleaner, moral government: perhaps a case of great expectations dashed once more.
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.
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.
The last thing the president needs to secure is credible commitment in support of his social compact.
There are several commitment problems in the strategy and vision of the benevolent one’s regime. For one, there is no way of knowing whether its budgets will be worth the paper they are printed on given the kind of expenditure contractions they are forced to exercise whenever revenues fall short. Secondly, the deadlines of several strategic infrastructure projects keep being delayed as contractors miss important milestones. Thirdly, the lack of party discipline in enforcing its program of government has impeded progress on a number of fronts.
From reform to de-formed budget?
Currently, the administration may have a social compact with several programs in the pipeline–an expansion of basic education, health coverage, and social insurance programs–but no sure way to fund them. The reform budget could very well turn out to be a de-formed budget. The pipeline could very well turn out to be a pipe dream.
That is unless the president finds a way to rally his forces behind his vision. That vision includes an expansion of the role of the state, but at the moment the fiscal component of that vision is the weakest link. Among the rich countries of the OECD, the general size of the state is about 30-40% of GDP. Even some emerging economies like Brazil are able to achieve that ratio.
For developing economies the size of government is limited to 10-20% due to a small formal sector and narrow tax base. At the start of the global financial crisis in 2008 when the fiscal position was nearly in balance, public revenues and expenditures had leveled off at about 17% and 16% of GDP respectively.
Budget analysts believe it has to be restored to 18% which is what it previously had been prior to 2003, to resource social programs adequately. In 2009, the tax take declined to 14.6% of GDP, while a stimulus program made expenditures go up to 18.4% increasing the budget gap to 3.9%. In 2010, that gap was down to 3.25%.
With an 10 trillion peso economy in 2011, a one percent rise in the tax take would rougly equal 100 billion pesos. It would cost the government around 300 billion pesos to plug the fiscal gap, while it would need another 100 billion to pay for its social compact. Nearly half a trillion pesos is roughly 4% of GDP. Budget experts believe going after tax cheats would raise around half a percent of GDP in revenues. The remaining 3.5% (350 billion) has to be sourced elsewhere. Assuming we are content to keep an annual deficit of 1-2% of GDP, then that would mean finding a way to raise between 150-250 billion pesos from the tax and revenue system.
Without a carefully considered roadmap for raising revenue, a credible commitment towards meeting the vision would be wanting. The notion that we can aspire for greatness without the required sacrifice is nonsensical. Tradeoffs have to be presented to the Filipino people, not the hopeful “stretch targets” provided by our economic managers.
Secondly, many equate improved governance with smooth running public transport and infrastructure. The poor state of our airports, seaports and railways is another reason why a credible commitment on the part of government seems to be wanting. Having resorted to the “magic of the market” to construct most of our major projects, the state failed to resource the screening of the private contractors properly.
As a result, an inadequately designed and costed project like the North Railway line was approved leading to subsequent cost adjustments to the tune of half a trillion pesos without any substantial improvement in its quality or completion rate. This railway is crucial to connecting the two major airline hubs in the country. The original delivery date was 2010, then it got pushed back to 2013 and now it seems it will be 2015.
Similar problems have hampered the upgrade of airports, highways and transit systems around the metropolis. The administration has partially adressed this situation by appointing competent cabinet secretaries over key portfolios. This will help ensure that future public private partnerships are screened properly. It does not necessarily address the problems of past faulty contracts.
A government takeover of failed projects and subsequent re-bidding seems to be the answer to a number of them, but will this kind of contractual failure continue to hamper projects in the future? Properly resourcing the agencies that examine their commercial viability with competent staff is a must for that to be avoided.
Finally, party discipline while it seems to be upheld in the impeachment of the ombudsman, seems to fall apart when it comes to important pieces of legislation. Certain senators that ran under the president’s banner do not support his entire platform of government.
This anomaly needs to be addressed. The expansion of conditional cash transfers and the reproductive health bill are two vivid examples. There needs to be a kind of credible commitment towards important pieces of legislation. Such a smorgasborg of support in the upper chamber continues to hound our presidential form of government.
In a chamber where every vote counts, this kind of feeble partyline is a hindrance towards achieving the vision. Certain institutions have to be designed and built prior to the congressional elections of 2013 to improve on this. One such institution could be the drafting and signing of a common agenda. This has to be developed if we are to see any meaningful development in our political culture. Not penalizing political turncoats is one thing, but not imposing a cost for party membership is another.
Conclusion and Recommendations
At the start of this series, I said that the president needs a roadmap that focuses on the big picture of his administration. Before he gets bogged down too much by official duties, he needs to create space and time for him and his team to have a re-think about their current strategic priorities.
This could be an opportune moment for that. He needs to first of all discard the outdated mental models he used earlier to define the role of the state under his presidency. He also needs to scope out his role as the guy who focuses on “that vision thing” and to focus on steering while allowing competent managers to do the rowing for him. Finally he needs to find a way to engender credible commitment towards his broad agenda.
The manner by which he accomplishes these three things will determine to a large extent how successful his administation will be and how he is remembered. Although he may have had a slow start, there is still time for him to recover, regroup and regain momentum.
The following are a number of policy recommendations for the president to consider at this time:
Policy recommendation #1: create a strategy unit within the office of the president to draft a strategic roadmap based on a long-term view but with action items to cover the next five years.
This strategic roadmap would look at the long-term trends that impact the social, economic, cultural, environmental and physical development of the population and align inter-agency goals and strategies for meeting these challenges.
The rolling mid-term development planning system which is managed by the NEDA is not strategic enough. It needs a higher level plan which models projections for the country over the next twenty to fifty years to frame the policy direction needed to shift the country into a higher growth trajectory.
The NEDA which is a technical agency used for asssessing development projects has no coordinating role in terms of implementing the medium-term development plan. A more central agency located in the Palace needs to take on the role of coordination and monitoring.
Policy recommendation #2: convene a commission to review both the revenues and expenditures sides of the budget.
The purpose of this commission would be two-fold: (a) to lay down a multi-year expenditure program for the attainment of the social compact and/or the fulfillment of the Millenium Development Goals, and (b) to determine the kind of tax structure that would produce the kind of revenues needed for meeting (a) in an efficient, effective and equitable manner.
Unlike the current revenue projections of the government which are based on “stretch” targets for the different agenices, the commission should take a dispassionate view towards what the revenue picture would realistically be over the medium-term given the current tax structure in place.
It should then determine how to reform the present system to account for any structural gaps that exist in our fiscal position. An eminent person well-versed in both the theoretical and practical side of instituting tax and spend reform should be appointed to head this commission. Its report should form the basis for proposed legislation.
The beauty of having a review of both the tax and spend sides of the budget is that it should allow the administration to propose to the Filipino people a price tag for a better equipped government in 2013. The nation has to be faced with a tradeoff. There ought to be no more free lunches (what I mean is no promise of a promised land without tough choices). If we want government to provide for better services, then we must be prepared to bear the cost.
The commission would allow the Palace to deal with the politics of tax and spend reform. Having an independent body provide advice would de-politicize the process. It would form the basis for a program of government which could be put to the people in 2013. Victory for the administration party would translate into a mandate for such reforms.
Policy recommendation #3: improve discipline within his coalition by imposing rewards and sanctions to its members who fail to toe the party line.
Within the ruling party, there should be a time and place for differences of opinion to be threshed out. A joint legislative-executive party caucus comprised of elected members of both congress and the executive branch needs to be convened to affirm their position on many legislative proposals.
A “contract” must be drafted and signed that would commit members towards the enactment of crucial bills and building of support for it among different constituencies throughout the country. Those that rode on the coat-tails of the president all the way into congress and local government posts need to know that there is a price for doing so. That price is to adhere to party rules and decisions.
Underpinning these recommendations is a basic philosophy regarding the correct role of the state. The old Washington consensus supported a declining role for it and concurrently a lower level of taxation to “starve the leviathan”. The new balanced consensus recognizes that the state needs to be robust enough to engage with the market.
The role of strategy within government is to pose critical questions to policymakers involving tradeoffs. We can continue on the road we are on with a feeble state unable to raise revenues and pay for its programs adequately, or we can change course and have a state which has the capacity to make credible commitments towards commonly held objectives.
Those that seek to succeed him in 2016 must see it in their interest to support the success of this presidency. They must find themselves all in the same boat and be willing to work cooperatively to get the job done. All the president’s men must see it in their interest to keep the administration’s support afloat until he steps down in 2016.
The task of the president now is to determine how to navigate in this terrain. Beyond the 24 hour news cycle, the palace has to focus on the long-term frame. The president himself needs to devote a good proportion of his time and energy in developing this grand vision and oversee the development of a roadmap that brings us closer to it within the next five years.
The ProPinoy Project is a Global Community Center for all things Pinoy, to connect Filipinos at home and abroad by creating a space for ideas, trends and analyses about the Philippines and the global Pinoy community to inspire informed discussion and transformative action.