fiscal sustainability

Reformists and Populists

The debate over policies needed to make permanent progress achieved under President Aquino’s rubric of Daang Matuwid (the Righteous Path) has not happened yet and perhaps never will.

Reformist measures are best kept close to one’s chest, not announced until they are actually implemented. That is because these measures often involve some pain to be borne by some section of the community, which essentially leads to votes being lost rather than won. In contrast populist measures are worth shouting from the rooftops since they appeal to voters but don’t necessarily make for good policies once in office. That is the quandary facing the administration as it campaigns for its senators for the coming election.

Just cast your gaze on the Team Patay (Death) slogan foisted by the clergymen against the administration’s ticket in protest over the passage of the reproductive health bill which the government facilitated over the church’s objections. Team PNoy candidates act surprised although they could’ve seen it coming. One way for them to take the heat away from this issue however would be to focus on their plans to introduce reforms to expand insurance coverage and make health care more affordable using the taxes to be raised from the sin tax law which was another major landmark piece of legislation the government achieved.

But they have for the most part refrained from outlining a vision for the health care system, allowing other players in the UNA coalition to establish their own credentials in the area. By ceding control over the health debate, the administration is underplaying the tremendous hand it holds–it alone can credibly put forward a detailed, costed program of health reform that would lead to millions more Filipinos enjoying better benefits from its health spending.

This is particularly disadvantageous to candidates like Risa Hontiveros who is outside the winner’s circle, given her stand on the reproductive health issue. Her candidacy could be given a significant boost if she were to be identified as the future architect of health reform in the senate. Ms Hontiveros should be given the role of explaining the planned reforms to come in this area and be given a policy team to help scope out what those reforms should be. Instead, due to the lack of such assistance, her policy pronouncements in health have necessarily been vague and non-committal.

Secondly, consider the conditional cash transfers program, which the present administration considers its “cornerstone” in its fight against poverty. The World Bank recently released a report on the first stage of the program. Its findings were for the most part positive-places that were targeted by the program were found to have significantly higher levels of school participation and better health outcomes compared to similar areas that were not targeted. In fact, in areas where the program was not so successful, e.g. maintaining retention among older age groups of children, the study suggested extending the program beyond the current five years.

This would provide a solid basis for the administration to claim credit and to bat for a continued ramping up of the program, but there hasn’t been a party-wide celebration of the findings, or a vigorous endorsement of it. Instead, the stage has been vacated to departmental technocrats to extol its virtues against its critics in the UNA coalition who have maintained the old tired line that it has been nothing but a dole out.

One candidate cunningly sought to depict the government’s prioritising of the conditional cash transfers program as misplaced,  saying it could have instead spent the money on free college education and skills training–quite a clever way to wedge college student voters against the disenfranchised indigent households across the country.

Thirdly, in making the anti-corruption and transparency measures adopted by the administration more durable, the government has failed to articulate a program of action towards this end. This is partly due to the fact that its path towards greater openness has itself suffered setbacks. Its Open Budget Index score in the latest report of the International Budget Partnership fell by seven points, meaning Filipinos have been denied full access to budget information. Despite overtaking Vietnam, Bangladesh and Indonesia in Transparency International’s corruption perception rankings, it has slipped two notches in the World Bank’s Cost of Doing Business report.

The government should be arguing from a position of strength in this area given the president’s reputation as an honest leader in contrast to the scandals involving the use and abuse of pork and privilege by those opposite. Team PNoy ought to be taking a suite of reforms to the electorate, including such measures as the Freedom of Information, Whistle Blower Protection, strengthening the powers of the ombudsman, fiscal incentives rationalisation, budget sustainability and transparency reforms. Instead, its campaign has failed to create any daylight between it and the UNA coalition with regard to these issues.

Again, this is in part due to the fact that enacting such reforms runs counter to the populist mode of campaigning it is forced to undertake. Championing the cause of fiscal transparency, openness and sustainability would run counter to the many proposed pieces of legislation that candidates under the administration are espousing at the moment.

I could go on. The plans for generating employment following the release of the latest jobs figures which show fewer people finding work compared to last year ought to spur a debate around the best way to promote inclusiveness in a nation that continues to post robust GDP growth figures. Instead the debate is confined to small minded livelihood programs (despite revelations of pork going to dubious organisations connected to legislators). There really isn’t a debate over how to transform the industrial mix of the nation or on how to direct foreign remittances to productive employment generating activity.

The people within the campaign probably feel that the need to elevate the debate is unnecessary given that its candidates seem to be improving in the polls. The UNA coalition seems to have suffered a few setbacks of its own given the negative press surrounding some of its principals, the ones which I have alluded to above. Yet, recent headlines involving Sabah and the president’s handling of it might cause some damage to its ticket.

To provide its candidates with a greater edge, the administration needs to arm them with solid, well-thought out programs that would demonstrate its seriousness in cementing its reform agenda. Rather than running a race based on populist rhetoric, its candidates need to be equipped with enough detailed policy advice to articulate what these reforms mean and how they would work once enacted. Rather than the airy-fairy platitudes and motherhood statements that they currently mouth, the campaign needs to bring the exalted righteous path down to earth.

If it does this, then voters might not feel the need to hedge their bets with the opposing side; they will provide the government with the majority it needs in the upper house. After all, if the nation were truly convinced that daang matuwid works, there would be no point in undertaking it with half-measures (no pun intended). The only way to pursue it would be to go all in.

So what now?

With the economic turbulence now gripping world financial markets once again, and the possibility of either a double dip recession or stagflation looming, governments around the world will be unable or unwilling to respond with another round of stimulus.

Only the monetary authorities both in the EU and the US stand in the way of a full blown debt crisis. It is quite ironic that S&P, the credit rating agency which figured in the first global crisis should have sparked this one.

Then it had caved in to Goldman Sachs to provide triple A credit ratings to the toxic sub-prime mortgages that led to the collapse of Lehman Brothers and brought AIG to its knees. This time around, it refused to cave in to pressure from the Obama White House which had legitimate reasons for questioning the downgrade that it gave the US economy.

In Manila, economic managers were closely watching as events overseas unfolded. The question on everyone’s minds must be, so what now? The best case scenario out of all this might be for the global economy to experience tepid growth accompanied by high inflation. And so then what? What options does the government face if that happens?

When the GFC hit three years ago, the government was on a path to fiscal sustainability with the budget nearly in balance. It had averted a debt crisis of its own early in the decade by raising and expanding the value added taxes from 10%-12%.

The stimulus initiated by the Arroyo administration led to deficits of 3-3.5% in the three years leading up to 2010. Spending in order of 200-350 billion pesos went to fuel and electricity subsidies as well as targeted discounts for seniors. A conditional cash transfers program was launched to help indigent families weather the storm.

Alongside these social programs, a relaxing of rules for granting fiscal incentives at business parks and economic zones was legislated by Congress. While the increased social spending could easily be retracted (and much of it was) when better economic conditions prevailed, fiscal incentives couldn’t.

They are partly the reason why the government now struggles to balance its revenues and expenditures. Having imposed a heavier form of regressive taxation on the broad sections of the public, the government of the day then took the money raised from that and gave it to special interest groups which arguably did not result in its stated policy goals to boost overall investment.

The present crisis now provides an opportunity to correct that. Firstly by rescinding redundant tax perks that have eroded government revenues, and secondly by making room for the expansion of both social and infrastructure programs, the government of PNoy can create a more equitable incidence of taxes and benefits while fostering a return to fiscal balance and growth.

What would be the incentive for Congress to do this right now?

Well let’s just say there are ways of making them come around. In Australia, the government’s stimulus measures during the GFC involved a school building program in every electoral district irrespective of the political affiliation of the local member.

The same thing could happen in the Philippines. Even without a fiscal responsibility bill, the Palace could pressure Congress to enact legislation to provide revenues for an expanded school building program under a 2012 supplementary budget. The timing of this, right before the 2013 elections would be impeccable.

In fact the same thing could happen if the government were to index sin taxes on alcohol and tobacco and earmark the spending for primary health clinics for each congressional district. It would be hitting two birds with one stone: making the tax system more effective while improving health outcomes.

They say, a crisis is a terrible thing to waste. That’s what happened the last time a financial crisis hit. Let’s hope this time around, the government does not waste the opportunities this current one presents it with.

Imagining True Independence

What would a truly independent Philippines look like?

In the week that the nation was celebrating the 113th anniversarry of its original declaration of independence from Spain, it was fending off rumors of impending incursions into its territory in the Spratlys by China. Having an up and coming naval power in the region press the boundaries of our sovereignty made us call upon our former Commonwealth partner in the US to come to our rescue with assurances of support.

To some, the fact that we had to seek foreign assistance to protect our domestic resources means that we are not truly free. This leads me to imagine what a truly independent Philippines would look like. I use the word ‘imagine’ in the Andersonian sense. Benedict Anderson, author of Imagined Communities would say that all post-colonial societies are mere fiction, inventions of their former colonial masters.

According to one definition of it, “independence is a condition of a nation, country, or state in which its residents and population, or some portion thereof, exercise self-government, and usually sovereignty, over its territory.” The concept of a sovereign state usually incorporates two things: an effective and independent government on the one hand and a defined territory on the other. Nations or states which are unable to fulfill these two requirements are generally recognized as failed states.

Based on these definitions, can the Philippines be seen as truly independent?

Aside from acquiring formal independence in the political sense, what other indicators would signal our independence in a de facto sense. It sounds like a sophomore’s essay writing assignment, but the president himself during his Independence Day addresses was ruminating out loud as to what this would mean for us today. He seemed to be offering up a few suggestions, to wit:

  • One was freedom from corruption. It was present and running rampant in 1898. In Cacique Democracy, Anderson described how the abuses of local bosses prevented the revolutionary taxes from reaching the central government of Aguinaldo. In 2010 a hundred and thirteen years later, one of the decendants of the original revolutionary leaders in the person of PNoy declared that the Philippines had become graft free. Strange imaginings, perhaps, but corruption does prevent the state from governing in the interests of its people.
  • Another ingredient for true independence dreamt up by PNoy was freedom from hunger and unemployment. In his speeches during the week, he spoke of the freedom from privation when he said that the problem facing his countrymen was what type of food to put on the table, rather than having something to eat or not. He also mentioned that overseas workers now had an option to come home to the Philippines because the booming call center industry permitted them to earn decent wages. Again, strange imaginings, it would seem, but deprivation of economic freedom does weaken a nation’s sovereignty.
  • Related to the second ingredient is energy independence or freedom from the high cost of foreign oil. During the week, PNoy announced the fifty percent renewable energy by 2030 target. Indeed the high cost of transportation and electricity along with food are the main causes of misery among much of the populace, which is probably the reason for his declining popularity. However, in the same week that he made this announcement, the palace also released a statement regarding the postponement if not outright cancellation of some port and rail projects just as the previous administration cancelled an airport contract for much the same reason.

Indeed each administration would like to draw a line in the sand to mark the end of the old era and the start of a new one. But what each administration finds out, whether it be the Aquino administration and the mothballing of Marcos’s nuclear plant, or Erap and Ramos’s indepenent power producers, or GMA and Ramos’s NAIA-3, or PNoy and GMA’s pet projects, cancellation of old contracts come at a price. This price is eventually borne by the taxpayers.

A fiscal strategy missing

The deeper question has to do with why the nation has to depend on overseas development assistance or ODA’s in the first place. These projects which often require us to purchase equipment from the donor country are little more than industrial policy disguised as foreign assistance. Indeed with the WTO restricting member countries from exercising independent industrial, trade or monetary policies, public sector procurement provides one of the remaining avenues for a nation to foster domestic import replacing industries.

The model I would put up is that of Marikina City under Bayani Fernando. The city’s engineering department under Mayor BF did not contract out its public works projects but produced everything in house, including its quaint looking portalets, traffic signs and street lights. While the city was not one of the richest, it raised revenues through property taxes which were justified by the city’s improvement of roadworks and schools. Fiscal independence was integral to its development.

Unfortunately, calls for a fiscal adjustment plan that would lead to greater fiscal independence seem to be falling on deaf ears as the administration continues to believe in its ability to attract private investors to supply public infrastructure. The idea is that a user pays principle trumps the socializing of public investment. The problem with that is that along with user pays, PPP’s also introduce the notion of a fair market return for the private investor.

It would be possible, under an alternative situation, for the government to fund the construction of public infrastructure projects and recover its investment by charging users without resorting to a private operator model. Under such a set-up, users would not have to pay as much, as the government would not require a fair market rate of return.

The social contract

The modern imagining of the concept of sovereignty comes from reflections on the relationship between individuals and their government. This led to an “intellectual device” known as the social contract. According to one definition, the “(s)ocial contract arguments assert that individuals unite into political societies by a process of mutual consent, agreeing to abide by common rules and accept corresponding duties to protect themselves and one another from violence and other kinds of harm.”

For the nation to maintain its territorial integrity, and protect its off-shore assets in the South China Sea from invasion, it will have to increase its military budget. Australia has already announced that it will increase its deployment of defence assets off its northern and western shores to secure its oil and gas reserves. The move comes while it also contemplates increased US military presence on its own bases. This is in anticipation of the rising influence of resource hungry China in the region.

For the government to provide security and basic social services to the people in a way that enables them to be productive citizens, it will have to become more efficient and competent in acquiting its resources. One of the things hindering the present government from doing what it intends appears to be its fear, some would say paranoia, that a lot of its spending goes to line the pockets of corrupt officials.

This distrust has created bottlenecks in the expenditure program which has hampered development spending of late. If as PNoy stated the Philippines has become graft free, it would be partly because his government in its first year has withheld spending from most of its line agencies with only the military and police agencies being spared.

Finally, and perhaps as a parting shot, let me say that if the nation is to be more mature, one would imagine there to be no need for petty partisan politics during national celebrations such as June the 12th. The use of folksy street parlance to settle personal political gripes denigrates the solemnity of the occasion. For me, the day when we as a people can mark such important dates in our history without our leaders resorting to snide remarks and bickering of this sort will be the day that our nation truly becomes free.