G20

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.

Snap, Crackle, Pop!

The media and blogosphere may have been mindlessly harping on the fumbling errors and bumbling missteps committed by the current administration of PNoy over the past six months in its first year in office, but the mood of the public and the markets seems to have taken it all in stride.

As latest polling by SWS reveals, PNoy and his policies continue to enjoy unprecedented confidence levels from the public. This exuberrant satisfaction is mirrored by the investor community which has driven the local bourse to all time highs following the normal transfer of power from one administration to the next during the middle of the year.

Despite its fiscal woes, the government very recently finds itself situated at a very auspicious moment in which it is able to borrow at very favorable terms. Its treasury issuance last month was oversubscribed four times leading to extremely low borrowing rates of just over three quarters of a percent for its 90-day treasury bill, nearly half what it was the previous month.

This makes it not far off from the yields of similar notes issued by the US Treasury and that of the UK, Eurozone and Japan! The governments of the struggling PIIGS economies of Portugal, Iceland, Ireland, Greece and Spain are having a much harder time raising funds to bridge their fiscal gaps having resorted to the IMF for credit while the Philippines exited from that program back in 2006 having paid all of its debts to the Fund in full.

With stellar economic growth predicted to hover around 6-7% per annum and a relatively benign inflation outlook predicted to continue over the next few years, the country is poised to take-off along with other emerging economies. The next decade could see the nation address some fundamental problems like infrastructure bottlenecks and social inequity if the government plays its cards right. Already the Gini coefficient a measure of income inequality reached its lowest point for quite some time.

What many will find most remarkable in all this is that there have hardly been any changes made to the socio-economic policy settings left behind by the previous administration despite all the campaign rhetoric about change. It could be seen as an acknowledgement that many of these settings prepared the conditions now evident for better times ahead.

As proof of this consider the following: the Conditional Cash Transfers program initiated in 2008 (CCT) is being expanded, the RH bill, which was drafted and vigorously pushed for in the previous Congress by the now leader of the opposition in the lower house and ally of the former president, is being supported, and reforms in education, training, research and development are continuing.

“Normalcy” restored

The boost in confidence has occurred because of the observance of the rule of law during and after the elections which led to a credible outcome. The political transition and stability this engendered has restored the notion of the Philippines as a “normal” state once again. The same transformation of perception occurred previously in Indonesia that led to it attaining G20 status (its recent setbacks notwithstanding).

Problems of corruption and conflict will still linger, but as was shown during the 90s under the Ramos administration, they can be tempered for as long as growth with equity is pursued (it should be noted here that it was during that previous period of expansion that poverty incidence as measured by the share of the poor to the overall population, fell to its lowest point since records were kept, and the country became relatively peaceful as a result, despite the fact that the poverty headcount, or the number of poor individuals kept rising-just not as fast as the rate at which the overall population grew, proving the point that equity is important).

What is crucial over the next six years is for the observance of good governance and the “market for rules” to be enforced. As demonstrated by two previous administrations, it is quite possible for political corruption and influence peddling to co-exist with an open market economy despite the enactment of “world-class” procurement laws and the application of electronic/automated processes in awarding government contracts.

The roll out of the PPP contracts beginning next year will be a litmus test as to whether the government can enter into such agreements without anomalous transactions occurring on the side. Another one will be the ongoing campaign to lift the tax take of the country which has not been buoyed by the recent recovery in economic activity.

With these key planks in place, the government will have sufficient funds to resource reforms in social policy arenas. Without them, an overall tax hike could loom as a distinct possibility which would threaten social cohesion particularly if an increase to the regressive VAT rate is pushed.

As the year draws to a close, it is worth considering the journey the country has taken. At the start of the year, there were doubts as to whether we would be faced with a doomsday scenario come election day. There were talks of civil unrest and military adventurism following a no-election or no-proclamation scenario.

At the close of the year, the country’s financial, economic and dare I say social outlook could not end at a brighter note. Indeed there is much cause to celebrate as the prospect for an economy that crackles and pops as opposed to one that merely sizzles but fizzles takes shape.

A Boy Scout Among Thieves

On the eve of the G20 meeting in South Korea, the Philippines through Finance Sec Cesar V Purisima voiced its aspirations for the outcome of talks to deal with the US-China disagreements over currency manipulation aimed at correcting stark trade imbalances.

On Monday’s issue of the Businessworld, he was quoted as saying that he hoped for

A framework… where there will be closer cooperation among countries in settling imbalances.

Such expressions of hope by our finance officials demonstrate not only their optimism that world leaders will put into practice their joint promises at such talk shops (when in reality they don’t-as demonstrated by the Global Trade Alert‘s findings about the increasing levels of trade protection committed by the same G20 members in violation of their first Communicade), but also the fact that they remain wedded to the development model preached by the Washington Consensus to the rest of the world regarding the reliance on free market principles that avoid government intervention in setting the prices of commodities and currencies.

The US Federal Reserve announced previously that it would exercise quantitative easing (QE) which in effect means it will print money to purchase US treasury bonds underwriting the deficits undertaken by the Obama administration. This has caused a weakening of the US dollar against other currencies which is expected to narrow their trade deficit with China.

This manipulation of the currency to “correct” trade imbalances is something that has been restricted by the WTO except that China seems to have gotten away with purposefully undervaluing its currency even after acceding to the terms of this world body. Decades earlier Japan did the same and benefited from it during its era of fast-paced growth. The US has been constantly at China for this but appears to have no qualms over effectively engaging in such behavior when it suits its interests. In the real politic of the global trading system, a nation can flout the rules for as long as it carries sufficient weight in political economic terms.

So it would seem that the Philippines remains stuck in the role of the perennial “boy scout” among nations that adheres to the rulebook while others blatantly invent their own rules. Because of the rise in the value of the peso against the US dollar, not only are exports expected to suffer, but so will the flow of imports (as much of the raw materials that go into producing these exports comes from overseas).

The Bureau of Customs which through the years has had to deal with a program of accelerated tariff reduction unilaterally set by the Philippine government ahead of international commitments will also have to deal with the rising peso in meeting its revenue targets. This along with all the perks needlessly offered to free ports and special economic zones will ensure that our budget targets will not be met.

A more proactive stance needed

In this space, I previously argued that the Philippines needs to take a more proactive stance vis-a-vis the currency wars to ensure the sustainability of its exporting industries and to guarantee the welfare of those dependent on income transfers from abroad. If we wait for a framework to be hammered out by the G20 which after all is just a loose, informal organization, then we could be waiting for a very long time indeed.

In fairness to our finance officials, they have proposed the Public Private Partnerships or PPPs as a way of generating investments in infrastructure which should lead to capital equipment and raw material imports as a means to generate demand for dollars domestically. Certainly that will help. But on the other hand, the Philippines is also issuing locally denominated bonds overseas which in effect increases the flow of dollars into the country and causes the value of the peso to rise. So it seems it is taking with the one hand while promising to give with the other.

Given that we already have the reserves to fund at least the public portion of the PPPs, I argued for a sovereign wealth fund that would along with private investments identify projects it would invest in. This could be a way of putting the dollar inflows to good use and avoid inflating our borrowings from overseas which simply help inflate the value of our currency.

Having exited the IMF program of macroeconomic stabilization after paying off its institutional loans, it is time for the Philippines to exercise some independence in setting its policies given the amount of “space” afforded by its advancing foreign reserves position. It is time we start shaping these policies by taking cognizance of the way the global economy actually works as opposed to the way we hope it would based on a literal interpretation of global accords or theoretical constructs contained in some textbook.

For this to happen, a new policy consensus has to be formed that would encompass both the officials in the executive branch as well as politicians in the legislative branch over a development framework. There does not seem to be any impetus from either branch of government to develop such a road map nor does there appear to be any public clamor for it.

Perhaps you, dear reader, have some views on this. Well then, let’s discuss them…