The Philippine Growth Spurt: will it last?

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The latest release of GDP growth figures showed an upward growth spurt for the country. From a growth of 6.8 per cent for 2012 (revised up from initial estimates) to an unexpected year-on-year growth of 7.8 per cent in the first quarter of 2013, the numbers seem to provide both a strong signal to the world that the country now is back in business and a platform for the government to claim that its policy of pursuing clean, honest governance is paying off.

Having outpaced the growth of countries like China (7.7 per cent), Indonesia (6 per cent), Thailand (5.3 per cent) and Vietnam (4.9 per cent), and having done so on the back of an expansion of manufacturing and construction, has led some commentators to claim that the country has turned a corner or reached a “tipping point” from where it would now be on solid footing on a higher growth path.

There are only three things to point out here.

The first is the blindingly obvious: one quarter’s performance does not make up a trend. We cannot make any projections regarding future prospects based on this single observation. I would argue, not even the performance of the last 18 months proves anything. Remember 1997 when we thought we were about to take off? For those who were old enough to recall, remember what happened next? The same thing can be said of today’s situation.

Second is for us not to downplay the effect of the recently concluded elections. Malacañang has stated that this was an unusual GDP growth result for a non-presidential election year. You would expect them to say that, but the problem with their argument is the automation of elections, which makes campaigns more expensive by all accounts as cheating can no longer be achieved centrally at the provincial or municipal levels, as was the case prior to automation, but has to be done at the retail, grass roots level through vote buying.

We cannot discount the fact, particularly in this election which was dominated by entrenched political families, that money might have flowed massively unlike previous midterm elections. This would have meant that provincial and municipal incumbents hit the pork barrel pretty hard in the opening months of the year in a bid to prove to constituents that they were hard at work.

Government spending and construction growth were consistent with this view, along with financial intermediation, which again could have been linked to this. That does not necessarily mean that all this spending went to waste. It just means that a large component of the first quarter growth was seasonal in nature: determined as it was by the political-business cycle.

The third and final point I would make is that the Philippines becoming the fastest growing economy in the region is more about China decelerating than it catching up to China. The two are interlinked though. Let me explain.

During the last decade, China was the workshop of the world. It basically drained the swamp for ASEAN sucking in much of the foreign direct investments in manufacturing. During this time, the Philippines suffered a hollowing out of its industrial base, what little of it that it had.

At some point in this period, China’s income per capita overtook the Philippines’. Demographically, China also started to face the consequences of their one child policy as labour started becoming scarce as investments in China’s interior slowed the migration of workers out to the prosperous coastal regions.

The newly installed Chinese president has also indicated that the government would not sacrifice the environment in pursuing economic growth. Much social unrest now stems from pollution. They are seeking to transition the country away from its dependence on exports and investment. China has basically lost its cost competitiveness and will now have to grapple with the challenges of being a middle income economy.

Early this year, it was reported that inward foreign investments into ASEAN have for the first time equalled that of China. A structural realignment is now taking place. Bangladesh, Vietnam, Myanmar and Cambodia are now the new Chinas. The Philippines could perhaps be benefiting from this trend as well. It probably has less to do with what the government is doing, and more to do with external factors, as I have just mentioned.

All this now puts the onus on government, however, not to “muck things up”. Recall how it inadvertently pulled down growth back in 2011 when it pursued a de facto austerity policy? Let me take the opposing view now and say that this could be the start of a trend, a structural break in economic parlance. In that scenario the one thing that could potentially derail it is the “noise” that we create. Happily for the administration, it won a rare majority in the Senate and kept control of the house (assuming its alliances hold).

The mystery now is what it plans to do with that majority. The ball is in its court. If this sudden growth spurt is to be maintained, then for the next three years, the Aquino government will have to work hard to unclog the investment pipeline in infrastructure, skills and energy that are needed to power its economy through.

Will things like charter change, the proposed Bangsamoro autonomous region, territorial disputes with our neighbours or some completely unexpected Black Swan event throw us off course? That I suppose is the burning question of the day.

What the country really needs

Talk to the pundits and commentators and hear their lamentations over the sluggish fourth quarter GDP growth figures of last year. Talk to the investment analysts and you hear a very different story.

Having used up much column space last year predicting an inevitable slowdown of the growth rate, and seeing it materialize, I find it useless to now cry over spilt milk. The government will try to paint a rosy picture, seeing the glass as half-full to counter the reasonable level of criticism it has to cop for tripping over itself. But as someone whose warnings and predictions came true, I would rather focus on the future, not the past.

The reason why analysts seem quite bullish over the country’s prospects is that they see the pipeline of projects that are either underway or about to flow through. It has taken about a year and a half to lay the groundwork, but the government has finally regained its footing. Forget about the invisible hand, last year it was the government’s usually visible boot that failed to leave an imprint.

If government was primarily the cause for the deceleration in growth last year as the external environment gradually deteriorated, this year external factors will pull growth down as both fiscal and monetary policy seek to restore it to its normal trajectory. If uncertainty persists in the EU, if President Obama gets his wish and the US Congress enacts laws to limit outsourcing, if the situation in the Middle East particularly in Iran continues to boil over, it could deflate the economy and counteract many of the measures government puts in place to invigorate it.

Despite all these what ifs there is still much reason to be buoyant if you are an analyst comparing the Philippines with other potential investment sites. The impeachment trial is a mere distraction from their point of view. Regardless of whether the prosecution or defence wins the case, it will not have a shred of influence over the current spend program. That is the good news. As far as the domestic economy is concerned, there should be a decoupling of political and economic events.

Portfolio foreign investments are sure to flow through the local bond market as the major players in the Phisix are set to corner different contracts under the public-private partnership program. They will thus have to raise capital as they breach their single borrower limits with the banks that they control. Forget about foreign direct investments, this is FDI by stealth.

As the government shifts the external debt obligations from the public to the private sector, the question now is whether it will have the fiscal fortitude to use the inflow of foreign currency in a more productive manner than just parking it with US treasury at near zero interest rates.

A more impactful use of these reserves would be to complement physical infrastructure investments by the private sector with economic and social infrastructure investments in education, health and housing. What the country needs is to plug the deficits in these areas of government spending.

But that is merely the first step. The next one would be to fund and implement the completion of the land reform program and to make agriculture and pockets of industry resilient to the global downturn and the emerging global business environment over the coming years. To do the latter, the government will have to roll-out a package of tax incentives and subsidies to boost productivity and encourage investment in capacity.

Of course there is nothing particularly new or fresh to this agenda. The extent to which governments become distracted or side-tracked from it by internal and external events, man-made or natural, self-inflicted or otherwise, determine to a great extent how successful they become in building prosperity and opportunity for all.

So perhaps in this year of the water dragon, the government could focus on letting the money flow so that our country gets what it needs and raises its clout as one of Asia’s newer economic dragons.


Employment might have risen, but I wouldn’t pop the champagne just yet if I were the administration.

The government was celebrating the release of third quarter employment figures after the disappointing GDP figures for the same period broke its pledge for a second semester rebound. The fact is, although more people were indeed working, they were on average working less hours.

The proportion of people working less than forty hours a week rose both as a proportion of the work force and in aggregate. It rose from 12.8 million in October 2010 (or 35% of employed people) to 14.3 million last October (or 37% of the same).

As a result, output per worker fell. It fell by 2.4%. We derive this by subtracting the GDP growth rate of 3.2% with the employment growth rate of 5.6% or by simply dividing the total GDP by the total employed persons (the government websites don’t provide statistics on total hours worked, so we can’t work out whether output per hour worked—a more accurate measure of labour productivity—fell).

Some would say that productivity is an even more significant indicator of economic health than GDP because it compares both the outputs of an economy (GDP) with its inputs (workers). The breakdown by sector shows that the decline in productivity (as measured by the statistics office as Gross Value Add over number of employees) was largest for industry which suffered a 4.2% decline, followed by agriculture which suffered a 3.1% decline, and lastly came the services sector which registered a fall of 1.1%.

The government through Sec Paderanga claimed credit for the growth in employment saying that its policies were responsible for generating more new jobs in the economy. One has to qualify the positive news by saying that these jobs were mostly part-time in nature. As a result, there may be more people working, but on average they worked for less hours, adding less value to the economy.

Whither the Philippines in 2020?

As America “pivots” towards Asia where the future economic centre of gravity of the world will be, how big or small a role will the Philippines play in this the Pacific Century?

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Jim O’Neill the man from Goldman Sachs responsible for the acronym BRICs (which stands for Brazil, Russia, India and China) in a forthcoming book feels all the more convinced as ever of the accuracy of his predictions ten years ago when he first coined it to describe the growth potential of emerging markets. His sense of vindication for what he now characterises as his “conservative” estimates comes from the fact that in his words,

The world economy has doubled in size since 2001, and a third of that growth has come from the BRICs. Their combined GDP increase was more than twice that of the United States and it was equivalent to the creation of another new Japan plus one Germany, or five United Kingdoms, in the space of a single decade.

At this rate, China will be on track to surpass the United States as the world’s biggest economy by 2027, according to O’Neill, beating the earlier estimate of 2035. Predicting when this will happen has become an interesting past-time of analysts of late, which is why The Economist whose own projections for a 2019 year of reckoning made available the following interactive chart where you can play around with the assumptions and do-it-yourself  by entering them in the assigned fields (see below).

As Secretary Clinton has put it

The Asia-Pacific has become a key driver of global politics. Stretching from the Indian subcontinent to the western shores of the Americas, the region spans two oceans — the Pacific and the Indian — that are increasingly linked by shipping and strategy. It boasts almost half the world’s population. It includes many of the key engines of the global economy, as well as the largest emitters of greenhouse gases. It is home to several of our key allies and important emerging powers like China, India, and Indonesia.

In his address to the Australian parliament, President Obama welcomed the rise of a peaceful China stating that

Together, I believe we can address shared challenges, such as (nuclear) proliferation and maritime security, including cooperation in the South China Sea.
Meanwhile, the United States will continue our effort to build a cooperative relationship with China.
…We will do this, even as we continue to speak candidly to Beijing about the importance of upholding international norms and respecting the universal human rights of the Chinese people.
A secure and peaceful Asia is the foundation for the second area in which America is leading again – and that’s advancing our shared prosperity.

A constant theme in that speech which effectively marked the “pivot point” to the East was America’s adherence to the rule of law to govern international relations in security and economic terms, as well as its championing of open democracies and free markets in the region. In both cases, Obama was at his professorial best when he promoted the concept of rules based trading in commerce and politics.

His speech writers could be said to channel F.A. Hayek the founder of contemporary libertarianism who said that, “Only the existence of common rules makes the peaceful existence of individuals in society possible.

This is consistent with America’s constitutional belief in universal principles. Prof Obama was also acting like Dr King, in that he was delivering a sermon. He may have seemed in Australia to be “preaching to the choir” but his real intended audience was not in Canberra, but Beijing. In Bali, he got to exchange a few constructive words with his Chinese counterpart. Much to the Philippine delegation’s dismay, the US defence posture in the region is not meant to intimidate the rising power of China into submission over the South China Sea issue.

Back home, President Aquino had another axe of sorts to grind with the placing of his predecessor Gloria Arroyo under hospital detention following her indictment for election fraud. This followed a week of controversy involving her attempted departure from the country to seek medical treatment following a Supreme Court decision to temporarily lift the Department of Justice’s hold departure order on her, a decision that was not accepted by the said department.

All of this puts into context, the question of where will the Philippines be in 2020? Will the Philippines be a prosperous democratic country governed by the rule of law? Or will it still be struggling to achieve this ideal that the US president spoke of so eloquently?

Today, the hot topic in Manila among political commentators is whether the action taken by the Aquino government to prevent Mrs Arroyo from leaving was in accordance with the rule of law. On the side of those who say yes is Randy David who believes what we have now is a “rule of justices” not a bona fide rule of law thanks to the lady at the centre of the controversy. On the side of naysayers is Solita Monsod who believes the speed with which the investigation was conducted points once again to the politicisation of the process. Both make reasoned arguments in support of their views.

The president convinced of the justness of his actions and mindful of his constituents exhorted his countrymen to “not waver.” He said that

We are all working for a new Philippines, one where there is equality, where whoever does wrong, whatever his status in life may be, is punished, a country where justice rules.

Whatever the position either camp holds in this debate, all will agree that prosecuting the Arroyos has been quite a messy undertaking, much like the way President Joseph Estrada was deposed from office. The legality of it will be questioned and the merits of it will be argued for years to come in the court of public opinion.

Incidentally, 2011 is also the tenth year since Estrada’s ouster. Back in 2001, Mr Estrada will argue, the country’s elites conspired to bring a sitting and democratically elected president down by extra-constitutional means. Today, it has been argued that one faction of the elite has manipulated the legal system to jail the head of another.

In all this time, has the country progressed towards becoming a stable more prosperous country? To the analysts, the country’s growth rate over the last ten years has proven their rosy forecasts right. They will say that we are on track both demographically and economically to be a force to reckon with by 2020 and beyond.

To the “insiders” the same old problems of social inequity still prevails. One set of rules still seems to apply to one class of people, and another applies to the rest. To the administration and its followers, the Arroyos have become totemic of this system. To them successfully prosecuting and sending her swiftly to jail would prove once and for all that only one system of justice prevails in the country.

To the realists, the application of justice over the course of the next ten years will largely depend on who sits in power. By 2020, a certain boxer-legislator who happened to be one of GMA’s strongest endorsers believes he will be a strong contender for the Palace in 2022. By then he would have tucked a few billion pesos under his belt and followed a path set before by the populist Erap Estrada.

Should the reforms espoused by the current seat warmers of Malacañang not take route in the next five years the political pendulum could swing the other way and a revival of patronage-based populism with a new face could rise to replace the torch-bearers of our current elite democracy.

Similarly, China could match the US pound-for-pound in their rivalry for regional dominance. The Beijing Consensus might by then trump the Washington version. A different model for prosperity might be in play making the need for establishing common rules seem rather (how shall we put it?…) academic.

Continuity reboots

Reboots, paradigm shift are all the rage this year. For instance, DC Comics announced that it was rebooting its entire comic book line, bringing 52 of its comic books to issue as well as publishing all their comics digitally. Then recently in the Philippines, a move is in place to bring divorce back, which Archbishop Oscar Cruz calls a anti-Filipino.

The Philippines went on a sort of reboot. At the very least, we are seeing the reboot ongoing. As Deputy palace spokesperson Abigail Valte pointed out sometime ago, “Democracy is already in the recovery room as of May 2011“.

If you look at the Philippine Development blueprint, you could see the depth, and breathe and shape of what Aquino wants the Philippines to be, when he leaves office.

It explains why the government refuses to spend money it doesn’t have. Without government spending 17 percent, it showed why the economy slowed down to 4.9 percent. In the same quarter in 2010 the economy grew double that, what with election, and election spending driving the growth.

How I read the tea leaves, government doesn’t want to spend what it doesn’t have. The administration intends to institutionalize spending: if the government doesn’t have the money to pay for it, the government doesn’t finance a project.

We can talk about lies and statistics. It is pretty good take, but without Government propping up GDP, who will pickup the slack? A GDP growth of 4.9 percent showed that the private sector as a whole wasn’t able to pickup the slack that government dropped. So the question is: as government intends to spend less, or at the very least manage its spending, what is it doing to get more business into invest?

Is the government making it easy for investors of all stripe to come in? Is the government interested in tapping the OFW market to invest in the Philippines? What is it doing to make investing in the Philippines easier, and more interesting?

The question also comes in that we know that Internet is a game changer, and that the Internet is like roads, and railways and electricity before it: they generate business. There is no clear cut government policy on the Internet. There is no clear cut government policy on science and technology. And yet we have policies like Cybercrime bill that is being debated in Congress that doesn’t actually help, but make Internet worst for Filipinos. Our legislators lack the understanding, and the foresight to take this Internet and make it go zoom. Do you want the government to regulate the Internet?

In the past year, we’ve also seen the push to diminish the power and influence of the Catholic Church. The push for reproductive health for example is one thing. It is meant to institutionalize maternal health and the side effect of course it goes against “church teaching.” Then there is a push to revive the Divorce law in the Philippines. The latter since the Philippines now becomes the only country in the world without any sort of divorce law.

There was once a divorce law according to @nerveending. The Philippines had a divorce law prior to 1947. Then we didn’t. Today, if you want to go get divorced, there is always annulment or legal separation. So you can get separated from your wife or your estranged husband. Relationships are never easy. They’re messy. They’re never black and white. It lives in that gray terrain. Divorce becomes important so we could protect wives and children who are being abused where the only recourse is to separate. Divorce becomes important when to have a better life, a man or a woman must reboot their continuity.

If the Reproductive Health bill becomes law, and it is followed by a divorce bill? That would be one continuity reboot for the Philippines. It signals that the nation is slowly becoming secular and less under the thrall of the Vatican.

As a Catholic, for me, it presents an opportunity for the Church to focus on the spiritual. I want sermons and direction that make me a better person. I don’t need the Church to tell me what is wrong with government. Filipinos everywhere already know what’s wrong with our nation. It is that time in history that we fix it. I need my church to help guide that poor maid who is always beaten up by her husband. I need a Church that guides street children away from the streets, and into education. I need this church to be relevant.

This is how I see continuity reboots. Like all things in life, it would depend a lot on how it is executed.

Image credit: The New Justice League by Jim Lee

Upate: @mannyneps and @jesterinexile points out that if you’re a Muslim in the Philippines then divorce is legal.

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Philippine National Statistical Coordinating Board: GDP at 7.3 percent

Fourth Quarter 2010
Annual GDP Sizzled to its Highest Growth Rate in the Post Marcos Era
at 7.3 Percent; Q4 2010 GDP grew by 7.1 percent
Posted 31 January 2011

Despite the El Niño and the diminished government spending during the second semester, the domestic economy sizzled to its highest annual GDP growth in the post Marcos era of 7.3 percent in 2010 from 1.1 percent in 2009.  The global economic recovery which resulted in record growth rates of foreign trade and election related stimuli that combined for a record first semester growth, followed by the peaceful conduct of the national elections and the renewed trust in government contributed to an economic performance in 2010 that well surpassed the government’s target of 5.0 percent to 6.0 percent.  Industry and services sectors expanded strongly in the last quarter of 2010 while Agriculture recovered after four consecutive quarters of decline due to El Niño, pushing GDP to grow by 7.1 percent in Q4.

With the prevailing sanguine outlook of both business and consumers, the economic prospects for 2011 are indeed exciting.

On the demand side, increased consumer spending for the whole year buttressed by increased investments in Fixed Capital Formation posting its highest growth rate since 2000, particularly in Durable Equipment and sustained by the double digit growth in international trade contributed to the record GDP growth in 2010.

Likewise, annual GNP accelerated by 7.2 percent from 4.0 percent last year in spite of the weakened growth in NFIA from 28.0 percent in 2009 to 6.0 percent.  For the fourth quarter, the continuing, though much decelerated demand for the services of our OFW’s caused NFIA to grow by 3.8 percent from 19.5 percent last year, pushing GNP growth to 6.7 percent from last year’s 4.1 percent.

The seasonally adjusted estimates show a surging Philippine economy as GDP jumped by 3.0 percent from a decline of 0.8 percent in the previous quarter while the seasonally adjusted GNP accelerated to 2.9 percent from 0.2 percent growth in the third quarter.

With the record pace of economic growth in 2010, per capita GDP rose by 5.3 percent from a decline of 0.9 percent in 2009.  Per capita GNP and per capita PCE likewise posted huge growths of 5.1 percent and 3.3 percent from 2.0 percent and 2.1 percent, respectively.

Growth of Major Economic Sectors

In 2010, Industry once again took the driver seat in boosting the economy with its huge 12.1 percent growth from a decline of 0.9 percent the previous year.  Services provided more than able support as it grew by 7.1 percent from 2.8 percent.  However, Agriculture, hounded by El Niño, posted a negative 0.5 percent from zero growth in 2009.

For the 4th quarter of 2010, Industry accelerated to 8.3 percent from 3.8 percent, almost sustaining its third quarter growth.  Services likewise accelerated, growing by 6.9 percent from 3.1 percent.  And AFF, after being battered for four consecutive quarters by abnormal weather conditions, rebounded by 5.4 percent from a decline of 2.9 percent.

Of the 7.3 percent growth in GDP for the whole year of 2010, 3.9 percentage points came from Industry and 3.5 percentage points came from Services while AFF pulled down the growth with negative 0.1 percentage point.

In the fourth quarter, the 7.1 percent growth in GDP came from Services, with 3.3 percentage points; Industry, 2.7 percentage point and AFF, 1.0 percentage point.

The seasonally adjusted AFF sector grew by 4.2 percent from a 1.0 percent growth in the previous quarter largely due to the growth in Palay and corn.  On the other hand, Industry rebounded to a 6.7 percent growth from a 5.9 percent decline in the previous quarter due to the expansion of Manufacturing and Mining & Quarrying.  Services sector, however, decelerated to 0.3 percent from 2.0 percent caused partly by two consecutive quarters of decline in Government Services.

On the demand side, all expenditure items registered accelerated growths in 2010 with Total Exports, Total Imports and Capital Formation rebounding to 25.6 percent, 20.7 percent and 17.0 percent from a decline of 13.4 percent, 1.9 percent and 5.7 percent, respectively.  Likewise, consumer spending accelerated to 5.3 percent from4.1 percent.  However, government spending decelerated to 2.7 percent from 10.9 percent.

For the fourth quarter, all expenditure items likewise registered positive growths, except Government Consumption Expenditure which declined by 7.6 percent.  Personal Consumption Expenditure accelerated to 7.0 percent, the highest since the 8.4 percent growth recorded in the third quarter of 1988, from 5.0 percent in the same period last year.  Investments in Fixed Capital Formation grew robustly with 22.8 percent, the highest since the 27.3 percent of the fourth quarter 2000, from last year’s growth of 5.8 percent as a result of accelerated investments in Durable Equipment.  Total Exports expanded by 21.1 percent from a decline of 6.7 percent as both Merchandise Exports and Non Merchandise Exports posted robust growths.  And, Total imports accelerated to 21.8 percent from 6.8 percent in the previous year as both Merchandise Imports and Non Merchandise imports recorded double-digit growths.

Secretary General, NSCB

DOF says deficit to stay within target, Q3 GDP between 6.7 to 7.7 percent

The Department of Finance reported that the deficit would be within target:

Finance Secretary Cesar V. Purisima expressed confidence, on Tuesday, that the full-year deficit would be kept within the target of P325 billion amid efforts to improve tax collection and expand the tax base.

Budget Secretary Florencio B. Abad said that while government expenses increased by 6 percent to P1.263 trillion, the government has been spending judiciously.

Meanwhile, GDP was projected between 6.7 percent and 7.7 percent for the 3rd quarter.

ADB warns gov’t against move to hike VAT to 15%

ADB warns gov’t against move to hike VAT to 15%
By Ronnel Domingo
Philippine Daily Inquirer

MANILA, Philippines—The government should not raise the value-added tax to 15 percent as this, along with the corporate income tax being lowered further, would make the Philippine tax system more regressive, according to the Asian Development Bank.

In a policy note on the Philippines, the multilateral lender said the Philippines should rather raise excise taxes on tobacco, alcohol and gasoline to improve its tax effort or collections expressed as a percentage of total output (gross domestic product).

The ADB noted a standing proposal for another increase in the VAT from the current 12 percent and a further lowering of the corporate income tax to 25 percent from 30 percent would not improve the tax effort, which was pegged at 12.8 percent in 2009.

“The overall impact [of this scenario] on the tax effort is neutral,” the ADB said. “But if the [corporate income tax] is cut further to 20 percent, the tax effort decreases by -0.6 percentage point.”

Aquino gov't aims to reduce deficit-to-GDP to 2%

Aquino gov’t aims to reduce deficit-to-GDP to 2%
By Lala Rimando

MANILA, Philippines – The Aquino administration wants to bring down the country’s budget deficit to 2% of gross domestic product (GDP) in the next 3 years, Budget Secretary Florencio Abad said Thursday.

The budget shortfall is forecast to reach P325 billion or 3.9% of GDP this year.

“We want to bring down deficit-to-GDP ratio to 2% starting 2013 from 3.9% now,” Abad told reporters at the sidelines of the Public-Private Partnership Conference in Pasay City.

“We are making renewed commitment to fiscal responsibility,” he added.

The deficit hit P259.8 billion in the first 9 months, already 80% of the 2010 ceiling.

Abad said the budget gap will not exceed the full-year target as the government tightens spending and shores up revenue collection.

“We will make sure that deficit will be within or below the P325-billion target,” he said.

The Aquino government, who took office in June, earlier said it would improve revenues by enforcing existing tax laws and cracking down on tax evasion and smuggling.