Goldman Sachs

Becoming Mexico

It could take thirty years for the Philippines to catch-up to where Mexico is.

A growing middle class, a net migration rate falling below zero, a major manufacturing power-house, these are outcomes that any developing country would happily aspire to deliver. They are what Mexico has achieved over the past decade. The Philippines can only dream of attaining them at this point.

To use a boxing analogy, the two nations Mexico and the Philippines may have started out in the same economic class back in the 1960s, but they are miles apart now. One is sparring as a welterweight, while the other is still stuck in the flyweight division. A change of regiment is needed for the latter to catch up with the former.

According to a World Bank report released in October, about 17 per cent of Mexico’s population of 115 million entered the middle class between 2000 and 2010. This means that close to 20 million began earning between $10 and $50 a day, the minimum standard for the global middle class.

The Pew Hispanic Center also showed that in 2012, net migration flows from Mexico to the US slowed, falling below zero for the first time in four decades, resulting in overseas dollar remittances to Mexico reaching a plateau following the Great Recession. This has not dampened consumer spending though as the Brookings Institution ranked its middle class within the top 10 list of “new big spenders”.

In fact, as the recession deepened in many parts of Europe, Latinos returned home joined by their Spanish compatriots to either work or start new businesses. In 2011, more than 9,000 from Spain moved to Latin America, up from about 3,600 in 2006. Between 2007 and 2011, the number of Spaniards emigrating to Mexico increased by 129 per cent.

Not only that, but the Spanish PM Mariano Rajoy went cap in hand to a Latin American summit of the Inter American Development Bank to seek investments from the former colonies to the Iberian peninsula as it reels from the EU debt crisis. This represents a reversal of fortune from the 1990s when Spanish companies took over prime assets in the region.

Jim O’Neill, the Goldman Sachs executive who coined the term ‘BRICs’ in 2001 has included Mexico in a new investment portfolio called ‘MIST’ which stands for Mexico, Indonesia, South Korea and Turkey. They comprise the four biggest markets invested in by the Goldman Sachs N-11 Equity Fund, which includes countries like the Philippines.

With the rising cost of wages in China, many manufacturers are considering re-locating production to Mexico. The country has turned into a powerful exporter and an unlikely challenger to the Middle Kingdom. As China’s working population ages, due to the one child policy instituted in the 1970s, the demographics ofMexico’s younger workforce seem to act in its favour.

The Philippines is about 30 years behind Mexico. Back in 2007, Goldman Sachs predicted that at current growth rates of 5-6 per cent, the Philippines would catch up to Mexico’s per capita income of about $8,000 by 2037. By then, Mexico would have achieved a per capita income of US$34,000 similar to what it is currently for France, Germany and Japan.

By 2050, the Philippines would attain a per capita GDP of around $20,000, around the same level as South Korea back in 2010, meaning it is about forty years behind its East Asian neighbour to the North. By then, Mexico will have attained a per capita income of $63,000, while Korea would have reached $90,000 having caught up completely with the West.

According to an Asian Development Bank report, only 4.5 per cent or 3.9 million out of a population of 93 million Filipinos back in 2006 earned $10 or above per day. About 23 per cent or 20 million live below the poverty line of $1.25 a day, while a similar amount earned between $1.25 and $2 a day and risked slipping into poverty. The remainder, about 50 million, earned between $2 and $10 a day, the ADB’s definition of middle class.

The same report says that in the two decades leading up to 2008, “the Philippines appears to have stagnated” as China zoomed past it in reducing poverty and increasing the middle class. In fact by 2030 under its most optimistic projection for developing Asia, only the Philippines along with India, Indonesia and Bangladesh would still have a significant proportion of people living in poverty.

If the growth of the middle class in Mexico is helping it avoid the “middle income trap” a term economists use to denote a country that can neither compete with low wage countries nor leapfrog into higher value economies, slow upward mobility in the Philippines is keeping it there.

Last week, the government announced that the economy had beat expectations and grown at 7 per cent in the third quarter, the fastest in Southeast Asia. Cielito Habito, a self-proclaimed professor of ‘Aquinomics’ was quick to point out however that though the GDP growth figure was stellar, jobs growth in the year remained dismal as only half a million net new jobs were created between 2011 and 2012, half of the targeted 1 million.

For the Philippines to become more like Mexico, it will have to foster growth in its manufacturing sector. Habito supports this view. Only sectors like tourism and manufacturing employ low-skilled workers who form the bulk of the unemployed and underemployed, according to him.

To reverse the premature stunting of our industrial sector, Raul Fabella, former dean of the UP School of Economics says that something will have to be done to limit the rise of the peso. This he says is causing severe stress to our exporters.

My question to these experts is given that the Philippines has lost its competitiveness in low skilled manufactures such as textiles and footwear and is focused more on elaborately transformed manufactures such as electronics, how will the low-skilled unemployed land a job in this sector assuming it is revived?

In boxing terms the two countries might be competitive, but economically, Mexico packs a much larger punch.

In Mexico the return to power of the PRI which ruled the nation for 71 years prior to 2000 after spending just 12 years in opposition is a stunning turnaround. Many had thought that this party which managed the country with an autocratic, transactional approach would be consigned to political oblivion for much longer.

From 2000 to 2012, the rise of China and the recession in America began to hit the Mexican economy hard. Having lost its majority in Congress, the successor to the PRI failed to pass structural reforms, and focused its energies on waging war with the drug cartels which has left 60,000 casualties in its wake. As a result, growth averaged a mere 1.8 per cent per annum. The newly installed president ran under a pledge to restore that growth to 6 per cent.

At his inaugural address the incoming president Enrique Peña Nieto departed from tradition by avoiding grand symbolism or rhetorical flourishes and honed in on two specific areas: education and competition policy. This signaled his willingness to take on the powerful teacher’s union and the two largest business groups that control the media.

The 46-year-old former state governor then went on to forge a pact with the five major political parties in congress to support his road map for the development of Mexico around five broad themes. There was no beating around the bush, here. No spending the first 100 days to settle in, no six to nine months to develop his legislative priorities. This president wasted no time in laying down a plan, spending political capital and getting the major players behind it.

For the Philippines to become more like Mexico, it will have to demonstrate the same sense of urgency at reforming itself from the top in a manner that Nieto has shown. Part of that requires arriving at a consensus on the way forward, forging an agreement around a shared set of values that would provide an organising principle to shape the development of policies and programs.

The Philippines may be thirty years behind economically, but if it reforms itself now, it might have a fighting chance to catch-up with Mexico much more quickly than previously thought. The question is whether our leaders have the courage to pass the much needed structural reforms that promote middle class values and reduce poverty before their time runs out.

Remittance Driven Growth

Monthly remittances inflows (US$ millions)
Source: World Bank

If anyone needed an explanation for the robust growth of the Philippine economy for the last nine years (two of which under the present dispensation), then the chart above would go a long way towards providing it. It shows monthly foreign remittances flowing from January 2003 to February 2012 into the country compared to that of some Latin American, Caribbean and South Asian countries of similar size or income to the Philippines.

In terms of its foreign remittances, the country is an absolute stand-out rising from about $600 million a month in early 2003 to about $1,500 million in early 2012. In the twelve months leading up to February 2012, the total inflows to the country was about $20.2 billion. If we convert that to pesos using the average exchange rate in 2011, that is roughly equivalent to PhP875 billion. In an economy of roughly PhP9.5 Trillion, that is about 9.2% of GDP. Given the multiplier effect that this income has, it would be safe to say that remittances contribute about double or about a fifth of the economy.

Unlike, Mexico which is dependent on its Northern neighbour the United States for providing a market for their cheap labour, the Philippine work force has its eggs in many baskets, not only in different countries, but many occupations, both high- and low-skilled. This is reflected in the data which shows that as the Great Recession unfolded in the US from September 2008, the growth in remittances to Mexico hit a ceiling, while that of the Philippines maintained its upward trajectory catching up with its North American counterpart towards the end of 2011.

As of October 2012, the nation’s gross international reserves reached a record high of $82 billion, 8% higher than it was a year ago at $75 billion. This would be enough to pay for close to a year’s worth of imports or settle half a year’s worth of debt resettlements. One can clearly see that without these foreign remittances, the gross international reserve position would be shrinking, not expanding.  In fact, if you took away the growth in remittances which was 7.1% year-on-year from 2010 to 2011, then you probably wouldn’t have seen any growth in the Philippine economy during that time.

These dollar remittances inflows are roughly the size of the Philippine government’s tax and revenue intake for a year. They could finance the government’s annual deficit three times over. The recent upgrade to the country’s credit status to one notch below investment grade owes more to this phenomenon than to the government’s “fiscal consolidation” and “debt management program”.

In its recent report for the third quarter, the global investment monitor Thomas White has said

The Philippine economy is in a sweet spot mainly due to the high infrastructure spending the country has unleashed. Adding to this, strong remittance income from oversees Philippine workers, a fast-growing domestic services sector, and increasing confidence from foreign investors bolstered to the country’s buoyant economic outlook.

If you averaged out the growth for the last four quarters, you would find that it would be  4.85% , the same as its average growth for the last ten years. The confidence of foreign portfolio investors in the local stock market comes largely from the country’s ability to keep the economy chugging along as events from Europe have dampened the outlook for other countries. This was admitted to by a senior official of investment bank Goldman Sachs in a recent visit to Manila. The White report continues by saying

With the country’s government awarding $16 billion worth of contracts to build social infrastructure that included constructing thousands of classrooms, the outlook for the infrastructure industry has grown rosy. The construction sector posted a growth of 10% during the quarter up from the 7.6% registered during the first quarter. As public spending rose, employment outlook also improved during the quarter, boosting consumer demand. Household consumption jumped 1.4% during the quarter, up from the 0.9% during the first quarter.

Notice that they say it was the “outlook” on employment from the “infrastructure outlook” that boosted consumer demand. That is either a lot of faith placed on the outlook or it was a result of hard cash pouring in from Filipinos living and working overseas (UPDATE: note that the construction boom is happening because the property and realty sector is benefiting from remittances, and this has actually gotten some analysts worried about a possible housing bubble). The report concludes by saying

…Meanwhile, despite maintaining a record low interest rate of 3.75%, inflation in the country fell to a low of 3.6% in September from 3.8% in August. The central bank has targeted an inflation of 3% to 5% for 2013.

The BSP has in fact cut interest rates recently to temper the appreciation of the peso that has been hurting the competitiveness of our export industries. The situation has been described as reaching a breaking point by industry insiders. The power of the peso relative to the US dollar is what is behind the low inflation figures as imports become cheaper. The so-called “sweet spot” of high growth, better employment and low inflation can actually be explained by the continued growth of remittances rather than any privately-financed stimulus that has yet to be spent.

 

The world according to HSBC

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.

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?

Source of image: taiwandocuments.org

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.

The long-term view

 

With experts calling tepid and jobless growth the “new normal” for North Atlantic countries for years to come, it is important for governments to assess how this impacts them in the long-run.

The administration seems to have put two and two together and realized that with weaker growth prospects come weaker revenues and in an environment where any sort of fiscal deterioration could lead to speculative attacks on an economy, it is aiming to shore up its fiscal position through tax reform before the effects of the crisis start washing on our shores.

There certainly is nothing like a crisis to focus the mind on issues that would have slipped under the radar otherwise.

Fixing the areas in our tax system where leaks occur is just as important as trying to avoid wasteful spending. Paying full-market prices for second hand helicopters may create more of a buzz in the media, but the impact of improperly crafted policies on fiscal incentives or sin taxes create much bigger losses for the government on an annual basis.

The uncollected portion of those taxes could easily fill-up the public sector deficit eliminating the need for forced fiscal contraction that prevents us from building the necessary social and economic infrastructure needed for attracting job-producing investments and for improving governance.

The long-term view would allow our leaders to make the tough decisions to undertake necessary reforms that would lift the long-run productivity of the Philippines instead of merely catering to populist sentiment and short-term political payoffs.

Take a look at the following chart which shows various long-term forecasts for average annual incomes per person in the Philippines.

The high-growth scenario comes from the analysis of Dominic Wilson of Goldman Sachs on the Next-11 group of countries with strong growth potential. You can see why all those toxic sub-prime mortgage backed securities could be endorsed by them to Standard and Poor’s for triple A rating.

The rosy positive outlook has our citizens earning $20,000 on average by the year 2050. We should take our cue from those crafty people at GS who bet against the very investment vehicles they packaged and sold to investors, by hedging our bets a little. Let us consider other possibilities.

The low-growth scenario is taken from the Institute of Future Studies online data available via Google’s public data explorer. It shows the country achieving a per capita GDP level of just above $4,000 by 2050. This is quite a low level of growth given that the NEDA projects a $5,000 per capita income by 2020 (assuming we grow by 7% for the next ten years).

The high-growth scenario assumes growth of 6.4% per year on average in the next forty years (net of inflation). The low-growth scenario assumes that it grows by 2.9%. Note that with the population rising, the growth of the overall economy needs to be 7.6% under high-growth and 3.9% under low growth for average incomes to rise as they are forecast here.

I have projected a middle case in between the high and low growth scenarios. This trajectory produces an average growth rate of 4.9% per year. Under this scenario, average incomes are set to rise to close to $10,000 by the end of the forecast period ($9,497 to be exact).

This level of income is important because as the World Values Survey suggests, $10,000 is right around the level at which the minimum material needs of a country are met. Above this level, the reported level of subjective well-being is less dependent on income growth than on other factors.

Based on this survey, the Philippines is punching above its weight in the happiness index (far above its material wealth would imply). Imagine what would happen if Filipinos attained an even higher level of income.

Considerations for the long-term view

The question now becomes, what sort of policy shifts in the next five years would spell the difference between each scenario. Even though its framework produces an overly optimistic case for the Philippines, it is worth looking at the Growth Environment Score of Goldman Sachs to see what kind of policy response is required.

Under the 13 components of the GES, the Philippines was considered at par or above average in four aspects in 2006, namely: inflation, trade openess, education and life expectancy. It was considered below average in three economic indicators: fiscal deficits, external debt and investment; three governance indicators: political stability, rule of law and corruption; and, three infrastructure indicators: computers, phones, and internet penetration.

Tax reform would allow the government to correct the below par performance in debt and deficits. Investments could be addressed through competition policy and an opening up of restricted sectors. Political stability, rule of law and lower corruption results from better fiscal capacity to provide social safety nets and a more professional bureaucracy. Finally, better telecommunications governance results from both better regulatory quality and bureaucratic effectiveness which come about by opening up the economy and compensating public officials better.

The bottom-line is that better fiscal capacity along with sound and rational policy result in better growth prospects for our country. Let us hope that our leaders are able to take heed of this maxim and resist the urge to pander to populist patrimonialism in the short-run. By 2050, there will be between 135 and 145 million Filipinos. It is for the sake of this silent electorate, that I hope our leaders fix their vision on the long-run.

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.

How Sri Lanka Overtook the Philippines

It is a continuing expression of the financial market’s faith in the story of poor countries catching up with richer ones propelled by economically liberal policies. Read more