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.

25 years of rejecting kings, presidents, and voting

“We reject kings, presidents and voting. We believe in rough consensus and running code,” David Clark spoke those famous words, and for 25 years those words guided the Internet Engineering Task Force (IETF) in how it sets technical standards on the Internet. The IETF is a standards body made up of… wait for it… anyone. There is no membership to speak of, well except if you join their mailing list, and everyone is welcome to join.

Ars Technica wrote an excellent read if you want to know more about the IETF. Here’s a snippet:

The Internet Engineering Task Force turned 25 yesterday. In that quarter century, 79 meetings were held in 15 countries and 4,500 RFCs (requests for comment) were written, resulting in 70 Internet Standards and 155 current best practices. Many more protocols are proposed standards and are often widely used, but haven’t made it to standard status—yet. This includes HTTP, for instance.

The IETF grew out of a group for government contractors working on the ARPANET who got together a few times a year to discuss what needed to be done to improve the network. In the intervening 25 years, it turned into a standards organization that creates standards related to the technical operation of the Internet.

Rough consensus translates to what is the dominant view point of the group. The interest of the IETF is that it is interested in “practical, and working systems that could be quickly implemented.”

Is there something, we Filipinos could learn from rough consensus?

The rough consensus is that we are not a rich nation and that incapacity exists. Looking at it under the context of charter change, In many ways, the answer has always been making the best with what we got, and building on top of it. In search of the most bang for the buck; and it will never be a perfect system. And politics would always be a series of compromises, imperfect.

Engineering and politics have one thing in common. In both spheres, the world is imperfect and every implementation is already partly a failure. The world is imperfect and while we attempt to build perfect systems, there will always be flaws in everything we do.

The second important quote that describes what the IETF is, and how it does business is known as Postel’s Law: “Be conservative in what you send and liberal in what you accept.” In my humble opinion it also works in a democracy.

Image credit: xkcd, some rights reserved.

Governments should not have a monopoly on the Internet

On Google’s blog, Vint Cerf popularly known as the Father of the Internet for his contribution to the development of TCP/IP, the protocol that makes the Internet possible wrote,

The beauty of the Internet is that it’s not controlled by any one group. Its governance is bottoms-up—with academics, non-profits, companies and governments all working to improve this technological wonder of the modern world. This model has not only made the Internet very open—a testbed for innovation by anyone, anywhere—it’s also prevented vested interests from taking control.

But last week the UN Committee on Science and Technology announced that only governments would be able to sit on a working group set up to examine improvements to theIGF—one of the Internet’s most important discussion forums. This move has been condemned by the Internet Governance Caucus, the Internet Society (ISOC), the International Chamber of Commerce and numerous other organizations—who have published a joint letter(PDF) and launched an online petition to mobilize opposition. Today, I have signed that petition on Google’s behalf because we don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works—protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.

Posted by Vint Cerf, Chief Internet Evangelist

Cerf is right. The last 30 years the Internet is driven by The Internet Society has done the world much good. It couldn’t have been made possible, if it was driven by governments, or the UN.

A sense of drift

A series of events seems to have blunted the reform agenda that PNoy promised and sought to deliver in his first months in office.

According to the Asia Sentinel, the Supreme Court dominated as it is by appointees of his predecessor Mrs Gloria Arroyo, seems to be conducting an effective rear guard action thwarting any attempt by PNoy’s administration to invalidate the appointments she made in the dying days of her term. Marites Vitug is quoted as saying

The Arroyo court is going to be an obstacle to Aquino’s anti-corruption program. The Arroyo allies’ strategy is to legally assault Aquino through the Supreme Court, which she still controls. This is baffling to me – because the political winds have changed. But now it looks like the ties that bind her appointees to her are deep. The court may strike down the Truth Commission, uphold GMA’s midnight appointees, and stop the Ombudsman’s impeachment.

Beset by factions within his government and lacking a coherent strategy to map out the steps needed to navigate through the minefield laid by Mrs Arroyo and her allies, Ms Vitug claims that what PNoy needs is a counterpart to Jose Almonte, the chief ideologue and behind the scenes operator of the Ramos presidency.

Cielito Habito chimed in through his regular column for the Philippine Daily Inquirer. He waxes nostalgic for the days when a meritocratic governance style was wielded that required cabinet to close ranks behind a consensus driven process and implement decisions through intergovernmental coordination: this as a kind of back-handed compliment to Malacanang’s current occupant whom he claims could “learn a thing or two” from the example of his former boss.

The lack of standards in handling the diplomatic faux pas committed by an assistant secretary and speech writer Carmen Mislang via twitterverse at his first official state visit to Vietnam is a continuation of the leniency demonstrated in the wake of the Luneta hostage drama. This is in contrast to the ongoing vacillation over the status of interior and local government Sec Jesse Robredo in his cabinet. Solita Monsod wrote a piece over the weekend appealing to PNoy to consider the merits of keeping him in his confidence given his sterling accomplishments in the area of governance reform.

These criticisms seem to cement the notion that PNoy’s presidency is adrift in a sea of division and chaos. It appears that although Mr Aquino’s personal integrity and character make him unwilling to countenance dishonesty; by the same token, it makes him more tolerant towards incompetence when it is committed by his trusted aides.

During the 2010 campaign, many criticisms were hurled at then candidate Aquino. One of these was his lack of executive experience and leadership qualities. I in fact argued back then that his ability to attract competent and reform-minded advisers to his side allowed him to narrow these competency gaps. It now appears that PNoy’s easy-going style seems to be ill-served by a mixed bag of competent AND trusted but inexperienced and naive appointees.  The latter may have the ascendancy as they often do when the leader remains unclear or ambiguous with his directives since they can always claim to have personal insight into the inner workings of his mind.

That is the crux of the problem moving forward. PNoy needs to consider either making adjustments to his team by allowing for greater meritocracy even if that means working with people that might rub him the wrong way, or making adjustments to his leadership style by being clearer about what he wants delivered to him and the consequences for failure leaving very little wiggle room on the part of his subalterns who claim to “know what the boss wants”.

So, dear reader, as always I leave it to you to assess the merits of this argument. What in your opinion would be the best way forward?

Palace is satisfied with latest transparency international result

This one from the Inquirer:

TI ranked the Philippines this year at 134th from last year’s 139th in the transparency and good governance index.

“We’re just four months old, Mia, and the fact that we improved in the ranking says something about our determination to promote good governance,” Presidential Spokesman Edwin Lacierda said in response to a reporter’s question during a news briefing on Wednesday.

“We’ll continue to do our part in the promotion of good governance,” he added.

You can find a PDF of the report, here.

Are you satisfied with this report given that the Administration is only 4 months old?