sovereign wealth fund

Succeeding Aquino

Political succession is the key to long-term economic growth.

The Philippines has been hailed as a rising star among emerging markets in 2013, but sustaining this strong performance will require a good succession plan for the Aquino presidency. Political succession as it turns out has been a crucial driver of long-term economic growth among emerging economies over the past fifty years.

A study conducted by Tim Kelsall for the Overseas Development Institute of Britain comparing the growth experiences of countries in the rapidly growing regions of Southeast Asia and sub-Saharan Africa has found that,

Contrary to currently fashionable ideas about ‘inclusive institutions’ and ‘golden threads’, (we find) that crucial to combining succession with growth is the embedding of policy-making in strong institutions of one of two types: 1) a dominant party with a tradition of consensual decision-making and leadership succession, or 2) a strong, organic bureaucracy, effectively insulated from changes in political leadership.

Sub-Saharan Africa, which today is the fastest growing region in the world, did experience respectable growth rates in the 1960s and 1970s. What prevented this region from sustaining its economic performance in the long-run was the failure of many countries to manage political succession well.

The same could be said of the Philippines. From the 1950s to the 1970s, the country experienced solid economic growth rates averaging between 4.9 to 6.4 per cent (see table below). Of course this was still well below the growth of Malaysia or Singapore, but it was respectable, nonetheless.

Source: NSCB

The 1980s spelled the end of this sustained growth as the Marcos regime, which had been in power since 1964 collapsed. The upheaval began with an international debt crisis and the assassination of Senator Beningo Aquino, Jr in 1983. “Ninoy” as he is popularly known was returning from exile in the United States where he was granted furlough by the regime to undergo heart surgery, after spending close to 8 years in prison. The then leader of the opposition was hoping to convince President Marcos to accept a power-sharing deal that would allow for a smoother transition to democracy.

Unfortunately, due to the ill-health of the former dictator (he was not totally in command of the situation), the conciliatory offer was not taken. Instead, the death of Senator Aquino led to massive street demonstrations and the eventual fall of the Marcos regime. They say that authoritarian governments offer a tradeoff: higher economic growth, in exchange for a higher risk of economic collapse when they fail to manage succession smoothly, and that is exactly what happened.

The 1980s saw a diminution of growth to 1.8 per cent. This was lower than the population growth rate, meaning per capita incomes retreated during this decade. The transition from Ferdinand Marcos to Corazon Aquino was marked by a series of coups, natural disasters and a power crisis. It is clear from the chart above that the Philippines never fully recovered from the trauma of this fall until the 2000s when growth averaged 4.8 per cent, roughly where it was in the 1960s.

Of course, the political transition was not the only factor that influenced economic growth during this period. The country was also making a transition away from protectionist industrial policy towards a more liberal economic position. The former had played into the hands of crony capitalists under the Marcos regime. Much of the debt that was accumulated during this time was illegally siphoned off. That was economically unsustainable.

Political economists Emmanuel De Dios of the UP School of Economics and Jeffrey Williamson of Harvard took a candid look at the possible factors that could have been responsible for us deviating from our upward path since the 1980s. They list the following as possible candidates:

  • political instability at a critical time in the 1980s
  • a subsequent failure to exploit the move of Japanese manufacturing FDI [foreign direct investments] into the region
  • an institutional weakness benign in the pre-1982 past but made more powerful since
  • some liberal policy package that penalized manufacturing when it was already on the ropes
  • emigration surge in the 1980s that stripped the work force of industrial skills
  • some massive Dutch Disease created by subsequent huge emigrant remittances.

They conclude that no single factor determined the outcome, but that all of them may have come together to create a ‘perfect de-industrializing storm’. I tend to agree with their findings although, the originating event is clearly the political instability that occurred as the dictatorship was in its death throes. The fact that Marcos or his party did not have a succession plan to manage a transition locked the country into a path of low growth in the subsequent decades.

Whatever the cause or causes of this, the authors acknowledge that the resulting pattern of growth has been less than ideal:

The path followed has led to a new stable equilibrium where a largely liberalized trade in goods coexists with a recurrent current account surplus built on remittances and strong (skill‐intensive) service‐sector exports. The peso is under steady pressure to rise in real terms, which leaves little room for (lower‐ skill) manufacturing to compete and expand. A considerable rise in the investment rate—still low by East Asian standards—would relieve the current account pressure for real appreciation and create more jobs. But the low investment rate may be part of an equilibrium where capital requirements are low simply because a significant share of the urban labor force is already abroad. [emphasis added]

In the first half of the current Aquino presidency, growth has averaged 5.8 per cent, close to where it was in the 1970s. Severe weather and economic conditions globally are not expected to knock it off its current path. As noted above, the trajectory is due to a combination of income flows from abroad and investments in the modern services sector. This has led to the criticism that it is not broad based.

A number of factors however seem to be lining up that could spell an end to this current “equilibrium”. The first is the slow but gradual demographic transition which could lead to an “economic sweet spot” where labour demand exceeds supply. A debate among technocrats is currently underway as to when exactly we will reach this tipping point. Central bank officials predict this could be as soon as 2016, while the more conservative economic development agency estimates for this to happen in the 2020s. I foreshadowed this debate in a post from two years ago.

The second factor is the gradual build-up of foreign reserves in excess of our external obligations, which is driving up the peso and convincing monetary and fiscal officials to consider setting up a sovereign wealth fund to address the investment gap that is hindering job creation. I have been advocating for this wealth fund as early as 2010.

The third factor is the “systemic vulnerability” from external threats to our national sovereignty and security, particularly from China, which could motivate the development of a national agenda towards building a better, stronger economy, to face these challenges from abroad. The same sense of vulnerability from both external and internal threats was what motivated Japan, Korea, Taiwan, Singapore and Malaysia to forge a national developmental agenda.

The key to all of these factors in producing the desired outcome is the ability of our political system to fashion a solid policy making capability from one of two sources: either through stronger political parties or a professional economic bureaucracy insulated from political interference. The continuity of a sound, stable policy making capacity with the ability to set the national agenda allows for considered, adaptive economic policies despite a number of political successions. This is the crucial element that would ensure sustained, rapid growth in the long-run.

Some further reading:

  1. The new Philippine political architecture: a blueprint for strengthening political parties.
  2. The national development project: Renovating the bureaucracy


If people want pork, should we let them have it?

The jury is literally still out, but the poll results are in, and they look ominous for those who want to abolish pork.

As the Supreme Court deliberates on the legalities surrounding the Priority Development Assistance Fund, a people’s initiative was being organised to propose the scrapping of pork outright. The protest movement swiftly adopted the idea posed by an ex-Supreme Court Chief Justice, and began calling for volunteers to collect the required number of signatures to put their proposal to a referendum.

Meanwhile Pulse Asia released the results of a nationwide poll conducted from September 24-27. Apparently, despite 90 per cent of respondents saying they were aware of PDAF (up from 66 per cent a decade ago) with news of wholesale plunder of such funds allegedly funnelled to ghost NGOs percolating in the media, a clear majority or 55 per cent still want to retain pork as it is, or with stricter guidelines or in a diminished form. Only 45 per cent wanted to do away with the practice altogether.

This is unwelcome news for the Scrap Pork Network behind the Million People March. It means that they have their job cut out for them. Not only will they have to collect millions of signatures from a minimum of 10 per cent of registered voters nationwide and at least 3 per cent from each electoral district, in accordance with the law on people’s initiatives, they will now have to convince a large chunk of voters to change their mind and support their proposition. If the wretched conduct of congress over the PDAF scam has not convinced them to support the scrapping of pork, it is hard to imagine what will.

It is clear that in a country with a culture of patronage, people want their pork. The question now is whether we should let them have it.

From a strictly moral sense, some idealists might argue along the lines (to quote the scriptures) “if your hand causes you to sin, cut it off.” Applying this to the situation, if pork causes our politicians to steal, shouldn’t we cut it off from them? That’s the basic rationale of abolitionists.

It is clear that a majority of Filipinos don’t see things this way. For them, there might be competing moral standards at play. To use a passage from Joel Migdal’s book State in Society: Studying How States and Societies Transform and Constitute One Another:

What may be easily labeled as corruption or criminality, such as nepotism or smuggling, can also be looked at, for instance, as a morality favoring kinship ties over meritocracy or one expressing the right of movement of people and goods across the boundaries arbitrarily imposed by state law.

Given the deep-seated attitudes of Filipinos favoring the pork barrel system, and their penchant to rely on personal ties based on kinship to get the resources that they need and want at the local level, legislating new moral codes won’t necessarily lead to behaviour change.

What is needed is a more systemic way of dealing with the structural bottlenecks in government that allow politicians to use pork barrel as a way to address unmet needs in the community, at large, and profit from it along the way, both politically and economically. To use an analogy from the drug enforcement field, the only way to lower the people’s addiction to pork, would be to address both supply and demand channels. What are these channels and how do we address them?

Allow me to propose six ways to deal with the demand and supply of pork. These are outlined below:

Reducing the supply of pork

When talking about the supply of pork, I am talking about where pork comes from, or how it gets doled out. I am talking about the budget process, and how both congressional and presidential pork get inserted into the general appropriations or retro-fitted into national expenditure accounts. So the question here is, how do we reduce the supply of pork at its sources? The following measures should therefore be considered:

  1. Pass a Budget Impoundment Control Act (BICA). To prevent the president from impounding budget savings and using them for unauthorised expenditures.
  2. Invest all GOCC profits, including the proceeds of PCSO and PAGCOR into a Sovereign Wealth Fund (SWF). To be governed by a board of directors and staffed with professional managers. The principal of the fund is to remain untouched, and only returns from investing it in safe, risk free assets are to be used for development purposes. This is to prevent profits from being used for political purposes. Incidentally, this is how the Malampaya Fund should operate as well.
  3. Pass Freedom of Information (FOI) and Whistleblower Protection (WBP) legislation. This would allow the sunshine principle to come into play that would increase the likelihood of scams to be caught and reduce the risk of pork abuse by legislators and the president.

Reducing the demand for pork

It is not sufficient to reduce the supply of pork, we also need to address the needs of the people in a more systemic way, to lessen their dependence on pork. As a start to this exercise, we need to ask, what were the most common uses and abuses of pork in the past? We have seen that the most abused element of pork has been the ‘soft’ projects, consisting of services such as livelihood training, medical kits and agricultural aid, as opposed to the ‘hard’ projects which are attended to by the government’s public works department. The following are some remedies to the demand for “soft” pork:

  1. Use the earnings from the Sovereign Wealth Fund (no. 2 above) to:
    • provide scholarships and income contingent loans to tertiary students and out of school youths. This would eliminate the need for congressmen and senators to fund scholarships through pork
    • invest in the Philippine Health Insurance Fund. This would support universal healthcare for indigent patients.
    • invest in social welfare projects. To expand the coverage of the conditional cash transfers and other community based projects.
    • invest in agriculture and agrarian reform projects. To fund the CARPeR and modernisation of our agricultural sector.
  2. Adopt recommendations by the Philippine Institute for Development Studies endorsed by the Leagues of Provincial Governors and Mayors to reform the Local Government Code to allow LGUs to raise revenues on their own by about an estimated third of their existing funds reducing their dependence on internal revenue allotments from the national government and on congress for aid. This will allow local governments to have fiscal capacity to address local needs.
  3. Provide state funds to political parties. To lower the demand for pork from politicians who need it to get re-elected.

If we could pass these measures, their combined effect would be to channel more resources to systemic and programmatic approaches to tackle poverty and underdevelopment and have less resources available for patronage based approaches. This is not to say that pork will be legislated out of existence, but what it will do is lower the incentives in the system that drive it. There will be less avenues for patronage and better safeguards to limit the abuse of privilege.

I know this is not the policy solution that abolitionists want. They would rather have what seems to be a more direct route to their goal. The problem is that by seeking to legislate against certain behaviour, without addressing the incentive matrix that fosters it, they are really conjuring up a whole heap of unintended consequences. Illicit drugs do not disappear simply because we have made them illegal, or because we catch a few drug dealers and send them to prison.

Rather than expending all that effort in finding a silver bullet through a people’s initiative, the reform movement should actually be putting its weight behind a reform agenda that would wean both patrons and clients off of pork, so that they may find healthier ways of conducting their business. The answer to the question, should we let the people have pork, if that is what they want, ultimately lies in changing the tastes and habits of both the public and those in power, through shoves and nudges rather than mandating them to change their “wayward ways”.

Philippine conservatism

On the problem of “jobless growth” and how to fix it

The last time the Philippines experienced an economic contraction was way back in 1998 in the aftermath of the Asian financial crisis. Since then, the country has posted 57 consecutive quarters of positive growth averaging 4.7 per cent in real terms year-on-year.

That may not be as fast as the Chinas or Indias of this world, but it is still pretty respectable considering the events both domestic and foreign that have occurred during this time (which include the impeachment trial of President Joseph Estrada, EDSA Dos and Tres, September 11, the crash and Enron scandal, the Oakwood mutiny, the global financial crisis, the Great Recession, and the current EU debt crisis, to name a few).

What do we mean by jobless growth?

Over the last seven years, 5.42 million net new jobs were created or an average of about 773,000 annually. This again is no mean feat. The only problem is that the labour force has also grown by about 5.49 million averaging an increase of around 785,000 new entrants per year 76,000 more than the jobs created since 2005.

If the growth of our workforce had been half as much, then the amount of jobs created would have been sufficient for the 2.8 million unemployed workers in 2012. If not for demographics, our unemployment rate would be much lower. Jobless growth in our context can best be described as a situation where economic growth fails to produce enough jobs to reduce the absolute number of unemployed workers in a sustained manner.

In the past, the economy’s inability to bring the number of the unemployed down was assigned to the growth rate not being fast enough. Instead of growing at an average rate of around 5 per cent, we needed to be growing at 7 per cent, or more.

Over the past three quarters, that is precisely the speed at which our economy has been expanding–above 7 per cent–which makes the employment figures for the April 2013 quarter all the more disappointing. Over the year, the number of those employed actually fell!

While we should not read too much into one quarter’s report (it is best to average four quarters’ worth of jobs data for the year to get a more realistic picture), it is still worth pondering how the economy could have expanded so much and yet not have made a dent in employment terms.

Examining “jobless growth”

Perhaps, much of the growth occurred as people moved from temporary and daily wage earnings into full-time, salaried employment as the labour force survey suggests. Increased income per worker rather than an increased number of workers might be a plausible explanation.


The other could be the increasing “financialisation” of the economy as the banking and finance sector posted one of the highest growth rates among all sectors. This means that growth came more in the form of profits, bonuses and commissions paid to the business elite and their shareholders. Financialisation has been blamed for jobless growth in the West, more recently.

Then there is technological progress. The construction industry, for instance, may have grown the fastest, but the use of new methods and materials might have made it less labour-intensive than before.

The same applies to manufacturing. Our country once specialised in garments and toy-making which were conducive to sweatshops, but we have since switched to electronics and semi-conductor production which makes use of automated processes. The rapid growth in durable equipment that occurred in the first quarter could have allowed businesses to substitute capital for labour.

How Philippine conservatism is to blame

This would all be fine if those who profited from growth gave back a proportionate amount of their earnings in the form of taxes. Unfortunately, the collection of taxes went down as a proportion of GDP in the first quarter of the year. Despite the best efforts and reassurances of the current administration to lift the tax collection effort, their ability to generate tax receipts in a manner that would keep pace with the growth of the economy, remains very much in doubt.

The unemployment situation would be even worse if not for the mobile and adaptable workers that we have. Over the past seven years, the country has on average deployed 1.3 million Filipinos each year to work abroad. If we had not done so, we would have had double digit unemployment rates during this time. There would have been greater poverty, crime and social unrest, not to mention less consumption, savings and investment.

The residential and commercial property sector as well as financial markets would not be experiencing the boom we are currently witnessing. The credit upgrades that our political elite boast of would not be possible either.

Yet, despite the extra impetus provided by ordinary Filipinos who are forced to earn their living from abroad, often under difficult conditions, separated from their loved ones, the conservative forces in our society have successfully marshalled resources to maintain the status quo or keep it from changing rapidly instead of opening up our socio-economic life to the dynamism that it requires.

First of all, the demographic burden that we have discussed above has been caused by conservative forces hindering the development of reproductive health policies for decades. As a result, the Philippines will only see its population peak sometime in the latter half of this century based on current estimates. This has created a situation where the country’s current growth rate is unable to provide a sufficient number of jobs for those entering the workforce.

Secondly, the low tax-to-GDP level in the country has been set by the oligarchic business community in complicity with dynastic political families who have been unwilling to contribute their fair share to improve our country’s physical, social and economic infrastructure, the very thing needed to boost investment. Of course that doesn’t bother them because as the big fishes in a small pond, they are able to keep their stranglehold on the nation’s resources.

As the government relies on the private sector to fund major infrastructure projects, large domestic conglomerates have successfully cornered these contracts. The tepid pace at which Public-Private Partnerships have been approved is due to the fact that interest from the global investment community has waned. This isn’t the sort of public private partnership we need. The correct form of partnership is for the business community to pay the right amount of tax for the government to do the investing, not the other way around.

Thirdly, other countries with more progressive leaders have created sovereign wealth funds from their balance of payments surpluses to invest in their nation’s development; but, the inherent conservatism among our policy elite restrains them from tapping the massive stock of foreign reserves generated primarily not through exports, nor by foreign direct investments, but by foreign remittances, to fund the infrastructure needs of the country.

This innate conservatism was on display during the last election. I did a thorough evaluation of the senatorial candidates—their policies and legislative proposals—and two of the most topical were the ones to increase “skills matching” activities and loans to micro, small and medium-size enterprises (MSMEs).

Now I have nothing against skills matching, but we know that there are skills shortages that if plugged would only solve a tiny fraction of the unemployment problem, and yet so many senatorial candidates ignored the elephant in the room, the massive, long-term unemployed in favour of the small target.

Similarly I have nothing against MSMEs, but we also know that MSMEs do not generate as much new employment, at least the kind that matters, i.e. the full-time, salaried kind. And yet they take up an inordinate amount of attention in our political discourse. The new ventures with high innovation content, the kind that generates higher incomes and greater employment were not even talked about, save for one candidate who took on board the sovereign wealth fund idea to fund them, but failed to get elected.

How do we rectify the problem

The notion of the state performing the role of investor of last resort, the source of funds for projects that are deemed too risky by private capital markets but could have massive potential, is seldom talked about. This is because our history is littered with incidents where our business elite have exploited their connections within government to fund their own pet projects. Rather than being the lender of last resort, the government has been the financier of first instance, or the source of “booty capital”.

Of course, given our innate conservatism, marked by a high tolerance for social inequality and low tolerance for risk, there is nothing that prevents us from focusing on the small target, the low hanging fruit, the necessary, but insufficient conditions for mass employment generation. We can continue focusing on providing the right “eco-system” for innovation and investment, lowering the cost of doing business and the like.

But what should happen if our overseas workers start being turned back in droves? What if that seemingly limitless source of jobs for our swelling labour force starts to run dry, whether this be due to economic nationalism (as in the case of Saudi Arabia with its policy favouring locals), border disputes (as in the case of Taiwan following the shooting by our coast guard of their fishermen), or some other unknown factor? What then?

Without this safety valve, will our conservative leaders still manage to keep an ironclad lid on our social cauldron? Even before it comes to a boil, they need to re-examine the basic framework for growth and development that has embodied their consensus for thirty odd years. In the past they have been good at socialising the cost of their projects and privatising the (super-) profits. It is time that we gear up the state to be able to fund development and innovative risk-takers and to capture a fair share of their rents for our people’s benefit.

Trapo Alert! Detecting political pandering, part 7


Featuring Jun Magsaysay, Edward Hagedorn, Antonio Trillanes, Samson Alcantara, Ramon Montaño and Ricardo Penson.

This is the seventh part in a series on the candidates for the senate in 2013. Just a recap: I am attempting through this series to have a serious discussion of the aspirants and their political platforms (or lack thereof). These are put through what I call the pander-o-meter to determine whether the policy detail they have released so far places them in either the reformist or populist columns. The following table details the range of possible scores a candidate can get and the equivalent meaning of each reading:Introducing: the ‘Pander-o-meter’ or Trapo Scale

A reading of… …is equivalent to…


Low levels of pandering detected, generally reformist in nature


A mixed bag of proposals aimed at both pandering and reforming


Trapo alert! Approaching dangerous levels of pandering


Could be likened to a vote buying trapo

In part 1, I covered Juan Edgardo Angara, JrBenigno Aquino IV and Alan Peter Cayetano. In part 2, I covered Francis Escudero, Risa Hontiveros and Loren Legarda. In part 3, I covered Aquilino Pimentel III,Joseph Victor Ejercito and Juan Ponce Enrile, Jr. In part 4, I covered Gregorio HonasanErnesto Maceda and Juan Miguel Zubiri. In part 5, I coveredTeodoro Casiño, the candidates of Ang Kapatiran Party (John Carlos delos Reyes, Lito David and Mars Llasos), and the candidates of the Democratic Party of the Philippines (Bal Falcone, Christian Señeres and Greco Belgica). In part 6, I covered Grace Poe LlamanzaresEd Villanueva and Richard Gordon.


Ramon Magsaysay, Jr (Liberal-Team PNoy)

At 74, Ramon or “Jun” Magsaysay is one of the older candidates in this year’s election. Having served in the 13th Congress as senator, he would be no stranger to the upper chamber having chaired a number of committees and contributed to if not authored a number of important laws such as the Anti-money Laundering Act, the Electronic Commerce Act and the Magna Carta for Small and Medium Enterprises.

He is also one of the few running for a seat in the upper house with a solid business background who supports innovation and the information economy, although it is ironic that his campaign does not have a website to communicate his platforms, just a scant social media presence (his Facebook account was created on 23 April and his Twitter account has 1,364 followers as at this writing). Thus, I was only able to find his platform through third party websites (like UP sa Halalan 2013) and through news articles.

Jun is pushing for:

  • a roadmap for the coconut industry,
  • a higher internet penetration rate, and
  • the creation of a sovereign wealth fund (SWF) that would boost innovation and entrepreneurial ventures in the country.

General Comments:

This is quite a full legislative agenda already. I was heartened when I read about his support for the SWF concept since I have been pushing this idea for more than two years. He assesses the risks of doing so, but he believes such risks are worth it given the potential benefits. Jun is the only candidate who has even addressed this issue. Given the ballooning of our gross international reserves as a result of remittances from Filipinos working overseas, he agrees that we need to direct some of it towards industrial development and innovation to counter the strength of the peso which is weakening our international cost competitiveness.

Among the senatorial contenders, Jun is the only one with an idea as to how to fund his proposals.  The rest just talk about spending programs, without any indication as to how their priorities would be financed. Jun does both with his endorsement of the SWF concept. Perhaps, due to his background in business and his honesty as a politician, Jun recognises that to get the economy of the Philippines heading in the right direction, livelihood programs and public infrastructure spending won’t be enough.

But he does not simply restrict himself to the promise of the information economy, Jun’s support for a coco industry roadmap shows that his views on economic development embrace both new and old economies. Again, the SWF could be used to spur the development of agro-industrial exports from coconut farming. The vision that PNoy has for the sector whose workers are the poorest in the industry could be realised by investing some SWF money in the commercialisation of export generating business ideas.

Pander-o-meter: 1 out of 5


Edward Hagedorn (Independent)

The long-serving mayor of Puerto Princesa, Palawan is making a bid for a national post for the first time with a platform based on his experience at fostering tourism in the island through peace and order and investing in natural capital. His Facebook page contains a short video clip that captures this approach in a slogan called Turismo, Trabaho, Mismo.

In his website, there is a more detailed description of his legislative priorities. There are numerous proposals involving the promotion of sustainable farming, eco-tourism and renewable energy. He also seeks to develop a national land use policy that would govern regional development and planning. He wants to promote regional investments through fiscal incentives, regional infrastructure and regional access to healthcare services right down to the barrio level.

On the health front, Mr Hagedorn’s proposal is to allow member contributions to increase in line with one’s salary to allow for greater coverage of services and for matching contributions to be made by government. He is also seeking greater devolution of health service delivery and for the allotment of local government units to be possibly increased in order to cover this.

On the social front, he advocates tougher laws on juvenile delinquency and beggars to be spearheaded by the DSWD and the PNP. He also seeks a regional employment program to replace the conditional cash transfer program of the national government and the funding of places in private educational institutions (i.e. a voucher system) in the public provision of education. He also supports the vigorous implementation of the reproductive health bill, progressive sin taxes and the freedom of information bill.

General comments:

Mr Hagedorn’s proposals for the country seem to be quite prescriptive, based as they are on his experience in the city of Puerto Princesa. Preserving the natural, cultural and human capital of a place is quite important for attracting tourism into the area. Having a land use policy would aid in preserving the character of tourist destinations.

My worry is that some regions in the country might not gain as much from an emphasis on tourism as others. For these regions, a different engine for growth is required. Perhaps the only option is farming, forestry or mining. To a certain extent, you could convert our forests into tourist destinations. If we could upgrade our government’s capacity to manage and enforce logging restrictions, we could have sustainable tree farms of already cleared forests alongside eco-tourist trails in preserved areas. The same goes for mining since many of our mineral reserves can only be accessed and extracted through forests. Again, a land use and environmental policy would be essential for regulating this.

Creating a voucher system for private education and flexible health coverage depending on one’s income will be a drastic departure from the current set up. More details are needed to determine the practicality and desirability of the plan. Despite that, putting them on the table could lead to very interesting debates and modifications in the senate.

Pander-o-meter: 2 out of 5


Antonio Trillanes IV (Nacionalista-Team PNoy)

Senator Antonio “Sonny” Trillanes IV, the former Navy Lieutenant turned rebel spokesman, is seeking a fresh mandate to remain in his position under Team PNoy. It must be quite a change after waging his first senate bid from a prison cell and serving the first half of his term from there. During his first term, he authored a number of important bills such as the Data Privacy Act and the Archipelagic Baseline Law.

He was the principal author of the Magna Carta for the Poor which was vetoed by the president due to insufficient funds. In his second term, he wants to enact a freedom of information law, amend the cybercrime act and extend e-procurement to all government agencies.

General comments:

Mr Trillanes took a while but his Magna Carta for the Poor bill has demonstrated his populist leanings. The law was vetoed by President Aquino for being prohibitively costly. As I have mentioned before, creating rights is one thing, but enforcing them is another. Enacting legislation that provides social and economic entitlements beyond the capacity of government and society to provide for is simply irresponsible.

I do not know what is worse: being the author of such a blatantly populist measure or voting for it. The fact that such a law reached the desk of the president for signature shows just how populist both houses of congress are. The fact that they were willing to follow the mad piper in pandering to the masses by passing his proposal is testament to the seductive appeal of going down the populist path. Fortunately, the president made the pragmatic decision and vetoed the bill on the grounds that he could not enforce it.

On the other hand, when it came to a measure that provided reproductive health rights which the government could afford and which would provide fiscal dividends down the track due to lower population growth, Senator Trillanes decided to vote against it. He may have enacted a number of good laws and his legislative agenda contains a few more good ones, but on the whole the senator’s performance has been a bit of a mixed bag.

Pander-o-meter: 3 out of 5.


Samson Alcantara (Social Justice Party)

The sole candidate for his party and law professor is running to bring about a more equitable society, although it is not clear how he intends to do this. The same goes for his advocacy for quality education and the establishment of a code for teachers and students.

This is symptomatic of taking a rights based approach to social and economic legislation. As I have said previously, many of our legislators think that they can legislate their way into a utopian society without considering the cost. Although he takes a high brow approach and couches the need to build a more egalitarian society on the constitution, it is very hard to see how his proposal for a people’s initiative to strengthen democracy will bring about the necessary social and economic transformation.

Essentially, creating a freer, more open and contestable political and economic system won’t be achieved in one go. Alcantara’s concept of social justice needs to be teased out further. He hasn’t really enunciated a coherent strategy for addressing inequity in our society. For someone who claims that the major political parties are not providing us anything of substance, he falls into the same category by his policy omissions.  I am tempted here to rank him a 5 out of 5 in the pander-o-meter because his platform seems hollow, but I am willing to be a bit more lenient in awarding a mark.

Pander-o-meter: 4 out of 5


Ramon Montaño (Independent)

This retired general is seeking to represent the veterans’ and retired soldiers’ interests in the senate and to decouple the police force from political interference. Other than that, it is not clear what he represents. The problem with single issue candidates is that they seem to represent a very limited view of the world. Electing someone to the senate should ideally be based on a more substantive set of policies and issues.

Pander-o-meter: 3.5 out of 5


Ricardo Penson (Independent)

This businessman is running to ban political dynasties since the case he filed with the Supreme Court has not prospered so far. As this has become a political hot button issue given the composition of the senate slates of major parties. It has forced some concerned citizens to run simply to put the issue on the table. He has also come out in support of progressive causes like reproductive health and divorce. What he lacks is an economic agenda.

Pander-o-meter: 2.75 out of 5


We are nearing the end of this series. The penultimate instalment will cover Nancy Binay, Tingting Cojuangco, Jamby Madrigal, Mitos Magsaysay and Cynthia Villar. This will be followed with a conclusion which will sum up all the findings in the series.

Sovereign wealth fund under consideration

That was the banner story of today’s BusinessWorld online.

Here is a direct quote from the article:

Economic managers are studying the possibility of setting up a Philippine sovereign wealth fund to maximize returns from the country’s foreign exchange holdings.
“As I understand, the national government is conducting a study on the possible operations of a sovereign wealth fund,” central bank Governor Amando M. Tetangco, Jr. said at the sidelines of yesterday’s Philippine Investment Forum.

Finance Secretary Cesar V. Purisima confirmed that the plan was being considered, although he said the review remained in the preliminary stages.

“We haven’t brought up the matter with [President Benigno S. C. Aquino III] yet. So far, it’s just look, see, study and evaluate,” Mr. Purisima said.

As readers of this space will be aware, I have been harping on this issue for over two years now. Before anyone in the upper echelons of policy making, whether fiscal or monetary, or within academia were even contemplating it, I had flagged the possibility here. The following is a compilation of the previous articles I have posted on the issue
Early this year, I developed a policy paper on this topic, which I enclose below

Fruits of Our Labour by Doy Santos

It’s good to see that after more than two years of writing and engaging with the issue, the idea is finally being seriously considered by both the Department of Finance and the Bangko Sentral as confirmed by today’s news item . Even more surprising is how prominent economists are now supporting the principle of establishing a sovereign wealth fund for the Philippines. If this should be included among the administration’s priority bills for the 16th Congress, it would be timely as the country is expected to receive investment grade status by the end of the year.

Challenging Conventional Wisdom about the Philippines

We could characterise our country as being stuck in a developmental trap where the only way to make it more competitive is to improve the productivity of its labour force. The primary way to do that is through capital deepening. But without capital, productivity declines relative to other countries where investments flow. The nation’s inability to raise productivity deters future investors, and on it goes.

It’s that time of the year, the month of Janus, when people take stock of what has gone before and produce an outlook for what lies ahead. Most balanced and fair commentators in the Philippines (and there are some) often highlight the things that year in, year out don’t change. It is funny because year after year, all they seem to offer are the same old platitudes, which our leaders do take to heart, but it all seems to lead to the same old results.

Let us start with the economy. Most analyses about the economy point to our strong macro-economic fundamentals. This year is no different. The growth registered in 2012 was 6.5 per cent. It is about the same as the average for the financial years 2000-01 to 2009-10 which was 6.1 per cent based on the national statistics board. The first two years of PNoy’s presidency have tracked closely to that long-run average. Nothing new there.

Aside from respectable growth, the country has experienced a relatively mild inflation rate of 3.2 per cent in 2012. Again, over the past half dozen years, apart from the blip in 2008 when the global financial crisis was in full swing and food prices soared, the country’s annual inflation rate has fluctuated within a narrow band of 3-5.5 per cent. There is nothing new or surprising here either.

The third item is employment. The latest data shows that from October 2011 to October 2012, the country suffered a net loss of 900,000 jobs. That would seem alarming. But considering that in the previous year, employment rose by 2.5 million, a truly anomalous situation, the recent decline (or correction in my view), means that over the two years, the nation created an average of 800,000 new jobs per year. Again, there is nothing new there. Net job creation has hovered around that mark for the past decade.

In order to prove that there has been some progress made, most analysts usually point to the intangibles. A change in the national mood due to renewed efforts to address intransigent issues is usually heralded as a precursor to better times ahead. Again, this year is no different. Without a doubt, there has been progress with the enactment of several laws, the impeachment of the chief justice, the improvement of budget rules for transparency, and the reaching of an agreement that might settle the conflict in the south.

Another way to argue that there has been renewed confidence in the Philippines is by pointing to the property market, buoyed by the business process outsourcing industry, the peso, buoyed by the country’s credit rating upgrades, and the stock market, buoyed by our sound macro fundamentals.

The only problem with all this is that it has yet to translate into what really counts —growth in fixed investments. Again, there seems to be no change here. In 2012, foreign direct investments have amounted to a mere $1.5 billion. That is about 3 per cent of the total that flowed into the ASEAN-5. This is a very dismal result, as usual.

The question here is why? The reasons given usually are a lack of competitiveness, restrictive investment policy, and poor governance and institutions. I would like to tackle these one by one, and offer my own insights into why I think the conventional wisdom surrounding them are misguided, and offer my own solutions.


It is a bit farcical but after the National Competitiveness Council’s efforts over the past two years to improve the country’s score in the World Bank’s Ease of Doing Business report by talking to foreign experts, understanding their methodology and working to satisfy their requirements, the result for 2013 was that the country slipped by two places down to 138th place in a league table of 185 nations. There had been a change in methodology, as there often is, which did not reflect the nation’s efforts, the NCC said, but needless to say, it is still a dismal record.

Disparities in administration across local government units as well as in- and outside of special economic zones and inefficient systems at national agencies are often cited as the causes for the abysmal performance, as is petty corruption among bureaucrats. While the Ease of Doing Business report indicates that government regulatory red tape has not improved, it would be wrong to say that the country’s overall competitiveness has not.

The Global Competitiveness Survey by the World Economic Forum takes a broader look at the issue –not just at how different a country’s rules, regulations and tax policies are from the leading economies of the world where most investments come from, but also at how well its labour force, infrastructure and innovation systems, to name a few, stack up in comparison. Here the country performed a bit better by advancing 22 places. It is now in the upper half of the league table. Whether this is enough to make investors change their minds is subject to speculation. We have to wait and see.

However, one of the main obstacles is the rising peso. It appreciated by 7 per cent last year. This makes the cost of producing things in the country for export relatively more expensive, particularly for the labour-intensive business process outsourcing industry. We could characterise our country as being stuck in a developmental trap where the only way to make it more competitive is to improve the productivity of its labour force. The primary way to do that is through capital deepening. But without capital, productivity declines relative to other countries where investments flow. The nation’s inability to raise productivity deters future investors, and on it goes.

Something has to break the cycle, and this won’t occur by simply relying on the Invisible Hand of the market, as private players suffer from the free rider problem—waiting for the first mover to take action before joining in. It will take some coordinated effort by government, and I will have more on this, shortly.

Investment Policy

Another oft-cited problem is the country’s overly restrictive policy on foreign ownership in selected industries. The 1987 Constitution is identified as the culprit. Actually, prior to adopting the present constitution, there were more industries in which foreigners could not invest or own a majority stake in. Under the present charter, foreigners are restricted from owning a major share in the mining, utilities and education sectors. They are also prohibited from owning land.

Removing these restrictions analysts say will unlock the investment potential of the country, creating jobs for millions of Filipinos, allowing them to escape poverty and the country to realise its true growth potential. The representatives of the foreign chambers, local economists and some foreign bankers claim this is what is needed. Are they right?

If we look at the size of the industries in question, mining accounts for about 0.9 per cent of our gross national income, utilities 2.7 per cent, and education is so small it does not even merit a separate line in our national accounts reporting. With respect to employment, the mining industry employs 250 thousand, utilities 153 thousand, and education 1.2 million. That is about 1.6 million out of a total work force of 37.7 million!

That means that to make a serious dent in the number of  unemployed which was at 2.7 million in October, 2012, we would have to at least double the size of these industries so that they could employ twice the number of people. I cannot really see this happening in the utilities sector or education. To double the size of those sectors would require a doubling in the demand for their services, which is close to impossible.

Mining, one might argue could double its size, but it only employs 250 thousand. Also, the problem here is in guaranteeing world-class labour and environmental regulations while ensuring that the nation derives a fair share of the profits from mining operations, since what is being dug up out of the ground belongs to the nation, and mining firms are only seeking ownership of the right to mine it on their behalf.

When it comes to the ownership of land, foreign investors do not really see that as a deterrent since they can obtain long-term leases and very favourable rates at the special economic zones in the CBDs of the nation and in the regions. Where it proves a deterrent is to small-time investors who want a piece of the property boom. Again, does the property sector look like it needs a boost? I would even argue that it needs to be slowed down because of possible overheating.

Governance, Institutions and Political Reform

The final missing ingredient that is currently the flavour of the month among our business and political elite is good governance and institutions. The improvement in this aspect is cited by the World Economic Forum as the reason why the country improved its business environment in 2012. Faith in institutions is grounded on the belief that this is why the Industrial Revolution took place in England in the 18th century and not in China, which was just as prosperous as Western Europe at the time.

To attain the foundations for rapid economic growth, the same set of of superior cultural norms, institutions and technology have to take over the ways of “traditional societies” or the “primitive mode of production” found in the the developing world today, so the theory goes. According to one author who has written a very short introduction to global economic history, however

The English constitution had many features that promoted economic growth, although they were not the ones stressed by modern economists, who emphasize restrictions on taxation and the security of property. Parliamentary supremacy actually resulted in the reverse…the English state collected about twice as much per person as the French state and spent a larger fraction of the national income.

…France suffered because property was too secure: profitable irrigation projects were not undertaken in Provence because France had no counterpart to the private acts of the British Parliament that overrode property owners opposed to the enclosure of their land or the construction of canals or turnpikes across it. What the Glorious Revolution meant in practice was that the ‘despotic power’ of the state that ‘was only available intermittently before 1688…was always available thereafter’. [emphasis mine]

Over the past decade, there has been a new school of thought emerging called the California School of Economic History which has challenged the paradigms of the New Institutional Economics school. Its general conclusion is that the Industrial Revolution took place in England because of the discovery of coal as a cheap substitute for wood as an energy source and the Americas as a source of metals and farmland. Coal led to steam power which in turn lowered transportation costs. The so-called Scientific Revolution of the 17th century had very little to do with such inventions.

What allowed England to compete with China and India which were then the leading centres of manufacturing in the world was their investment in labour-saving technology such as coal-powered steam engines to increase the efficiency of their cotton mills. A population boom in the hinterlands of China led to labour-intensive production which made the adoption of such mechanised production technology uneconomical, since capital was expensive and labour cheap.

Multifactor productivity is what led to competitiveness which led to higher wages for English workers, which led to further productivity improvements and so on. The entire 19th and 20th century was all about the de-industrialisation of Asia and the catching up to England by other Western states such as Germany and the US and later by East Asia which belatedly includes China. This was achieved through deliberate state policy which sought to channel limited capital into strategic sectors.

Failed Wisdom

The failure of conventional wisdom to explain why the nation’s competitiveness is in such a rut should force us to look elsewhere. Posing the problem in that manner is misguided to begin with. The first question we need to ask ourselves is, why do we even need foreign direct investments in the first place? The conventional answer to that question is that we need them because we don’t have the capital to finance development ourselves.

Again, I would challenge that view. From 2000-01 to 09-10, investments in the country have grown by 7.1 per cent per year on average. That is even with our low attraction rate of foreign investors. Since the the last decade, national savings has exceeded investments, meaning we are a net saving nation now. Many have said that was because private investors were wary of investing under the Arroyo regime. But the Aquino government does not seem to have convinced them to change their minds and invest their surplus capital. There is something amiss there.

More importantly, the inward flow of dollar remittances from overseas Filipinos has created a national treasure amounting to $85 billion worth of foreign reserves. That is about the size of the Czech Republic’s entire economy. It is also about 75 per cent larger than the total official reserve assets of the Reserve Bank of Australia, which was at US$49 billion in December 2012. Let me ask then, what is an economy the size of the Philippines which produces about $250 billion a year doing with reserves of that amount compared to the Australian economy which is about $ 1 trillion a year? Do we need to maintain such a high level of reserves relative to our economy?

Policy Implications

The reason why our policy makers have not realised that they are sitting on a pile of untapped wealth is because they have been used for so long to go cap in hand to the foreign community for loans. There is a saying in business that banks will only be willing to lend to you when you don’t need to borrow. The same holds true in our case. Yet our officials continue to trumpet the ease with which they are able to borrow, without realising that they don’t need to do so anymore.

The preceding discussion leads to the following policy implications

  • Continue to raise taxes in order to close the fiscal gap. Continue tax reforms such as the sin tax law that has just been signed. Expand the tax base by closing loopholes and consider other measures to raise revenue such as fiscal incentives rationalisation and a one per cent national land tax piggy backed on local property taxes. If we can reduce the gap to within 1-2 per cent of GDP, that would be fine. If we could completely close the gap, that would be even better.
  • Undertake coordinated investments in strategic sectors by leveraging sovereign wealth. Japan and South Korea did not rely on foreign direct investments to boost their economies during their periods of rapid growth because they directed their banking institutions to lend to heavy industries with their implicit sovereign guarantees. We can adopt a new approach by setting up a sovereign wealth fund, which would serve as the main vehicle for channelling our excess foreign reserves into infrastructure, minerals exploration joint ventures, agro-industry clusters and clean technology hubs. I have outlined how this could be done here and here. There are enough internal resources currently to increase our growth rate by 1-2 percentage points a year for the next four years. Once government acts as the catalyst, other players, including foreign investors will follow. This will incidentally temper the rise of the peso, which is currently hurting our export sector.
  • Continue to improve and enhance our educational system. Higher educational attainment among our populace is one of the best ways to resolve our economic and political problems. A highly literate and skilled workforce not only is what our industries need, it is also what will help shape political reform. Tinkering with our political system won’t really address the problem. An educated voter will not be satisfied with handouts from the government but will demand much more.

If we focused on these three policy areas: improving our tax revenues, coordinating investments and enhancing educational opportunities, then we will be on our way to unlocking the development trap that we find our country in. It is important for our leaders to challenge conventional wisdom regarding what is hampering our nation’s growth potential. Otherwise, we might find ourselves attempting to improve our situation using the same methods, year after year, decrying the same problems, but achieving the same dismal results.

Establishing and Managing a Philippine Sovereign Wealth Fund

This is the second part of a series on this topic. In the first part, I discussed why we need a sovereign wealth fund or SWF in the first place. My main contention was that the Philippines is currently suffering from “Dutch disease” or the adverse effects of a sudden rise of income from its export of labour and from a rise of confidence in its domestic economy. In this second part, I will discuss how we could govern and operate our own SWF.

The Santiago Principles established by 26 countries with SWFs known as the International Working Group or IWG  in 2008 lays out a number of generally accepted principles and practices or GAPP to ensure that “the SWF arrangements are properly set up and investments are made on an economic and financial basis”. One of the main reasons for this is that as government-owned  entities, as SWFs continue to grow in importance to global capital markets and perform a bigger role in corporate governance, they need to demonstrate that their investment decisions are not politically motivated.

Traditionally, SWFs took the surplus foreign reserves accumulated within a resource exporting nation and invested them in long-term projects overseas. This allowed recipient countries that were often capital constrained and developing to benefit from such investment flows. The size and relative lack of transparency of some SWFs however caused many actors in the international community to cast a suspicious eye at these funds.

In the Philippine context, as discussed in the first part of this series, I propose that our SWF be confined to funding projects within the country given our chronic underinvestment in infrastructure and need to resuscitate our industrial sector. Given however our historically poor track record at ensuring that government owned and controlled companies manage their assets in a prudent manner, the main concern in establishing a SWF would be to ring-fence it from the influence of politics.

The Santiago Principles help to define a set of best practices for us in establishing our own SWF in the Philippines. The Carnegie Endowment for International Peace talked about what the effect of signing up to these principles is by saying that

(b)y voluntarily submitting to the Santiago Principles, IWG members ceded their autonomy to establish governance arrangements in line with their individual needs and preferences. In a way, they made a conscious decision to limit the reach of their “sovereignty.”

You might be tempted after reading that to draw an analogy between the IWG to the World Trading Organisation or WTO which implements the General Agreement on Trade and Tariffs or GATT. Unlike that body, the IWG and its successor the International Forum of Sovereign Wealth Funds or IFSWF is purely voluntary and has no powers to sanction its members. The Carnegie Endowment does draw this distinction. What our Philippine authorities should do in drawing up the framework for its SWF would be to hard code “the Principles” in its charter.

As shown in the table below, the Principles may be divided into three distinct parts. These cover the legal and macroeconomic policy framework of the fund, its institutional and governance arrangements and structures, and finally its methods for managing investment decisions and handling risk. I am adapting the Carnegie Endowment’s description of these parts here.

Table 1: Santiago Principles*

Section What “the Principles” state there should be GAPP #
Legal framework, objectives, and coordination withmacroeconomic policies
  • disclosure of legal framework
  • definition and disclosure of policy purpose
  • public disclosure of funding and withdrawal arrangements
Institutional framework and governance structures
  • clearly defined roles and responsibilities of the principal/owner (the government) and the agent (SWF’s governing body, officers and executives)
  • a limited role for the principal which is to set the broad  objectives, appointment of governing body or board, and oversight of operations
  • a clear mandate to the fund’s governing body to set strategy for achieving its objectives along with being accountable for its performance
  • delegated authority for independently implementing strategies and handling operations for officers and executives under clearly defined roles and responsibilities







Investment and risk management frameworks
  • disclosure of investment policies
  • information about investment themes, investment objectives and horizons, and strategic asset allocation, including:
    1. disclosure of investments that are subject to non-economic and non-financial considerations
    2. whether they execute ownership rights to protect the financial value of investments
  • a framework that identifies, assesses, and manages the risks of its operations and measures to track investment performance employing relative and/or absolute benchmarks
GAPP 18 



GAPP 19.1




*adapted from Sven Behrendt (2010). Sovereign Wealth Funds and Santiago Principles: Where do they stand? Carnegie Papers No. 22, Carnegie Endowment for International Peace.

The policy aims of setting a SWF in the Philippines are clear: to channel excess foreign reserves in a productive way and to cope with the developmental needs of the country. As I stated in the first part of this series, existing legislation tasks the Bangko Sentral with ensuring an adequate supply of currency to meet our international obligations. It does not contemplate our current predicament where the annual flows of remittances and portfolio investments have made our gross international reserves (GIR) rise rapidly.

This has caused the appreciation of the peso which has put a strain on our exporters. Even our burgeoning business process outsourcing industry is beginning to feel the pinch of the currency’s upward trajectory. As I previously stated, the GIR is now sufficient to cover twelve months of imports and to meet all our external obligations with a comfortable buffer left over.

And it will keep rising especially if our government earns an investment grade credit rating as is expected next year. Our GIR should only be allowed to rise in proportion to our external commitments. As our economy becomes less dependent on foreign borrowing these external debts won’t rise as rapidly as they have in the past.

Once a targeted level has been reached, the Bangko Sentral should be authorised to declare any additional funds in excess of its requirements. The existing Central Bank Act should be amended to explicitly state this. The monetary board should be given the task of setting the appropriate benchmarks for making such declarations and for transferring excess funds into a SWF.

The nature of such a transfer, as I have suggested, should be in the form of a sovereign loan issued to the national government, which will own the SWF. This would help ensure that the projects which the SWF invests in will have a sufficient return to cover its borrowings and operating costs. It would also ensure that the value of the Bangko Sentral’s assets is preserved.

As to the appointment of its board and officers, the SWF would be subject to the same rules covering government owned and controlled corporations or GOCCs. The reforms carried out by the new GOCC law which created a commission that regulates the appointments, compensation and accountabilities of such officers would apply as well. This would include the need to provide audited financial statements and management reports.

In terms of the type of projects it would fund, I have suggested four potential areas or themes. This includes public infrastructure (such as the ones eyed for Public-Private Partnerships) aimed at both social and economic development, joint minerals exploration in consortium with private mining firms, industry cluster development projects, and clean, renewable energy projects.

The allocation of resources across these themes could be based on national priorities. Let’s be clear: the main purpose of this SWF would be to support the development priorities of the nation, and that should be stated unapologetically. But for specific projects, a set of solid business cases needs to be presented. When entering into joint ventures or consortia with private players, the SWF should also be allowed to exercise ownership rights over the project to protect its investments.

Just as with government financial institutions or GFIs, the SWF should be guided by proper prudential management principles that would monitor its risk exposure. Unlike the conservative treasury management practices of government banks and pension funds, the risk-return equation is different for an equity investor like the SWF. The risk tolerance would be higher while its returns need not necessarily be as big given its lower cost of borrowing. Its risk adjusted return on capital would thus be lower compared to commercial banks.

Some PPP bidders have expressed concern over political interference in the Philippines affecting their ability to set fees independently of the government. This has limited the appetite for actually managing the operations of the utilities and transport oriented projects. They have therefore chosen to participate only in building contracts. Takashi Ishagami of Marubeni Corporation has been quoted as saying that “the Filipino PPP is far away from our standard”. It has partnered with a local firm to jointly bid for a $1 billion railway project in which it would be merely supplying equipment.

That’s fine. If the SWF were to finance such partnerships, our excess foreign reserves would leak out of the country (as intended) through the purchase of foreign equipment. This will help temper the peso’s rise since these projects will no longer be financed through overseas assistance or equity from abroad. What could leak in, however, is foreign technology and know-how because as an equity investor, with a long time frame, the SWF would also have greater leverage to request that suppliers provide technology transfer to local partners. This should unapologetically be part of its investment prioritisation framework.

An Alternative to Charter Change

Rather than relaxing the maximum capital requirements on foreign participation in certain industries contained in our constitution, the government should instead be looking to accelerate the flow of funds into productive activity with the SWF as one of its prime vehicles. Where private players are too small to generate sufficient scale to participate in large projects, the government should encourage them to form a cluster and fund them to be able to compete with multinationals.

This incidentally was the vision of the late-Senator Benigno “Ninoy” Aquino for the Philippine economy which he explained in a speech delivered in Los Angeles back in 1981 while he was in exile. He sought to counter the Marcos regime’s formula of encouraging multinational firms to engage in extractive activities and to commercially fund projects like the Bataan Nuclear Power Plant. Juxtaposed to Marcos’ “crony capitalism”, Ninoy termed his philosophy “Christian socialism”.

Don’t be turned off by the name. As his remarks suggest, what he really meant was essentially a form of capitalism more akin to Northern Europe’s brand than to the English version as espoused by Adam Smith. The last time I checked, the German and Scandinavian economies seemed to be weathering the present crisis well, while maintaining one of the highest levels of income and social well-being compared to their Anglo-American counterparts.

Under President Benigno “Noynoy”Aquino’s rubric of good governance, the stage is now set to pursue that economic philosophy and vision for the country.  As the Carnegie Endowment for International Peace found, sound democratic institutions best explains a nation’s compliance with the Santiago Principles.

With the government now facing the prospect of receiving investment grade status in the coming year, it must prepare for any unintended adverse consequences this might have as more short-term investors flock to our shores, boosting the peso’s value and putting more of an already unbearable strain on our exporters of goods and services.

For good governance to yield economic benefits to the people, it needs to be used to address the developmental challenges facing the nation. If we act soon, we won’t have to face these same challenges in the future. The country is already in a gradual demographic transition that will lead us from an excess supply to an excess demand for labour over the next decade.

While we still send our surplus workers overseas, we need to channel the wealth they are creating for our nation into projects that would increase economic opportunities for our people back home. This presents our policy makers with a once in a generation opportunity to get things right. Given the discussion covered in this series, it would seem apparent that a SWF would be the way to go.

A Philippine Sovereign Wealth Fund

The Philippines is suffering from a rare form of “Dutch disease”, the negative consequences of a rapid rise in income normally associated with the export of natural reserves. In our case, the income comes from our export of labour. Overseas remittances rising every year swell our foreign currency reserves. The peso appreciates as a result. This diminishes the global competitiveness of our manufacturing sector with adverse implications for domestic employment.

Meanwhile government keeps borrowing from international markets to finance its chronic budget deficits. This contributes to the upward pressure on the domestic currency as more dollars flow in to purchase government securities. To keep its borrowing down and make credit rating agencies happy, government constrains its spending. It wants to rely on public-private partnerships (PPP) to provide infrastructure which are both time-consuming to arrange and limited in scope.

As it postpones development spending credit rating upgrades keep coming. Each time this happens, fund managers around the world increase the flow of “hot money” into the stock market, thus contributing to more upward pressure on the peso. Property developers also cash in as the value of residential and commercial assets appreciates with the rising peso, which creates even more demand for new development.

The families that receive remittances on the other hand suffer as the purchasing power of the dollar declines. And due to their dependence on these transfers, the income that families receive goes mostly to household expenditures. Very little is invested in productive activity. And when it is, the investment normally goes into retail or transport enterprises, which earn very marginal returns.

For the rest of the population, finding a job is a struggle. Life is hard as there are not enough opportunities that come by due to a dearth of fixed private capital expenditures on plant and equipment let alone research and development. Most of the inflows go to short-term investments, i.e. the stock market, or to fund property purchases, which results in very little job generation outside the construction industry which demands casual employment due to the seasonality of its activity.

This in a nutshell is the problem that confounds the Philippines.

Foreign remittances for the twelve months to January 2012 hit $20 billion according to the World Bank. Remittances for the first ten months of 2012 have already equaled that amount according to central bank figures (with the Asian Bankers Association estimating the real amount to be in the order of $27 billion). This was close to 90 per cent of the Bureau of Internal Revenue”s total tax collections for 2011, and would have been enough to finance that year’s budget deficit four times over. As of November 2012, the country’s gross international reserves (GIR) stood at $84 billion exceeding the BSP’s full year estimate of $78 billion.

This was enough to cover our imports for a full year or to settle all short-term debt obligations 12 times based on original maturity and 6.8 times based on residual maturity (that is short-term loans based on original maturity plus principal payments on medium- and long-term loans of both private and public sectors falling due in the next 12 months).

In fact back in June 2012 when the GIR stood at $76.1 billion, the country’s external debts belonging to both the public and private sectors stood at $62.5 billion. That means the BSP had enough to settle all external obligations and still have roughly $14 billion left over.

The two charts below show what has happened over the past decade. The first one shows that after a rocky first half, the country has been producing consistent balance of payments (BoP) surpluses averaging about 3.8 per cent of GDP from 2005-2011. That is the inward flow of foreign currency exceeded the outward flow by the said ratio. A quick rule of thumb is that 1 per cent of GDP is roughly $2.5 billion or Php100 billion.

So on average, the annual surplus has been about Php380 billion during the past six years. The average BoP surplus is therefore more than enough to accommodate government’s annual revenue shortfall averaging 1.11 per cent a year. The second chart shows the effect these surpluses have had on our GIR. From 2001 to 2011, it has grown on average by 16.7 per cent. Up until 2005, you can see that the line is pretty flat. Afterwards it rises steeply. This means that a tipping point in the flow of overseas remittances occurred back then which placed our BoP structurally in surplus territory from that point on.

Surpluses and deficits, in per cent of GDP

No wonder bond markets have had such confidence in the Philippines. As the saying in business goes, banks will only offer you credit when you don’t need it. The question is do we just keep accumulating these reserves knowing the problems they create for our economy? Or do we actually put the excess funds to good use by investing in the country’s development?

As the title of the piece suggests, we could set up a sovereign wealth fund (SWF) with our excess reserves. The $14 billion mentioned above, which by the end of the year will probably be $15 billion would be the seed money. That is enough to double our infrastructure spending which is currently 1.5 per cent of GDP to 3 per cent, much closer to the recommended 5 per cent, over the next four years. With that added spending, the government could easily meet its aspirational stretch target of growing the economy by 7-8 per cent a year.

Every year, depending on how well our balance of payments performs, we could just keep adding to the SWF. Assuming that the government’s new revenue measures and fiscal consolidation will mean an annual deficit of about 1 per cent of GDP and that the annual BoP surplus remains at 3 per cent of GDP, there would be enough to fund government’s deficit and set aside another 1 per cent to augment the SWF, with the remaining 1 per cent going to GIR.

But we are getting ahead of ourselves. Let us first define what is a SWF? According to the Sovereign Wealth Fund Institute, it is

a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, governmental transfer payments, fiscal surpluses, and/or receipts from resource exports.

The Institute cites some “interesting facts” about SWFs, namely that some of them “invest indirectly in domestic industries” and that “they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves. Most often SWFs receive their initial capital through “commodity exports, either taxed or owned by the government” or through “transfers of assets from official foreign exchange reserves”.

There are about US$5.1 trillion invested in SWFs globally. About three of every five dollars come from oil and gas exports, the remainder from other sources. The size of funds varies from as little as US$300 million for Indonesia to as large as US$664 billion for Norway. Of the 64 SWFs that currently exist, 39 were established since 2000.

Some have argued that the Bangko Sentral is restricted by its charter, RA 7653, the Central Bank Act, from investing in instruments other than Triple-A rated bonds of foreign governments. At the time this law was passed, the problem facing the country was chronic balance of payments deficits. More transfers out rather than in were being made.

The BSP is tasked under the law with maintaining international monetary stability in the country. Part of this according to Article II, Section 64 of the law is “to preserve the international value of the peso and to maintain its convertibility into other freely convertible currencies”.

To maintain such stability, Section 65 says that “the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies”. It would have to judge for itself the adequacy of these reserves based on “prospective receipts and payments of foreign exchange by the Philippines”.

Finally, Section 66 lays out the composition of such reserves which it says “may include but shall not be limited to” gold and other assets that took the form of “documents and instruments customarily employed for the international transfer of funds; demand and time deposits in central banks, treasuries and commercial banks abroad; foreign government securities; and foreign notes and coins”.

So why did the central bank governor offer in September of 2011 to purchase Philippine treasury using its dollar reserves given that these notes are not Triple-A rated? Well, he had probably realised as I had back in November 2010 that the Bank already had an adequate supply of reserves to meet international obligations.

Given that the law says nothing about what to do if the Bank were to have more than a sufficient level of reserves we can say that the Bank is sailing in unchartered waters. If the law does not specify what it should do in such a situation, then it should be left to the discretion of its board to decide on how best to deal with it.

Currently, the return on short-term US treasury notes is between 0 and 0.25 per cent, negative in real terms, meaning that the Bank is paying the US government to borrow from its reserves. And the Fed has said that it plans to keep interest rates as low as they are for the foreseeable future until the US unemployment rate goes under 6.5 per cent (it is currently at 7.7 per cent). If the BSP lent its excess reserves to the Philippine government, it would gain a better return and preserve the value of its assets.

Now that we have cleared the financial viability and legality issues, what would be the purpose of a Philippine SWF? The nature and purpose of SWFs are varied, but in the Philippines it might be to do the following (as adapted from the SWF Institute):

  • Protect and stabilise the budget and economy from excess volatility in revenues/exports
  • Diversify our industry sector to make growth more inclusive and robust
  • Earn greater returns than on foreign exchange reserves
  • Assist monetary authorities dissipate unwanted liquidity
  • Increase savings for future generations, or
  • Fund social and economic development.

Given the need to boost productivity and improve competitiveness, addressing the infrastructure backlog would be the most obvious answer. The public-private partnership projects would be a good initial source of demand for funding as these projects are designed to earn a market rate of return for the investor. Another possibility would be for the SWF to enter into joint-ventures with mining firms for the joint-exploration and production of oil and other commodities. This would ensure that we received a larger share of the benefits from such operations.

A third possibility would be to fund innovation through government procurement, business incubators, industry clusters, and competitions aimed at the commercialisation of ideas. Government could serve as a catalyst in the germination of new activity around key areas of specialisation that the country has already exhibited proficiencies in. The expansion of our semiconductor and electronics industry into higher value adding activities could be one priority. The growth of agribusinesses into higher yield crops and again value adding processes could be another. A fourth priority could be the generation of clean technology and renewable energy.

Finally, beyond just the economic, financial, legal and commercial viability, there is the political viability of doing this. Creating a Philippine SWF would be politically astute as it would be seen as the Aquino administration’s unique contribution to the development of the country. The vice president has also expressed his support for the concept of using foreign reserves for development. This means that the measure would have the support of both leaders and their coalition partners in both houses of Congress.

Beyond that, the consensus formed by our leaders would mark the first time a remittance dependent nation’s government deliberately leveraged the income derived from its work force overseas to channel resources into highly productive activity back home. It would be a shift in the development paradigm of such countries and provide a model for them to follow. Just as conditional cash transfers were forged through a consensus among Mexico’s and Brazil’s leaders as a way to alleviate poverty, the Philippine consensus would provide a path for low income households out of poverty and into the middle class by providing jobs to people of low skills through the fruits of their countrymen’s sacrifice overseas.

If we don’t recognise the opportunity that lies before us in this regard, then when our overseas workers return home, all their hard work may come to nothing as their children will then have to go abroad because there would be no jobs left for them here. With the Aquino government’s good governance credentials, it should be able to shape the probity and prudential measures needed to ensure that the SWF is properly managed and its funds transparently and judiciously utilised for public benefit. This would prove that good governance is indeed good economics and that the righteous path can create in the Philippines opportunities not just for some but for all.

Spend More, Talk Less

With the release of third quarter GDP figures upsetting all but the most ardent economic apologists for this administration, the time has come for it to re-think its priorities.

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The situation is nearing a critical level. As the whole of Europe is placed on credit watch and as recovery in the US struggles for momentum, the vibrancy in the domestic economy is being sucked out by government’s poor infrastructure spending rate just at a time when it is needed. Cabinet officials throughout the year have been promising a more rapid deployment, but this has so far not materialized.

The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?

(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).

That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?

Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.

Market analysts have already pointed out and the Bangko Sentral agrees that stimulating greater demand to address the slowdown in growth lies not in the hands of monetary authorities at this point but with fiscal managers. What this means is that the government has to spend more and talk less. Or in the words of Jerry Maguire, it has to “show me the money!

All talk, no action

The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply”  is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.

P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.

When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.

And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf  the growth of the CCT or conditional cash transfers which cost about thirty billion.

Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.

That third option which I had first written about late last year which then got echoed by no less than the BSP Governor a few months back is for the government to issue infrastructure bonds to the BSP which is at present earning negative returns on its foreign currency reserves.

Better returns

By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.

The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:

  1. Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
  2. It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
  3. Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
  4. It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
  5. It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
  6. Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
  7. It will help prop up employment and growth which will spur increased tax collection.
  8. It will reduce the cost of doing business for most firms, not just exporters.
  9. It will help achieve the government’s growth target of 5-7% in the medium term.
  10. It will fulfill the government’s own development plan and set us on a higher growth plane.

Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.

But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.

Making daang matuwid work

In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”

The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.

The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”

That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.

Shall We Dance (Cha-cha-cha)?

As foreign ownership of land is talked up in the Philippines, other countries like Brazil and Australia are looking to limit it.

Brazil began last year when it decided to treat farmland as a strategic asset on par with oil when the government invoked an old law from 1971 limiting the amount of rural land that foreigners are able to buy. It is estimated that as a result of this about $15 billion of planned agriculture investments will be dropped.

Australia followed suit early this year when its Parliament passed a resolution that would see for the first time their bureau of statistics (the ABS) collate a list of direct foreign ownership of agricultural land, water rights and businesses. This is seen as a first step towards taking any necessary action to safeguard the food security of the nation.

What spooked the federal governments in both cases were growing reports of sovereign wealth funds and state owned or state-backed enterprises buying up vast tracts of prime agricultural land. With the world population set to rise from 7 billion to about 9 billion by mid-century, the quest for food security is forcing countries like Qatar, China and Singapore to look overseas for their food supply.

Unlike the Philippines which has a constitutional restriction against foreign ownership of any kind of land, Brazil and Australia are not seeking to resrtrict foreign ownership, but merely monitor and manage it, to ensure that it doesn’t pose a national security risk or lead to speculative bubbles.

I think these considerations should give our legislators reason to pause and consider their plans for liberalizing participation of foreigners in certain sectors like communications, education, professional services and land. Liberalizing services may be necessary for the Philippines to join the Trans-Pacific Partnership and gain market access to signatory countries in the Asia-Pacific. Opening up real property is another matter.

Opening up land to foreign acquisition would require us to have a few necessary safeguards in place. How would the country maintain food security for instance? Should there be a requirement to seek government approval once the scale of land purchase breeches a certain amount? If so, what should that amount be?

The case involving the lease of one million hectares to Chinese interests for grains and bio-fuel crops which was halted by a petition to the Supreme Court due to its constitutionality will almost certainly become mute once constitutional restrictions are removed.

If stronger states such as Australia and Brazil start to place increasing scrutiny towards the use and sale of their land to foreigners, will the affected foreign firms turn to weaker states like the Philippines in order to pursue their agenda? Once these assets are sold, it will be very hard to retrieve them.

It makes the question of lifting constitutional restrictions all the more poignant. While it is true that it might stimulate much needed investments and exports, what will happen to us as a nation once our ability to feed our people is traded away?