Category: economy

Rent seeking

By Calixto V. Chikiamco

What’s wrong with Philippine society is that its economic system is primarily characterized by rent seeking. So, what’s rent seeking? It’s the non-market extraction of surplus or profit. It means the profit is generated from licenses, quotas, monopolies, protection, and other government granted privileges.

It differs from true capitalism where the profit or surplus is extracted from the market, usually through innovations in product or marketing and distribution. True capitalism is dynamic because it results in innovations and increases in consumer welfare. Society benefits as a result. In rent seeking, there’s no innovation, nor additional value to the consumer. Instead, there’s unearned extraction from the consumer. Welfare is diminished.

Rent seeking in the Philippines hasn’t stopped. It just takes new forms.

A vivid example of this is the Feed-in-Tariff (FIT) rate to be given to Renewable Energy Developers under the Renewable Energy Act. Under the proposal of the National Renewable Energy Board, all electricity consumers must pay an additional 12 centavos per kilowatt hour, amounting to 8 billion pesos per year, to subsidize Renewable Energy developers.

Why the need for a subsidy? Because the cost to produce energy by RE developers is much higher than conventional sources. The price for conventional sources (coal, natural gas, geothermal, big hydro) averages about P5 per kilowatt hour while the price to be paid for run of the river hydro is P6.15, biomass at P7.0, wind at P10.37 and solar at P17.95.

The difference between the price of conventional sources and the price to be paid for Renewable Energy must be made up by the FIT Rate, which is really a surcharge on consumers.

Some may ask: shouldn’t the Philippines do its share to halt carbon-induced global warming?

No, because the country’s contribution to carbon emissions is only less than 1% (.48%s). Hence, unlike the rich, developed countries, it has no moral or legal obligation to slow down global warming. Furthermore, the share of renewables in its energy mix is already 32%, much more than the 10% in the US and other countries.

But here’s the cake: Not only are we poor consumers being coerced to pay three times as much for solar energy and two times as much for wind, but in addition the developers are guaranteed a generous rate of return for the next 20 years! No risk on their part, even of technological obsolescence, because that risk has been passed on to us poor consumers who must pay the same FIT Rate for the next 20 years even if the cost to produce solar energy drops by 50%.

The guaranteed rate of return is not the only form of rent seeking. Under the proposal of the NREB, there will be no auction, whether among the different technologies (run-of-the-river hydro, biomass, wind, and solar) or among suppliers within a specific technology. Everything will be negotiated (wink, wink). No competition either on price or on time period (i.e., for a time frame less than 20 years) will be allowed.

Aside from that guaranteed rate of return and the no-sweat, no-competition policy, the developers will be enjoying a seven-year income tax holiday, duty-free importation, special realty tax rate, zero VAT on sales and purchases, cash incentives, 10% tax rate after income tax holiday, and so on.

The high-costing wind and solar energy producers are resisting a dispatch policy of cheapest first because they say that the country must have a “portfolio strategy.” It’s a conceit to think that the government can ever place bets on a particular technology. Should the government have subsidized the pager industry? Or the typewriter industry? The only valid criterion is value for money or efficiency. The market, not NREB, must determine the winners.

Besides, solar and wind are unstable and unreliable sources of energy, dependent as they are on weather and other climatic conditions. They would be poor choices for a diversification strategy. They can never be energy sources for industrialization.

Also, why the rush? A policy of waiting when solar prices are expected to come down to grid parity in five years would better serve the power consumers, but the NERB wants to hand out contracts and lock in the profits of developers for the next 20 years now. We can only speculate why.

Rent seekers usually cloak themselves with noble aspirations to mask their predation. Since the 1950s, rent seekers have raised the lofty banner of nationalism in order to keep out competition and to mask their government granted monopolistic privileges.

Today, the new cloak is not nationalism but “environmentalism.” But it’s the same old predation. Different color perhaps (green), but the same old predation.

What’s disturbing is that the manufacturing sector, already suffering from the highest power cost in Asia, will have to bear this burden in addition to the lifeline rate and other impositions. This is the road to perdition because societies collapse when the productive sectors of society are “taxed” to subsidize the inefficient, non-productive sectors.

The scourge of Philippine society is not corruption per se, but rent seeking. What the NREB proposal shows is that the scourge has not been eliminated. It’s just taking new forms. Pity us poor consumers. We can only say, “Please, moderate the greed.”

new year wish 2011

clinton’s campaign strategist carville was right, “it’s the economy, stupid” that won clinton the presidency in 1992, trumping bush senior’s foreign policy high from the “successful” gulf war.

here at home it would seem that the president and his men know it too, that it’s the economy that truly and urgently needs working on.

“We are conscious of the fact that we are in a debt hole. We can only begin to climb out if we strictly implement austerity measures and cut down on unnecessary spending,” said Malacañang aide Paquito Ochoa.

but is there a plan? asks business world‘s amelia h.c. ylagan:

The national budget in 1986 was P250 billion and 70% of that went to servicing the US$26-billion debt that Cory’s predecessor, Ferdinand Marcos, grew from the $465-million 1965 level, in his 20-year reign. The 50 million Filipinos (in Cory’s time) had to live on the remaining 30% of budget. And then there were the many military coups d’état from the misguided military who wanted to take advantage of the weakness of the country at that time. Cory could not have worked a miracle in six years, many now allow in judgment of her. Some may also say that in comparison, her successor, President Fidel Ramos, probably benefitted from the six-year cycle of painful adjustment and realignment before him, and he successfully augmented what would have been economic deficits with significant one-time proceeds of the privatization of some big government-owned and -controlled corporations.

Survival and growth might be more difficult in Noynoy’s presidency. There are 92.2 million Filipinos (84% more than 1986 population), owing about P47,000 per head for about P4.3-trillion debt (US$ 95 billion approx.) The Asian Development Bank (ADB) warns of extreme debt stress as the country holds the highest debt-to-GDP ratio at 56.5%, the highest among Asian countries. This key measure shows how a country can manage its obligations from its annual economic output, with a declining ratio viewed favorable as this means the country would allot a smaller amount to pay off its debt. But based on the ADB’s projections, the Philippines’ debt-to-gross domestic product (GDP) ratio may rise by 15% by 2015 in a scenario of higher primary deficit to GDP; by 5.1% amid lower nominal GDP growth rate; by 3% on higher nominal interest rates on public debt; and by 12.7% on a combination of the three negative scenarios.

So, is there a plan to address these scenarios of where we, as a country might be going, how we are going to get there, and when we will get there.

grabe, we are deeply in debt to the tune of Php 4.3 trillion, that’s $ 95 billion.   ylagan rightly asks if there’s a plan, what’s the plan, considering that the president vetoed the debt cap provision inserted by senator joker arroyo in the P1.645-trillion 2011 national budget, which would have limited government’s borrowing to 55 % of gross domestic product.

Malacanang has defended President Benigno “Noynoy” Aquino III’s decision to veto the debt cap in the 2011 General Appropriations Act.

Presidential spokesperson Edwin Lacierda said this is a good time to borrow given the favorable market conditions like the strong peso and the appetite for peso bonds.

so that’s the plan?   since creditors are willing to lend, we will just borrow and borrow, ganoon, bahala na si batman.   but, as senator joker points out:

The US is, in many ways, our model. There is a debt ceiling in the US President’s power to borrow money, but the US Congress would invariably increase the ceiling whenever it is justified by necessity,” he said.

“For the cause of fiscal prudence and transparency, why can’t we adopt the same?” he asked.x

why not indeed?   i wonder if it has anything to do with what former senator orly mercado said, when he was the new president erap’s secretary of national defense, that when you’re in the driver’s seat na pala, the view, the perspective, changes and campaign promises prove unrealistic.   or something to that effect.

could it be the same for president aquino?   but who exactly is holding him hostage to the old rotten system, making real CHANGE impossible?   what exactly are these forces beyond his control?   i wish he’d tell us so we can all grow up and face the unpleasant consequences of our past actions and/or inactions.

and then, again, the president could just be in over his head?   sana hindi.   and that’s my happy new year wish for us all ;))

g-20, apec, aquino, and the peso

MANILA, Philippines—Six Filipino activists who had planned to take part in alternative meetings that are set to run parallel to the G20 summit in South Korea have been deported from Seoul, their colleagues said on Sunday.

… The activists were put on a flight back to Manila late Saturday after being told by South Korean authorities that they were blacklisted and could not enter the country, the activists said…. One of those deported, Maria Lorena Macabuag of the group Migrant Forum Asia, said they were only attending a peaceful parallel forum and had not broken any law.

Her companions were identified as Josua Mata of the Alliance of Progressive Labor, Joseph Purugganan of Focus on the Global South, musician-poet and Asian Public Intellectual fellow Jess Santiago, Rogelio Soluta of the Kilusang Mayo Uno and Paul Quinto of Ibon Philippines.

… “We were granted visas and it was clear that we were invited by KCTU. It was all disclosed and it was clear that we are not a threat to them,” Purugganan said.

make that 7 activists, the 7th being Bernice Coronacion of the Alliance of Progressive Labor.   hmm.   heard ibon’s sonny africa saying on ANC that only filipino activists have been denied entry.   and so there is wondering whether this is with the collusion of the philippine government, which would explain why the aquino admin is not offended?   but if true, why so?   why would we not want filipino activists represented, having been invited to participate, in the parallel forum organized by the Korean Confederation of Trade Unions?   baka kasi mag-ingay masyado this “noisy minority” that the aquinos think very little of?

and then, again, isn’t it just as possible that this is a kind of backlash vis a vis the aug 23 bloodbath and the vietnam tweets, a kind of curveball from a good friend of hong kong and vietnam?   okay okay it may be a stretch but after reading this…

What is the Philippine interest in this event? At first glance, there is not much to indicate that the Philippines is represented, much less invited. The president of neighboring Indonesia regularly sits at the summit. Korea as the host country exercised its privilege of inviting Singapore, as well as Vietnam which is this year’s head of the ASEAN. With these three ASEAN countries sitting in G20, could it be safely said that Philippine interests are well represented? The presence of at least three ASEAN leaders both have advantages and risks, due to the diverse characteristics of small, free market leader Singapore, socialist Vietnam, and big Indonesia.

… it’s like we’re being snubbed?   and then, again, it could be simply that aquino’s presence would be of no consequence anyway, given the philippines’ reputation of being america’s lackey, no more no less, especially when it comes to the economy?

The G20 leaders will be expected to affirm agreements drafted less than a month ago by their finance chiefs. They promised to avoid a damaging round of competitive currency depreciations. China accuses the United States, however, of already violating the spirit of the pledge by printing excess dollars, which Beijing says contributes to Chinese inflation. Washington accuses Beijing of keeping its currency artificially weak.

[G-20 economies represent about 90 percent of the gross domestic product globally, nearly 80 percent of world trade, and two-thirds of the world’s population. G8 members — Great Britain, Canada, France, Germany, Italy, Japan, Russia and the United States — plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Turkey and the European Union (EU).]

mabuti’t nag-iingay ang brazil:

… Brazilian President Luiz Inacio Lula da Silva blames both China and the US for keeping their currencies artificially low — causing the Brazilian real to rise and making his country’s exports less competitive — and could stir things up.

“We believe the United States and China are creating a currency war,” Silva told reporters Wednesday. “So, I am going to the G-20 to put up a fight.”

He didn’t specify what steps he intends to propose.

so the summit should be interesting, america vs. china, and everyone else vs. america and china?   even more interesting, our very own dr. bernardo m. villegas, who is usually so pro-america and pro-imf-worldbank, is predicting that the peso will depreciate post-G20.

In an economic forum sponsored by Security Bank for its clients last October 22, I had the temerity to make the fearless forecast that the peso-dollar exchange rate at the end of this year will be closer to P45 to 46 than to P40 to 41.

…The bleak outlook for the results of the G-20 in Seoul is in stark contrast with the upbeat mood in 2008 when the G-20 met for the first time to help stabilize the global financial system at the beginning of the Great Recession. Two years ago, there was an admirable cohesiveness among the leaders. Today, there is a “clash of interests and a clash of perceptions” that could result in a stalemate at the summit that would impede progress toward recovery. Mr. Mervyn King, the governor of the Bank of England, is more specific in his warnings. He is afraid that tensions over exchange rates could degenerate into trade protectionism: “That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world.”

… The Filipino overseas workers, the biggest source of foreign exchange for the country (estimated to reach $20 billion in 2010), are getting more sophisticated in their understanding of foreign exchange rate fluctuations, especially with the advice of our leading banks and remittance companies. It is very probable that a good number of them will postpone remitting their dollars to the Philippines in the hope of a peso depreciation late this year or early next year. For this reason, I do not expect the usual larger inflow of dollars for the Christmas holidays. The more important expenditures for the families of these OFWs have to do with education, which usually peak in June of each year. There is, therefore, reason for the OFWs to wait and see how the exchange war will work out and keep their dollars in the meantime.

Furthermore, there is reason to expect that portfolio investments in the Philippine capital market could slow down as many more countries follow the lead of China that raised interest rates for the first time in nearly three years because of concerns about increasing inflationary pressures in the economy. As more countries raise interest rates, they would attract more “hot money” into their respective economies. With inflation at low levels in the Philippines, I do not foresee our Central Bank raising interest rates in the near future. If this scenario of higher interest rates among our trading partners should be fulfilled, I am issuing a word of caution to those who are overly excited about our booming stock market today. Easy come, easy go.

These are my reasons for expecting the peso to depreciate closer to P45 to 46 by the end of this year. At the risk of immodesty, let me remind my readers that at the beginning of 2010, I was ridiculed by my fellow economists (including those working for the former administration) when I forecasted that the GDP would grow at 7 percent. The consensus forecast then was between 3 to 5 percent. As everyone knows, GDP grew by 7.9 percent in the first semester and is mostly likely to grow at 7 percent for the whole year. I rest my case.

samantala right after the G-20 summit in south korea on nov 11-12, there’s the APEC summit in japan nov 13-14 that aquino is attending (minus ms.lang of course) along with many of the G-20 leaders, including obama.

[APEC member economies are Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, Thailand, the United States and Vietnam. They account for 40.5 percent 1 of the world’s population, 54.2 percent of world GDP and 43.7 percent of world trade.]

aquino daw is set to propose that a framework be developed to deal with the volatile global financial markets.

“The idea lang, basically, is let us learn from the lessons of the Great Depression where each individual state decided to act on their own interests,” the President said.

sounds good.   if he can swing it.   if not, well, it’s also the same weekend that pacquiao will be fighting margarito in texas, let’s hope pacquiao wins.   consuelo de bobo.

Why Fighting Corruption Is Not Enough

By Walden Bello

After nine years of witnessing increasing poverty among the masses and spiraling corruption in high places, it is understandable that Filipinos see a strong correlation between corruption and poverty. And the judgment of many is probably correct that the candidates that are free of the taint of corruption stand the best chance of turning this country around. Moral leadership may not be a sufficient condition for successful leadership but it certainly has become a necessary condition in a country that has been so deprived of exemplary public figures like the Philippines.

Corruption, however, has become the explanation for all our ills, and this brings with it the danger that, after the elections, campaign rhetoric might substitute for hard analysis on the causes of poverty, leading to wrong, ineffectual prescriptions for dealing with the country’s number one problem.

Let me be more explicit: Corruption must be condemned and corrupt officials must be prosecuted because being a violation of public trust, corruption undermines faith in government and leads to an erosion of the moral bonds among citizens that serve as the foundation of good governance. Corruption, however, is unlikely to be the main cause of poverty. Wrongheaded policies are, and clean-cut technocrats have been responsible for more poverty than corrupt politicians.

The complex of policies that have pushed the Philippines into the economic quagmire over the last 30 years might be summed up in that formidable term: structural adjustment. Also known as neoliberal restructuring, it involved prioritization of debt repayment; conservative macroeconomic management that involving huge cutbacks in government spending; trade and financial liberalization; privatization and deregulation; and export-oriented production. Structural adjustment came to the Philippines courtesy of the World Bank, International Monetary Fund, and the World Trade Organization, but it was internalized and disseminated as doctrine by local technocrats and economists.

Prioritizing Debt Repayment

Corazon Aquino was personally honest and her contribution to the reestablishment of democracy was indispensable, but her submitting to the International Monetary Fund’s demand to prioritize debt repayment over development brought about a decade of stagnation and continuing poverty. Interest payments as a percentage of total government expenditures went from 7 percent in 1980 to 28 percent in 1994. Capital expenditures, on the other hand, plunged from 26 percent to 16 percent. Since government is the biggest investor in the Philippines—indeed in any economy—the radical stripping away of capital expenditures goes a long way toward explaining the stagnant one percent average yearly growth in gross domestic product in the 1980’s and the 2.3 per cent rate in the first half of the 1990’s.

In contrast, our Southeast Asian neighbors ignored the IMF’s prescriptions. They limited debt servicing while ramping up government capital expenditures in support of growth. Not surprisingly, they grew by 6 to 10 percent from 1985 to 1995, attracting massive Japanese investment while the Philippines barely grew and gained the reputation of a depressed market that repelled investors.

Trade and Financial Liberalization

When Fidel Ramos came to power in 1992, the main agenda of his technocrats was to bring down all tariffs to 0 to 5 percent and bring the Philippines into the World Trade Organization and the ASEAN Free Trade Area (AFTA), moves that were intended to make trade liberalization irreversible. A pick-up in the growth rate in the early years of Ramos sparked hope, but the green shoots were more apparent than real, and they were, at any rate, crushed as a result of another neoliberal policy: financial liberalization. The elimination of foreign exchange controls and restrictions of speculative investment attracted billions of dollars in the period 1993-1997. But this also meant that when panic hit the ranks of foreign investors in Asia in the summer of 1997, the same lack of capital controls facilitated the stampede of billions of dollars from the country in a few short weeks in mid-1997. This pushed the economy into recession and stagnation in the next few years.

The Estrada administration did not reverse course, and under the presidency of President Gloria Macapagal-Arroyo, neoliberal policies continued to reign. New liberalization initiatives in the next few years were initiated on the trade front, with the government negotiating free trade agreements with Japan and China. These pacts were entered into despite clear evidence that trade liberalization was destroying the two pillars of the economy, industry and agriculture.

Radical unilateral trade liberalization severely destabilized our manufacturing sector, with textile and garments firms, for instance, being drastically reduced from 200 in 1970 to 10 in recent years. As one of Arroyo’s finance secretaries admitted, “there’s an uneven implementation of trade liberalization, which was to our disadvantage.” While he speculated that consumers might have benefited from the tariff liberalization, he acknowledged that “it has killed so many local industries.”

As for agriculture, the liberalization of our agricultural trade after we joined the World Trade Organization in 1995 transformed the Philippines from a net food exporting country and consolidated it into a net food importing country after the mid-1990’s. The year 2010 is the year that the China ASEAN Trade Agreement (CAFTA) negotiated by the Arroyo administration goes into effect, and the prospect of cheap Chinese produce flooding our markets has made our vegetable farmers fatalistic about their survival.

Depressive Fiscal Policy

What likewise became clear during the long Arroyo reign were the stifling effects of the debt repayment-oriented macroeconomic management policy that came with structural adjustment. With 20-25 percent of the national budget reserved for debt service payments owing to the draconian Automatic Appropriations Law, government finances were in a state of permanent and widening deficit, which the administration tried to solve by contracting more loans. Indeed, the Arroyo administration contracted more loans than the previous three administrations combined.

When the deficit reached gargantuan proportions, the government refused to take the necessary steps to contain the key factor acting as the main drain on expenditures; that is, it refused to declare a debt moratorium or at least renegotiate the terms of debt repayment to make them less punitive. At the same time, the administration did not have the political will to force the rich to take the brunt of bridging the deficit by increasing taxes on their income and improving their collection. Under pressure from the IMF, the government levied this burden on the poor and the middle class via the adoption of the expanded value added tax (EVAT) of 12 percent on purchases. The tax was passed on to poor and middle class consumers by commercial establishments, forcing them to cut back on consumption, which then boomeranged back on small merchants and entrepreneurs in the form of reduced profits, forcing many out of business.

Facing the Policy Challenge

The straitjacket of conservative macroeconomic management, trade and financial liberalization, and a subservient debt policy kept the economy from expanding significantly, resulting in the percentage of the population living in poverty, according to the World Bank, increasing from 30 to 33 percent between 2003 and 2006. By 2006, there were more poor people in the Philippines than at any other time in the country’s history.

The country’s plight under the lash of wrong policies over the last four administrations becomes even clearer in a comparative perspective. According to the United Nations Development Program Human Development Report, the Philippines registered the second lowest average yearly growth rate, 1.6 percent, in Southeast Asia in the period 1990 to 2005 —lower than that of Vietnam (5.9 percent), Cambodia (5.5 percent), and Burma (6.6 percent). The only country registering average growth below that of the Philippines was Brunei, which, being an oil-rich high-income country, could afford not to grow.

So yes, we must wage an unrelenting campaign against corruption because it destroys faith in government and weakens the moral fiber of the country. And yes, let us by all means punish corrupt officials and elect morally unquestionable people to power. But let us not mistake corruption as the principal cause of poverty and believe that anti-corruption crusades provide the main response to the country’s economic ills. The main source of our lack of economic dynamism is a wrong policy paradigm that we have allowed ourselves to be straitjacketed into.

It is disturbing that the policy errors that have led to our present state are hardly mentioned in the presidential debates. It is unfortunate that we are not taking advantage of the current international economic crisis that has dragged down our local economy to debate the wisdom of the policies of globalization and liberalization that have brought us to this impasse. Yes, the issues of corruption, management experience, and bureaucratic reform that dominate these debates are vital, but unless the winning team has the courage to reverse 30 years of failed neoliberal economic policies, the country will remain in the economic doldrums, unable to take off, with poverty possibly rising to the point of no return.