Tuesday, September 30, 2008

Inflation and CBs 5: Capitalism Without Failure is Like Religion Without Sin

Capitalism without failure is like religion without sin. The statement is from a CATO scholar, Gerald P. O'Driscoll Jr., in his paper, "Treasury's Thieves". Perhaps people should keep that in mind before they conclude that the current financial turmoil in the US, which is spreading to financial markets abroad, marks the beginning of the "end of capitalism".

The current financial "meltdown" should happen. If the meltdown does not happen today, then it should happen tomorrow, or next week, or next year. And it should continue, if only to weed out the irresponsible corporate leaders and the cheaters.

What should not happen is a government bail-out of collapsing and imploding big banks and firms. In this case, the proposed US government bailout for the financial sector to the tune of $700 billion -- not counting the projected budget deficit of more than $480 billion by the end of 2008 of the federal government alone (many states, cities and counties have their own sets of budget deficits).

So why is government bailout not justifiable? Three important reasons.

One, make those responsible for a corporate collapse be accountable for their mistakes. Hence, they should pay the price for their irresponsibility and misbehavior. Those who should sink must sink. And taxpayers' money should not be used to bail out irresponsible corporate guys.

Two, governments by themselves have no money on their own to bail out failed enterprises except for what governments confiscate from the income and savings of the hardworking citizens in the form of various taxes, charges regulatory fees and fines, or by printing money endlessly through their central banks, which can push inflation upwards endlessly, and thereby rob again the responsible citizens of the real value of their income, savings and investments.

And three, the US Fed's and other central banks' (like the Europe CB) large-scale bailout pool and consequent monetary policies will be distortionary. In cases like this, producers and manufacturers are forced to watch the behavior of the Fed or any central bank on whether it will raise or lower or keep existing interest rates, or protect the currency from further depreciation or appreciation, rather than watch the behavior of consumers (if their preferences and buying pattern are changing or not) or the behavior of competing producers from other countries (if they are producing better quality goods and services or selling at lower prices or a combination of both).

High inflation is caused mainly by lower supply relative to demand. So to address high inflation, expand supply relative to the size of demand. But central bank bureaucrats think they can solve the world's price problem by centralizing monetary tools in their hands, and squeeze money supply by tightening credits and raising interest rates -- which in the process choke many entrepreneurs and producers, both big and small.

The term "socialism for the rich" (under a longer phrase, "profits are privatized but losses are socialized") is wrong. The proposed multi-billion dollar bailout can be aptly called "socialism for the irresponsible" because only irresponsible and envious people would love socialism. Under socialism, the lazy and the envious will still eat, will still have allowances, and will be entitled to free "quality" education, health care, housing, etc. because social equality is non-negotiable.

For the socialists or trying-hard socialists, personal and corporate responsibility or irresponsibility do not count much. What matters to them is more "government responsibility" . So, corporate irresponsibility of officials of those big firms don't count much, those firms are "too big to fail", they should not sink, and their officials need not go to prison.

Some people ask, "Who are the irresponsible? Who defines 'irresponsibility' and who should penalize them?" There can be a BIG political battle on the definition of "irresponsible" because among the most irresponsible institutions involved in the current financial "meltdown" is the BIG US government itself.

It is easy to spot an irresponsible guy or institution: they live beyond their means, consistently. They spend much bigger than their income or revenue, consistently. Or worse, they spend and ask for more subsidies even if they have no income, nor have any plan to work and have regular income. A person who in his late 20s or 30s still depends his parents' allowance is irresponsible. A bank that lends to many people, who it perfectly knows have no jobs or no stable jobs and income, is irresponsible. A government on budget deficit, for one, two, five decades or more, is irresponsible.

So, how should they be penalized? The penalties for cases like failed companies are already in the books of any country's legal system. Bank or corporate officials who lose their stockholders' money should go to prison, or the cemetery perhaps -- in the case of those unlucky to be caught by really mad and impoverished investors.

After the US government announced the huge bailout fund that it seeks from the US Congress, the US stock markets were battered once more, the US dollar was knocked down further, and even world oil prices were up once more.

Why? It's the distrust on the US government, distrust on any fiscal "stimulus" by a bailout scheme because of the big taxes and fees that will be confiscated from the pockets and monthly salaries of US citizens in the coming months and years.

A friend shared that the proposed Treasury bailout plan has this provision:
Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Dictators hate for their work and decision to be reviewed and questioned. "Non-reviewable" clause by any court or any agency speaks of the absence of accountability and transparency, absence of personal and official responsibility, for any mistakes in the future. If they are not dictators, then they should be fully transparent and fully accountable for their actions and policy decisions. If they do not want to be accountable for any future mistake, then they should not initiate such bailout move in the first place.

The pattern and the dangers are there: individual responsibility is meaningless under a socialist or trying-hard socialist framework. Everything is "government responsibility" . The primacy of the collective over the individual, always. And in their books, to have order in the collective, each individual -- except the administrators and governors of the collective -- must surrender a big portion of their income, their savings and their personal liberty, to the collective. Then there will be order in society, harmony and equality. Perhaps equality in misery.

Again, corporate failures and bankruptcies, as well as expansion and becoming big, are part of the game under a capitalist set-up. Market failures almost always result in market solutions, unlike government failures that almost always result in more bureaucracies and offices to find out how much have been wasted and stolen already.

Here at home, if Metrobank or BDO or BPI would "collapse" someday for whatever reason, taxpayers should not support any bailout by the government, whether through the the central bank (BSP) or congressional appropriation. Let any big but misbehaving ship sink if it must -- that's fair game, and this alone will put enough pressure and discipline on existing banks, corporations and enterprises not to act irresponsibly. Government has little or no role on private contracts between stockholders or owners and corporate officials, except with its usual role of a parasite -- collecting high and dozens of different taxes when one or two taxes will suffice.

* See also: Inflation and CBs 4: Subsidies and Money Printing, August 17, 2008

Friday, September 26, 2008

US Debt 2: Private Sector Bailout of Government

On the subect of "bail-out", below is a short but good paper from a good friend, former President of Mackinac Center for Public Policy in Midland, Michigan, Larry Reed.

Larry is arguing that it's the private sector bailing out the national/federal government, not the other way around.

Meanwhile, now Mackinac Center President Joe Lehman made a comment a few years ago, that "While the Democrats want to bring us (Americans) to socialism on a train, the Republicans want to bring us there on a bus."

A friend here in Manila asked me, "After 8 years with Bush, does your friend in Mackinac change his statement?"
I said, "I think Yes. Probably he will say now, 'both Democrats and Republicans are bringing the US to socialism on a train.'"


Not So Fast!
by Lawrence Reed

"Thank God we had the federal government last week to bail out the private sector!"

That's what a rather statist friend of mine declared, almost gleeful that the financial crisis seemed to be proving how much we all need a massive federal establishment to both regulate and rescue us.

Never mind the federal government's own indispensable role as an enabler in the crisis, from its reckless monetary policy to its jawboning banks to make dubious mortgage loans. Never mind the long-term danger of its assumption of colossal new obligations and the moral hazard in the message its intervention sends. My response to my friend was of a more narrow focus. "Thank God we have the private sector to bail out the federal government not just last week, but every week!" I exclaimed.

Think about it. Taxes on the private sector pay a majority of the federal government's bills. For most of the rest, the government borrows by selling its debt obligations mostly to private sector entities - including banks, insurance companies and individuals.

The federal government is the world's biggest taxer and the world's biggest debtor. If those of us in the private sector didn't pay our taxes or didn't buy Washington's paper, the feds would have gone belly-up decades ago. We've rescued Washington to the tune of about $10 trillion and rising. A big difference between Washington bailing out the private sector and the private sector bailing out Washington is that the private sector has to work, invest, employ people and produce goods to come up with the cash. It can't print it like Ben Bernanke can.

Our friends in Washington have blessed us with future burdens almost too astronomical to comprehend. In the name of taking care of us in our old age, we are saddled with no less than $6 trillion in Social Security payouts over the next 75 years for which there are no presently-earmarked funding streams. According to Brian Riedl of the Heritage Foundation, the unfunded obligations for the new federal prescription drug program, enacted under President Bush total another $8 trillion. On and on it goes. The private sector has an awful lot of bailing out to do in coming decades.

If you have any doubts about the role played in the present crisis by the very federal government now posturing as our rescuer, take a look at this article from the Sept. 30, 1999 edition of The New York Times: http://tinyurl. com/3jdn9e. And then contemplate how deeply we taxpayers will have to dig in the not-too-distant future to pay the bills of our benevolent, compassionate and forward-thinking government.

* See also, US Debt 1: How Bloated is the US Govt? May 08, 2006

Tuesday, September 16, 2008

Rule of Law 1: Entrepreneurship and Government Permits

The World Bank and International Finance Corporation (WB-IFC) conducts an annual report, “Doing Business” and its 2009 Report was released last week. The goal of such report is to assess the 181 countries (178 countries in the 2008 Report) included in the survey on how easy or how bureaucratic they are for entrepreneurs and businessmen – who create jobs, who buy and produce various goods and services in society. It is a complex and delicate procedure, involving the inputs of top business consulting, auditing, legal and other companies in the countries surveyed.

After assessing the countries through assignment of a certain score, it ranked all the 181 countries. For this year, the 10 factors considered and measured in coming up with a composite score and where rankings are made, of “Ease in Doing Business” were: (1) Starting a business, (2) Dealing with construction permits, (3) Employing workers, (4) Registering property, (5) Getting credit, (6) Protecting investors, (7) Paying taxes, (8) Trade across borders, (9) Enforcing contracts, and (10) Closing a business.

So, how did the Philippines fare?

Rank in Ease of Doing Business, 2008

1. Singapore
4. Hong Kong
12. Japan
13. Thailand
20. Malaysia
23. Korea
61. Taiwan
83. China
88. Brunei
92. Vietnam
122. India
129. Indonesia
135. Cambodia
140. Philippines
165. Lao PDR

Again, for the nth time, the Philippines proved to be among the most bureaucratic of all supposedly “emerging economies”, ranking 140th out of 181 countries included in the survey! What pulled down its ranking were its scores on the procedures in Starting a business, also in Closing a business.

The top 10 countries with easiest procedures in starting a business – New Zealand, Canada, Australia, Georgia, Ireland, United States, Mauritius, United Kingdom, Puerto Rico and Singapore – only have one, at most 6 or 7, procedures to register and start a business, and each procedure does not take long to complete, and the fees are not plenty and high. In addition, the local governments hardly have any part in business registration procedures.

In contrast, the Philippines requires at least 15 procedures: 3 with the Securities and Exchange Commission (SEC); 4 with the barangay/village and city/municipality; 6 with the Bureau of Internal Revenue (BIR); 1 with the Social Security System (SSS); and 1 with PhilHealth. Registration with Pag-IBIG maybe optional, but most firms are required or advised to do so. Ask any serious entrepreneurs around, and most likely they will pinpoint at the local governments and the BIR that really give them difficulty if not hell.

The empowerment of local government units (LGUs) after the enactment of the Local Government Code (1991) was supposed to make the LGUs more responsive to the needs of the people in the locality. What happened in many cases, was the lives of hard-working and entrepreneurial people became more complicated, the less-responsible and less hard-working people were placated and subsidized, and personnel of the barangay/municipal/city halls were expanded and often pampered. Political decentralization and devolution did not mean less government but on the contrary, more government, as both national government agencies (NGAs) and LGUs take turns in slapping new regulations, new taxes and fees, to entrepreneurs who are deemed to have less political clout to the incumbent set of politicians.

The BIR will remain to be the nest of wastes and inefficiencies, if not large-scale corruption, because of the various powers and authority, whether transparent or arbitrary, given to that agency by various revenue laws sought by the Executive branch and granted to them by the Legislative branch.

Then there are many other NGAs that also require their own set of requirements, regulations and fees, on top of regulations, taxes and fees imposed and collected by the above-mentioned NGAs and LGUs. If a firm is manufacturing or distributing various food products, drinks, medicines and related products, it will have to get a license from the Bureau of Food and Drugs (BFAD) and/or the Department of Health (DOH). A friend of this writer who likes cooking produced different sauces for different type of barbeques. He invented around 20 different sauces, had his own packaging, already set up the marketing channels with selected local restaurants, shops, supermarkets, even a few outlets in the US. Six months have passed, 10 months, a year, and he still never got his BFAD license despite having submitted various samples for testing and re-testing. This experience plus some family concerns pushed him to abandon his business plan and migrated to the US instead.

If a firm is dealing with minerals extraction, it will have to go through a very long and complicated process in getting an Environmental Clearance Certificate (ECC) and other environmental permits with the Department of Environment and Natural Resources (DENR) and LGUs.

Friedrich Hayek observed in his book, The Constitution of Liberty, that government regulations “will always limit the scope of experimentation and thereby obstruct what may be useful developments. They will normally raise the cost of production or reduce overall productivity” (Chapter 15, Economic Policy and the Rule of Law). More regulations, more restrictions. Although such regulations may mean more revenues and more power for any national or local government body, they definitely kill certain innovative spirit and outcomes that some entrepreneurs may produce and develop.

The Rule of Law philosophy explicitly limits the arbitrary power of governments to create and enact too many rules, too many regulations and restrictions. Entrepreneurship and job creation is not a crime and harmful to people, especially those who need jobs, those who need new products and services. What often results with more restrictions, is that more ways and schemes are invented – and allowed in exchange for bribes – to circumvent and avoid those restrictive rules. This results in high levels of what are known as “informal” or “underground” economies.

For entrepreneurship and rule of law in the economy to flourish, the number of business regulations have to be drastically cut and reduced. Then entrepreneurship and job creation will be rewarded with freedom and prosperity, not penalized with endless regulations and taxation.

Thursday, September 04, 2008

CSOs and State 5: Subsidiarity, Decentralization and Privatization

This paper will discuss some political concepts related to citizen administration and governance, including the role of civil society organizations (CSOs). Those 3 concepts in the title though will be the dominant themes.

The principle of subsidiarity

This principle states that the lowest and least centralized levels of administration and governance should handle the citizens’ various concerns. Only on concerns where the lower levels cannot handle that the next higher level of administration should take charge.

According to Wikipedia, “The principle of subsidiarity goes back to Pope Leo XIII in Rerum Novarum and holds that government should undertake only those initiatives which exceed the capacity of individuals or private groups acting independently. The principle is based upon the autonomy and dignity of the human individual… and emphasizes the importance of small and intermediate-sized communities or institutions, like the family, the church, and voluntary associations, as mediating structures which empower individual action and link the individual to society as a whole and holds that all other forms of society.

This is a beautiful model of citizen administration because it encourages self-reliance, independence of action, and most importantly, it promotes and respects individual and parental responsibility in running people’s lives. Ultimately, society is made not mainly of government agencies and bureaucracies, but of individuals, households and their voluntary organizations. Such bodies range from churches, neighborhood or village associations, sports clubs, civic and charity clubs, professional organizations, advocacy associations, and so on. Government is only part of society and it is not the most important part, it is individuals and people.


Decentralization of political power, from the central or national government to the sub-national or local government, is a move that affirms the beauty and practicality of the principle of subsidiarity. This is after people have realized the ugliness and impracticality of central planning under a socialist government set-up or any of its derivatives characterized by a big and centralized government that is supposed to provide and subsidize everything but also takes everything from the people.

So certain social and economic functions are devolved to local government units (LGUs), functions that used to be handled by the central government and its various line agencies. Decentralization in this sense, is good because the LGUs are able to bridge the gap between a powerful and often less-sensitive central government, and ordinary citizens and their private enterprises and civil society organizations. Such civil society organs are mostly "apolitical" (like cooperatives, neighborhood associations, churches, sports clubs, civic and charity clubs, etc.), where people just want their individual choices and organizational freedom be respected. The citizens often feel “powerless” in relation to a centralized and very often bureaucratic, national government.

Local government function in this respect can approximate the competition among private enterprises and/or individuals in providing the needs of society. When certain functions are provided by the central or national government alone, there is no competition, there is only monopoly. And a monopoly very often creates lots of waste and inefficiencies because a monopolist thinks its “consumers”, the people, have no other options anyway.

Competition is possible among local governments. Neighboring towns and/or cities attracting lots of investors, local or multinationals, are forced to compete with each other in terms of better infrastructure, lower crime rates, lower local taxes, easier business registration, and so on. This competition among neighboring cities is happening in some of Metro Manila’s LGUs (composed of 17 cities and municipalities), and the result is generally good. Provinces and cities or municipalities that have good white sand beaches, or beautiful waterfalls or lakes and mountain resorts, will be competing with other provinces and cities or municipalities that have the same natural attractions. The LGUs in this situation will be compelled to improve their infrastructures like airports, seaports, roads, power supply, etc., as well as improve the peace and order situation, if they are serious in attracting more tourists and visitors to come. More tourism, more business and employment opportunities to local residents.

With this background in mind, can one conclude that local governments  automatically provide more democracy? NO. While it is true that LG is closer to the citizens and can identify their needs more than a central government, LG can also introduce its own set of economic distortions through new regulations, taxes and fees on top of those implemented and collected by the national government.

Note for instance, those small economies with very small local governments like Maldives, Singapore and Hong Kong: they charge only 1, 4, and 5 different taxes respectively, for medium-sized companies. In contrast, economies with plenty of local governments like the Philippines, Indonesia and India, even with decentralization, charge 47, 51 and 60 different taxes and fees, respectively, to medium-sized enterprises. Data from the World Bank and Price Waterhouse Coopers (WB-PWC) study, “Paying Taxes 2008: The Global Picture”.

Will decentralization always lead to better governance and poverty alleviation? NO. Decentralization can lead to better governance because LGUs competing with each other can improve services to the public, but this is not always the case. As discussed above, LG can introduce new rules and regulations, new taxes and fees, even create new local monopolies, etc. on top of existing regulations, taxes and monopolies administered by the central government. The end-loser of this situation are the citizens.

And will fiscal decentralization ensure equality among regions? Again, NO. There is no assurance for equality among regions, provinces, cities and villages because each locality has physical, geographical and population characteristics that are different from the other localities. Finally, local governments should NOT aspire for equality among each other. An island-province that is mountainous and volcanic cannot aspire to become equal with a flat, cosmopolitcan and urbanized island-province. The former can develop eco-tourism or geothermal energy as main development path.

Splitting of function

The main task for the national government in the opinion of this writer, is maintenance of (a) armed forces against external aggression, (b) foreign affairs and international diplomacy, (c) infrastructure and public works not covered by the private sector through franchise or build-operate-transfer, build-own-operate and related schemes; (d) judiciary, both lower and higher courts to settle disputes among people, their enterprises and organizations, (e) legislature, to amend or abolish antiquated laws, create or consolidate new laws, and (f) revenue collection and budgetary disbursement body.

The rest of social functions – the police, fire protection, basic and secondary education, primary health care, garbage collection, others – can be devolved to LGUs. The purpose is to instill competition among LGUs – better roads, airports, other infrastructure; better peace and order; better education and training of people, etc. So that people can “vote with their feet”, if their current LGU is behaving like a giant hold-upper and providing mediocre services, people can leave and move to other provinces or cities. With such splitting of function, I can hardly think of other disadvantages.

Levels of local government

Local government takes many forms in many countries. In the Philippines, LGUs range from the province, down to city or municipality, down to the barangay or village, as the lowest and most basic political organ. A province is composed of municipalities and cities. A city is more “prestigious” than a municipality because the former connotes bigger economic activities and hence, bigger revenues. All LGUs have a share of internal revenue allotment from the national government, and have powers to create and collect their own set of local taxes and fees.

In theory and in the law, those barangay leaders should be “non-partisan”; hence, they cannot join the established political parties. In reality, they are highly partisan to any opposing candidates for city or municipal mayor. Nonetheless, barangay leaders are usually the most sensitive to citizens’ concerns.

In the experience of this author as a private citizen, and living in a “non-gated” village or subdivision, the most important function of a local government, the barangay especially, is the maintenance of peace and order in the locality. The barangay does this mainly through good street lighting in the evening, and having very alert and mobile barangay patrols. When some neighbors become noisy at nighttime, disturbing other people’s sleep, just one phone call of the barangay, the barangay patrol comes in a few minutes, and the noisy neighbors suddenly become silent. Any roving thieves and robbers are also afraid to come near the neighborhood in the evening because they can easily be seen and recognized due to good street lights.

When there is peace and order in the community, people can be productive. They can work late if they want, or start work very early in the morning, knowing that their house, their family, are generally safe. Of course, households should still secure their house and other property properly.

Getting good people for local governments

Bad politicians run for local (and central) government mainly to steal, or to create restrictive and protectionist policies to favor and protect themselves, their businesses, and their friends’ economic and political interests. But good people also have the same incentives to run for the same position, mainly to block the victory or capture of political power by the bad politicians. Hence, “recruting good people for local governments” is not a problem because there is always an incentive for some well-meaning people to join the government, both at the local and national levels.

The main problem though is the credibility of the electoral process. Good politicians are not likely to cheat in elections and to bribe election officials just to win. It is the corrupt politicians who have all the incentives to cheat in elections, bribe voters, bribe election inspectors, bribe election officials. And it is this lack of credibility of the electoral process in the Philippines and many other developing countries that is the main hindrance why many good people are discouraged from entering politics. There is deep feeling that one will be compelled by circumstances to engage in some election cheating, or bribery of election officials, from limited to large level, if only to minimize the damage and reduce the effect of large-scale cheating by the bad politicians and unprincipled political parties. This alone turns off many good people from entering politics and they prefer to be in private business, where there is less political controversies, where life is more peaceful.

There are at least 2 ways to help remedy this situation. One is a major reform in a country’s electoral system towards more transparent, more modern system like computerized voting and counting. And two, to have a strong political party with very distinct and principled political and economic philosophy, and the party and its leaders will provide political, financial and moral support system to good politicians not to lose heart and be more brave.

The usual campaign of “fighting corruption”, “good governance” and related mottos may no longer catch the imagination of the average citizens because almost all political parties, almost all politicians, whether from the administration or the opposition, are saying the same thing. There is a big potential for a political party that advances the principle of subsidiarity, classical liberal and related philosophies of less government, less taxes and regulations, and advancing individual responsibility. A political party that strongly believes in the “rule of law” in the Hayekian definition of “the law applies to everyone and exempts no one”.


This philosophy, according to wikipedia, considers “individual liberty to be the most important political goal”. Putting this definition with the above definition of subsidiarity principle, it can be said that the individuals and their family, their private enterprises, their voluntary and civil society organizations, are the lowest levels of citizen administration and governance, and not the local government. Only in cases and functions where the households, the private enterprises and civil society organs cannot handle, that local governments up to the central government should take charge.

The advantage of relying first with the individuals and their voluntary organizations for self-administration and self-reliance, is that various goods and services are produced and exchanged in a voluntary way. When a locality has lots of rice, vegetables, fruits, animal products, but no fishery products, a fisherman or aquaculture farmer, or a small firm producing and trading fishery products, will provide said products to the people. And when people have lots to eat but no or little entertainment areas, another firm can put up a mall with moviehouses, or theme park, and so on.

When people exchange goods and services in a voluntary manner, as in free trade and free market, very little forcible contributions, i.e., taxes and fees, will be needed. The government’s role, local governments especially, is to watch out and discipline lazy and bully people who engage in stealing, cheating and various crimes. The protection of the citizens’ right to life, right to private property, and right to liberty and dignity, remains a very important function of government, both the central and local government.


Here in the Philippines, the proliferation of private security guards is noticeable. All malls and department stores, all residential and office buildings, all banks and convenience stores, all schools and universities (except government schools at elementary level), all hospitals, all villages and subdivisions, even airports, seaports and bus terminals, are guarded by private security guards. In a sense, one can say that the peace and order function has been privatized, and so far it is working. And that it is an indicator of citizen distrust of the capacity and sincerity of the government policemen. The police effectively has limited function but big budget, and some of them are tainted with links to organized criminals.

Private schools at the pre-elementary, elementary and secondary levels are plenty in the Philippines. Which again is an indicator of citizen distrust of the capacity and quality of government-run schools, despite the Department of Education (DepEd) having the biggest annual budget among all departments and agencies. There are plenty of private clinics and hospitals too, some expensive but many are offering competitive prices. People have choices  depending on their budget and type of services demanded.

If peace and order function can be privatized, and private security companies are competing with each other in offering good services, many other social functions can be privatized too.

Privatization is consistent with the principle of subsidiarity. If private enterprises can provide the needs of the people, say education, restaurant, buses, hospital, haircut, then both central and local government should stay away. This also reduces the rationale for high and multiple taxes and fees. And privatization works best if the economy is deregulated and demonopolized. When a state enterprise is privatized, it should be “one of the many” enterprises in that sector. If privatization happens while the economy is over-regulated and monopolized, then it will just be a transfer from government monopoly to private monopoly, and citizens will not feel much the difference. When citizens say private enterprises are better compared to government monopoly, it’s because in the former, they have a choice. They can patronize one company and boycott the others. This scares all other enterprises, and they are all forced to improve their services.

Some services becoming expensive after privatization can be expected, and some services becoming cheaper after privatization can be expected too. This is because of “product differentiation” and “price segmentation” by competing enterprises. When an airline is a government monopoly, fares can be either low (due to subsidy) or high (due to wastes) but services can be lousy because the monopolist knows that the riding public have no other airlines to choose anyway. After privatization coupled with deregulation and demonopolization, various airlines come in and compete with each other. Airline A will field new and modern planes, provide free food and drinks to passengers and charge expensive fares. Airline B is a budget airline, no food and drinks and charge low fares. Airline C also gives no food and drinks but offer some perks on participating shops and hotels and charges fare midway between those of airlines A and B. That is how product or service differentiation and price segmentation work and it is one result of competition.

It is important that local government leaders should recognize the practicality of the principle of subsidiarity and privatization, that local governments can only be a transition stage to a condition of civil society, and not an end in itself in citizen self-administration and empowerment. Informed and responsible people know what they want, and what they do not want. This creates diversity in needs and aspirations of people, but such diversity should be respected, not discouraged by forcing equality in society.

Tuesday, September 02, 2008

Climate change and more government regulations

While the UNFCCC had a meeting in Accra last week, there was also a big conference in Manila last week, August 27, on "Energy, Climate and Food Security Conference", the program you can view at http://www.policy.aim.edu/downloads/Energy,%20Climate,%20and%20Food%20Security%20Conference/Programme_Final.pdf

The main sponsoring organizations were the Asian Institute of Management-Policy Center, Konrad Adenauer Foundation (KAF), International Alert (UK) and the World Food Program (WFP). About 300 people came including media, quite a big and well-organized conference.

The second session was on "Climate Security" and 2 of the 3 speakers were climate alarmists: a Japanese academic from Waseda U, and from International Alert, The 3rd speaker was a provincial Governor, he talked about what his government did, little alarmism discussed.

I did not stay long, but I caught the presentation of the first speaker on the 3rd session, "Food security", a guy from the WFP and he talked as alarmist as the 2 speakers in the previous session. Things like "with global warming, we expect more food security problems".

Among the new "fight global warming" moves and proposals here in the Philippines are the creation of a new bureaucracy called "Climate Change Commission" -- with its full army of commissioners, employees, travels and conferences, offices, etc. It's still in Congress debates. Another is requiring local corporations to reforest xx hectares before their business registration can be renewed. A friend who told me about this was working in a local environmental group "Haribon", and I guess they could be making money since they are positioning as "mediators", they will reforest some denuded mountains in behalf of those corporations, for a good fee I guess. I don't know of other new government regulations and interventions, but there should be more.

Tree planting and reforestation is fine, but it should not be made mandatory that will further increase the operating costs of enterprises. If the cost of reforestation are tax deductible, that should be fine. But if government taxes and fees remain high, then government creates another regulation to increase the operating costs of companies, that's additional distortion in the economy.

If tree planting and reforestation is a "must do", then companies that engage in forest plantation either for the wood industry or for eco-tourism (say develop mountain resorts) should be spared of paying corporate income tax (currently at 35% of profit) and other fees. But you don't hear such kind of move from the government. Only new and additional regulations and costly compliance.