Monday, June 25, 2007

FIGs and Ratings Technocrats

Guys who used to prod fiscally-irresponsible governments (FIGs) to either create new taxes, or hike existing ones, were used to be IMF bureaucrats and consultants, aka “IMF review team”. By the way, is this term “FIGs” been used elsewhere in the past? I don’t know. In case not yet, then I can console myself of being among the first to define that term J. And for that, I call FIGs to refer to those governments, especially of poorer countries, whose concept of “public service” is “tax and tax, spend and spend; those they can’t finance by taxation, borrow and borrow.”

So, during those times, the “IMF review team”, would look and tinker with various fiscal, monetary and macro-economic data, then scare those FIGs whose debts have grown to rather unmanageable levels, that if they want “macro-economic stability”, they should either enact new taxes, or raise existing ones, and at least, never ever entertain proposals for tax cuts. These days, FIGs borrow less from the IMF, WB, and other rich governments institutions. FIGs borrow more from private lenders – bondholders, private commercial and investment banks, and so on.

When FIGs do this, the “review team” that private lenders look up to, are no longer IMF bureaucrats, but private credit ratings companies, also called “global debt watchers”. So, guys from Standard & Poor’s (S&P), Fitch, and there’s a 3rd big company on their league. So when FIGs are in a rut, the ratings technocrats make it big in national and international media by releasing their assessment of the “creditworthiness” of various FIGs. The bigger the fiscal irresponsibility of a government, the lower the creditworthiness and hence, the higher the debt premium (ie, interest rates) that private lenders will charge.

One of those FIGs in this planet is my country, the Philippines. With nearly 1/3 of annual budget of the national government devoted to paying interest payment alone for its domestic and foreign debts, the Philippines is among the “big leagues” in terms of fiscal irresponsibility. There are just too many past debts to pay; too many government personnel and bureaucrats (from national to local governments) to pay salaries; too many pork barrel (from the President to military generals to Senators, Congressmen) to set aside money for, and so on.

Now, the ratings guys are not happy with privatizing government assets, especially shares of stocks or equities, in private firms (see BWorld story for instance, “Deficit cure not in government asset sales”, I am one of the very few souls in this country who advocate large-scale privatization as the single most important revenue source to drastically retire and reduce those huge public debts, so that some taxes will eventually have to be either slashed, if not abolished. You will note therefore, my dislike for those guys – whether government bureaucrats and politicians, or academics and media people, or technocrats of those international ratings companies – who can utter a deafening silence on FIGs’ tax and tax, spend and borrow attitude, but very vocal in opposing large-scale privatization.

FIGs really distort the incentives system in society. Many of the bright minds in society have been successfully pulled away from entrepreneurship and primary job creators, and diverted to the business of being bureaucrats and politicians, and their international cousins and counterparts – bureaucrats of multilateral institutions and technocrats of ratings agencies.

Tuesday, June 12, 2007

Tax Cut 5: Tax Imperialism, Privatization (PRPX 2007 Hawaii)

There was a "Pacific Rim Conference" held in Sheraton Waikiki, Honolulu, Hawaii, last May 23-24. The event was jointly sponsored by the State Policy Network (SPN), Americans for Tax Reforms (ATR), International Policy Network (IPN), Asian Forum Japan (AFJ), Lion Rock Institute (LRI), and Grassroot Institute Hawaii. I attended that forum and presented a paper too.

A friend from HK, Andrew Work, Executive Director of Lion RockInstitute, HK ( also presented a paper there on Tax Imperialism. He was attacking the EU, US and Canadian governments who tax, or want to tax, their citizens who are working and living abroad, earn income and have savings there. He says that the "secret" of HK's economic dynamism is its low and simple taxes. Meanwhile, 3 countries in the world are taxing their people abroad -- the US, North Korea and Eritrea!

So, how will the EU, US and Canadian governments tax their citizensabroad? By getting lots of data from them, and those data to be provided by the governments of those countries where their citizens currently live and work. So, imagine the tax spying that will happen around the world!

But the worst part of said Tax Imperialism, is trying to force those countries that have low, simple taxes, to raise those taxes and make the tax compliance more complicated through data mining about theb usinesses and other economic activities of citizens.

Andrew concluded his paper with this call:
"Continue to encourage your local government to engage in tax competition by simplifying and lowering taxes and resist tax imperialism wherever it rears its ugly head. The global network of business and the great experiment of humanity depend on our success in keeping the world free."
I say "Amen" to that. In the Philippines, there is realization even by Department of Finance (DOF) people that the country's taxes are among the highest (not to mention among the plentiest) in Asia. But they are in quandary where to get additional revenues if they cut down existing tax rates since there are lots of public debts to pay, millions of government employees to pay, and so on.

People are not static. You cut taxes, you don't expect the volume of economic transactions to remain at the same rate as before. There should be bigger, faster economic activities when people have more money in their pockets or bank accounts due to bigger take-home pay or bigger savings.

Below is a portion of the paper that I presented on the panel on Privatization.

From Privatization to Tax Cut: Some Theoretical Considerations and the Philippine Experience

I. Introduction

II. Theoretical Framework

There are two major schools of thought on the existence of government enterprises. First, that which justifies SOEs’ presence, and second, that suggests no justification for the continued existence of SOEs. The former is the dominant thought advocated not only by politicians, appointed bureaucrats, as well as cronies that benefit from SOEs, but even by many academics and consultants.

A. Theory and rationale why SOEs are created

The main reason given by many governments around the world why they create government corporations and banks or SOEs, is to “further push development”. This position is also supported by many intellectuals, consultants and academics. In a paper, “Raison d’Etre of Public Enterprises, Comparative Review (by ASOSAI, 1985), among the reasons given by the governments of the following countries are:

Bangladesh: Promotion of social policy.
India: Promotion of self-reliance in strategic sectors in the economy.
Indonesia: Participate in business vital and firmly connected with the needs of the people.
Malaysia: Growth and expansion.
Pakistan: Self-reliance, deal with strategic sectors of the national economy.
Sri Lanka: Make investments where there is absence of significant private sector.

Australia: Government control, prestige; specialization for economy and effectiveness.
Japan: Strengthen nation’s power; build-up modern industry.
Korea: Promote public services, generate (additional) state revenues.

In the Philippines, one important framework justifying public enterprises is provided by the Constitution itself. In the 1987 Constitution (Article XII, National Economy and Patrimony), it says:

“Sec. 16… Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.”

B. Why creation and maintenance of SOEs is not justified

Not everyone is convinced with the above-stated philosophies, of course. Among those who offered some strict criteria by which government enterprises may be allowed is Friedrich Hayek. In his book “The Constitution of Liberty”, he wrote the following in chapter 15, “Economic Policy and the Rule of Law”:

“But though government may at any moment be best qualified to take the lead in such fields (“public goods, public works”), this provides no justification for assuming that this will always be so and therefore for giving it exclusive responsibility…

“So long as government uses any of its coercive powers, and particularly its power of taxation, in order to assist its enterprises, it can always turn their position into one of actual monopoly. To prevent this, it would be necessary that any special advantages, including subsidies, which government gives to its own enterprises in any field, should also be made available to competing private agencies.”

The second statement implies zero justification for state enterprises., because one important characteristic of public enterprises is their exemption from certain taxes and regulations imposed by the state to private enterprises. This immediately invalidates any claim for “fair play” or “level competition” by government enterprises with private enterprises.

To generalize, when SOEs exist because of any of the following conditions below, the justification for their creation, no matter how noble and developmentalist, evaporates. These conditions are:

(a) SOEs are perennial losers and just live off on annual subsidy and continued cronyism for their existence.

(b) They are “doing well” and churn out positive financial statements (ie, have regular net incomes) because: (i) They have instant big capitalization or equity infusion from taxpayers’ money and hence, need not borrow from anyone. (ii) They enjoy certain privileges like tax-exemptions, hassle-free renewal of business licenses or franchise, or freedom from extortion by national and local politicians. (iii) Their big debts and unpayable liabilities in the past were taken off their backs and passed on to the national government (NG), which the NG passed on to the taxpayers. And lastly, (iv) they are plain monopolies.

Thus, when any or all of these conditions is/are evident, the “promises” depicted in Graph 1 may not materialize at all and SOEs instead could produce opposite results. That is, instead of stabilizing or declining costs while benefits expand, you can have increasing costs while benefits decline.

Aside from the above Hayekian criteria, another theory that can disprove the necessity or justification of SOEs to deliver welfare to society, is the concept of contestable market. A market is “perfectly contestable” if entry and exit of firms is absolutely free (Nicholson, 1995). Governments’ various regulations and business-related taxes and fees already impede entry and exit of players. Introducing state enterprises and their built-in exemption from some of those business regulations, taxation, and even extortion by government bureaucrats and politicians further makes entry and exit of firms costly and risky. And with fewer sellers and producers, a society is courting an oligopolistic, even monopolistic market structure, and people can say “goodbye to choice”.

The free entry and exit of firms produce growth through time. And in the observation of one economist, “Government is the enemy of free entry and exit” (Kling, 2007).

C. Don’t Privatize All, Retain Some

There are some proposals that government corporations should only be created and maintained for (i) large, long-term projects that are beyond the reach of the market, and for (ii) activities with distant payoffs, or with great externalities, either negative or positive, that cannot be brought into the enterprise.
Though such proposal appears “neutral” between the current proliferation of SOEs and zero-SOEs argument, the argument is weak.

On activities with distant pay-offs, the state is "justified" to put up a government enterprise. Suppose there is a project to develop a rice variety that contains anti-malaria, anti-AIDS, anti-polio, anti-hepatitis, anti-tuberculoses resistance to people who eat that rice. That is a very "distant pay-off" project. So governments will put up a super-large rice research corporation, and extract super-large taxes from the citizens, to finance that super-large corporation and bureaucracy? That project is too good to be true, and if ever it will materialize, say 100 years from now, then people will be more than willing to save and buy that rice, and will not wait for any government subsidy to give that rice to them at low or zero cost.

On activities with great externalities, government is "justified" to put up a public enterprise. Farming anywhere around the world (rice farming, wheat farming, livestock farming, chicken farming, vegetable farming, fruits farming, etc.) has great externalities, positive and negative. The negative externality is the large-scale conversion of forest land into agricultural land, hundreds of millions of hectares of them. Another negative externality is regular or frequent plowing of the land, which loosens the soil, which aids soil erosion. But farming productivity for some crops will be very low if you do not plow the land and soften the compacted soil.

With such great externality of farming, will governments all over the world be justified to put up super-large farming corporations, or “nationalize” many private farms, to "internalize" those externalities that private farms cannot take in? And again, extract super-large taxes from the citizens, hire super-large bureaucracies, to supervise that super-large corporation?

The proposal therefore, is faulty, or shaky at least. And yet it can be a clever logic to justify statist thinking and intervention into the economy, into our lives, into our pockets....


Large-scale privatization of SOEs (GOCCs and GFIs in the Philippines), preferably all of them (ie, no SOEs left) is in the best interest of taxpayers. Not only that some taxes can be cut, personal income tax can possibly be abolished. When the endless subsidies to ever-losing government corporations and banks, the endless servicing of big public debt, and expansion of the bureaucracy in general has declined, a room for tax cut should be opened.

Some of those government enterprises may have to be sold at a big bargain to expedite their privatization. Proceeds from privatization of SOEs should be used mainly to retire public debts, both foreign and domestic loans, since a big portion of those accumulated public debts were due to the losses, wastes and underperformance of SOEs, both disposed and still existing.

Few or zero SOEs should also reduce cronyism and corruption in the government. This is because appointment to those government enterprises are often used as “rewards” to many supporters of those in the administration, especially those who cannot be given juicy positions in big departments and other agencies. That is why many retired military and police generals become instant presidents or administrators of government enterprises. Likewise, appointment in SOEs is also used to bribe some critics of the administration, including some media people and academics. At least they become silent, better if they become ardent supporters and apologists of the incumbent political leadership.

Privatization is not the end-goal; it is to have a more competitive economy that can harness the entrepreneurial energy and innovative culture of the people. Thus, liberalization and deregulation, if not de-bureaucratization, of the sectors where GOCCs operate should be done before and after privatization. This way, fears and concerns of some people that privatization will only transfer hands from government monopoly to private monopoly, will not happen.

Government should regulate and run after rapists, hold-uppers, drug pushers, carnappers, kidnappers, murderers, land-grabbers, extortionists, arsonists, other forms or variants of thieves and killers. There are so many criminals to regulate and "control" that the state should be very busy running after them. If the state should also busy itself with putting up so many corporations and bureaucracies, then there is a danger that the state can become a robber itself -- robbing the legitimate incomes and savings of the citizens for endless taxes and fees to finance those endless corporations and bureaucracies.