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.

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