Monday, April 26, 2010

Medicinal elections

Health financing and medicine prices are among the topics that would crop up during debates among opposing candidates and political parties as the national and local elections are just a few days away. Candidates tend to embrace the more interventionist, more confiscatory policies to become more popular with the voters. Among the populist promises made by national politicians are (a) extend and expand the drug price control policy, and (b) the state confiscating drug patents to further bring down prices.

Let us expand this into a hypothetical but probable scenario.

Let the Department of Health (DOH), upon the prodding of some influential legislators, extend drug price control, impose compulsory licensing (CL), and push parallel importation, to all patented drugs in the country. Do all three policies simultaneously, since these policies are now legal and allowed under the Cheaper Medicines Law (RA 9502) under certain conditions, and many people think that patented drugs = expensive = anti-poor.

With the high cost of inventing more powerful drugs, the innovator pharmaceutical companies will stop selling their newest drugs, their more disease-killer drugs into the country. They say,

"The most effective anti-hypertension drugs in the Philippines right now can bring down blood pressure in 1 hour or 30 minutes. Our new drug can do that job in 5 minutes, zero complication…. Or current anti-cancer drugs available in the Philippines can give an average patient some 20 to 30 percent survival chance. Our new anti-cancer drug can improve a patient's survival chance from 50 to 60 percent…. But you can not buy our drugs in any Philippine drugstore. You have to buy them in Hong Kong or SingaporeJapan and other Asian countries with no price control, no CL." or

Is this a good and desirable situation?

Other people will say “Nothing to worry, multinationals have threatened in the past to pull out of the country, or pull out some of their products in Philippine markets if they will not get what they want. But they never did so since they still make lots of profit here. And patents have to be shortened as much as possible because 20 years patent is too long for profit-making. Patients over patents.”

This answer is not plausible for the following reasons.

One, there is no need to "pull out" newly patented, more expensive, but more disease-killer drugs from the country because the innovator companies, as mentioned above, will not make them available here in the first place. They will only bring in their off-patent, or patent expiring in 1 to 2 years, but not the newly-patented with 7 years or more patent life.

Two, the 20 years patent is only on paper. There are plenty of regulatory approvals AFTER a patent has been filed and approved, and regulatory scrutiny is increasing, not decreasing, around the world. Meaning, the patent starts from the discovery of the molecule, before undergoing various clinical trials, and not from the time the drug is marketed. Innovator companies say that of the 20 years patent life, the effective patent protection and “commercial or profit period” is only about 7 to 11 years because the first 9-13 yrs are spent on various clinical trials (from animals to people) and complying with various regulatory procedures by food and drugs administrations (FDAs) of governments.

Three, any adverse result to people that will occur during clinical trials which the innovator company cannot find a solution, then that drug will be abandoned for commercial development, even if several million dollars have been spent already, even if that molecule has a patent already.

There are proposals also that the government should put up its own drug industry, similar to Thailand’s Government Pharmaceutical Organization (GPO). The best way that I can think of developing "our own drug industry" is to allow United Lab, Pascual Lab, and other domestic pharma companies to flourish, via joint ventures with other big local Asian pharma companies (say from India, China and Pakistan) and become innovator multinational companies themselves, exporting their new drugs to other countries.

Let us not push the idea of the DOH putting up a government pharma company as the fiscal cost of such project will be too high. If the DOH cannot operate a big government hospital with full efficiency, what makes us think that the DOH can operate a big pharma company?

Many people never tire of citing “market failure” in health and other sectors. What they do not realize is the huge distortions created by bigger government intervention and taxation. At 5 percent import tax + 12 percent VAT + FDA regulatory fees + normal corporate taxes + local government taxes, government contribution to expensive medicines is often overlooked.

More competition, not more government regulation and taxation, will bring down medicine and healthcare costs over the long term.

Friday, April 23, 2010

Profit and taxes

(Note: And this is my article for "People's Brigada News" last April 16)

April 15 every year is the deadline for filing of income tax returns for individuals and corporations without penalties. If a corporation is delayed by just one day, say it files its taxable corporate income by April 16, there are 3 penalties to pay on top of the taxes on income and profits: (a) surcharge of 25 percent of taxes due, (b) interest of 20 percent of taxes due, and (c) compromise penalty. These are indeed harsh penalties.

But more than the penalties, it is the high taxation of corporate income that is unfair and unjust. In some rich countries, the corporate income tax could be as high as 50 percent, in the Philippines it is 30 percent, in developed Hong Kong and Singapore it is only 16 percent, and in a growing number of countries, it is at flat 10 to 12 percent only.

A corporation’s profit is an indicator of its being useful to society and its being efficient and not wasteful in its operations. An enterprise that sells high prices for its lousy products or services will soon lose its consumers and clients, forcing that company to improve its efficiency or become bankrupt. A bankrupt company is an indicator of its inefficiency, wastefulness, and lack of sensitivity to the needs of its customers.

If people cannot make profit on providing transportation, we shall have no buses, taxis, jeepneys, airlines, shipping lines, etc. If people cannot make profit on cooking and selling food, we shall have no restaurants, food shops, carinderias and ambulant food vendors. If people cannot make profit on selling rice, chicken, meat, fish, vegetables and fruits, we shall have no farmers, fisherfolks, animal growers. If people cannot make profit on education, we shall have no private schools and universities. Government colleges and universities survive only because of the money from taxpayers, including private universities, their instructors, officials and employees.

Profit is good, it is not evil. The important thing is to make the economy competitive, so that enterprises, from single proprietorship to partnerships to corporations, are competing with each other in attracting customers. In the process of competition, they are forced to produce good quality products and services, and not to price their products too high that will turn off their clients, nor too low that will bring them close to bankruptcy. Thus, competition among producers and sellers provide welfare to the consumers, to you and me, because we are empowered to have more choices, we can compare prices, quality, shops’ location, warranty of service, and so on.

Of course, there are profits which are abnormally high because of a monopolistic or oligopolistic market structure. This is the kind of “gargantuan profits” that many people dislike. But almost all monopolies are created by governments via franchising. Thus, certain routes are monopolized by tricycles only because the government did not allow franchise to jeepneys and air-con vans to operate there.

Telecom companies Smart and Globe for instance, were enjoying spectacular profits that the sector has attracted Sun Cellular to join the fray. With about 50 million mobile phone subscribers, a 4th or even 5th player and competitor is still possible and such new entrants will introduce similar services offered by the leading companies at a much lower cost to the public.

There is a proposal by some economists from the University of the Philippines School of Economics, to raise the value added tax (VAT) from the current 12 percent to 15 percent, in exchange for bringing down corporate income tax from 30 to only 18 percent, and individual income tax from the top rate of 32 percent to a flat 18 percent.

Personally, I am in favor of this proposal, to introduce drastic reduction in income taxes, both personal and corporate incomes. Government should not penalize profit and hard work by individuals by imposing high income tax rates and various consumption-based taxes (VAT, excise tax, travel tax, amusement tax, vehicle registration tax, real property tax, and so on).

Government can pursue its social welfare objectives to the people by encouraging the entry and formation of more profit-oriented private enterprises, which create jobs and produce various goods and services needed by society and the people. When people have productive and stable jobs, they themselves can pull themselves and their households from poverty. The government can focus its personnel and other resources at running after various criminals who sow fear and extortion in the minds of the public.

Thursday, April 22, 2010

Transport Econ 2: Small-Scale Monopolies

(Note: this is my article for "People's Brigada News", last week of March 2010)

When we talk of monopolies and oligopolies, people often think of the large ones, like power and energy monopoly, airline and shipping monopoly, telecommunications and water monopoly, and so on. People seldom talk, even "forgive", small-scale monopolies. Like jeepneys, tricycles, and pedicabs or "trisikad".

It is true that there is no single jeepney (or tricycle and trisikad) operator that monopolizes the industry. But they as a group monopolize a particular route. That is, jeepneys from various owners/operators and drivers monopolize a particular route, buses and vans are banned there. Tricycles from various owners/operators and drivers also monopolize a particular route (usually from village gates to the main road), jeepneys, vans and buses are banned in that route.

When a route is granted by the government to be monopolized by buses or jeepneys or tricycles (ie, only one of them can take that route, all other public transportation except taxis are banned), commuters have no other choice except to bring their own cars, or take the cab. Both options are expensive considering the high prices of fuel products, traffic congestions, high parking fees, and dangers of carnapping or towing by some local governments, if one brings his/her own car.

The monopolists almost always do not strive to improve their vehicles anymore. Even if their units are old and dilapidated, smelly and mutilated, they often do not care. They know that non-rich riders and commuters have no other option but take their dilapidated and/or over-loaded vehicles, so why bother and spend money to improve their vehicles? Better use the money to bribe government officials so they will keep the route monopoly and keep away competition from more modern, more comfortable public transpo like air-con vans, new and more modern bus lines.

Take the Ayala-Washington route in Makati, for instance. Ayala Avenue is the country's prime financial district. While there are buses and air-con vans from the northern part of the metropolis that pass this road, there are none coming from the southern part. So passengers from the south get off from the MRT Ayala station and take the jeepneys that ply the Ayala-Washington route. There are no alternative air-con vans, only taxis and the often rickety and smoke-belching jeepeneys.

So you can see in the country's prime and famous financial district, sometimes dilapidated side by wide with new model and expensive cars, competing for road space. What is worse is that jeepney drivers overload their vehicles. A jeepney that can comfortably seat 8 passengers on one side is being packed with 9 passengers, otherwise the driver will not move the vehicle. Again, jeepney owners and drivers do not bother if their jeepneys are smelly and ugly, they are aware that passengers who have no cars and cannot afford to take taxis, have no other alternative but ride their jeepneys.

Some people propose that government should phase out jeepneys and tricycles in many areas of Metro Manila. I do not agree with this proposal because this will involve coercion and charges of government “favoritism”. A better option is that the government will (a) not grant or create monopoly franchises to jeepneys and tricycles in particular routes, (b) allow various options of public transpo, the air-con vans and buses in particular, to compete with jeepneys and tricycles, and (c) deregulate fares. This way, it will not be the government that will phase out -- or at least force the improvement -- of those jeepneys and tricycles, but the passengers themselves. When many people will not ride jeepneys and tricycles, the latter will be forced to either improve their units, or bring down their fares to attract passengers, or abandon the route and bring their jeepneys and tricycles to areas and routes where the vans and buses are either absent or have weak presence yet.

Many countries with big population do not have jeepneys and tricycles, only buses and trains. Even for rich countries with small population, like Singapore, Hong Kong and Malaysia, they do not have small-passenger public transpo like jeepneys and tricycles. They only have buses and trains.

The Philippines need not jump into the extensive and expensive train system. The government needs only to step back a little and de-monopolize certain routes to allow the entry of more comfortable vehicles to serve passengers who do not have cars and are poor enough to take the taxi everyday. Competition among various public transpo providers will empower passengers.

* See also Transport Econ 1: Public Transpo Regulation, December 19, 2007

Tuesday, April 20, 2010

Climate Alarmism in the 70s, Pinoy Style

For Filipinos who were born in the 50s and 60s (or born in the 70s and 80s), do you remember a song by Asin, "Masdan mo ang kapaligiran"? It was a famous song sometime in the 70s. Here's part of the lyrics:

...Ngunit masdan mo ang tubig sa dagat
Dati'y kulay asul ngayo'y naging itim...

Ang mga batang ngayon lang isinilang
May hangin pa kayang matitikman?
May mga puno pa kaya silang aakyatin
May mga ilog pa kayang lalanguyan?

Darating ang panahon mga ibong gala
Ay wala nang madadapuan
Masdan mo ang mga punong dati ay kay tatag
Ngayo'y namamatay dahil sa 'ting kalokohan.

Fast forward to today, about 30 years after that famous song...

-- ang dagat, kulay asul (blue) pa rin
-- ang mga batang 30s na ngayon, may hangin pa ring natitikman
-- may mga puno pa rin silang aakyatin (pero ayaw na umakyat, marami nang bondying na eh)
-- may mga ilog pa rin silang nalalanguyan (marikina river pwede pa, pasig river di na)
-- mga ibong gala, madami pa rin
-- mga puno, kalaban ng kuryente ng meralco kasi matataas ang dahon, fire and electrical hazards na.

lesson: climate alarmism in the 70s was proven wrong,.
climate alarmism of this decade is proven wrong in recent years up to the present.

Meanwhile, here's a short discussion about the effects of ocean decadal oscillations (pacific, atlantic) and cycles, and the Sun, on the world's climate. And some projections of what type of global cooling we are entering -- Dalton minimum type (2-3 decades cooling) or Maundeer Minimum type (7 decades cooling).

About El Nino and La Nina cycles, here's a good chart, from 1979 to 2009.

The problem with the alarmists is that they will insist that persistent cooling in the coming years is a result of "man-made climate change" and hence, all forms of environmental regulations such as carbon emission trading system (ETS) and other variants of carbon cap and trade, should be pursued at the global level.

Burkha and earthquakes

There's a weirdnews story, or rather, a weird pronouncement, by one Iranian cleric, who said,

"Many women who do not dress modestly ... lead young men astray, corrupt their chastity and spread adultery in society, which (consequently) increases earthquakes," Hojatoleslam Kazem Sedighi was quoted as saying by Iranian media."

I cannot see the logic. Maybe because I am not a follower of him?

But there are lots of "promiscuous" women in Europe and north America than in Indonesia, south America, Philippines, Malaysia, etc. And there are very few earthquakes in europe and n. America compared to those countries mentioned.

Meanwhile, as the "Earth Day" approaches, more stupid arguments like "more global warming, more earthquakes or more volcanic eruptions" will come out. Is the Earth Day also Stupid Day for the rabid greenies?

CL and drug price control

During the Coalition for Health Advocacy and Transparency (CHAT) forum last month assessing the cheaper medicines law (CML, RA 9502), some friends and fellow NGO leaders argued that price control of off-patent drugs is not effective because there are competitor generics available already which are a lot cheaper even if innovator drugs' prices have been slashed to one-half. Then they added that price control should be imposed on patented drugs, where there are no generic competitors yet, in order to force their prices down.

This logic is questionable. A friend and health NGO leader added with the following arguments.

"The multinational drug companies have always threatened a pull out of their products if they do not get what they want, but they have never really done it. In this case, with compulsory licensing or parallel import or government price control of drug prices, they can always threaten us again. They can again give the same threat but I doubt if they will really implement it because they will not take the risk of losing the huge amount of profit that they are amassing in the Philippines.

... the government should stand firm in its position of lowering drug prices. If the drug companies pull out, then we can do parallel importation. It is about time that we show these drug companies that we are not afraid of their threatened pull out. We should not be made hostage to their ploy.

Thus, patent protection for drugs should really be shortened so we are not dependent on these foreign companies for so long. We should develop our own drug industry as soon as possible and encourage healthy competition among local drug manufacturers."

Yes, we all want cheaper medicines. My father is 82 yrs old and is practically dependent on medicines. My mother is 75 yrs old and is totally dependent on her weekly injection for her kidneys, for life! My wife has hypertension and is dependent on maintenance drugs. My elder brother died of prostate cancer, my sister in law died of colon cancer.

I am lucky that I don't get sick, except on Dec or Jan where I get nasty cough because of the cold weather and holiday parties.

My parents are lucky to get 20% senior citizen discount on their drugs, but at xx thousand pesos per month of medication, it's still pocket-draining.

So competition among innovator companies and among generic manufacturers is really helpful. But government's continued taxation of medicines does not help. At 5% import tax + 12% VAT + regulatory fees (FDA, etc.) + local govt taxes, they all contribute to expensive medicines.

Here are some of my rejoinders.

If any of those multinationals will get out of the country, not just their products but their offices, then only traders and importers will bring in their products, new and old. The term for that is plain importation. The term "parallel importation" applies only if the (pharma) company has an office here, imports their patented drugs from their regional or global HQ at a high price. Then comes another company that will import the same patented drugs from other countries without the permission of the patent holder and sell at a lower price. That's why it is called "parallel" importation. In Filipino, "magkatabi" or "magkasabay na importasyon."

The best way that I can think of developing "our own drug industry" is to allow United Lab, Pascual Lab, other domestic pharma, to flourish and become multinationals themselves, exporting their drugs at least to other Asian countries. Let us not push the idea of the DOH or the Office of the President (OP) putting up a government pharma company like Thailand's GPO as the fiscal cost of such project will be too high. If the DOH cannot operate a big government hospital with full efficiency, what makes us think that the DOH can operate a big pharma company?

I sincerely wish to see local pharma companies become multinationals themselves. SMC, Jollibbee, Figaro, Metrobank, SM, etc. are now big multinationals abroad. The cost of pharmaceutical R&D is so big, that only big companies will have the resources to do such job with full accountability. Meaning, if a local pharma company will sell its new line of innovator drug and some adverse results happen to patients and it gets sued, such local pharma company will have the resources to tackle both scientific and legal battles at the same time.

Tuesday, April 13, 2010

On rice "self-sufficiency"

There is the recurring observation that "IRRI is based in the Philippines, Thailand and other countries just sent their rice researchers to the Philippines and yet we remain a rice importer while they are big rice exporters."

I think it is impossible for the Philippines to aim for rice "self-sufficiency" and stop importing rice someday. Thailand will remain a rice export powerhouse, also Vietnam, and possibly soon, Cambodia.


The Philippines has 20 typhoons/year on average, causing various crop damages.
Thailand has almost zero typhoon. Vietnam has a few typhoons mostly coming from the Philippines.

The Phils. has only 4 million hectares of rice land, while Thailand and Vietnam have 10 mill. hectares each.

The Phils. has few big rivers (mainly coastal and/or mountainous), Thailand and Vietnam have Mekong river, other big rivers like Ton le sap river and lake (Cambodia).

The Phils. has 93 mill. people, growing at 1.8M per year (net of death and migration), Thailand about 65 mill. people and growing at only around 0.5M/year.

In short, the Philippines only has expanding population, not riceland. It is impossible and it is not desirable, to continue aiming for rice "self-sufficiency" and keep allocating huge amount of tax money every year for this goal.

There is nothing wrong with being a rice importer. HK, Singapore, Japan, are net rice importers. So long as you have extra resources to pay for rice imports, no problem.

The main strength and attraction of the Philippines is not rice production but tourism. If you are an archipelago with very long coastlines, thousands of islands and islets, mountainous and plenty of waterfalls, it should attract plenty of foreign and local tourists, we get the money, use part of it for rice importation.

The sooner that people will recognize this, the better.

Gloria the leech

Today's Inquirer report says "Arroyo satisfaction rating now 'very bad'",

http://newsinfo. inquirer. net/inquirerhead lines/nation/ view/20100413- 263901/Arroyo- satisfaction- rating-now- very-bad

MANILA, Philippines—Public dissatisfaction with President Gloria Macapagal-Arroyo’s performance fell to a record low from “bad” to “very bad” in practically all areas and socioeconomic classes, a Social Weather Stations (SWS) survey conducted from March 19 to 22 showed.

Sixteen percent of Filipinos were satisfied, while 69 percent were dissatisfied with Ms Arroyo’s performance, resulting in a net satisfaction rating (satisfied minus dissatisfied) of negative 53, SWS said in a statement Monday.

Ms Arroyo’s net satisfaction rating fell by 15 points from negative 38 (23 percent satisfied and 61 percent dissatisfied) in December 2009, surpassing her previous record low rating of negative 50 posted in July 2008.

Malacañang blamed the “toxic” election campaign for the unprecedented negative ratings of Ms Arroyo.

“We are not surprised with the continued drop of her ratings because what we have now is toxic campaigning and the toxic campaigners always target President Arroyo,” said deputy presidential spokesperson Gary Olivar.

Mr. Olivar is confused, if not part of the lying machine of Malacanang. He was "not surprised" that the president has the worst dissatisfaction rating in all her 9 years in power at the last 3 months of her term? While the "toxicity" of the campaign period is partly to blame, it's her being Gloria the President that simply makes her very toxic -- over-greed in political power, period. A family of political leeches, not to mention the endless corruption and robbery scandals that have been hounding her term since she assumed power in 2001.

Nine (9) years in power are not enough, so the president is running as a congresswoman, then house speaker, then what?

The presidential son running for party-list as a "marginalized" what?
Another in-law running for party-list as a marginalized millionaire?

Thursday, April 08, 2010

Government: coercion and corruption

There was an old Social Weather Stations (SWS) survey in 2003, the SWS Enterprises Survey: Business has Resources to Fight Corruption, but Must Cut its Dishonest Practices.

The paper was discussed in one of my yahoogroups. One member considered the Department of Finance (DOF) as the "baddest" agency in terms of corruption.

I think the "baddest" is the Office of the President (OP). Government is all about power, force and coercion. Government is never about voluntary exchange, it's all about coercive exchange. Government says, "I take your money (taxes and fees), I give you this policeman, this DPWH inspector, this BIR assessor,... whether you like them or not, they are your public officials."

The office with the greatest power, greatest force and coercion (being the commander-in- chief of the AFP and the boss of the PNP chief) is the OP. So no agency in the Executive branch can be worse than the OP. And since the head is rotten, many agencies below can be equally rotten. Like the agencies under the DOF (BIR and BOC especially), the AFP, PNP. DPWH, etc.

I do not favor zero taxes. That's equivalent to zero government. I favor minimal taxes for minimal government. Maybe 3 or 4 different taxes and that's all, the rest are abolishable.

A friend working at the DOF commented that the above comment is too denigrating for them and the entire bureaucracy. I apologies to her for the rather harsh indictment of the Executive branch, including the office headed by my former boss 2x, Gary Teves. But it is simply impossible for people to consider many staff of those agencies as "honest". This is not to say that they are 100% rotten, perhaps 75% rotten and 25% decent,or vice versa. But even a 1% rot can give the impression that the rot is bigger than that if that 1% is the frontline people that the public see.

May I expand my indictment to include the institution that I worked for 9 years in the 90s, the House of Representatives. I've seen a number of rotten eggs in that agency, that's why I was very happy when I jumped out of govt and joined the private sector -- Gary Teves' Think Tank, Inc.

All these public noise about "bad governance" mainly refer to the government -- the executive, legislative, judiciary. It's not much with the private sector. If people find Henry Sy as a jack__s, then people have the option to boycott Henry Sy and his companies -- SM, BDO, etc., fine. They can patronize Gokongwei's malls, or Ayala's malls, or other malls, or simply not visit any mall at all. There is choice.

In government, choice is almost zero. Especially if you are a fixed income earner. That is why since government is an imposition, a coercion in body and spirit, then such coercion should not be big. Let there be big coercion and over-regulation of criminals, rapists, killers, thieves, land-grabbers, extortionists, etc. But there should be little or zero coercion in work, entrepreneurship and job creation.

The DOF in particular is in an ugly position. It's mandate is to tax and penalize those who create jobs, those who produce various goods and services in society. Is your job to steal and kidnap children? DOF will not deal with you. Is your job to manufacture food, retail medicines, distribute housing materials, operate an internet shop? DOF and the BIR, BOC will deal with you. If there are only 2-4 taxes to pay each year, at low rates, I guess people won't hate the DOF's frontline agencies. But since there are one dozen to 4 dozen taxes and fees to pay, including those imposed by other agencies and LGUs who also want a slice of the sweat and blood of the job creators and workers, then people begin to dislike, if not hate, them taxes and fees collectors.

Wednesday, April 07, 2010

Forced equality and sectoral socialism

A friend from Liberty Institute, India, Barun Mitra, wrote a good article,
"The political fallout of the battle of the sexes"
Pragati: The Indian National Interest Review, April 2010

Barun looked at the proposed constitutional amendment in India which is seeking to reserve one-third of the seats in legislative assemblies, on a rotational basis. Barun said that "While I am all for greater political participation by women and all other sections of society, I am completely against this idea of reserving seats for any section of society."

I told Barun that in the Philippines, this is similar to the party-list system in the House of Representatives. The Constitution mandated that "up to 20 percent" of the House should be alloted to party-list groups. The result is ugly. I made a short discussion about it, "Party-list as a marginal concept" (article below) and also posted in

A friend who worked in Norway once also observed that the law mandating that up to 20 or 30 percent of management position in private corporations should be reserved to women, is putting many Norwegian companies at a disadvantage in global corporate competitions. Not because women are "inferior" but when female managers take maternity leave of up to 1 year, the company is somehow crippled.

Wholesale socialism is still difficult to advance now as the fall of the berlin wall and east european communism is still fresh in the minds of many people. So many socialists advocate "sectoral socialism", like forced gender equality (gender socialism?), forced health equity (health socialism), forced and heavy environmental regulations (ecological socialism), and so on.

There are a number of successes with sectoral socialism compared to wholesale socialism.

China Watch 7: Rising Yuan, Economic Bubbles

There is a growing literature and op-ed articles arguing of an "impending" China economic bubble burst. A few Chinese scholars argue otherwise. One such guy is Dr. Fan Gang, a professor of economics at Beijing University and the Chinese Academy of Social Sciences (CASS), director of China's National Economic Research Institute (NERI), secretary general of the China Reform Foundation, and a member of the monetary policy committee of the People's Bank of China.

I have met him in 2004 in Hong Kong, during the Economic Freedom Network (EFN)- Asia Conference. He presented their study on "China marketization index" then.

Fan Gang wrote an article that was published in the WSJ Asia, reprinted in Mint newspaper in India, entitled "Illusion of a Chinese economic bubble".

For me, economic bubble is 100 percent part of a market economy, it's part of corporate and capitalist expansion. The same way that bubble burst and corporate bankrupties are 100 percent part of a market economy.

So the terms "Chinese bubble", "Korean bubble", "US bubble", "European bubble", etc. are not illussions, they are realities. Like political coercion, it's just a matter of degrees. So, one can say there's "35% Chinese bubble", "80% US bubble", "25% Indian bubble", "10% Philippine bubble", and so on. The bigger the bubble, the sooner it will burst. Once an economic bubble bursts, it pours some sense and more realistic assessment of the valuation of assets (housing, education, banking, etc.) and capitalism or the market economy goes back to a bit lower level, but not "zero" as implied by the term "economic collapse".

What Fan Gang is saying is that the Chinese bubble is not too big yet. Either it will become bigger, or the current precautions of a "bubble burst" will prevent it from becoming bigger and hence, a "hardlanding" burst may not happen, at least not this year or next few years.

A friend from the Lion Rock Institute (LRI) in HK, Simon Lee, argued that

"Fan has totally ignored the fact that China's RMB is a currency under a managed peg, or more appropriately a dirty float system with currency control. Yes, RMB is still not freely convertible and Chinese on mainland do not have the choice to keep their wealth in instrument other than RMB denominated ones! So what happen then is they horde whatever they can buy with RMB: stock, real estate, commodities. The "administrative control" causes bubble bursting in one domain and the creation of one in another. This is the state-made bubble and Fan remains zip about it."

On second reading, Fan appears more of a statist apologist than a free marketer analyst. Well, he's a member of the monetary policy council of China's central bank.

Anyway, exchange control is exchange control. No different from price control, trade control, or political control. It's government control, period. I agree with Simon that on this account alone, bubble is being created somewhere. Once a control and heavy regulation is introduced, the quick solution to avoid a big bubble is to remove such controls, not to reinforce with new controls and regulations. LIke raising the bank required reserves (RRs). But I guess central banks around the world are just doing their work: they are the central planners of the monetary system, so they centralize policies.

I guess Fan is correct though, when he asserted that people in fast-growing economies, in crisis-free economies (for at least 3 decades), tend to become less risk-averse. But as I argued earler, allow those people to do so, to become less risk-averse, to become less financially responsible and are financially wild and high risk takers. So long as the government will NOT give any signal, any hint, any policy, that it will come to rescue those guys later on.when a financial crisis would hit them big.

I am slowly writing a "China watcher". And being a resident of the Philippines which benefits from the continued economic boom of China -- rising number of Chinese tourists here, rising exports of the Philippines to China, investments of both Filipino and Chinese businessmen in both countries, etc. -- I will not be happy to read that China will suffer a hard landing someday. But neither am I happy that there is continued political monopoly and political coercion by the Chinese government.

So let nature take its course. People invest where they can make money, and run away if they will lose money. China's economic bubble will definitely burst. It's just a question of when. Perhaps not this year, perhaps not in 2011, perhaps in 2012 or beyond.

Below is the link to his article.

Illusion of a Chinese bubble
Fan Gang
Mint, 3 April 2010

On the eve of Chinese New Year, the People’s Bank of China (PBC) surprised the market by announcingâ€"for the second consecutive time in a monthâ€"an increase in banks’ mandatory reserve ratio by 50 basis points, bringing it to 16.5%. Shortly before that, China’s government acted to stop over-borrowing by local governments (through local state investment corporations), and to cool feverish regional housing markets by raising the down payment ratio for second house buyers and the capital adequacy ratio for developers.

Two related papers that I wrote the past few months:

(1) Weakening $, Rising Yuan

May 14, 2009

April of every year is tax deadline month, so revenues rise like a tidal wave, then ebb in the succeeding months. This is the tax schedule in the US, Philippines, and many other countries. But last month was the first time that the US experienced a deficit (in about 26 years) in the month of tidal wave revenues. Why? Because its expenditures were a mega tidal wave. And such kind of development (or underdevelopment) creates a bad image for the US $.

Super loose monetary policy of near zero interest rate. Super-spending fiscal policy of nearly $2 trillion budget deficit in 2009 alone by the federal government alone.

Since interest rate and inflation rate behave the same way in general, then US inflation rate should be very low. Might be in the short term, but not for long. With too much $ roaming the banks, shops and government spending, high inflation should be just around the corner. And the weakening of the US$ becomes just a question of when it will happen.

Below are 2 of the many articles today on the weakening US$.

(a) Geithner’s biggest problem is dollar, not China

Written by William Pesek / Bloomberg
Monday, 20 April 2009 22:03

It’s a bit rich for US politicians to berate Treasury Secretary Timothy Geithner for not labeling China as a currency manipulator.

Perhaps Sen. Lindsey Graham, a South Carolina Republican, hasn’t seen a newspaper in the last 12 months. With near-zero interest rates, the likely issuance of trillions of dollars of government debt and massive taxpayer-funded bailouts, the US will soon make China look like a manipulation piker.

Memo to Graham and his ilk: Your economy has lost any moral high ground as it drags the world down with it. That will be even truer as the dollar eventually pays the price for ultra-loose monetary and fiscal policies. And it will....

(b) The Almighty Renminbi?

May 13, 2009

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time....

(2) China's Boom: Going Bust?

January 12, 2010

China now the world's biggest exporter (overtook Germany), biggest car market (overtook the US), to overtake Japan shortly as world's 2nd biggest economy. Is economic "bubble burst" near for China? I don't think so. With the bulk of its 1.3 billion people still in poverty, there is still huge room for economic expansion.

See this news report below:

As China Rises, Fears Grow on Whether Boom Can Endure
Published: January 11, 2010

BEIJING — As much of the world struggles to clamber out of a serious recession, a gradual flow of economic power from West to East has turned into a flood.

New high points, it seems, are reached daily. China surged past the United States to become the world’s largest automobile market — in units, if not in dollars, figures released Monday show. It also toppled Germany as the biggest exporter of manufactured goods, according to year-end trade data...

A friend commented via this news link,

China Boom, or China Bust?
By Ian Mathias

01/08/10 Baltimore, Maryland – Is the great hope of the investment world little more than hype? We like to visit the “China boom or China bust?” debate every once in a while, and the argument today is pretty one-sided… the “busts” have it....

It's true that to go "bust", there should be credit excesses. I don't know much about personal and corporate debts, but on the fiscal side, China's govt is sort of mercantilist, surplus thinking, not deficit and borrow thinking. This is not to say that I sing Jalleluiah to a socialist government.

Another friend voted "bust". For me, it is important that China won't bust in the coming few years. The China-ASEAN free trade agreement (FTA) will be the largest free trade area in the world, about 2 billion consumers (1.3 + 0.7 billion, China-Asean countries' population, respectively). China will become ASEAN countries' biggest export market in the coming years.

* See also:
China Watch 1: World's Largest Economies, Population, 2005, April 20, 2006
China Watch 6: China-India Blog, Eco-Protectionism, August 30, 2009

Monday, April 05, 2010

On airport terminal fees

The Holy Week and its long vacation is over. Many Filipinos now fly instead of taking the boats in visiting various islands and provinces in the country. There are more budget airlines now than before, so that flying has become more affordable to more people. And this is where the government makes lots of money, foremost of which is the collection of airport “terminal fee” of P200 per person for domestic flights, and P750 per person for international flights.

Except in Thailand and Vietnam I think, government airport administrators in many airports in Asia, the US and some European countries do not collect “terminal fee”. Perhaps for some of those airports, the “terminal fee” is included in the plane ticket costs. Passengers do not need to check their wallets if they have the local currency to pay for the last-minute fees. Besides, those airports are very big, modern and beautiful, compared to the airports in Manila (terminals 1, 2 and 3), Clark, Cebu and other provincial airports.

For me, the P200 per person domestic terminal fee is big, even unnecessary. For one, passengers normally do not stay long inside the airport terminals. After queuing for security check-up and to check in their airline, passengers just wait for about 30 to 45 minutes before they board their plane. There are not even drinking fountains in the biggest terminal, terminal 3, so people will have to buy bottled water or soda/juices inside the shops, and the prices there are expensive as those shops and tenants pay a handsome fee for their lease and monthly rental at the airport.

Mall owners can give the public equally comfortable air-conditioned place for hours for free, and the food and drinks are cheaper.

The government, through the various government-owned airport authorities, makes plenty of money as a monopoly airport operator. Among these revenue sources are:

1. Passenger terminal fee, as discussed above.
2. From the various airlines - landing fee, navigation fee, ground handling fee, etc.
3. Lease and rental from shops inside the airport terminals.
4. Lease and rental from taxi and transport operators, hotels, that occupy spaces at the passenger arrival area.
5. Advertisers inside and outside the passenger terminals.
6. Car parking fee.
7. Franchise or related fee for the two airport-based taxi lines (yellow taxi and “Bayan ko” taxi).
8. Passengers’ waiting area in the case of NAIA terminal 1.
9. Other revenues.

While plane fares are dynamic and changing, depending on the season, day and time of flights, government terminal fees are fixed. Sometimes budget airlines give promo fares of only P10 on a few seats in each flight, the terminal fee plus other fees (aviation security fee, fuel charges, etc.) are fixed.

Aside from revenues by airport administrators, the government also collects more revenues from the airlines and other tourism-related investments. These include more fuel taxes (excise tax and VAT), more corporate income taxes and VAT.

I believe that to encourage domestic tourism and investments, airport terminal fees should be abolished. As enumerated above, the airport administrations have plenty of other revenue sources to recover the “foregone” revenues of terminal fees. Passengers include the cost of terminal fee (P200 each way or P400 per passenger for domestic flights) in deciding whether to visit a particular place or not. With this additional cost to passengers, there should be fewer than potential number of passengers that actually fly. Which adversely affect domestic tourism, domestic trade and investments.

When there are more investments and jobs in the provinces, there will be less poverty, less government expenditure for social and economic services, less social tension and unrest and less political and economic instability.

Oil Politics 7: Oil Price and Fare Hikes, Public Transpo Deregulation

With the recent spike in local oil price hikes recently as world oil prices were rising, there are growing voices and lobbying to demand higher fare for jeepneys, taxi and buses. While it is understandable that movement of fares (upward or downward) should follow movement in petroleum prices, I find it irrationale that politics should be used in determining when and how much, such fare movement should happen.

It is chaotic and politically complicated if government transport officials will always call for public hearing. Supporters and opponents to come, including those who ride on the issue so they will get good media coverage, which helps in their political work and lobbying, like those running in the forthcoming elections.

It is possible to detach politics from fare setting. Here are some mechanisms that may be worth considering by the various stakeholders.

1. Encourage corporate brands of jeepneys and taxis. Jeepney drivers and operators will become conscious of the corporate brand that they carry and passengers will remember the corporate brand of particular jeepney and taxi groups. Thus, some passengers will remember and avoid taking a particular jeepney or taxi corporation where drivers are discourteous and road maniacs that get into frequent accidents. And passengers will remember those jeepney or taxi corporations where drivers are courteous and friendly, give the exact change, and maintain their units in good running conditions. Competition among various jeepney and taxi corporations, not among single units, will give more comfort and safety to the passengers.

2. Deregulate fare-setting. Some jeepney or bus lines that do not maintain their units well will be forced to charge lower fares per kilometer while those jeepney or bus lines that give passengers comfortable and safe rides can charge higher fare. For instance, some bus lines can field buses with only 40 seats instead of the usual 60 seats, and charge minimum fare of P20 to P25 for the first 4 kms. Other bus lines can dispatch crammed buses (say 70 seats or more) and charge only P10 minimum fare for the first 4 kms. If fares are deregulated this way, some ugly and not regularly-maintained jeepneys will either slowly vanish from the road, or they will be forced to charge only P5 minimum fare for the first 4 kms., because passengers will have other options to ride the more comfortable jeepneys or buses even if they pay a higher fare.

3. Deregulate routing. Some jeepney or bus lines can dispatch their vehicles near the gates of big private villages in the suburbs (say Novaliches, Fairview, Antipolo, Las Pinas, Bulacan, etc.) to Makati, Ortigas, Eastwood, Manila, and so on. Then people will be encouraged to leave their cars in their house when they go to their offices or schools as they will take only one or two rides, not four or more rides.

At the moment, people who will not bring their cars from say, a village in Fairview, Quezon City to Makati, will take 4 rides or transfers. First, tricycle from their village gate to the main road. Second, jeepney or air-con van to MRT station. Third, MRT to Buendia or Ayala station, and fourth, jeepney or bus or taxi to Ayala or Buendia avenue. If one is wearing proper corporate attire and/or carrying a laptop and other important documents, it is very inconvenient and unsafe to be moving from tricycle to jeepney to the train and back to jeepney again. So even if there is heavy traffic and parking is expensive, people are forced to bring their cars to work or school, which exacerbates road congestion and parking nightmares in major commercial and business districts. The national government, through the LTFRB, and the local government created mini-monopolies on certain routes, like tricycle monopoly and jeepney monopoly.

Just encourage competition among bus or jeepney lines, also taxi lines or corporations, so that passengers will have plenty of options. If people will find that such options are safe, comfortable and economical, then they will not insist on bringing their cars everyday to their offices or their kids’ schools. There will be less traffic congestion, less air pollution, less parking problems, and more savings for the public.

And we will avoid politicized fare setting. No need for any public hearing, no need for any political and media lobbying, no need for any intervention by politicians and government transport officials.

Driver and operators of jeepneys, buses and taxi will be forced to maintain their units in good conditions, they will be forced to become more courteous to their passengers. Passengers need not even complain to the government if the service of a particular bus or jeepney line is lousy. Passengers will just stop riding that particular corporation and let their friends and acquaintances know about their bad experience. This kind of passenger boycott is worse than being reprimanded and penalized by any government transport agency.

Nearly two years ago, I wrote something about petroleum taxes.

VAT on Oil Products

July 10, 2008

As the price of petroleum products keep rising, the call for the lifting or abolition of value added tax (VAT) on these products gets louder. While the goal of such measure -- help reduce the price of oil products -- is laudable, the policy tool being proposed is wrong.

The single most important element of the "rule of law" concept is that the law applies to everyone and exempts no one. Any exemption to the rule immediately invalidates the "rule of law" and automatically becomes "rule of men". When applied to commodities, the law should apply to all sectors or products and exempt not a single sector or product.

In the crafting of the current VAT law that was enacted in 2005, a few products were exempted from coverage of VAT. These include agricultural and fishery products in their original forms, meaning raw vegetables, meat, fish, fruits, etc. Once they are processed, like dried mangoes or canned sardines, the processed product is covered by VAT.

The exemption of these products, and the attempts by many other producers that the products or services they produce be exempted from VAT, was both a proof and indicator that the 12 percent VAT rate was high, so that almost everyone wanted exemption from the tax law.

Now that it is a law, the spirit of "apply to everything and exempt nothing" should be retained. In this sense, I am not in favor of lifting or abolishing VAT on oil products. Or any other products and services.

And yet I also want the prices of those VAT-covered products and services be made lower, so how can it be done considering that VAT is one of those significant price inflators?

One of my favorite alternative policy options is the abolition of import tax (if it is not abolished yet) of all petroleum products, and abolition of excise tax on gasoline products. Current excise tax is about P5.60 per liter. These will help reduce the price of oil products.

Another policy option is a lower, flat income tax, especially on personal income tax. Any tax cut is equivalent to "salary increase". Such de facto "pay hike" especially for fixed income earners, will enable many people to better adapt to higher oil prices since it is a global phenomenon anyway, and other commodities with higher prices with higher take-home pay.

How "low" should the flat tax be to have a maximum positive result to the people? Zero income tax is the best. But the best is not always the most practical and feasible. A 10 percent flat income tax, to my mind, is the second-best alternative. At this rate, many people, from public school teachers and policemen to private sector ordinary employees to struggling small entrepreneurs, will benefit. And the State will still collect taxes at a much broader tax base as more people will be encouraged to pay income tax because the rate is lower and complying with it is simpler.

See also:
Oil Politics 1: Bush vs. Chavez? March 12, 2007