Friday, June 30, 2017

BWorld 141, Reducing system loss, Part 2

* This is my article in BusinessWorld last Wednesday.

This is a follow up to a previous piece entitled, “Rule of law in Distribution system loss cap (June 7).” This sequel is prompted by three recent developments: (a) “NEA seeks expanded authority over electricity distributors (BusinessWorld, June 20),” (b) “DoE official backs NEA control over power distributors (BusinessWorld, June 21),” and (c) public hearing early this month by the Energy Regulatory Commission (ERC) to reduce the system loss cap of all distribution utilities (DUs).

The ERC plans to allow higher cap (maximum rate of system loss) for electric cooperatives (ECs) compared to private DUs.

In particular, the ERC plan is to impose a technical loss cap of 3.25% to 7.0% for three clusters of ECs but only 2.75% cap for private DUs and a non-technical loss cap of 4.5% of energy input for all ECs but only 1.25% cap for private DUs.

The message is that the proposed new ERC regulation is to favor ECs, all under the supervision of the National Electrification Administration (NEA), which has the effect of allowing them to incur higher wastes that can be passed on to electricity consumers while forcing private DUs to spend more on higher capex so that their system losses are reduced to the barest minimum.

The NEA and the various provincial ECs are not exactly doing well in consistently reducing the distribution system loss and raising the overall electrification rate in the country.

As of 2013, only 87.5% of all households in the country have electricity, and not all of them have 24/7 electricity, many still suffer from frequent “Earth Hours” -- that is to say power outages -- daily. (See table.)

The Philippines’ archipelagic geography is a contributor of course for the rather low electrification rate as many households in far away islands are off-grid and rely on generation sets administered by Napocor-SPUG and small private electricity sellers. More off-grid areas are now using solar.

Still, the absence of 24/7 electricity in many areas covered by ECs as administered by NEA is a problem. When there are frequent brownouts, people use two things: candles and generation sets. Candles are among the major causes of fires in houses and communities while gensets are noisy and are running on more expensive fuel, diesel oil.

The Philippines’ low electricity generation compared to its neighbors in the region (column 4 of the table) is a result of combination of many factors, like the huge bureaucracies face by generation companies putting up new power plants, and rigidities in the electricity distribution system.

Protecting the electricity consumers via lower distribution charge, lower system loss charge, and lower incidence of brownouts can be done via the following measures.

One, both the ERC and the NEA should identify which are the most inefficient, lowest-rating ECs or DUs, push them to be corporatized (not exactly “privatized” because ECs are already private entities). These agencies, in turn, should serve notice to these ECs that if they fail to make their operations more efficient, then they will be corporatized. With these measures, these ECs will be forced to improve their systems loss, collection efficiency, employee-customer ratio, etc.

Two, the government should remove differences in caps of systems losses between DUs and ECs. The ERC has to determine the increase in rates so that DUs can comply with their systems loss cap since they need to put up more expensive equipment to decrease technical systems loss. Having a different system loss cap for ECs and DUs means the ERC will not exactly be protecting the consumers but more of protecting ECs so that their inefficient if not outright wasteful operations are tolerated and rewarded with higher profit.

Three, NEA should not aspire to supervise all DUs including private corporations. It is not exactly good at instilling financial discipline on all ECs as a number of them are inefficient and therefore lose money while charging high costs to their consumers (See “NEA offers P1.7-B loan window for distressed power cooperatives,” BusinessWorld, April 12). NEA in fact should step back and give more supervisory functions to the Securities and Exchange Commission (SEC) via ECs that were corporatized. After all, the SEC has more transparent, more universal corporate rules than NEA.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and President of Minimal Government Thinkers. Both are members of Economic Freedom Network (EFN) Asia.

See also:
BWorld 135, On reducing the distribution system loss, June 9, 2017
BWorld 138, PPP vs ODA, Part 2, June 21, 2017 

BWorld 139, State central planning vs household decentralized planning, June 22, 2017 

BWorld 140, Mineral rent and taxation, June 23, 2017

Drugs war 7, Duterte first year, one year of impunity

Today is the first of the six-years term of President Rodrigo Duterte. His administration is known for drugs-drugs-drugs preoccupation and the series of deaths and murders by the thousands of suspected drug pushers and users. One year of official "drugs war" (unofficial drugs war and lots of murders from mid-May to June 29, 2016 when he was still a "President Elect"). One year of impunity.

A disturbing article from interaksyon today.

"They were already dead... so why take them to hospital? An analysis of crime data from two of Metro Manila’s five police districts and interviews with doctors, law enforcement officials and victims’ families point to one answer: Police were sending corpses to hospitals to destroy evidence at crime scenes and hide the fact that they were executing drug suspects."

It's a long article with details how police murder victims, often killed pointblank, are still brought to hospital ERs, partly to show that the police "care" for victims of violence.

I think this partly or largely explains why the Mautes, Abus and other organized armed groups have consolidated if not strengthened during the Du30 administration -- the police were busy harassing and killing unarmed suspects so the real criminals, armed and organized, were relatively free to move around.

The AFP should be doing external defense, PNP for internal defense. But since the PNP is busy catching motorcycle drivers with no helmets, killing unarmed drug suspects, the real armed criminals are freer to move around, PNP cannot get them so the AFP is deployed.

See also:

Friday, June 23, 2017

Asia stockmarkets the past year

Stockmarkets in Asia the past year until today. PH, ID, TH and MY, respectively. Is PDu30 inspiring to business or not? Data from

CN's Shanghai, Shenzhen, HK, TW, respectively. Stocks sentiment in PH seems similar with CN. Could be one reason why Du30 loves Xi.

SG, JP, KR and IN, respectively. In these 11 economies, PH and CN are the laggards for the past 12 months. 

Investors see political and business instability in both CN and PH. Instability in the leadership of Xi and Du30, distrust in the lack of rule of law in these two countries.

BWorld 140, Mineral rent and taxation

* This is my paper in BusinessWorld last Wednesday.

The Philippines’ mining potential is inversely proportional to government mining policies.

Until about two years ago, the debate was on how much tax hike would be imposed on mining. Then early this year, the debate shifted to outright suspension and cancellation of operations by many mining companies. After the Commission on Appointments rejection of Ms. Gina Lopez as DENR secretary last May 3, the uncertainties have greatly subsided and certain sectors are reviving the old debate -- how much tax increases to impose on big mining companies.

Many of the anti-mining sentiments and groups will be jumping on this issue. Very high taxes on metallic mining companies will produce three results that are all favorable to them: (a) some operating companies will be forced to close down especially when global metallic prices are low; (b) planned projects or expansion of existing mines will be discontinued; and (c) companies that continue to operate will be forced to somehow underdeclare output and these groups will further demonize them and lobby for their closure.

In some developed countries like the US, Canada, and Australia, it seems that even big environmentalist groups do not lobby for mining closure but their counterparts in the Philippines are so adamant in this philosophical nirvana.

Consider some data for member-countries of the Asia-Pacific Economic Cooperation (APEC) below. Two technical terms are used:

1. Mineral rent: the difference between the value of production for a stock of minerals at world prices and their total costs of production. This rent is not the same as value added to GDP. Rent is pure profit (price minus marginal cost multiplied by quantity) while value-added is the sum of earnings from production that are due to residents. Thus, salaries of mine workers are included in GDP value-added but not in rent.

2. Mining Contribution Index (MCI) is calculated based on aspects of mining contribution to national economies, composite for three variables: (a) Mineral export contribution in 2010 as percent of total merchandise exports, (b) Increase/decrease in mineral export contribution 2005 to 2010, and; (c) Mineral production value as a percentage of GDP in 2010.

The numbers show the following:

1. China being a powerhouse producer of copper, silver, zinc, lead, and gold is the world’s biggest mining country despite having a low MCI. Australia comes second and its output is almost twelve times than that of the Philippines.

2. Countries on the “ring side” of the Pacific Rim generally have higher MCI -- Australia, Chile, Papua New Guinea, Peru -- than those a bit far from the Rim.

3. The Philippines is estimated to have $1 trillion-mining potential yet its actual output in a year is low, only $7 billion in 2013, much of it from nickel production as the country is the world’s second biggest producer of nickel, next only to Indonesia.

So a rich and developed Australia allows and optimizes mining while a poor Philippines with big potential for mining discourages it, at least in the minds of many environmentalists and some accidental DENR officials.

Responsible mining is happening here and abroad. So long as local mining companies follow the law in environmental protection and rehabilitation, and doing plenty of community projects as specified by law, they should not be demonized and over-taxed and/or over-bureaucratized.

The Philippine government can improve the mining attractiveness of the country via two important taxation policies:

One, do not further increase taxes as existing taxes, fees, royalties, bonds, fines, mandatory contributions, mandatory community projects, and environmental rehabilitation are already high and plentiful.

Two, the government should also ensure stable tax rates, or reduce demand for ad hoc taxes on excess or windfall profits as there are also no ad hoc tax breaks or subsidies for excess losses when world metal prices are low. Tax stability is more useful for private players than giving them certain fiscal privileges because these policies may later be challenged and reversed.

Having rule of law in mining audit, environmental rehabilitation, and tax stability is the single most important function of any government in economies with proven high mining potential. The Philippine government should take this path.

See also:
BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017 
BWorld 138, PPP vs ODA, Part 2, June 21, 2017 

BWorld 139, State central planning vs household decentralized planning, June 22, 2017

Thursday, June 22, 2017

Oil competition, US vs OPEC

Thank you for competing with OPEC and Russia, US shale oil capitalism. I hope we can go back to below $40/barrel again.

"The resurgence of U.S. shale is already complicating OPEC’s efforts to draw down global stocks in 2017, as well as threatening its market share in 2018.

OPEC now predicts U.S. oil production will increase by 800,000 bpd in 2017, compared with a projected decline of 150,000 bpd at the time of its December forecast (“Monthly Oil Market Report”, OPEC, June 2017)."

"Thanks largely to the domestic hydraulic fracturing revolution, the U.S. has been the world’s top natural gas producer since 2009, passing Russia, and the top producer of oil and petroleum hydrocarbons since 2014, passing Saudi Arabia."

Pol. Ideology 71, Georgism and the geolibertarians

A friend posted in one of my fb groups this question, "Do free markets and privatization encourage monopolies?"

I replied that innovation creates temporary micro monopolies. Government franchising, local and natl govts, create permanent monopolies. From tricycle route monopoly to electric coop area monopoly.

Then a fan of Georgism or geolibertarianism argued that “Privatization of land and natural resources encourages land monopolies.”

(I got this meme from the web, which I think somehow simplifies the definitions.)

These guys dislike land privatization, they want communal or state ownership of all lands in a country. Below are some of the georgists' arguments.

1. “Land sale is never truly a free market because a free market involves the exchange of legitimately owned goods and services.”

My late father owns about 2-3 hectares of land in the province that he bought many decades ago out of his entrepreneurial savings. He has no right to "legitimately own" that land? And give to us later? If no, who should own it, the commune? the state?

2. "He can enjoy the rights of ownership of the land, but land is ultimately common."

Meaning he cannot pass ownership to his children, surrender ownership to the commune? Lousy philosophy. If that is the case, owners of land won't plant long-gestation crops like forest trees, mango and coconut trees, etc. Next round of inheritors who have zero interest in trees will simply cut those mature trees, sell the lumber, enjoy the money in partying and the land is back to being idle. Lousy philosophy, very anti-market.

3. "People lease land and make productive use of it all the time." 

Wrong. Many people have no interest in rural land, they want the money quick and go to the cities or live abroad. It is the inheritance among families that often ensure productive use of the land.

4. "Private landowners can sit on a piece of land without doing anything to it." 

It is fine, it's a gamble that land price will rise quick, or it may not. Instead of higher price, one may get higher cost of protecting an idle land -- from govt politicians, bureaucrats and their friends, from armed extortionists like NPAs and Abus.

Currently local governments collect rent via real property tax (RPT). They can even confiscate private lands with high unpaid RPT. Then local govts enjoy the money even if all they do is play politics.

5. "Land speculation is wrong." 

Speculation, boom and bust, risks and rewards, expansion and bankruptcy, are 100% part of free capitalism's DNA. Remove speculation and business gamble, it's not free capitalism anymore.

The georgists hate privatization of land, that land ownership should be communal, belong to the commons. This is anti-free market philosophy. The essence of market capitalism is private property, not common/communal property.

Speculation is about risks and rewards, it's not all rewards, that they call "rent". Capitalism without bankruptcy is like religion without sin. Likewise speculation without risks is like religion without sin. 

These guys cannot support private property in land capitalism. Sunlight, wind, rainwater we cannot occupy; land, even portions of a river or lake we can occupy, we can establish private prop there. Sunlight, wind, rainwater we cannot create but we can create land (thanks to modern reclamation tech), we can create man-made lakes.

Land speculation is not a problem. Too many people got burned waiting for their land prices to go up fast but failed. When state-connected land grabbers, when armed extortionists like NPA and Abus, when professional squatters come, the value of their land decreases, not increases.

6. "Land has no cost to bring into production."

Wrong. Land populated by NPAs and Abus has no value to you or anyone else unless you are part of these extortionist groups too. The Ayalas, the Sy family, etc. will not buy or develop this type of land even if sold to them at P1/sq.m.

A bare land, populated only by snakes, frogs, rats, other wild animals (and assuming no extortionists as mentioned above) has very low value.

The same land developed by land speculation capitalists -- with concrete road, drainage, canals, street lights, multipurpose hall with swimming pool, etc. -- has high value. I support this type of land speculation.

7. "The supply of land is fixed." 

Wrong. The supply of land is rising. Among the examples:

1. Land reclamation everywhere makes the land ever-expanding. The space where the new HK airport is now based used to be a sea. Many structures in Dubai are sitting on formerly a sea, again thanks to land reclamation.

2. What is inland water like a wide lake or river or marshland, part or whole of it can become land.

3. Hilly or mountainous land good only for bushes and snakes and rats to reside can become expensive mt resorts.

4. Some 1,500 hectares of land was non-existent in Metro Manila before, until the Bay City in Manila Bay was created via land reclamation, hosting the CCP complex, Financial Center area (PNP, PAL, WTC, GSIS,...), CBD (SM MOA, etc). About 2 more big land reclamation projects at Manila Bay are planned, about 600 hectares each.

5. China's artificial islands at the SCS/WPS.

It is through the land speculation of capitalists and entrepreneurs, the risks they faced and the rewards they might get someday, or they may lose even their shirts when the costly land devt project flops.

Gains from land use can be called economic rent or econ profit as a result of land development and speculation. Or it can be economic disaster if the project flops.

Common or communal ownership of land. Communism, lousy. 

7 " 'Land" includes water and all other natural resources'. 

Sigurista masyado. Pacific Ocean is land, Atlantic Ocean is land, agh! But then again, people are entitled to their illusion. 

Geo-commies argue that even the seas and oceans are "land" and hence, cannot be privately-owned. I'm floored by that argument, really weird and funny. So I will call the geoism movement as a leftist movement. No private ownership of land, only common, communal ownership, lousy. Liberty is individual, not national or clan or communal liberty. The same way that property rights refer to private property, not national or communal ownership. 

Private property, period. Disrespect private property and private ownership, that's leftism for me.

See also:

BWorld 139, State central planning vs household decentralized planning

* This is my column in BusinessWorld last week.

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design... Planning leads to dictatorship because dictatorship is the most effective instrument of coercion and the enforcement of ideals and, as such, essential if central planning on a large scale is to be possible.”-- Friedrich Hayek

The bigger the socioeconomic unit like a state, the less central planning should be. And the smaller the socioeconomic unit like a household, the bigger the planning should be. The family is a good example of this. Parents take care of their children until they grow up. Once the kids feel they are independent enough, they move out of the house. And moving out is an expression or an attempt at independence of the kids from the nitty-gritty of support and intervention by the parents or guardians.

In contrast, in many countries including the Philippines, as the population expands and as the needs and aspirations of the growing population further diversifies, the state bureaucratizes further and regulates and imposes more taxes. Meaningful decentralization and federalism is muted by high taxes and regulations from the central or federal government so that the states, provinces, and cities are left with little leeway for tax adjustments and regulations.

 The current tax reform program of Dutertenomics known as TRAIN (Tax Reform for Acceleration and Inclusion) is generally based on envy. While its income tax cut for the low income earners is good and commendable, its tax hike for upper middle class and the rich is not. And the government will hike the taxes of many other products and services including those consumed by the poor and lower middle class -- cars, petroleum products, sugar-sweetened beverages, more services that will be covered by VAT.

This government therefore, its politicians and bureaucracies, feel that they have more entitlement to the income and wealth of the upper middle class and the rich. The implicit message is that if people aspire to become upper middle class and rich, the state will go after them, demonize them if they resist paying more taxes. And this is where the advice of Friedrich Hayek above becomes appropriate.

During the BusinessWorld Economic Forum last May 19, 2017 at Shangri-La at the Fort, one of the impressive speakers in the afternoon session was Ms. Vicky Abad of Kantar. She discussed what are the income ranges of upper and lower middle class households and their aspirations. Below is the income class differentiation she made. ONCR means Outside of the National Capital Region (NCR) or Metro Manila (See table).

Three things are worthy of note in Ms. Abad’s presentation.

One, middle class households in C1, C2, and D classes comprise some 72% of the population or nearly three out of four households. Those in D should include previously bicycles- or jeep-riding people who now drive motorcycles or second, third-hand cars.

Two, while middle income class C1 and C2 are big consumers of fast-moving consumer goods (FMCG) or consumer packaged goods, the class D households drive about 62% of the FMCG market in value contribution.

Three, the key, constant driver of middle class aspirations is being able to provide for the needs of family. Family basic needs, health, and savings are the top three concerns. Followed by friends/bayanihan, car and house, value of work, and social status/rewards like travel.

Many of these things are not sufficiently provided by the government. There is public education, yes, but many middle class including government officials and personnel bring their kids to private schools and universities. There is public health but these people go to private hospitals and clinics when they are unwell. There is public peace and order by the police but these people employ lots of private security agencies to secure their villages, schools, shops, banks, buildings. There is public welfare department but many people still dig deep into their pockets and savings to help their fellow Filipinos struck by severe natural calamities.

With this wide gap between government taxation and low quality of public services, and the rising aspirations of the people, government central planning should decline, and households should be given more leeway, more take home pay via deep income tax cut across the board. Household planning should prevail over state central planning.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a SEANET Fellow. Both are members of Economic Freedom Network (EFN) Asia.

See also: 
BWorld 136, Income tax and the politics of envy, June 12, 2017 
BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017 

BWorld 138, PPP vs ODA, Part 2, June 21, 2017

Wednesday, June 21, 2017

Sugar tax and nanny state

Why the DOF's sugar tax bill in Congress is lousy.

1. The state is further addicted to tax-tax-tax mentality and policy.
2. This 2-tier taxation (higher tax for imported sugar) is anti-WTO rules, DFA is correct.
3. State nannyism ('protect public health' alibi) is fuelling more state interventionism. Tax alcohol, tobacco, soft drinks, juices. Soon it will tax litson baboy, litson manok. 

See this report from BusinessWorld last week.

That the state has hiked the tax on alcohol and tobacco products is generally accepted by the public. But taxing further soft drinks, powdered juice drinks, etc. is OA state nannyism. People own their body, not the state and politicians, not the health NGOs, etc. Simple joys by the poor like drinking powdered juice, the state will make these products become more expensive, and certain sectors like health NGOs, medical groups are clapping partly because they will get more tax money.

Earlier, a lady Senator wanted to file a bill banning unlimited rice ("unli-rice") in restaurants. The usual alibi is "public health concern." Trying-hard state nannyism, those politicians and state bureaucrats think they are so bright they can plan other people's lives. Next they will penalize climbing trees and climbing roofs because they might fall and it's bad for their health and it's bad for public health budget.

The silent motive here is that Dutertenomics will need lots of tax-tax-tax because it will go into endless borrow-borrow-borrow from China. Improving public infra is good and there are many big private companies, local and foreign, willing to bankroll many infra projects, but this administration intends to please China -- the communist dictatorial government, its banks and contractors.

BWorld 138, PPP vs ODA, Part 2

* This is my article in BusinessWorld last week.

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
-- Thomas Sowell (US economist and political philosopher)

This paper is a continuation of the same topic in this column last June 8. To summarize previous arguments:

1. User-pay principle via public-private partnership (PPP) means only those whose the service or facility will pay for its construction and maintenance. As a result, the rest of the population in other parts of the country will be spared of such cost.

2. All-taxpayers-pay principle means projects are paid by current taxpayers through the annual general appropriations act (GAA) or by future taxpayers through official development assistance (ODA). Taxpayers from Visayas and Mindanao will also pay for toll roads, dams, airports even if they hardly use these since these are located in Luzon.

3. It is not true that infrastructure projects funded by official development assistance (ODA) and/or taxpayers through the GAA are more beneficial to the public than PPP-funded projects. Iloilo Airport -- which was funded by ODA -- took longer to build and incurred cost overruns compared to the PPP-funded Mactan-Cebu Airport, which remains on schedule despite initial delays.

4. There are inherent problems and risks to the public under GAA- and ODA-funded projects since ODA funding normally has strings attached. Thus, a project funded by China ODA may require the government to hire Chinese contractors, suppliers, managers, and even workers.

We now add more reasons why the Dutertenomics’ shift from PPP to ODA (mainly from China) funding of its build-build-build plan is unwise and risky.

5. In a Management Association of the Philippines (MAP) forum two weeks ago, finance expert Vaughn Montes cited the big contrast between ODA-funded Subic-Clark-Tarlac Expressway (SCTEx) and the PPP-funded Tarlac-Pangasinan-La Union Expressway (TPLEx). SCTEx took seven years from government approval to completion, two years delayed, and cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.

6. Investor confidence in the Philippine economy has gained momentum compared to some of our neighbors in the region and it is not wise to constrain such confidence by ditching many PPP projects and shift to ODA and GAA funding.

The expansion of FDI in the Philippines from 2000 to 2009 (last year of the Gloria Arroyo administration) was not significant (less than twice). However, during the same period, FDI expanded almost five times in Singapore, about four times in Indonesia and Vietnam, about three times in Thailand, Cambodia, South Korea, and Taiwan.

But from 2009-2015 or just six years, FDI in the Philippines expanded two and a half times while there was only two times expansion in Singapore, Indonesia, Vietnam, and Myanmar; and less than two times expansion in Thailand, Malaysia, Hong Kong, South Korea, and Taiwan. It is this kind of investor confidence and momentum that can greatly propel the Philippines into more investments and job creation, faster growth and infrastructure buildup.

7. The government’s PPP Center noted that “most PPP bids received in recent years have come at lower than the approved government costs. If in the instance that actual project costs turned out higher than approved government costs, the private sector partner assumes or shoulders cost overrun risk.”

8. The China government is the least trustworthy source of ODA funding considering that it is acting belligerently and aggressively in bullying the Philippines and other ASEAN neighbors that have claims over the many islands and islets in the South China Sea or West Philippine Sea (WPS). Note also that recent China-funded projects in the country were notoriously scandal-ridden -- North Rail and National Broadband Network (NBN)-ZTE projects.

The insistence of the Duterte administration to compromise the income and savings of Filipino taxpayers -- even if there are many big private investors, local and foreign, that are willing to shoulder the costs and risks of infrastructure projects -- may result in shenanigans and large-scale corruption.

And its consistent pronouncement of relying more on the money and contractors of the bully state across the WPS would further weaken the Philippines’ territorial claims to those islands and exclusive economic zone and weaken the rule of law.

Honest minds in the Duterte Cabinet should remind the President of the economic and political dangers that it is treading on.

See also: 
BWorld 135, On reducing the distribution system loss, June 9, 2017 
BWorld 136, Income tax and the politics of envy, June 12, 2017 

BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017

Tuesday, June 20, 2017

EFN Asia 65, EFN panel at Jeju Forum 2017

The Economic Freedom Network (EFN) Asia participated once more at the annual Jeju Forum for Peace and Prosperity, a big international conference held at Jeju Island, S. Korea. I am reposting this report submitted to the organizers within an hour after the panel discussion. Originally posted at the EFN website.

I add two photos here, taken from EFN's fb page. From left: Wan, John, Razeen, Young-Han.

This is 3,200+ words, 7 pages, enjoy.

Session Outline

Name of Session: Asia’s Contribution to the Global Open Market
Session Organizer: Friedrich Naumann Foundation for Freedom
Date: 1 June 2017, 14.50-16.20
Moderator: Dr. John Delury, Associate Professor, Graduate School of International Studies,
Yonsei University

Welcoming Remarks: Dr. Lars-André Richter, Head
Friedrich Naumann Foundation for Freedom Korea Office

Dr. Razeen Sally, Associate Professor,
Lee Kuan Yew School of Public Policy, National University of Singapore
Wan Saiful Wan Jan, Chief Executive
Institute for Democracy and Economic Affairs, Malaysia
Dr. Kim Young-Han, Professor,
Department of Economics, Sungkyunkwan University

Summary of Presenters & Discussants’ Remarks

Dr. Lars-Andre Richter

Friedrich Naumann Foundation (FNF) is a German non-profit organization, founded in 1958 post-war West Germany. The main goal at the time was to help re-establish democracy in West Germany. Shortly after, FNF opened offices abroad, including in Tunisia, India and Indonesia. The office in Korea was opened in 1987. We promote liberty in Korea through a variety of programs including democracy building, projects with market economy, human rights, rule of law and also the re-unification issue, bringing in the unique German experience of re-unification. In fact, FNF has projects in both Koreas. The North Korea program started in 2004, focusing on economic policy. The session today at the Jeju Forum is hosted by both FNF and Economic Freedom Network Asia (EFN Asia), FNF support’s network of liberal minded think tanks and individuals.

Dr. Kim Young-Han
Threat of the Protectionism by the US Trump Presidency

- Why Protectionism by the Billionaire US President?
Trump thinks that the current format of ‘the Global Open Market System’is unbearable and unsustainable for the US blue collar workers. Are US blue collar workers simply irrational? No, they are absolutely rational.

- The US blue collar workers know that there is not and will not be an effective trade adjustment assistance system in the US. Winners get everything with no room for losers in global open market according to the US experiences. (The same with the Brexit case.)

- How much of a threat caused by the Trumpian Protectionism?
Very threatening and disastrous. If Trumpian Protectionism is spilled over to major trading countries, the global trade war is the next stage, just like the experience before the two World War. The current one-sided protective measures of the US are highly likely to provoke retaliatory measures from trading partners.

- Is Trumpian Protectionism Sustainable?
Not really, since it’s self-defeating. Why? The source of gains from free trade: Efficiency Gains via Reallocation of economic resource from inefficient sectors to efficient sectors. In the US, without the effective trade adjustment assistance mechanism, resources in the inefficient sectors became laid-off instead of being reallocated. What Trump tries to do is to keep inefficient sectors protected as inefficient, which is self-defeating and unsustainable. He suspects Trump will realize this after 3-4 years.

- Can other powers fill in the US role?
The Share in the Global Trade: EU takes roughly 40% of the world trade, followed by Asia which takes 33%, and North America (17%). If the US goes back to protective regime, it is bad, while the other players can keep the remaining 83% under free trade regime. The EU might play a more meaningful role in leading the global free trade regime and also Asian powers like China. But he does not think so.

- The requirements for the leadership the global free trade regime: Leader has to prepare itself and operate on a rule-based trade policy and National Treatment for all players (treat all players as domestic players). The EU is more prepared, but not China. Furthermore, Big Players with market power are likely to resort to bilateral arrangements based on one-sided bargaining power. Therefore, relying on a multilateral platform is better than relying on a big guy leading power. Rebuilding the Multilateral Free Trade Regime via WTO is the solution.

The Role of Asia in Rebuilding the Global Free Trade Regime

- Datawise, Asia takes significant market power, i.e. 33% of the global trade. Historically speaking, all Asian countries’ economies, such as Japan and South Korea, have emerged via the global free trade regime with no regret against the multilateral free trade regime, WTO. A multilateral free trade regime as WTO is welfare dominant to a single country leadership (by whether the US or China). Asia has kept the spirit of multilateral or plurilateral free trade regime via ASEAN and ASEAN+3, and even ASEAN +6. Asian economy with her complexity in terms of diverse stages of economic development and asymmetry of economic size and power works as a miniature of the global economy with gradual and sustainable unit of economic integration.

- Condition for “Sustainable Global Open Market System”

i) Effective Trade Adjustment Assistance Mechanism: Losers (i.e., workers in the importing competing sectors with comparative disadvantages) should be reallocated to Winners’ sectors (jobs in the export sectors with comparative advantages) via Effective Trade Adjustment Assistance Mechanism.

ii) Multilateral Free Trade Regime with strong surveillance and reputation building mechanism with respect to the Big Guys with market power.

Dr. Razeen Sally

He has three main points to make. First, where we are in the global economy, particularly on trade. Second is on protectionist threat. Third is on what can be done in and by Asia to keep the market open.

- Where are we in the global economy?
Economic globalization has not been reversed, since the global financial crisis, but it has stalled. There has been a global growth slowdown. Trade to GDP worldwide has not increased, since about 2006. Foreign direct investment flow has decreased, since the crisis Cross-border flow of finance has Decreased considerably, as expect from the global financial crisis.

- But particularly on trade, something unusual is going on. Since the beginning of 19th century until 2008, world trade grew faster than world output, which is the indication that trade is the engine of growth. But since 2012 until the end of 2016, trade growth barely kept pace with world GDP growth at about 3 percent or less. This is highly unusual and tends not to happen except in war and deep recession. This is particularly worrisome for Asian nations, whom depend on exports. But still too early to tell if this is a new trend.

BWorld 137, ASEAN trade expansion and RCEP

* This is my article in BusinessWorld last June 09, 2017.

Despite various protectionist rhetoric by many world leaders against free trade, deep inside they know that there are “net gains” from trade and there are “net losses” under protectionism and restricted trade. Thus, while the multilateral trading agreement under the World Trade Organization (WTO) is not moving significantly, bilateral and regional free trade agreements (FTAs) are everywhere.

Trade within the Association of Southeast Asian Nations (ASEAN) is among the most dynamic in the world because of their consensus on faster unilateral trade liberalization policy and near zero tariff for all 10 member-countries since 2016. The region of some 630 million consumers would naturally attract the attention of its neighbors that want to source many of their needs and imports and want to export many of their products and services.

Thus, the ASEAN + 6 (Japan, China, South Korea, India, Australia, New Zealand) evolved and later these 16 countries moved towards creating the world’s biggest FTA covering half of the planet’s total population + the Regional Comprehensive Economic Partnership (RCEP).

Plenty of negotiations still ongoing but member-countries are hoping that RCEP will be formalized within the next two years. The main thorn in the agreement is not on tariffs but on non-tariff barriers (NTBs) or non-tariff measures (NTMs).

Last May 8, Stratbase-Albert del Rosario Institute (ADRi) organized a small group economists’ roundtable discussion on the “Global Geopolitical Situation: its Impact on Australian and Philippine Economies” at the Manila Peninsula Hotel. The main speaker was Mark Thirlwell, chief economist of Australia Trade and Investment Commission (Austrade).

It was a good forum with lots of useful data and insights. Among Mark’s points were the following: (a) Global tariffs are still low but have stopped falling, (b) Free Trade Agreement (FTA) coverage has grown but may have plateaued, (c) Non-tariff barriers are rising, including temporary barriers like anti-dumping, countervailing duties and safeguards, (d) trade liberalizing measures are surpassed or outnumbered by discriminatory/protectionist measures, and (e) ASEAN countries fit this global pattern as shown in these two very clear charts.

During the ASEAN Summit in Manila, Malaysian PM Najib Razak reemphasized the need to reduce the NTBs or non-tariff measures (NTMs) in the region, which have surged from 1,634 in 2000 to 5,975 in 2015.

Mark also said that e-commerce is also enabling trade citing the role of eBay, Amazon, and he asked if the world has already attained “peak trade” as global trade/GDP ratio has somehow plateaued at around 63% over the past few years. I argued during the open forum that like “peak food” (formulated by Thomas Malthus and later by Paul Ehrlich, others) and “peak oil” (formulated in the ’70s, reformulated in the ’90s), “peak trade” will not happen.

The average merchandise exports/GDP ratio from 2010-2015 of these Asian economies are as follows: Hong Kong 352.2%, Singapore 260.7%; Vietnam 152.7%; Malaysia 134.7%; Taiwan 114.6%; Thailand 113.6%. Yearly data I got from the ADB’s Key Indicators, November 2016 report. These are exports of goods alone. If exports of services are included, the ratio will grow much higher.

ASEAN countries should proceed with further trade liberalization and reduce the number of NTBs/NTMs at least among themselves. There is economic prosperity in trade expansion and misery in protectionism.

See also: 
BWorld 134, PPP vs ODA, June 08, 2017 
BWorld 135, On reducing the distribution system loss, June 9, 2017 

BWorld 136, Income tax and the politics of envy, June 12, 2017

US and China stockmarkets, huge divergence

One year until yesterday, US vs China stocks, below. 

What does this mean: that global investors have rising trust of the US economy but flat or rising distrust of the China economy? More trust in Trump policies but less trust in Xi policies?

I checked CNN and BBC's business sections, seems they did not make any report of this. NYT has one.
CNN, BBC, NYT, others are among the top anti-Trump media outlets.

The report says it's the tech and health companies that were the main attractors,

Then there's this news, "Oil falls to seven-month low on more signs of growing crude glut." This could mean that US shale producers are gaining the upperhand over OPEC countries, so back to low world oil prices. I'm waiting for sustained below $40/barrel in the coming few weeks or months.

I checked Hong Kong's Hang Seng index, while the China stocks are declining, HK's are rising, faster than the growth in US stocks actually. 

I am a non-finance guy so I asked several friends about this development, including my friend in HK, Andrew S. if this means that there is a growing divergence in investor trust between the economies of the mainland and the HK SAR.

Andrew offered a different perspective. He said that “Of the 10 biggest companies that make up the hang Seng index.  Probably less than 5% of their combined revenue/profit comes from Hong Kong.  The Hang Seng Index is of zero value as a reflection of HK's economy.”

I'm inclined to believe that the HK stock market has a positive, non-zero value to the overall HK economy because there is more rule of law, more policy stability in HK market than say, the PH or TH or ID or MY markets.

Mr. Trump has been making plenty of economic, fiscal, energy policies that almost reverse the 8-yrs policies of Mr. Obama. I am curious if Trump's policies were factored in positively by investors in the US stock market. Like the recent decline in world oil prices as reflection that Trump's energy policies are doing positively for the US. Shale oil frackers, coal producers, they are improving. And manufacturing, transport firms that are energy-intensive like airlines.

From a WSJ oped last week, June 15:

"Remember the “energy independence” preoccupation of not so long ago? The U.S. is now emerging as the world’s energy superpower and U.S. oil and gas exports are rebalancing global markets. More remarkable still, this dominance was achieved by private U.S. investment, innovation and trade—not Washington central planning.

Thanks largely to the domestic hydraulic fracturing revolution, the U.S. has been the world’s top natural gas producer since 2009, passing Russia, and the top producer of oil and petroleum hydrocarbons since 2014, passing Saudi Arabia."

Trump's reversal of Obama energy policies is a big contributor to this. More shale gas and oil, more coal, production and exports. To surpass Russia in gas production and surpass Saudi Arabia in oil production is one big achievement.

From the reports, biggest gainers yesterday were some pharma firms since Trump is trying to get rid of Obamacare. Like United Health Group, up 14.5% since Nov 6 2016.

Meanwhile, China's market is "very very expensive for a long while" according to another friend, Peter A. This means the bubble is slowly crashing already? Hard to predict because China's communist government will never allow Freedom of information, will hide the real data.

More globalization means more mobility of capital, labor and technology to markets worldwide that have more rule of law.

Monday, June 12, 2017

BWorld 136, Income tax and the politics of envy

* This is my article in BusinessWorld last Thursday.

“The income tax created more criminals than any other single act of government.”
-- Barry Goldwater (US businessman and five-term senator)

“The difference between death and taxes is death doesn’t get worse every time Congress meets.”
-- Will Rogers (US actor, humorist, columnist)

The tax reform plan of Dutertenomics known as Tax Reform for Acceleration and Inclusion (TRAIN) is composed of (a) overall personal income tax (PIT) cut, (b) hike in excise tax for cars and oil products, (c) hike tax for sugar-sweetened beverages, and (d) hike in number of sectors covered by the value-added tax (VAT).

This paper will focus on the income tax reform: Minimum-wage earners and those earning P250,000/year and below will pay zero income tax. The 13th month pay and other bonuses not exceeding P100,000 are also exempted from income tax. The number of tax brackets has been reduced from seven to six. And the top PIT rate of 32% for taxable income of P500,000/year or higher has been increased to 35% for taxable income of P5 million/year or higher.

To better appreciate the current PIT and proposed changes in the policy in the Philippines, let us compare the rates with our neighbors in the ASEAN.

The proposed PHL-TRAIN indeed deserves compliment because current PIT policy is highly confiscatory and makes Barry Goldwater’s statement so accurate. Imagine earning an annual income (net of some deductions) of only $10,000 and the Philippine government automatically confiscates one-third of that.

But what the Department of Finance (DoF) and Congress did is to adopt the “increase tax rates elsewhere to compensate for lower PIT rate” philosophy. This is wrong and there are four reasons why.

First, it is possible to abolish income tax, zero, and yet government will still survive and prosper via other revenue sources. Currently there are 10 countries in the world which have zero income tax policy: Bahamas, Bahrain, Bermuda, Brunei, Cayman Islands, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. Their governments rely and thrive on selling petroleum, natural gas, lands, and/or earning from consumption-based taxes and financial transaction taxes.

Second, lower PIT rate can expand the tax base and can potentially increase overall tax revenues. More entrepreneurs and professionals from abroad as well as Filipinos working abroad will be encouraged to do business here to take advantage of lower income tax rate and hence, bigger take home pay.

Stated in a simple equation: Tax revenue (T) is a product of tax rate (t) multiplied by the number of taxpayers (N). Or (T = t x N). A decline in t can encourage the increase in N so that overall T can potentially increase, not decrease.

The DoF and Congress leaders have taken the linear and simplistic argument that lower tax rate means automatic lower revenues. They did not consider potential increase in N and T when income tax rate is significantly reduced.

Currently, Asian economies with low, flat income tax rates are Mongolia with only 10%, Macau with 12%, and Hong Kong with 15%.

Third, lower PIT even for high-income people means more take home pay, more domestic consumption which are captured by other consumption-based taxes like VAT, excise tax, property tax, motor vehicle tax, entertainment tax, travel tax and so on.

And fourth, the politics of envy is wrong. The philosophy of “demonize and overtax the rich, subsidize the poor forever” creates moral hazards problem. The implicit message is: Be careful when you become rich because the government will silently demonize you and explicitly overtax you. Aspire to remain poor, poor forever if possible because (a) your minimum wage income plus bonuses will be tax-free, (b) you get lots of freebies and subsidies, and (c) these are no timetable, forever subsidies and transfers.

When there are plenty of poor people, the government is silently saying two things: “Congratulations” and “Thank you.” Here’s how:

a. “Congratulations -- you are entitled to many subsidies and freebies: free cash transfer, free health care, free education until university, free or highly subsidized housing, free or highly subsidized e-tricycle, tractor, etc. No timetable, for life, can extend to your children and grandchildren, so long as they continue to be poor.”

b. “Thank you -- we have more justifications and alibi to harass and confiscate more from the income, wealth, properties and inheritance of the rich and super-rich (especially if they are not friends of the administration).”

Therefore, instead of raising the top PIT rate to 35%, Congress should bring it down to 25% to be more comparable with Malaysia; better if it is only 20% to be more comparable with Singapore rate.

Society should reward people who become rich and wealthy via entrepreneurship and efficient professional work, not demonize and overtax them. We should have more millionaires and billionaires, not less; we should have more super rich people, not less.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET and Stratbase-ADRi.

See also: 
BWorld 134, PPP vs ODA, June 08, 2017 
BWorld 135, On reducing the distribution system loss, June 9, 2017

Friday, June 09, 2017

Neuroscientist, Duterte and Du30 fanatics

(Originally posted: 4am today)

A friend, Selwyn, posted in his fb wall about this news report.

Then a Rose Bascon commented, my comment to her...

My beef is that people should stick to the issue, the thread which in this case, is about Duterte and the charge of that neuroscientist. But see her reply...

I am not "yellow", not red, not blue, not black, not white, etc. I don't care much about politicians, political parties, NGOs, individuals who are non-advocates of limited, minimal government.

Many Du30 fanatics have that low-life attitude that if you are not with them and their idol, then you are a "yellow" or 'pro-drug criminals" and related insinuations. Lousy minds.

(Updated: 7pm)

Rose posted this in one fb group of which I am also a member.

Nagsumbong si Bascon, pero kulang ang kwento, hehe.
Simple thread posted by a common friend -- on Duterte and the US neuroscientist who attacked Du30.

Bascon digression #1: “someone more knowledgeable about drugs, si Mar Roxas…”
Me: “the thread is about Du30 and that neuroscientist, bakit sinali si Roxas?”
Bascon digression #2: “Nonoy Oplas, really, you are an LP-tard? Nooooooo!!!!!!”
Me: “O, personal attacks agad, pasisikatin kita Rose ha”
Bascon digression #3: “I really didn’t expect it. Especially from you.”

See the hijack of thread? Original topic is Du30 vs the neuroscientist who criticized him.
Digression #1 turned to Roxas; digression #2 turned to LP-tard and me; #3 reiterated it’s now me as the issue.

If Rose said, “someone more knowledgeable about drugs, si BBM; or Butch Abad, or Trump, or Spiderman, or WonderWoman,…” I would still comment, “the thread is about Du30 and that neuroscientist, bakit sinali si BBM; or Butch Abad, or Trump, or Spiderman, or WonderWoman,…?”

Gets? I hope so.

Bascon digression #4: “I just quoted Mar, nagalit na sya.”
Nope, I did not get angry, I made fun on the hijack and digression of thread.

See also her language: “LP-tard”, “libtard”, indicator of someone unable to stick to the original issue and expand the digression to sloganeering and personal attacks.

About the comment of Manny “Nonoy is a certified Duterte hater”, haha, hoy Manny, not 100% naman. I support Du30’s questioning the Paris Agreement on the climate drama, he was 99% correct there. I also support his build-build-build program, but not his shift from PPP funding to ODA (especially China loans) of massive infra.

About the comment of Butch C, the guy joined the fray from an ignoramus perspective.
“He would go on your wall and engage you…” Wrong. I did not go to Rose’s wall, we are not friends, I don’t even know her except that she’s also a fellow UP alumni. We debated at a mutual friend’s wall.

“he would endorse you and shame you on his wall.” Wrong, I did not post that debate, not even mentioned it in my wall.

Many Du30 supporters and fanatics, uhrmm, do lots of strawman arguments. Pathetic.