* This is my column in BusinessWorld last May 17, 2018.
Disruptors tend to be successful in three ways: (1) They
dramatically lower historic prices through new cost structures…”
— Accenture, “Disruption need not be an enigma,”
February 2018
“Inflation is taxation without legislation.”
— Milton Friedman, 1974
Disruption is good for consumers. It unsettles many
incumbent and entrenched players which may have been lording over the market for
decades with expensive and substandard products and services.
Disruptors are often the newcomers, or old players using
new and modern production methods that drastically change how things are done.
Inflation is immediately tamed by disruption, ceteris
paribus or all other things being equal or held constant. Consumers are given
new choices and they tend to flock to products and services with lower prices
or similar prices but better quality or more add-ons.
The institutionalization of freer trade in 1995 with the
creation of the World Trade Organization (WTO) has contributed to lower prices
across many countries.
As a result, prices in Asia in 1995-1999 were
significantly lower than prices in 1990-1994 except in Thailand and Indonesia
which were badly hit by the Asian financial turmoil of 1997-1998. Then prices
generally declined in the succeeding decades until 2017 (see Table 1).
Higher taxation and more government regulations however, have the opposite effect of market disruption. When a country imposes drastic tax hikes, that country experiences significant inflationary pressure and reverses the gains of disruption.
This is particularly true in the Philippines when it enacted the Tax Reform for Inclusion and Acceleration (TRAIN) law of 2017.
While personal income tax rates have declined, many products (oil, LPG, coal, sugary food and drinks, etc.) and services were slapped with higher excise tax and/or expanded VAT.
While all countries and economies were hit by rising world oil prices, many incurred even lower prices.
But in this case, the Philippines is an outlier.
Inflation jumped even after the sudden rebasing of the consumer price index (CPI) from 2006 to 2012. The two richest economies of North America and Europe are included to widen the scope of comparison, year to date (Ytd) vs. December 2017 as base year (see Table 2).
Note that the outlier inflation rate in the Philippines
this year does not yet include fare hikes by land transportation companies and
providers (jeepneys, taxi, UV express, buses). If such fare adjustments are
granted — and they should be — then the country’s inflation will rise even
higher.
The Bangko Sentral ng Pilipinas (BSP) noted this
unexpected level of price increases and it raised local interest rates to
encourage people to spend less and save more and hence, help reduce
inflationary pressure.
Rice protectionism and NFA importation monopoly are also
slowly being abandoned and the rice import quota will soon be replaced by
tariffs and cheaper rice from our ASEAN neighbors will soon become more
available to consumers and this will help reduce inflation.
The bad news is that January 2019 is fast approaching and
there will be a second round in oil and coal tax hikes. This means another
round of inflationary pressure, fare hike pressure, and even larger inflation
spikes.
This is a clear case of higher taxation reversing the
gains of innovation and disruption in the Philippines. Government as negative
disruptor is not good. The TRAIN 2 bill should be an instrument to reverse
these disagreeable provisions of TRAIN 1.
Bienvenido S. Oplas, Jr. is President of Minimal
Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.
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See also:
BWorld 203, TRAIN, inflation and PPP, April 10, 2018
BWorld 210, Electricity competition, EPIRA, and WESM, May 16, 2018
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