* This is my article in BusinessWorld on September 27, 2018.
President Duterte’s government can be described currently as having double inflation in both consumer price index (CPI) and political insecurity index.
His economic managers’ usual and repeated alibi on why the country’s inflation rate is high is mainly because of external factors like high world oil prices and high US interest rates. This is a half-truth. The main reason is the TRAIN law that was implemented starting January this year.
From the monthly data of inflation rate, the January to August 2018 or year-to-date (ytd) average is taken. These Asian economies have complete data until August. Those with incomplete data (Cambodia, Bangladesh, etc.) are not included here (see table).
So while world oil prices and US interest rates increase, five countries have experienced lower inflation this year compared to 2017, between -0.2 (Singapore) to -2.5 (Malaysia) percentage points. Four countries have mild increase of up to 0.5% in 2018 compared to 2017: Japan, Thailand, China and Pakistan.
The Duterte government’s dishonesty in admitting the significant contribution of their TRAIN law — especially the tax hikes of oil products — disables them to realize that part 2 of oil and coal tax hikes this coming January 2019 will create another round of higher inflationary pressure.
The political insecurity index of the Duterte administration can be proxied by the latest Pulse Asia survey on the Approval and Trust ratings of the President. Its Approval rating has declined from 88% in June 2018 to 75% in September 2018 while its Trust rating has also declined by similar figures for the same period.
The consistent persecution and jailing of very vocal opposition legislators — first Senator De Lima and now Senator Trillanes — is one proof of President Duterte’s political insecurity and intolerance. While Sen. Trillanes has posted bail and is free temporarily, he can still go to jail if the administration will find other ways. After all, the coup d’etat charge again confronting him is a non-bailable offense.
They cannot arrest the spiraling inflation — only 2.9% in 2017, 3.4% in January 2018 or first month of TRAIN law, up to 6.4% in August 2018 — so they arrest vocal opposition leaders.
The government’s performance can be depicted in this hypothetical chart.
Instead of aspiring to be in point A, the administration further moves away, outwards to point B where both price index and insecurity index are high.
One important policy that the government can undertake is to reduce VAT from 12% to 8% with very few exempted sectors. There is a concrete and very recent example why this policy can work.
Malaysia abolished its gross sales tax (GST), the equivalent of our VAT, as a result of an election promise in May 2018 fulfilled by PM Mahathir. With GST of 6%, Malaysia inflation rate was 1.4% in April then 1.8% in May 2018. When GST moved from 6% to zero last June, inflation rate significantly declined to 0.8% in June, 0.9% in July, and 0.2% in August. Massive, large-scale price decline across many sectors by the simple abolition of GST.
So President Duterte and his economic team can try the Malaysian model so that it can hopefully move towards point A in the illustration. Cut the VAT rate from 12% to 8% with very few exempted sectors.-------------
BWorld 227, Inflation, taxation, and protectionism, July 14, 2018
BWorld 235, Inflation worldwide is declining, no special credit to Dutertenomics, July 27, 2018
BWorld 251, Cure the big trade deficit, bring in the miners, September 24, 2018
BWorld 252, Mining, Itogon and Lee Kuan Yew, September 25, 2018
BWorld 253, Cheap, stable electricity vs climate alarmism, September 30, 2018