BWorld 217, Dutertenomics, TRAIN and high inflation

* This is my article in BusinessWorld, May 30, 2018.

“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”

— Adam Smith, The Wealth Of Nations (1776), Book V, Chapter II, Appendix to Articles I & II.

Two columns in BusinessWorld on May 28 jointly defended Dutertenomics’ Tax Reform for Acceleration and Inclusion (TRAIN). These are “Eight former Finance secretaries support TRAIN 2” by Romy Bernardo of FEF and “Coolly explaining inflation” by Men Sta. Ana of AER.

I will quote some phrases from the two pieces and explain the title of this piece.

(1) “TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two thirds of last April’s 4.5% inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand.” (Bernardo)

(2) “The higher inflation rate we are seeing is mainly a result of the increase in global crude oil prices. The Dubai crude oil price has increased to $68.43 per barrel in April 2018… The tax reforms resulting in higher fuel tax and higher prices of cigarettes and sugary drinks of course have contributed to inflation. But its effect accounts only for 0.4 percentage point of an inflation rate of 4.5%.” (Sta. Ana)

So the main explanation of Dutertenomics and its supporters as to why the Philippines has recently posted an outlier inflation rate are (a) high world oil prices, high sin taxes, (b) rapidly expanding economy, but the impact of (a) is very small while (b) is substantial.

If this is true, then other countries that bore the brunt of high oil prices and incurred elevated growth levels should also have rising inflation rates.

But this is NOT true and did not happen as shown in a chart covering Asian emerging and developed economies and the two biggest economies of America and Europe.

On (a), many countries even experienced lower inflation in January-April 2018 compared to December 2017 level despite the rise in world oil prices — UK, Germany, Malaysia, Pakistan, India, Indonesia, South Korea, and Singapore. Others have inflation differential of only 0.2% to 0.6% while the Philippines’ differential was 1.2% or 1.3% depending on the CPI base year used.

On (b), several countries that have reported growth momentums from 2016-2017 and were projected to grow at least 5.3% in 2018 experienced negative or low inflation differentials compared to December 2017 levels — Malaysia, Pakistan, India, Indonesia, Vietnam, China. These countries show that low inflation and fast growth can occur at the same time, no trade off expected (see table).

So are supporters of the TRAIN being less honest?

Moreover, their clamor for higher oil/LPG/coal taxes is directly proportional to their silence in calling for fare hike adjustments. They know 100% that higher oil prices will result in demand for higher fares/tariff by jeepneys, taxi, buses, UV express, trucks, etc.

And since January 2019 is fast approaching, another round of oil/lpg/coal tax hikes will come, prompting another round of demands for hikes in fares, electricity, and wages.

With this in mind, TRAIN supporters should be equally vocal in telling the LTFRB and DoTr to grant the fare hikes very soon, before the second round of energy tax hikes begin, then re-run their numbers on inflation impact and targets.

But there is sound of silence in this aspect.

If government will not grant the necessary fare hikes soon, PUV operators will cut costs elsewhere, like forcing bus drivers and mechanics to work longer hours at little or no extra pay, or using less-reliable but cheaper spare parts, or using old tires. Then we wait for more road accidents and government will blame the PUV operators then penalize them with huge fines or franchise cancellations.

(3) “We also believe that the corporate income tax (CIT) regime, burdened by the highest standard rate among ASEAN countries, at 30%, is in urgent need of reform. We strongly support the reduction of corporate income tax alongside the rationalization of tax incentives.” (Bernardo)

True, there is an urgent need for the Philippines to cut the CIT because our 30% is the highest in East Asia: Indonesia, China and South Korea 25%, Taiwan, Thailand and Vietnam 20%, Hong Kong and Singapore 16.5-17%.

But TRAIN 2 wants to cut the CIT to only 25% by 2022 or end of Duterte’s term while it will reduce or remove many fiscal incentives by 2019 if they succeed in having TRAIN 2 law this year.

So Dutertenomics is being less honest again on the extent of the Philippines’ taxation distortion.

Aside from the Philippines having the (1) highest CIT of 30% in East Asia, it also has the (2) highest withholding tax on dividends OF 15/30%, (3) highest withholding tax on interest of 20%, (4) highest withholding tax on royalties of 30%, (5) highest VAT/GST of 12%.

One big result of this is that the Philippines has the lowest FDI inward stock (inflows less outflows through the years) of only $64B in 2016 vs. $115B of Vietnam, $122B of Malaysia, $186B of S. Korea and Japan, $189B of Thailand, $235B of Indonesia, $1,096B of Singapore, $1,354B of China and $1,590B of Hong Kong.

A more economically realistic and politically acceptable CIT under TRAIN 2 would be 15%, or max 20% in exchange for reduction/abolition of many fiscal incentives. And such cut should be done in 2019 assuming that TRAIN 2 becomes a law in 2018, and not 2022.

Finally, the last point is that the implicit purpose of TRAIN’s tax-tax-tax strategy is to pay for loans-loans-loans from China and its crony contractors involved in Build-Build-Build as many previously integrated PPP were reversed to become hybrid PPP.

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 213, Disruption, inflation and taxation, May 23, 2018

BWorld 214, Disruption in global economic power, May 24, 2018 

BWorld 215, Urban mobility index and transport disruption, May 29, 2018 

BWorld 216, Positive and negative disruptions in the electricity market, May 31, 2018

8 years of "Hope and change" vs 1 year of Trump

I see many people still glamorize the 8 years of "hope and change" in the US when it did not have a single year of GDP growth of 3%. Many policies were simply anti-business. From 2009-2016 of "hope and change," these countries achieved growth of 3% or higher: Canada and Germany 2x, UK and Japan once, USA zero. China, it kept humming at 6-10% growth.

Last year, the US was estimated to grow at 2.2%.

Joblessness, four years before "hope and change", the US has a low unemployment rate of 5% average. Things drastically change in the first term of "hope and change", US unemployment rates almost doubled and were higher than perennially high unemployment Germany and Canada.

By the 2nd term of "hope and change", US rates have declined but still higher than Germany, Japan.

Posting this because some people still think that it should be the candidate of "hope and change", Hillary! Hillary! Hillary! who should be US President so she can continue the high taxes, high bureaucracies, high energy prices to 'save the planet' and related policies. They cannot accept that many US voters were just dissatisfied with 8 years of "hope and change" and do not want its candidate to continue the lousy policies. So they blame Russia and Putin, agh.

Obama is a good orator but many US economic numbers do not match his glorified speeches. Many of his policies are anti-business, anti-job creation and divisive.

Dutertenomics, GDP growth and inflation

Duterte and his Dutertenomists are deceptive. #TRAIN law alone has siphoned off more money from private pockets to government pockets esp the high oil tax, coal tax (round 1), sugar tax, etc. More tax revenues, more govt spending (13.8% growth) allowed higher Q1 2018 GDP growth of 6.8%. But look at household consumption, slowed down to 5.6%. And Dutertenomists are silent about the need to raise fares -- jeepney, taxi, UV express, buses, truckers, etc. Those fare hikes should be granted and see the impact on household consumption, impact on #inflation.

And now this, $71/barrel, another oil price hike. And January 2019 is near, oil tax hike, coal tax hike Part 2 will be slam dunked upon us. #DOF #NEDA #DBM #BSP

If Dutertenomists, DOF and its NGO front Action for Economic Reforms (AER) are very vocal and noisy about the need to raise oil taxes, they should be equally vocal and noisy to grant the fare hikes too, so that entrepreneurs in the land transport business (jeeps, taxi, UV express, buses, etc.) can pass on the cost of their advocacy. But they are silent. Hoping to reduce the damage of high oil taxes to inflation and household spending.

The decline in household spending would have been steeper and bigger if the estimated 100,000 mainland Chinese gamblers/workers new migrants were not here?

https://www.bloomberg.com/news/articles/2018-05-03/in-china-s-new-gambling-hot-spot-property-prices-are-on-a-tear

Chinese Money Triggers a Dizzying Rally in Manila Property

Bloomberg News

May 4, 2018, 12:00 AM GMT+8

BWorld 164, PES conference amidst reduced risk and uncertainty

* This is my article in BusinessWorld last November 6, 2017.

The Philippine Economic Society (PES) annual conference is probably the most cerebral event in the field of economics and business in the country. The reason is that in the afternoon, there are eight simultaneous panel discussions on eight different topics within 1 ½ hours, each panel with 3-4 presenters giving technical papers. A coffee break then another 7-8 simultaneous panel discussions, a total of 15-16 different topics with a total of about 50 speakers and panelists, in just one afternoon.

The morning session is devoted to big personalities in government (Cabinet Secretaries, Congress leaders), multilaterals, and sometimes corporate leaders. Except on few cases, I don’t give these speakers much weight because their presentations are generally presented and discussed somewhere else and in media.

So I became a lifetime member of PES and I have attended all the past PES annual conferences in the past decade or more. The next PES annual conference will be this coming Wednesday, Nov. 8 at Novotel Hotel in Cubao, Quezon City.

This year’s theme is “Growing Amidst Risk and Uncertainty.” I have developed skepticism to subjects with generally pessimistic or alarmist titles so I checked certain numbers to see if indeed there are more economic and social risks and uncertainties now and the near future, both global and national, compared to the past few years.

My skepticism is justified because I found out that there are less risks and uncertainties, not more, now and at least next year compared to the recent past. In particular:

(1) Projected gross domestic product (GDP) growth among the world’s biggest economies US, Canada, Germany and Japan are faster than the last four years. There is projected growth slowdown in China and India, the world’s #1 and #3 biggest economies in GDP-PPP values but the rates are still high at nearly 7%.

In the ASEAN-6, the same pattern of higher growth this year and the next compared to the past four years except in Singapore.

(2) In consumer prices, projections for 2017 are higher than the last four years for the industrialized west but the uptick is not scary nor alarming. For Asia’s big economies, either there is projected decline or the rise will be mild.

(3) It is in fiscal irresponsibility, in the spend-spend-spend culture of many governments around the world, where long-term risks can materialize because of their persistent budget deficit (revenues lower than expenditures). Still, it is good to see that some welfare states like Germany and S. Korea are posting fiscal surplus this year. (see table)

For the Philippines, note that The Economist/EIU pool of forecasters project a crack in growth momentum next year. The past Aquino administration has managed to post really strong growth compared to many countries in the planet, growth momentum until this year but expected to somehow crack starting 2018.

Sadly, I cannot attend the PES meeting this year because I am going to the US for another conference this week and hence, first time in many years that I will miss this big event. If I could attend, of the 15 different topics in the afternoon, I would attend the Energy Policy Development Program (EPDP) panel on “Power Economics: Prices, Generation and Use” or Trade topic in session A. In session B, I would attend the Friedrich Naumann Foundation for Freedom (FNF) panel on “Climate Change and the Economics of Natural Disaster” or Ateneo School of Government (ASoG)’s panel on infrastructure.

I have written a number of papers in this column on the merits of cheaper, stable energy from conventional sources and the lousiness of unstable, intermittent, expensive renewables that depend on subsidies and priority dispatch to make them “viable.” In Germany, there is a growing momentum of policy reversal in climate and energy policies because the German liberals Free Democratic Party (FDP) and politically wild Alternatives for Germany (AfD) have surged high in the recent Bundestag/Parliament elections last September and these two parties are very explicit in questioning continued renewables cronyism and endorsing cheaper, stable energy from coal.

To summarize: (a) There are less risks and uncertainties now and the near future compared to recent years; (b) Endless fiscal irresponsibility by governments will create long-term risks with rising public debt; (c) Dutertenomics of tax-tax-tax aside from kill-kill-kill in its drugs war may crack starting next year; and (d) Climate and renewables alarmism will see slow policy reversals in more countries soon.

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See also:
BWorld 161, The sin of smuggling and corruption in the Sin tax law, November 02, 2017 

BWorld 162, Open pit mines and open economy, November 05, 2017 

BWorld 163, US energy policies and implications in Asia and Philippines, November 19, 2017

On the PH's GDP growth of 6.9% in Q3 2017

A friend, Ateneo de Manila's Economics Professor, Ser Pena-Reyes, posted this chart from Rappler in his fb wall yesterday. I like it.

My immediate reaction -- see in the Expenditures side, Q3 2016 vs Q3 2017, Household consumption is declining this year while Government consumption is rising fast. The Du30 government is spending big time this year, funded by lots of borrowings, to be followed by tax-tax-tax in 2018 and beyond. Magaleeeng.

Another economist friend, Jun Neri, BPI's chief economist, posted their chart analysis of the Q3 growth, their version on the spending side. Jun said "It factors in the weight of each sector. Notice how Net Exports (X - M) helped compensate for the slowdown in HFCE (household consumption)." Good chart, Jun/BPI.

Ser made another chart, below, on the demand side of the GDP growth. Ser noted that "HFCE, GFCE, and capital formation appear to be the main drivers of the deceleration—an observation that raises some concern regarding growth sustainability. There is a need to accelerate capital formation in particular, if we are to shift from consumption-led to investment-led growth."

Growthwise, the slow growth in year 1 of PNoy Aquino government was momentum from the lousy Gloria Arroyo economy. Likewise, the fast growth in year 1 of the Du30 administration is momentum from PNoy fast growth era. Besides, while PNoy budget deficit was around P300 B/yr or less, Du30 deficit in year 1, this year, is p600B+. No crisis year yet it borrowed heavily, hence the high jump in Government consumption growth.

Fiscal responsibility means in financial turmoil or crisis years, government borrows big time to help propel an economy then have fiscal surplus in non crisis years to pay some debt. This administration  displays big time fiscal irresponsibility of spend-spend-spend, ramp up the deficit and borrowings in non crisis, already fast growth period.

US economic growth of 3%, due to deregulation?

If we exclude the years 2008-09 because they were outliers (global financial upheaval), the Obama years seem to be the weakest since 1990. Never experienced growth of 3% or higher.

https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/

Early peek of the Trump admin first 3 Quarters of 2017, experienced 3% growth in the last 2 quarters (Q2 and Q3). 

https://tradingeconomics.com/united-states/gdp-growth

Fastest 6-months growth since 2014, because of Trump or Yellen or something else? One of Financial Times' headlines today.

If the 3%+ is retained in Q4, it will be called the "fastest 9-months growth since ____".

This chart below could be one explanation -- US stocks growth the past year was rather fast compared to other major markets (China/Shanghai, Japan/Nikkei, Germany/DAX). 

http://www.wsj.com/mdc/public/page/mdc_us_stocks.html?refresh=on

The 2008-09 crash was a product of multi-decades of moral hazards problem in housing finance, not just 8 years of the Bush Jr. era.

A friend noted that "an institutional collapse like 2008 is followed by many years of slow growth and stagnation. The Philippines had the same experience from 1983 through the 90's. From 1991, Japan nearly had two decades of below-average growth."

Good points, he was arguing the slow growth momentum, which actually applied also to the rest of  G7 economies. But not to China, India, other Asian economies.

My hypothesis for the rather fast growth of the US economy in the last 2 quarters -- somehow a growth momentum due to some of his deregulation, de-bureaucratism policies. And the big tax cut plan, it's seeping into business decisions, big investments may be coming to the US from abroad and big investments in the US won't migrate to other countries anymore.

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See also: 
US and China stockmarkets, huge divergence, June 20, 2017 

On the US stockmarkets' consistent rise, August 08, 2017

BWorld 127, Economic freedom in Asia means faster growth, lower prices

* This is my article in BusinessWorld on April 26, 2017.

Thanks to its rapid economic growth, the Association of Southeast Asian Nations (ASEAN) is being looked up to by other economic blocs as it celebrates its 50th anniversary this month in Manila.

The pace of trade liberalization until this decade is perhaps the world’s fastest both among ASEAN member-states, and even among those outside the group.

Free trade creates good will among people and governments across the globe. It gives foreign trade partners greater access to the home market and, in the process, these trade partners tend to open up to more ASEAN countries’ exports and investments.

Here are two tables that show the economic wonders of free trade policy -- not exactly zero-tariff and minimal non-tariff barriers (NTBs) but approaching there -- for the emerging economies of Asia. We will use the purchasing power parity (PPP) values of gross domestic product (GDP) to somehow equalize valuation of goods and services across the world.

Overall, the GDP size of the world at PPP values was $40.3 trillion in 1996 and it rose to $120 trillion in 2016 or an expansion of more than three times in just two decades.

ASEAN-5 refers to Indonesia, Malaysia, Philippines, Thailand, and Vietnam. G7 countries are the US, Canada, Japan, UK, Germany, France and Italy.

Table 1 numbers show the following:

1. Emerging and developing Asia (including China and India) is now the world’s biggest economic bloc with GDP size of $38 trillion in 2016, overtaking the G7. The expansion of GDP size in just two decades was six times, an astonishing feat. The per-capita GDP also expanded almost five times, the fastest in the world.

2. ASEAN-5 GDP size of $6.5 trillion in 2016 was larger than the combined economies of the CIS or developing Europe or Sub-Saharan Africa. Per capita GDP expanded more than two and a half times over two decades which is larger than that attained by many other economic blocs. 

Table 2 numbers further show that:

3. While emerging and developing Asia is only the 3rd largest bloc in the exports of goods and services in the world, selling $3.9 trillion in 2016, the size of exports has expanded 7.2 times after only two decades, the fastest in the world. In terms of price inflation, the region also showed consistent price decline and stability at only 2.9% in 2016, the lowest among developing blocs in the world.

4. Sub-Saharan Africa and MENA remain burdened with high prices and slow expansion in exports.

Giving local consumers and manufacturers more economic freedom where they can buy and sell the various goods and services that they need and produce means empowering the whole economy. Price declines and price stability are proof that freer trade is working and are instrumental in stabilizing the supply of various traded goods and services.

There are winners and losers in free trade, the same way that there are winners and losers in protectionism. But overall, “net gains” from trade trump “net losses” from protectionism because locals are deprived by policies that limit choices and options.

It is important therefore, that emerging Asian economies like the Philippines should never lose sight of the potentials of free trade and resist protectionist aspirations that penalize the consumers while protecting local vested business interests.

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

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See also: 

BWorld 124, On Grab, Uber, traffic and LTFRB, May 05, 2017 

BWorld 125, On the retail competition and open access (RCOA) and EPIRA, May 05, 2017 

BWorld 126, Why mining is appropriate for certain areas and provinces, May 06, 2017

BWorld 89, President Duterte's outbursts and PH economic momentum

* This is my article in BusinessWorld last October 27, 2016.

Several issues preoccupy President Rodrigo Duterte’s mind and mouth: the violent anti-drug campaign and murders, his anti-US, anti-EU, and anti-UN expletives and polemics (but later reversing his earlier attacks against these countries and/or multilateral bodies).

After his anti-Obama, anti-US tantrums before and during the ASEAN and related summit meetings, he repeated the same vitriol in his China visit last week, citing his “separation from the US” and that the Philippines is united with China and Russia against the world. As expected, he took back these assertions almost immediately, clarifying that the country cannot afford to be separated from the US the minute he arrived in Manila.

Spouting off these incendiary remarks then taking them back -- characterized as “sugod-atras” in Filipino -- should not be taken literally as advised by the President’s cabinet officials.

However, these unnecessary assertions have real, negative impact on business confidence in the country, especially for massive investment plans and pledges that remain on the “wait and see” mode since the campaign period (February 2016) until today.

Will these outbursts by the President ultimately derail the economic momentum of the Philippines as started by the previous Aquino administration?

The Economist magazine regularly pools some of the world’s biggest investment banks and ratings companies about their global economic forecast and GDP growth projections. The numbers are shown on the table.

This piece made these country groupings in re-constructing the table. Group A are traditional, developed economy allies of the Philippines; B are President Duterte’s “pivot new friends”; C are the major Asian friends and trade partners; and D are miscellaneous. Venezuela is included in D to show how socialism and heavy statism can lead to economic and business decline (see table).

These numbers show us the following:

One, group A remains to have sclerotic growth, they seem to be very lucky to grow 2% or higher. Unemployment rate is high, 5% and up, except Japan. Not shown on this table are the four EU countries which have incurred double-digit unemployment rates in July or August 2016: France 10.5%, Italy 11.4%, Spain 19.5%, and Greece 23.2%.

These figures show that the developed countries cannot be expected to provide more impetus to lead and drive faster global growth. Their capacity to provide more foreign aid, more loans and grants, is also compromised.

Group B has mixed results. China can be expected to lead regional growth and help pull upwards global demand, but not Russia. The latter remains limping due to low global oil prices, petroleum being one of its major export products, among the important factors.

Groups C and D continue to show fast growth potentials except the developed Asians like South Korea, Taiwan, Hong Kong, Singapore, and socialist Venezuela. The Philippines is expected to retain fast growth, third highest after India and China this year, also third highest next year after India and Vietnam, among emerging and developed Asians.

An important ingredient for faster growth is high and young population. Notice above that countries with 90+ million people -- Vietnam, Philippines, Indonesia, Pakistan, India and China -- are growing fast. The US, Japan, and Russia should belong to this category but they are growing slow, partly because they have an old and aging population.

Going back to our earlier question, will President Duterte’s emotional outbursts ultimately derail the Philippines’ economic momentum?

The answer seems to be no for two important reasons.

One, growth momentum is retained as various macroeconomic and infrastructure reforms laid by the previous administration are bearing fruit.

Two, our high and young population of 103 million people as of 2016 has become a potent force to provide the necessary market demand and labor force supply for more investments and entrepreneurial advancement.

So, despite the President’s incendiary remarks plus thousands of murders in the anti-drugs campaign that can potentially disappoint if not threaten big foreign investments planning to come to the Philippines, growth momentum is well in place.

Moreover, if this economic momentum is coupled with presidential sobriety and an anti-drugs campaign that is guided by due process, the country’s growth rate of 7%, or perhaps even higher, is very much possible.

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See also:

BWorld 74, Pres. Duterte's anti-corruption programs and Transparency Intl., July 30, 2016

BWorld 85, Drugs war morphed into war on critics of President Duterte? October 11, 2016

BWorld 87, Economic, fiscal and energy policies of the Duterte administration, October 17, 2016 
BWorld 88, Economic freedom and human rights, October 31, 2016

BWorld 87, Economic, fiscal and energy policies of the Duterte administration

* This is my article in BusinessWorld last October 07, 2016.

The new administration of President Rodrigo Duterte will turn 100 days old this week. The basis for its assessment is still sketchy and raw, so one way to further assess it later is to see some baseline figures when it assumed office.

Stratbase-Albert del Rosario Institute (ADRi) conducted a forum last Sept. 28 on “Raising the Next Tiger: The New Administration’s Economic Priorities” at The Tower Club in Makati. The main speakers were Mr. Aekapol Chongvilaivan, Country Economist, Philippines Country Office, Asian Development Bank (ADB); Department of Budget and Management (DBM) Secretary Ben Diokno; and Bangko Sentral ng Pilipinas (BSP) Deputy Governor for Monetary Stability Sector, Diwa Guinigundo.

The various reactors and discussants included Mr. George Barcelon, president of the Philippine Chamber of Commerce and Industry (PCCI); Mr. Calixto Chikiamco, president of the Foundation for Economic Freedom (FEF); Ambassador Donald Dee, president of the Employers Confederation of the Philippines (ECOP); and Mr. George Chua, president of the Financial Executives of the Philippines (FINEX).

These four reactors particularly mentioned the high prices and limited capacity of the Philippine’s energy sector. They pointed out that this factor, among others, reduces the country’s competitiveness compared to our ASEAN neighbors. Mr. Chikiamco and Mr. Chua in particular mentioned the problem of pushing more renewables wind and solar into the national grid as contributing to rising electricity prices and even affecting the grid stability.

Below are some numbers presented during the forum. I added the data on electricity generation (in terawatt hours) to further contextualize the points made by the four mentioned discussants (see Table 1). 

Sec. Diokno did not give comparative data for some ASEAN countries, only the Philippines’ fiscal data. He only emphasized the bigger focus of Duterte administration to expand and improve the country’s infrastructure to address the Philippines’ low rank in global competitiveness surveys.

Public spending by the national government for infrastructure are as follows: P165B in 2010, P175B in 2011, P216B in 2012, P307B in 2013, P346B in 2014, P576B in 2015, P756B in 2016, and P861B proposed in 2017. These numbers indicate a sustained increase in infrastructure spending from 2015 until next year.

So as baseline data: First, the Philippine economy has been growing rather fast until 2015 and the challenge is how to sustain this expansion. Second, overall global competitiveness is good enough but ranking in infrastructure quality is low. And third, growth of our power generation remained low, only 46% after one decade. In contrast, Indonesia’s power capacity has expanded nearly twice after a decade while Vietnam’s has expanded more than three times.

The big challenge therefore is to allocate more public resources for infrastructure development.

To get the additional funds, the new government will have to discontinue -- or at least significantly cut the budgets -- of some programs and projects that have questionable impact on poverty alleviation. These funds should then be reallocated to help bankroll more infrastructure projects.

Second, attract more private players and investors in coal and natural gas power generation, in road tollways, in seaports and airports, in rail-based urban transportation. This process is non-burdensome to taxpayers because these public goods are funded via user-pay principle.

For instance, only those who regularly use NLEx and SLEx pay for the capital expenditure and maintenance of those roads, not taxpayers who live far away who hardly ever use these roads.

It is also good that the President has explicitly declared that we cannot turn our back in using cheaper and stable energy from fossil fuels like coal and natural because of our fast rising energy demand that require 24/7 power. It is not possible to sustain fast growth without cheaper and stable electricity supply. Energy precedes economic development, it is not vice versa.

In the presentation by Mr. Guinigundo, he showed important reform measures from 1993 to 2016. I will show here some, especially those referring to enhancing more economic competition, liberalization and deregulation (see Table 2).

If we remove the uncertainties of murders and disrespect for due process related to the ongoing “war on drugs,” the Duterte administration is starting on good and relatively stable macroeconomic platform. It just needs to sustain the momentum while hastening development and expansion of public infrastructure, especially in roads and energy.

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See also:

BWorld 74, Pres. Duterte's anti-corruption programs and Transparency Intl., July 30, 2016 

BWorld 84, Eliminate red tape in the Philippine energy sector, October 08, 2016 

BWorld 85, Drugs war morphed into war on critics of President Duterte? October 11, 2016

BWorld 86, Philippine industrial policy, October 15, 2016

BWorld 72, Economic integration and disruption

* This is my article in BusinessWorld last July 11, 2016.

Three of the five themes of the first ever BusinessWorld Economic Forum on July 12 will be on economic integration, technological disruption, and regulation and incentives. Except for three speakers from the government (VP Leni Robredo, DoF Sec. Carlos Dominguez, NEDA Chief Ernesto Pernia, PCC Chairman Arsenio Balisacan), all the other speakers will be from the private sector.

The speakers on Integration will be Phinma President Ramon del Rosario and Sunlife President Riza Mantaring. Speakers on Disruption will be Solar Philippines’ Leandro Leviste, ABS-CBN’s Donald Patrick Lim, McDonald’s Margot Torres, and Facebook Canada’s Alfredo Tan. Speakers on Regulation and Incentives will be PCC Chairman Balisacan, SEC Chairperson Teresita Herbosa, and McKinsey’s Suraj Moraje.

This paper will track some of those themes and analyze the growth expansion and leadership disruption of leading countries in the world and Asia.

Global economic integration was hastened in 1995 with the creation of the WTO. The “normal” pace of economic expansion of many emerging and developing countries is to double GDP size per decade. So over the past 30 years, the average expansion or multiple should have been six times. But many Asian economies (except Japan) have expanded more than that.

Here are the top 10 largest economies in 2015 based on Purchasing Power Parity (PPP) valuation of GDP, then the big economies of East Asia. Their GDP size at nominal or current prices are also given. Russia has no data for 1989 and earlier years because it was still the USSR and contained countries that emerged and separated in 1990 onwards after the collapse of the Berlin Wall in November 1989 (see table).

From the above numbers, we derive the following lessons and observations.

1. Integration: A decade before the WTO creation in 1995, many Asian economies were small. Three decades after, their economies have expanded big time, thanks to their fast trade liberalization policy and global integration. Based on PPP prices, China expanded 30 times, Vietnam 13 times, India and Singapore more than 12 times, Malaysia and South Korea by 11 times, Thailand, Indonesia, and Taiwan by nearly nine to 10 times. The Philippines, for its part, has only grown more than six times.

Meanwhile, based on GDP expansion by nominal prices, China is still on top with 35 times the multiple in just three decades. It is followed by Singapore, South Korea, and Vietnam that also posted double-digit multiples. The other Asian economies (except Japan) have expanded by 8-10 times.

2. Disruption: The G7 economies used to grow quickly before and after World War II. They have led global growth and commerce for more than a century. They were the 7 biggest economies until the 1980s, as indicated by GDP at current or nominal prices.

By 1990s, G7 leadership was disrupted and by 2015, China and India have displaced Italy and Canada as the top 7 biggest economies in the world at current prices. And at PPP values, only the US, Japan, and Germany have remained in the top 7 biggest economies in 2015; the BRIC (Brazil, Russia, India, China) have displaced the UK, France, Italy and Canada.

3. Sustainability: A big question is whether the developed and emerging Asian economies including the Philippines can sustain their fast growth in the next two decades. The answer seems to be YES for the emerging East Asian economies plus India and Pakistan. And NO for developed East Asian nations except perhaps South Korea. Why?

The quick answer is population and demography. All the 10 ASEAN countries except Singapore and Brunei have big and/or fast-growing populations. More people means more producers and consumers, more entrepreneurs and workers. Raising labor productivity these days is much faster than two or three decades ago because of modern technology. One can get great speakers and trainers from around Asia or the world quick because of dynamic airline competition, or simply via online teleconference training and seminars. The important thing is that there are plenty of trainable people.

Furthermore, based also on the above numbers, these trends are emerging.

1. By PPP values, Malaysia will become a trillion-dollar economy by 2017 or 2018, the Philippines by 2019 or 2020, and Vietnam by 2024 or 2025.

2. Korea will become a $3-trillion economy (PPP values) once the north collapses and merges with the south. The collapse of East Germany and USSR in 1989-1990 was quick and generally peaceful. The same is to be expected in North Korea, perhaps within 6 years.

So long as we keep faith in the market economy and human innovation, global economic integration will result in a more prosperous, less destructive planet. And that means disruption to the old thinking that force and wars can settle disputes. Humanity is more rational than what certain sectors think.

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

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See also:

BWorld 69, Foreign direct investments and Pres. Duterte, July 08, 2016 

BWorld 70, Wind power firms corner billions of FIT money, July 09, 2016 BWorld 71, Free trade and higher income, July 11, 2016

BWorld 67, Economic projections under the Duterte administration

* This is my article in BusinessWorld last June 23, 2016.

“Change is coming” is true for all administrations, public or private, because people change, communities change, and so on. For the coming Presidency of Rodrigo Duterte starting this June 30, the main question is “Change for the better, or for the worse?”

This question will covered in the forthcoming BusinessWorld Economic Forum on July 12, 2016, to be held at the Shangri-La at the Fort, Taguig City. It will be a big event featuring the CEOs and Presidents of some of the biggest corporations in the country as speakers.

The afternoon session will feature the topic “The Philippine Economy Under the New Presidency” and the main speaker will be Mr. Carlos G. Dominguez III, Secretary, Department of Finance. The two other speakers in the same panel will be Mr. Ramon R. Del Rosario, President, Phinma Corporation, and Ms. Riza G. Mantaring, President, SunLife Financial.

Let us briefly review the Philippine’s GDP growth performance over the last six administrations, from the last six years (out of 20 years in power) of past President Ferdinand Marcos up to the term of the outgoing President Benigno S. C. Aquino III. Growth figures of the Philippines’ major economies in Asia are also shown to provide a comparative insight about the overall economic environment during those periods (see Table 1).

The numbers show the following:

1. President Benigno S. C. Aquino III’s administration has experienced or facilitated the fastest growth of the Philippine economy over the past 3 decades.

2. From 1980-1997, the Philippines has the slowest growth rate in the Asia Pacific except Brunei and Japan. Which contributed to the country’s ugly label of “sick man of Asia” for nearly two decades.

  

3. China has maintained its average double-digit growth for four decades until 2010. Growth slowdown started in 2011 until today but the growth rate, 6%-9%, is still high compared those experienced by many other countries. India and Vietnam are following its fast growth trajectory, though at a lower pace of 6%-8%.

Among the ASEAN countries, the fastest growing economies actually exclude the Philippines. These countries, with their average GDP growth rates from 2010-2015, are: Laos with 7.7%, Myanmar, 7.1%; and Cambodia, 7.0%. These countries though have low economic base and hence, growth potential is much higher than countries with bigger economic bases.

But after being an economic laggard for three decades, the Philippines stood out, posting robust growth. Will the Duterte administration be able to sustain this momentum, reverse it, or surpass it?

Here are three GDP growth projections for the same 12 economies above, coming from three different institutions. The Economist forecast is composite for month of their reports are also indicated (see Table 2).

The Bank of Philippine Islands’ (BPI) Global Markets Commentary, June 2016 issue also showed its GDP growth forecast for the Philippines from 2016, 2017, and 2018 at 6.2%, 6.3%, and 6.6% respectively, or an average of 6.4%, much higher than IMF’s projections.

So it appears that the Duterte government will be able to sustain President Aquino’s economic achievement, especially based on the ADB and IMF forecasts. The Economist’s pool of forecasts however, sees a slightly lower growth trajectory. Nonetheless, let us keep the optimistic perspective.

The economic team of Duterte administration has released the updated “10 Point Agenda.”

1. Continue and maintain current macroeconomic policies, including fiscal, monetary, and trade policies.

2. Institute progressive tax reform and more effective tax collection, indexing taxes to inflation.

3. Increase competitiveness and ease of doing business, relax Constitutional restrictions on foreign ownership except land ownership.

4. Accelerate annual infrastructure spending to account for 5% of GDP, with Public-Private Partnerships.

5. Promote rural development, agricultural, and rural enterprise productivity, rural tourism.

6. Ensure security of land tenure, address bottlenecks in land management and titling agencies.

7. Invest in human capital development, health and education systems.

8. Promote science, technology and innovation.

9. Improve social protection programs including the Conditional Cash Transfer program.

10. Strengthen implementation of Reproductive Health (RH) Law.

These are good programs, especially since they cover economic liberalization policies and rule of law. Welfarism policies complete the picture although President Duterte was not known for promising welfarist policies during the campaign period, he focused on fighting criminality and corruption.

So, can we expect a “change for the better” or “change for the worse?” Economically, it appears to be the former. Respecting human rights is a different matter though and we hope it will not be a change for the worse because some worrying indicators are showing, more dead bodies of “suspected drug pushers/drug lords/thieves” are piling faster as June 30 is approaching.

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

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See also: 

BWorld 61, 100 indicators better than GDP, June 03, 2016 

BWorld 62, Unemployment and underemployment data may be overstated, June 08, 2016

BWorld 64, The WTO and trade agreements, June 17, 2016 

BWorld 65, PH exports growth from 1960-2014, June 22, 2016 

BWorld 66, Renewable portfolio standard and electricity prices, June 26, 2016

B360-36, GDP expansion in South Asia, 1995 - 2015

* This is my article in the business magazine in Kathmandu, May 2016 issue.

GDP expansion in South Asia from 1995 to 2015

Anywhere in the planet, the pursuit for faster and quicker economic growth by countries and economies is being sought and tested. This is because no amount of income and property redistribution will be successful if the economic pie remains small. The pie must expand first so that the share of various sectors and stakeholders will rise in absolute amount, even if their percentage share remains the same or small.

Let us review the economic expansion of South Asian economies over the past two decades, from 1995 to 2015, and draw some lessons from them.

In nominal prices, India’s GDP has expanded 5.7x; Pakistan’s GDP by 3.4x; Bangladesh’s by 4.5x; Sri Lanka’s by 6.3x; and Nepal’s by 4.2x.

In PPP values for the same period, India’s GDP has expanded by 5.6x; Pakistan’s by 3.3x; Bangladesh’s by 4.5x; Sri Lanka’s by 4.4x; and Nepal’s by 3.3x. These are modest growth and may be fine, although certain sectors in these countries would be unhappy with such expansion of their economy after 20 years. They would wish to copy many South East Asian economies that expand their GDP by 6-10x after two decades. 

 Notice Japan’s economy: in nominal prices, its GDP has stunted while in PPP values, the economy expanded less than 2x after two decades. Whereas economic expansion in China was buzzing at a fast rate.

In per capita GDP at current or nominal prices from 1995 to 2015, South Asian economies’ per capita income has expanded between 2.2x (Pakistan’s) to 5.3x (Sri Lanka’s). In PPP values, the per capita income expansion was between 2.1x (Pakistan’s) to 4.2x (Maldives’).

Compared to the levels enjoyed by developed Asian economies like Singapore, Brunei, Hong Kong and Japan, their per capita GDP are really huge. 

If we review again the growth trajectory of many Asian tiger economies aside from Japan – S. Korea, Taiwan, Singapore and Hong Kong – they managed to grow fast because of (a) market- and outward-oriented economic policies, (b) technological advances and competition, and (c) prevalence of the rule of law. So while their governments started with cronyism and state-sponsored industrialization, the main contribution of their governments was the promulgation and respect for the rule of law. Laws that generally apply to everyone, little or no exception.

Doing business in this kind of environment is stable and relatively easier. Entrepreneurs can put their huge savings and borrowings to long-term business projects knowing that rules and policies remain for many years and not changed midway to favor certain business interests that are close to the President or Prime Minister of the country.

It is good that a number of South Asian economies are slowly realizing this. More trade liberalization, whether via regional, bilateral or unilateral liberalization, any of such move will produce net gains (advantages are larger than disadvantages) because people trade only if they realize there is net gain for them.

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See also:

Business 360-33, Cheap energy now and in the future, January 28, 2016

Business 360-34, Hydropower in Asia, March 17, 2016 

Business 360-35, Economic expansion in South Asia, May 28, 2016

BWorld 62, Unemployment and underemployment data may be overstated

* This is my article in BusinessWorld last June 02, 2016.

Based on the latest January 2016 labor force survey data by the Philippine Statistics Authority (PSA), there were 2.47 million unemployed and 7.88 million underemployed Filipinos, representing 5.8% and 19.7% of the total 42.5 million total labor force in the country. So 10.35 million (25.5% of labor force) were either unemployed or underemployed, a big figure.

Also from among East Asian economies, Philippine unemployment rate is the highest. From 2010-2015 especially, where the Philippines has the highest average GDP growth rates in East Asia except China, Cambodia, Laos, and Myanmar, unemployment rate remained the highest in the region. Not included in the table below are Cambodia and Laos because no data was available in the IMF database (see table).

What explains for this discrepancy or disconnect between the Philippines’ fast growth and persistent high unemployment?

I myself have doubts about the country’s unemployment data since several years ago.

But it’s not about the data itself as collated and reported by the PSA but the attitude and response of survey respondents when PSA survey staff talk to them.

The reasons for my skepticism are the following:

One, survey respondents tend to highlight the adverse side of their economic status. When people approach the public for social surveys, the tendency of respondents is to report the pessimistic side of their lives mainly to avoid taxation if they declare that they have a regular job, and/or they expect more welfare and subsidy programs, especially if more of them will declare that they are unemployed or underemployed.

Two, voluntary and short-term unemployment.

A person offered a P60,000 a month job but declined it because he is waiting for a possible job offer with a higher salary is technically jobless and unemployed, especially if that person happened to be surveyed by the PSA at that time. That person has a high “reservation wage” but neither is he poor or miserable.

Countries with unemployment rate of 1%-3% are considered having a “full employment” economies because those 1%-3% of the labor force who have no jobs are voluntary or temporarily unemployed, like resting for a few weeks while raising their reservation wage for the next job offer.

Three, fully-employed yet underemployed persons.

The PSA defines underemployment as “employed persons who express the desire to have additional hours of work in their present job, or to have additional job, or to have a new job with longer working hours”

So a person already working 40-50 hours a week and earning P150k a month but still want additional work because he needs at least P170k a month or more is technically underemployed, even if he is already well off compared to the average income of the population.

Four, my experience looking for a house helper last week in my hometown, Cadiz City, Negros Occidental opened my eyes to what’s happening on the ground.

I went to four rural barangays, most of which are sugar-dependent and roads to which are still unpaved until now. These things surprised me.

(a) Unemployment is almost zero. People have jobs, mostly low-paying or contractual and seasonal jobs in the informal sector, but people have jobs. Many of the younger ones are working in Bacolod City, the provincial and commercial capital, or in Metro Manila. The older ones work in the sugarcane fields, or tricycle drivers, carpenters, construction workers, in shops in Cadiz City proper, etc.

(b) Voluntary unemployment is evident. The few who have no stable jobs and want one chose not to work in Manila for various personal reasons like they do not want to be far from their kids, parents, etc. They would rather be unemployed or underemployed than be fully employed but far from their loved ones. In the provinces, families have relatives and other network that can help them tide over. Some have parents or siblings who work abroad and regularly receive their monthly allowance and opt to stay in the province where the cost of living is low.

(c) High “reservation wage” also exists in the lower strata of society.

I offered a prospective househelper a starting pay of P4,000/month + free travel to Manila + days-off or overtime pay on their days-off (if prefer to work instead) + pay hike after 4 months ++.

One that I interviewed used to receive P6k a month ++ and will work for me only if I will at least match her last pay. The P6k a month ++ is her reservation wage.

Months before, my sister and other folks told me that it is hard now to get a helper even in rural areas.

After going to different barangays in three days, I was able to find one. She’s never been to Metro Manila and she wants to work there. More importantly, she is my distant relative and I will be comfortable leaving my two young girls to her when I and my wife go to work. She used to work for a department store in Cadiz City and enduring a pay of P120/day, 7 a.m. to 7 p.m., sometimes until 8 p.m., no meal or transportation allowance, and only 3 months contractual work.

With those four reasons above, I think that the Philippines’ unemployment and underemployment data is overstated. Consequently, even the SWS’ survey data of “self-rated poverty” is also overstated. The actual state of unemployment in the country should be lower than what is reported.

How to verify, prove or disprove the above hypothesis?

One possible way is to conduct a survey asking people, with work or no work at the time of the survey, if they are willing to work as house helpers, as gardeners, as messengers and janitors, etc. in Manila or Cebu at X monthly pay ++. If people are so poor and desperate for work, they will grab even “low pay” work and/or being far from their families, just to get a stable source of income.

Acceptance of those deemed “low pay” work should be counted as the proxy unemployment rate. If this method can be used, my bet is that Philippine unemployment rate will be between 1%-3%.

And those endless, ever-expanding government welfare and subsidy programs should be streamlined to only a few, with a timetable of cutting them in the future. New welfare programs should be initiated only if some old welfare programs that obviously do not work are discontinued and defunded.

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

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See also: 

BWorld 59, Free trade and Norwegian salmon, May 28, 2016 

BWorld 60, Classical liberal, neoliberal and anti-liberal, May 29, 2016 

BWorld 61, 100 indicators better than GDP, June 03, 2016
Fat-Free Econ 34: Rise in Unemployment Rate Not Exactly Bad, December 20, 2012

Fat-Free Econ 38: Jobless Growth vs. Jobless Non-Growth, February 12, 2013

Labor Econ 10: Voluntary and Involuntary Unemployment, February 18, 2013