BWorld 213, Disruption, inflation and taxation

* 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 

BWorld 211, Intellectual property, innovation, and prosperity, May 20, 2018 

BWorld 212, Commodities competition and the mining debate, May 21, 2018

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

Energy Econ 25: Coal Use and GDP Expansion, Is There a Correlation?

* This is my article in thelobbyist.biz last Friday.
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Energy is development. The more energy and electricity that an economy can provide for its citizens and private enterprises at low price and stable supply, the bigger is the growth and development potential of the economy.

There is growing public interest for renewable energy like solar and wind and this is fine. But when there is also corresponding high opposition to coal, petroleum and even natural gas, then public policy is distorted, like more taxation of conventional sources, royalties for Malampaya natural gas. While the renewables are guaranteed of high electricity prices that will be passed on to the consumers, via feed in tariff (FIT) for wind, solar, biomass and run-of-river hydro. People do not recognize and appreciate the value that conventional energy sources have played in alleviating poverty and underdevelopment in the developing world.

For instance, there are claims like “more coal energy = more climate crime”, or “more coal power plants are anti-developmental.” How true or untrue are these and similar claims?

Let us check some regional and global energy and economic data. In particular, global coal consumption as this is among the pet peeves of those pushing for more environmental regulations, energy rationing and carbon taxation.

In 2010, the latest comparative energy data of Asian Development Bank’s (ADB) Key Indicators, slightly more than one-third of the Philippines’ total energy production came from coal. For Indonesia, it is 40 percent. Those that are highly dependent on natural gas are Brunei, Singapore, Thailand, Malaysia and Vietnam.

Table 1. Energy Mix in the ASEAN, 1990 vs. 2010, Percent of Total Energy Production

Source: ADB, Key Indicators for Asia and the Pacific 2013

Here now is the global data for coal consumption.

Table 2. Top Coal Consumers Around the World, 1985 to 2013

(in Million Tons of Oil Equivalent,MTOE))

Source: http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html

The last column is not part of the original data, added and created only in this paper.

The above numbers show the following:

First, China consumes half of all coal power in the entire planet as of 2013, and the level is almost 5x that of their 1985 consumption level. Its appetite for more coal power seems to remain the same in the coming years.

Second, India and Indonesia join China as among the world’s biggest consumers of coal. India’s 2013 consumption was 4.7x larger than its 1985 consumption. Indonesia’s is 60x much larger. This is because Indonesia has become a major coal producer and exporter in recent years.

Third, by continent and economic group, Asia-Pacific countries consume nearly three-fourth of the total coal output of the planet. Coal however, is least preferred in Africa as well as South and Central America. And it is in the Asia-Pacific where substantial economic growth and poverty alleviation has been happening for the past three decades or more.

Now,  let us review global economic growth over the same period.  The figures for 1995, 2005, 2011 and 2012 are also given for additional information that some readers may wish to see. Data from the International Monetary Fund (IMF).

Table 3. GDP Size Based on Purchasing Power Parity (PPP) Valuation, 1985 to 2013

(in Billions of international dollars)

Source: IMF, World Economic Outlook April 2014 Database, www.imf.org

The last column is not part of the original data, added and created only in this paper.

Notice that countries highlighted in bold in Table 2 are generally the same as those highlighted in Table 3. Meaning those that consumed coal energy faster also grew economically faster. Of course this is not to say that coal power consumption is the primary or sole important contributor to faster economic growth.

We now lay down the major players in both coal consumption and GDP growth over nearly three decades. Is there any correlation?

Table 4. Ten Fast Coal Consumers and their GDP Expansion, 1985-2013

Sources: Tables 2 and 3 above.

This summary table shows the following:

* Of the 10 countries that were fast coal consumers over the past 28 years, meaning their 2013 coal consumption were at least 4.5x their 1985 level (in contrast to many other countries with coal consumption multiples of only around 2.5x),   eight have high GDP expansion over the same period. For instance, China and India GDP levels have multipled by 25x; S. Korea and Malaysia GDP levels multipled by nearly 10x, in just 28 years.

* Only Mexico and the Philippines in the above table, fast coal consumers, whose  GDP expansion were the not-so-fast of less than 6x.

*  Singapore and Vietnam economy expanded by 11 - 12x, also very fast compared to many other countries, even though they are not major or fast coal consumers. They are largely dependent on natural gas, as shown in Table 1.  

* This crude comparison has established  a general correlation between coal consumption and GDP expansion. Of course other studies would use more sophisticated econometric models to make any categorical statement. But such finding is easy to explain.

Coal is relatively cheap and a stable energy source. A 100 MW coal power plant can deliver 100 MW 24 hours day, not 80 or 60 MW or lower. In contrast, a wind or solar power plant with rated cap of 100 MW will be very lucky if it can deliver 40 MW sustained for 24 hours. Usually their average dependable capacity is only around 20 percent, or just 20 MW only. So how can an economy develop fast if there is frequent brown out, because the power plant can deliver only 10 or 20 or 25% of its rated capacity? Industries and factories, malls and offices depending on wind and solar must have back up generator sets running on expensive fuel, that must run any hours daily, and this will raise their cost of production and operation.

The WWF yearly campaign of "celebrate darkness" even for one hour is idiotic.  WWF gets lots of money from donations and UN or government funding, by promoting irrationality in energy policy.

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See also:

Energy Econ 21: Joint Statement on EPIRA Implementation, May 27, 2014

Energy Econ 22: FEF on FIT for Solar Power Plants, June 13, 2014

Energy Econ 23: Death of Australia's Carbon Tax, July 17, 2014

Energy Econ 24: NPC Debt, PSALM and Universal Charges, August 02, 2014

Fat Free Econ 54: WEF and East Asia Growth Story

* This is my article yesterday in interaksyon.com.
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MANILA - The World Economic Forum (WEF) is among the unique inventions in promoting global economic and social dialogue among many sectors of different countries around the world.

While the United Nations and its many affiliate organizations (WHO, ILO, IMO, WMO, FCCC, etc.), WB, IMF, WTO, OECD, APEC and other multilateral institutions are all government clubs, or composed of governments only, WEF and similar international fora are private sector-initiated, invite participants from governments, multilaterals, corporations, civil society and academe, and are able to attract many high-profile participants from these sectors even if they have to pay hefty registration fees.

The WEF on East Asia forum 2014 will be held this week in Manila. Several heads of state, cabinet officials, CEOs of big corporations (national and multinational), heads of civil society and other organizations are attending.

Since high and sustainable economic growth – which expands businesses and material wealth, creates jobs, lifts many people from poverty – is often the key concern of WEF and other international fora, the best region to hold it is in East Asia. Growth here is generally much faster and has been sustained for decades more than in other regions.

I dug up the IMF World Economic Outlook Database, April 2014 for GDP size of the biggest economies in the world for the past two decades. I used data for 1993, 2003 and 2013, particularly the purchasing power parity (PPP) valuation of GDP as it has a more comparable pricing of goods and services produced in the economy.

A decade after 1993, there have been some changes like China replaced Japan in the #2 spot, India jumped from #9 to #5 (see tables 1 and 2 below).

Table 1. Top 40 economies in 1993, GDP based on PPP, in billion US dollars

Table 2. Top 40 Economies in 2003, GDP based on PPP, in billion US dollars

The World Trade Organization (WTO) was created in 1995 and it heralded the start of fast growth in many economies, especially some emerging markets like China, India and Indonesia. This is because protectionism limits a country’s growth through (a) limited size of consumers and (b) limited source of raw materials, intermediate products and capital goods that can further expand the economy’s productive capacity. Free trade, or even reduced protectionism allows private enterprises to address these two limitations somehow.

After another decade – and despite the various international financial turmoil (housing bubble burst in the US 2008-2009, European debt upheavals 2010-2012, among others), many economies in Asia were able to withstand the uncertainties. Early this decade, three of the four biggest economies in the world were in Asia. And two Asian economies that were outside the top 40 in the last two decades – Singapore and Vietnam -- were able to barge in.

Other emerging economies which joined the top 40 were Nigeria, Venezuela and Peru. And a number of European economies were dislodged from the top 40, like Austria, Greece, Ukraine, Portugal and Norway (see table 3 below).

Table 3. Top 40 Economies in 2013, GDP based on PPP, in billion US dollars

That is what increasing globalization and mobility of people, their products and services, technology and capital, can do. To reallocate resources to areas where they are needed more, or priced better. Notice also that many of the top 40 economies are also countries with big populations. People are the planet’s most important resource.

Let’s analyze some Asian economies closer. Many of them were able to expand their economies by four times or more in just two decades. That’s a short period of time compared to a century or more for the industrial countries during an earlier period.

Ironically too, two socialist economies -- China and Vietnam -- were able to optimize the opportunities of global capitalism and the generally free trade policy that dominate globalization. The Philippines was among the modest benefactors of globalization (see table 4 below).

Table 4. Biggest economies in East and South Asia, GDP based on PPP, in billion US dollars

In comparison, not a single economy from North America and Europe was able to grow three times their size two decades ago. Germany and Italy failed even to double their GDP size within that period.

Of course, these economies can brag that they were already on a high base, so that incremental growth was not fast anymore. This may not be a good explanation because of their ageing populations, tens of millions of their people need to be supported by more economic activities, especially in healthcare.

Table 5. Biggest economies in America, Europe and Australia, GDP based on PPP, in billion US dollars

The WEF is roosting on the region which has proven to be among the important engines of global growth. And it’s a region that will sustain the growth momentum and pace the rest of the world. This region has the world’s biggest populations, meaning the biggest number of entrepreneurs and workers, of producers and consumers.

Asia needs to learn from Europe and North America. That heavy welfarism and bureaucratism are anathema to more growth and prosperity. Business and entrepreneurship is most dynamic when it is left alone to innovate and become more creative, more competitive.

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See also: 

Fat Free Econ 50: Growth, Bubbles and the PH Economy, December 19, 2013 

Fat Free Econ 51: Ten Things About the Meralco Rate Hike, December 28, 2013 

Fat Free Econ 52: Optimism in 2014, January 02, 2014

Fat Free Econ 53: WESM, Myths and Realities, January 22, 2014

Are Markets Moral?, January 06, 2014 

Globalization, Mobility and Inequality, February 18, 2014

Fat-Free Econ 37: PH GDP Growth 2012

* This is my article yesterday in TV5's news portal.

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In November 30, 2012, this column made a rather bold statement about the economy for the fourth quarter of that year.

The National Statistical Coordination Board (NSCB) yesterday announced that fourth-quarter growth came in at 6.8 percent, or just 0.2 percent shy of the forecast.

It was not an “ambitious” figure to target for the fourth quarter. For one, the growth momentum for the first three quarters of the year was already there: 6.3 percent in the first quarter, 6 percent in the second, and 7.1 percent in the third (later revised upwards to 7.2 percent). Second, the growth momentum in Asia’s emerging economies is still there. For instance, growth rates in the third-quarter were 7.7 percent in China, 6.2 percent in Indonesia, 5.3 percent in India, 5.2 percent in Malaysia, 4.7 percent in Vietnam and 3.3 percent in Thailand.

This is one advantage of being a neighbor to faster growing economies. Even if political and economic governance in the home country is not that good, overall economic activity will be pulled up by the more dynamic neighbors through regional trade, investments and tourism. In the case of the Philippines and its neighbors in North and Southeast Asia, they seem to be pulling each other up.

The phenomenal economic expansion of the planet’s two most populous countries -- China and India, with a combined 2.5 billion population -- is a good example of how they have helped expand demand for goods and services exported by their neighbors in the region. Below are two tables showing the phenomenal economic expansion of many Asian emerging economies in just two decades. Purchasing power parity (PPP) valuation of gross domestic product (GDP) is used instead of the usual nominal GDP to correct for hyper valuation of goods and services in many rich countries.

Source: IMF, World Economic Outlook, October 2012 Database 

In just two decades, China’s economy has expanded 10.3 times from its 1992 level, while India has expanded 5.6 times over the same period. In contrast, the rich European and US economies have expanded only between 2-2.5 times.

The table below shows the expansion of a bigger set of Asian emerging economies:

There are several important implications of the above numbers.

One, many Asian economies increasingly are becoming the “growth anchor” for the rest of the world economy. Expanding wealth and consumer purchasing capacity in Asia creates additional demand for other economies' goods and services exports that may balance between anemic growth and stagnation, if not contraction.

Two, big population is generally an asset as the economy has more consumers, more workers and more entrepreneurs. This is clear in the cases of Japan Indonesia, India and China, countries with populations of 127 million, almost 250 million, 1.2 billion and 1.3 billion, respectively. Among the reasons often cited by investors who put their money here is that the Philippines has a big and young population that can easily be trained with new and changing skills. 

Three, intra-Asian merchandise trade and people mobility greatly help integrate their economies and in the process, pull each other up economically.

So in the absence of really globally or regionally disruptive events like war or huge fiscal collapse of the major European economies, the “default mode” is continued expansion of many Asian emerging economies like the Philippines.

More business-friendly government policies and bureaucracies will help the country sustain and even surpass current economic performance.

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See also:
Fat-Free Econ 33: Institutions and Why Governments Fail, December 09, 2012

Fat-Free Econ 34: Rise in Unemployment Rate Not Exactly Bad, December 20, 2012

Fat-Free Econ 35: World's 25 Largest Economies in 2012, January 02, 2013

Fat-Free Econ 36: Peso Appreciation, Growth and Less Government, January 06, 2013

Fat-Free Econ 35: World's 25 Largest Economies in 2012

This is my article in TV5's news portal last December 31,

http://www.interaksyon.com/business/51641/fat-free-economics--philippine-economic-prospects-viewed-against-global-growth-scene
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Diversity and spontaneity are important characteristics of the human mind if unhindered in pursuing individual talent and creativity. The more restrictions and limitations imposed on people, the less creative and innovative they can be.

This is the case of many developed economies as welfare populism has tied their entrepreneurial creativity and public finance, resulting in slow growth, and even economic contraction in some European economies like the so-called PIGS – Portugal, Italy, Greece and Spain.

With modern technology, political restrictions and bureaucratic bottlenecks are somehow circumvented, allowing politically suppressed economies to grow fast. This is the case of the BRIC economies (Brazil, Russia, India and China) and to a certain extent, Indonesia.

Below is a quick rundown of GDP size and growth of the major global economies. We used the purchasing power parity (PPP) valuation of GDP as it reduces or eliminates hyper valuation of goods and services in many developed economies and put their values at par with those in developing economies.

There are some interesting facts in the table.

One, three Asian countries make it to the top four largest economies in the world.

Two, if growth rates over the past six years, 2006-2011, are maintained, China’s GDP will likely overtake that of the US in about five years or so, at least in PPP valuation.

Three, India has overtaken Japan this year. On a per capita GDP basis, the gap between the two is huge of course, like the gap between China and the US.

Four, at current growth rates, South Korea will land in the top 10 largest economies in less than five years, over-taking Mexico and Italy.

Five, Taiwan’s economy will touch the one trillion dollar mark in about three years if similar growth is sustained, joining the five other Asian economies including Indonesia.

Six, if the Philippines will maintain a 5 percent average growth rate over the next few years, its GDP size will reach the half-trillion dollar mark in about four years or by 2016.

 

Source: IMF, World Economic Outlook (WEO) database, October 2012.

There are several positive things going for the Philippines to grow five percent or higher, including the following:

Sustained OFW remittances growing at nearly $2 billion a year: $20.74 billion in 2010, $22.35 billion in 2011, and projected to reach $24-plus billion in 2012. More skilled labor is going abroad, like those in shipping, healthcare, management and telecoms.

The BPO industry at nearly $11 billion in 2011 and projected to reach $25 billion in 2016. So far this is the most dynamic sector as labor rigidities in the developed economies are not expected to be relaxed soon.

Renewed interest in the local stock market, among the best performing in the world in 2011 and 2012. This year, it was up by nearly 33 percent over 2011.

Tourism is also showing a huge potential as the successful peace negotiations with the MILF in Mindanao and the open skies policy provides access to more resorts across the country.

While things can be gloomy in other economies in the world, it is more optimistic in many emerging economies like the Philippines. Governments do not have to “bend backwards” and offer various fiscal incentives. They just need to promulgate the rule of law, to guarantee that contracts are respected, honored and enforced, and violators are punished accordingly.

The stability of contracts and predictability of policies, plus keeping away from the welfare populism and politics of envy that has trapped many developed countries, are important ingredients for stable and sustainable growth.

Human imagination and innovation is without limit. It is an endless, unfathomable resource.  This ensures that economic and social growth can be sustained, especially now that we have seen the social trappings of welfare populism, labor and government rigidities.

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See also:
Fat-Free Econ 31: On the Kasambahay, Solo Parents Welfare Bills, November 26, 2012

Fat-Free Econ 32: GDP Growth, Stockmarket and Rule of Law, December 01, 2012

Fat-Free Econ 33: Institutions and Why Governments Fail, December 09, 2012

Fat-Free Econ 34: Rise in Unemployment Rate Not Exactly Bad, December 20, 2012

Fat-Free Econ 15: IMF and Freedom From Debt

* This is my article today in TV5's news portal,
http://www.interaksyon.com/article/36217/fat-free-economics-imf-and-freedom-from-debt
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To clamor for freedom from debt, one must clamor for freedom from borrowing first. Debt is nothing but the accumulation of past wastes, inefficiencies and profligacy. If the use of past debt was useful, then the debtor – a person, a corporation, or a government – should be able to pay off those debts later while sustaining its productive momentum. Or at least the debt stock should just be a small portion of its overall wealth. But if the use of past debt was unproductive, then the debtor will have an ever-rising pile of obligations.

Recently, the IMF has mobilized funds from emerging markets to pool some $456 billion to help debt-distressed European Union economies. The Philippine government through the Bangko Sentral ng Pilipinas contributed $1 billion to the IMF crisis fund. That fund will not directly come from tax money; rather, it will come from BSP’s international reserves, which are mainly foreign investments denominated in foreign currencies and are parked at the BSP. Still, the BSP move to contribute to the Eurozone bailout fund is wrong, and here are the reasons why:

One, those debt-ridden EU governments are not exactly resource poor. They have lots of state-owned corporations and financial institutions, as well as huge assets (military camps, parks, etc.) that can be privatized to raise domestic revenues to deal partially with their current spending requirements and debt obligations, instead of relying on endless taxation and borrowings.

Two, the bailout will create more moral hazard problems for those indebted countries. If they see that a bailout is forthcoming, why would they institute more austerity and subsidy reduction programs? Why privatize, which can hurt their chance at reelection? Instead, they made limited austerity measures, then issued some warnings that their debt problem can "spiral to the global economy” unless the world will send them more money.

If those European governments could not stabilize themselves when their public debt-to-GDP ratio was only at 60 percent or less, what makes us think that they can stabilize themselves at 110 percent or more? Spain, Italy and France for instance, have been in deficit spending for more than 30 years straight, three plus decades of living beyond their means. The PIGS (Portugal, Italy, Greece, Spain) would need possibly one trillion dollars or more of bailout money, and there is no guarantee that such rescue money will be fully paid.

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF

Yesterday, I posted this in my facebook wall.

The $1B PH loan to the IMF for Eurozone reserve fund won't come from tax money but from BSP's international reserves. It is within BSP's mandate and resources to do so. Still, I don't support helping to bail out fiscally irresponsible governments with more loans when those governments have lots of state-owned enterprises, financial instns and assets that can be privatized to raise domestic revenues, instead of endless taxation and borrowings.

I was happy to see some serious exchanges and comments from some friends, below. I am posting these comments without asking the permission of these guys for two reasons. One, my fb wall is a public wall anyway, and  two, many of the points raised here are no-nonsense ideas and would greatly help educate the public on the merits and demerits of this recent move by the central bank/BSP.
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Malou Tiquia I just totally do not agree to it...

Butch Arroyo But if you were the BSP what else would you do with the $s? BSP evidently doesn't want to sell the $s to the local economy and make the PHP stronger. So it has to push out the $s. But everything else out there they could put it into is either risky (and wouldn't be allowed to count towards "international reserves"), or safe but very low-yielding. A loan to IMF might be the highest-yielding of the alternatives that are acceptable for designation as international reserves.

The European bailouts are painful and costly result of policy mistakes of the EU in not enforcing the fiscal and public debt requirements of the original Maastricht agreement. I agree that those governments (the borrower govts for sure, but also the Germans, who weakened fiscal discipline in the EU by themselves violating the fiscal pact) deserve the wrath of their constituents. But until they get voted out they are (unfortunately) still the democratically elected leaders of these countries. If the leaders of the center countries (FRA, GER) still favor a bail out of the problem governments rather than allowing an exodus from the monetary union, the IMF will probably have to go along, since the only other countries who could vote it down-- US, UK, and, Japan-- probably support preservation of the monetary union.
From PH perspective, as long as the bailout lenders retain seniority, $1B to IMF is probably a small portfolio risk for the BSP.

Nonoy Oplas Thanks Butch. If I were the BSP, I will use some of my $77 B gross international reserves (GIR) to buy and hoard more gold plus other precious metals. My beef is that by pooling rising amount of bail out money, it will create moral hazards problem for those indebted countries. They have many govt-owned corporations, financial institutions, national parks, military camps and other assets, things that can be privatized to raise local revenues to deal with their spending requirements and debt obligations. I have not encountered much literature that those governments are taking this measure. Rather, they made limited or bogus austerity then issue some warnings that their debt problem can "spiral to the global economy unless the world will send them more money."

By not participating in the creation of more moral hazards problem with that IMF bailout money, the PH government is sending a signal both to itself and the rest of the world, that it is time to really look inwards, there are several options and solutions that can be internally generated, aside from endless borrowings and issuing a blackmail of global fiscal crisis unless they are given more bailout money.

Jules Calagui It is high time that we create a Sovereign Wealth Fund. We can set aside $20 B to start one and still left with over 6 months of GIR to cover 7 months of imports.

Benson Te The Bangko Sentral ng Pilipinas is a creation of the Philippine Congress REPUBLIC ACT No. 7653 and hence every exposure it does exposes Philippine taxpayers.

To give you an example, the liabilities of the old central bank (central bank ng Pilipinas, according to Malcolm Cook valued at over 300 billion were shifted to the newly created, off-budget Central Bank Board of Liquidators. In short, the liabilities of the old central bank was passed on the taxpayers.

FYI

Giovanni Rodriguez Agree with you Noy, the financial crisis in Europe and the world is the culmination of a failed experiment - fiat money !

Todd Foster So a country who still has many scratching out subsistence levels of living is loaning to a country, so it's residents can better afford their new "right" of do-overs on their vacations, if they got the sniffles on vacation #1? That's just plain evil.

Malou Tiquia Butch Arroyo, I really do not agree with your "small portfolio risk for BSP line. Point of the matter is we need the money here and not to support a failed system worldwide. Bail outs have proven to be not the right thing to do and really the Phils as lender is just a stunt to project the "breakout nations" status. Why not use the $ locally? BSP has to be creative, instead of FER what Jules Calagui posted is something worth considering. With SWF, it maximizes long term return, with foreign exchange reserves serving short term currency stabilization and liquidity management. There is a way to go than serve the ends of IMF. The world is in search of a new economic order and IMF has been part and parcel of failure of nations to handle responsibly fiscal and monetary policies. I fully share Nonoy Oplas' position here. Its time to go back to the drawing boards and bailouts are not the way to go! That's IMHO.

Casey Phyle The only thing that could possibly justify the Phils lending $1B to save Europe is the hope of not losing an important export market. But that is a vain hope, as lending to people who owe more than they can ever pay back is not the smartest thing to do. Borrowing more only makes their hole deeper. Some say it was intended like that by the money power who, on the way to NWO or One World, wants to force its will on the nations. So far that appears successful. The Philippines should not tie its raft too tightly to a sinking ship that will probably go down this year. On the other hand, the Philippines have been the recipient of western aid for long enough and have improved their situation at least this far. Now that they have a little cash on the side they probably thought it was only right to reciprocate and show some solidarity. Difficult to judge. That 1B would have stayed with the CB anyway and never gone to the people. Now the Phils will have a marker from IMF/Europe for $1B, with gold at $1600/oz.

Pol. Ideology 22: Diskurso sa Kapitalismo, Sosyalismo at Gobyerno

Or a Discourse on Capitalism, Socialism and Government.

The bulk of this blog's readers are from the US, Philippines, UK, Canada and Germany, in that order. Thus I write in English most of the time. But for this article, the exchanges are done mostly in Filipino language. This is my exchange of ideas with Arcy Garcia in his facebook wall. Arcy is a friend way back in the 80s in BISIG when I was still a socialist. I've abandoned socialism and Marxism since the 90s but Arcy remains a steadfast socialist, someone I would consider as a true-bloodied socialist who, unlike many other socialists and ideologues, has deep tolerance and respect even for opposing views, and does not believe in violence to advance the socialist agenda.

Arcy gave me permission to post here our exchanges - thanks Arcy. Here we go.
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Arcy Garcia

P1.3B raw ang kinita ni Pacman sa laban kanina...isang mahabang putok sa taas ng kilay ang parusa sa kanya....(may pambili na naman siya ng isang mall. (P215M ang kay Marquez, may pambili na naman siya ng hammer)..yan ang kapitalismo. magkano kaya kinita ni Arum? ang tagapagpagalaw ng mga manika.

• Nonoy Oplas yan ang isang kagandahan ng kapitalismo. Di mo kailangang maging Ayala or Henry Sy para yumaman at sumikat, pwede kang maging pacquiao or si Schumacher or Mike Jordan or maski Phil Younghusband lang. Heto, mga super-rich athletes,http://funwithgovernment.blogspot.com/2011/06/roger-federer-manny-pacquiao-and-free.html
  

  
  

  Government and Taxes: Roger Federer, Manny Pacquiao and the free market

  funwithgovernment.blogspot.com
  

  FB exchange between Bonn, Nonoy, and Kissy, 18 June 2011Bonn JuegoWhew! It's som...See More

  
  

  Yesterday at 6:12am ·  · 
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  Mark as Spam

  Arcy Garcia hindi sila dapat kumikita nang ganyang kalaki tol. ang sistemang nag-aanak ng ganitong kalaking biglang yaman ay artipisyal-tulad ng mga manlalaro natin sa PBA- na sinasahuran habang pinahihirapan naman ng mga kumpanya ang mga mangagagwa nila sa mababang sahod. o ng ateneo, si Norman Black, galing sa tuition fee ng mga estudyante.
  

  Yesterday at 12:37pm · 
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  Nonoy Oplas ok lang kung "artipisyal" basta galing sa pinaghirapan, hindi pinagnakawan. Sa gobyerno na gustong kontrolin ang kapitalismo kuno, kaya kaliwa-kanan ang regulations and taxation, subsidies and welfarism kuno, sila ang yumayaman nang di man lang nababaliaan ang katawan (tulad ng mga boksingero, basketbolista, etc.) o kaya namamatay sa sports (cycling, F1, Nascar, etc.).
  

  Yesterday at 2:10pm · 
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  Arcy Garcia hindi comensurate ang hirap at prakrtis sa kita tol. isang ordinaryong manggagawa sa isang kontrakteor ng manila water- P200 isang araw, sa kanya pa ang piko. si Pacman, 4 na linggo ng jogging, boksing, disiplina sa pagkain, etc. hindi naman matatawaran ito. pagod at hirap din ito- pero para kumita ng P1.3 bilyon (sabihin nating mga kalahating bilyon dahil pambayad niya kay Roach, trainers, etc., etc ang iba- hindi pa rin commensurate. hindi makatarungan.) dito ang crux ng isyu- hindi fair na pagsusukli sa hirap at pagod ng bawat isa- manager ng bangko- tama- mahirap di yan. reesponsibilidad- pati sa pagtulog, dala mo ang pag-aalala; pero hindi naman cguro tulad ng sahod ng mga CEO ng BA at Goldman Sacchs ang sahod at kita kasama ng santambak na perks.
  
  

  Yesterday at 2:16pm ·  ·  1