BWorld 146, Mining and industrialization in Duterte SONA 2017

* This is my article in BusinessWorld on July 27, 2017.

Aside from frequently cussing and cursing or threatening people with state-sponsored murders over his anti-drugs war, President Rodrigo R. Duterte (PRRD) is not exactly known for articulating policies on industrialization. But during the State of the Nation Address (SONA) this year, he was able to coherently explain his dreams for the country.

“That is why I say that it is not enough that we mine this wealth. What is more important is that we convert the raw material thereof into finished products for international and local purposes. That way, it will not only be the few who are the rich but also the poor who are many who will benefit therefrom.

Therefore, I call on our industrialists, investors [and] commercial barons to put up factories and manufacturing establishments right here in the Philippines to process our raw materials into finished products.... if possible, we shall put a stop to the extraction and exportation of our mineral resources to foreign nations for processing abroad and importing them back to the Philippines in the form of consumer goods at prices twice or thrice the value of the original raw materials foreign corporations pay for them.”

This is an understandable concern and aspiration.

And this has been articulated by many other previous administrations and Presidents in the past. For instance, former President Fidel V. Ramos articulated it partly at the Mining Act of 1995. Former President Gloria Arroyo articulated it in Executive Order (EO) 270 in January 2004.

Is the Philippines ready now to undertake this mining-to-industrialization quickly?

In December 2010, the Philippine Institute for Development Studies (PIDS) produced a paper by Dr. Danilo C. Israel, “National Industrialization in Philippine Mining: Review and Suggestions,” PIDS Discussion Paper Series No. 2010-35 (Revised).

The 53-page paper gives a number of useful data about the sector. It concluded that “judging by experience, the search for national industrialization in the mining sector would be difficult. In the past, the record of the Philippines in this regard was one of failure. This, however, should not prevent the country from attempting once again especially given the importance of industrialization to the growth of the economy.”

It added, “the knowledge base of the country required to pursue the national industrialization strategy is poor. The following studies therefore were suggested: a) value chain analysis for the mining sector and its sub-sectors, including but not limited to the copper, nickel, gold and chromite industries; b) development of community-based small and medium-scale operations in mining including the technology, financial, institutional and other forms of government support that could be provided to them...”

What are the stages of supply chain from mineral extraction to finished products? In one illustration, Dr. Israel identified these nine stages.

(1) Exploration stage, locating the ore to be mined, (2) Development stage, preparation of the mining project before (3) actual Mining and extraction of the ore, (4) Milling and concentration stage, the separation of the desirable minerals in the ore from the undesirable contents, (5) Marketing and transportation, shipping and selling of the desirable minerals to buyers or users, (6) Smelting, the treatment of the desirable minerals to produce impure metal, (7) Refining the impure metal and afterwards built into metal structures by cutting, bending, and assembling, technically referred to as the (8) Semi-fabrication and (9) Fabrication stages.

The country is currently engaged in stages (1) to (5), perhaps up to (6), depending on the metallic products. So the challenge is to find investors, local and foreign who can do stages (6) to (9). And it will not be easy to attract these large investors who need large requirements before they bring in their money and technologies.

Dr. Israel said that there should be a “comparative advantage” for the country to make this possible. This advantage includes the following: (a) location of mineral deposits to be processed; (b) relative factor costs and input prices; (c) availability of processing technology, (d) distance from major markets and the associated transport costs, and (e) the security of supply.

He cited Glance et al. (1992) who said that factors that affect the costs of a prospective processing location and activities are: (a) the cost of meeting environmental regulation which can vary from site to site of operations, (b) market for by products as the profitability of smelting and refining often depends on the ability of processors to sell by-products, and (c) government intervention, which can directly or indirectly distort investment decisions and trade flows.

The last item, government intervention, is very important. Interventions can span from A to Z, from where to explore and mine and where not, how to do it, how much payments in taxes, fees, permits, bonds, mandatory funds and contributions, both local and national.

Seemingly not mentioned in Dr. Israel’s paper is the role of electricity -- cheap, stable supply of electricity that is available 24/7. Intermittent energy like wind-solar will be a disincentive for mining-to-industrialization development because they are heavily dependent on the weather, not on consumer demand.

Plenty of big and reliable base-load plants from coal power have been installed in recent years. This means 24/7 of cheap, stable electricity is assured now and the medium-term.

The industrialization dream has been restated and the energy infrastructure has been set up.

What the President should assure now is the rule of law, stability of policies, that there will be no more Gina Lopez type of government officials whose happiness rests on how many mining companies he/she has suspended and/or closed. His threat of “tax mining to death” during the SONA is a new source of uncertainty that can complicate his dreams of industrialization.

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See also:
BWorld 143, Coal power and economic development, August 09, 2017 
BWorld 144, Individual liberty vs state coercion and taxation, August 10, 2017 
BWorld 145, Energy agenda of China’s Belt and Road Initiative, August 11, 2017

AEC 13, SEANET Website, AFAS in Financial Services

The South East Asia Network for Development  (SEANET) website, http://seanetwork.asia/, has been expanded. It now has more pages, more contents. Check it guys, thanks.

Yesterday, I attended this lecture at the Philippine Institute for Development Studies (PIDS) here in Makati. It's a USAID-funded study aimed to assess the Philippine government’s commitments on the financial services sector under the ASEAN Framework Agreement on Services (AFAS), the status of its compliance, and the country’s financial services sector’s competitiveness in comparison to other ASEAN Member States (AMSs).

Here is one indicator in the banking sector. Broad money/GDP ratio, A higher ratio connotes higher level of banking development. Malaysia, Singapore and Thailand had higher levels of banking development than the rest of AMSs, the Philippines’ratio was higher only than those of Indonesia’s and Myanmar’s.

In money supply per capita, the Philippines fell behind five AMSs; Singapore stood out way above other countries in the region; the Philippines fell behind five AMSs, including Vietnam.

The Philippines ranked 7th in terms of the ratio of banking assets to GDP, ranked 6th in banking assets per capita, deposits per capita was equivalent only to one-third of Thailand’s and one percent of Singapore’s.

In life insurance, Singapore had the largest market both in terms of assets and premiums while the

Philippines had the smallest market. Market penetration (insurance premium as percent of GDP) for the Philippines was second to the lowest among AMSs, and its insurance density (insurance premium per capita or average spending of each individual on insurance) was the lowest.

In non-life insurance market, the Philippines’ was the smallest both in terms of assets and

premiums. It is dominated by small companies just as its life insurance subsector. And the country was second to the lowest in terms of non-life insurance market penetration and the lowest in terms of non-life insurance density.

In capital market, the Philippines had virtually the same number of listed companies during the period 2003-2012 and stood at 268 in 2012. Vietnam experienced a sustained rise in the number of listed companies during the same period, overtaking the Philippines in 2010.

In market capitalization, Malaysia and Singapore stood out as consistent leaders in the region despite a sharp decline in their capitalization in 2008. The relatively few firms listed in the Philippine Stock Exchange, accompanied by a relatively high market capitalization, suggest that only a few large firms carry the ball compared with Thailand. And this also suggests that a few stocks tend to be highly priced, making the stock market greatly vulnerable to sudden withdrawal by investors as happened in the last global financial crisis.

In capital account openness index De Jure, this index takes on higher values the more open the country is to cross-border capital transactions. Singapore has the highest degree of capital openness among AMSs.  The Philippines has the same degree of restrictiveness as Thailand, Malaysia and Lao PDR, all of which are more restrictive compared with Vietnam’s and Indonesia’s.

In De Facto openness index, second chart below, the higher the ratio of total stock of foreign assets and liabilities to GDP indicates that the country concerned has a de facto higher degree of capital account openness. Singapore is still the most open, the Philippines is less financially integrated with the rest of the world compared with other AMSs. This is possibly due to, among others, the size of the markets for financial instruments in the country and investment climate.

In financial regulaton, AFAS commitments, the Philippines’ recent equity cap reform for banks is not yet reflected in the AFAS commitments. AMSs apply different degrees of restrictiveness on the equity participation of foreign players. Market entry can be further limited by imposing the requirement that the majority of the board members be nationals.

In financial regulaton, de facto, shares of foreign banks in total deposits is less than 10% in Indonesia, Lao PDR, the Philippines and Thailand. Foreign banks seem to focus more on wholesale banking, probably due to the limited number of branches in countries where they operate. ASEAN banks still have much room to expand their presence in the Philippines in the near term, while it is a big challenge for Philippine banks to penetrate the banking markets in other AMSs.

On the competitiveness of ASEAN narkets and financial institutions, descriptive analysis, banking subsector.

Descriptive analysis, insurance subsector.

The paper's recommendations as discussed by Dr. Lamberte.

1. Unlock the power of the banking system through the reduction of intermediation taxes (reserve ratio) and unwinding the special deposit accounts (SDA).

2. Continue the liberalization of the financial system, particularly by encouraging more foreign players to enter the domestic financial market.

3. Combine liberalization with a strong merger and consolidation policy. Having subsidiaries will allow foreign partners to play a bigger role in the domestic financial system than if confined to being branches of their head offices.

4. Introduce measures to support SMEs to scale up their operations. Raise competitiveness by allowing more branches on the basis of capital and SME loan portfolio.

Durng the open forum, I noted that the recommendations did not expound much on how the various government regulatory agencies should step back from costly regulations -- Bangko Sentral ng Pilipinas (BSP), SEC and the Bureau of Internal Revenue (BIR) especially. Their regulate-regulate-regulate, tax-tax-tax policies often tie the hands of players, existing and potential players, from engaging in more dynamic competition that benefit the borrowers and the public.

Dr. Lamberte replied that this is the latest paper in a series of studies they have done on the financial sector of the Philippines. Previous papers have touched on those regulatory agencies.

Well, this is a USAID-funded paper and I don't expect that it will take a more radical, less-government role in the financial sector perspective, as the US government itself (SEC, Fed, etc.) keeps piling up plentier and thicker set of regulations yearly. Nonetheless, the data presented by the paper are informative and useful.

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See also:
AEC 9: SEANET Forum on Economic Liberalization, Kuala Lumpur, April 23, April 19, 2015 
AEC 10: Indigenous Rights, Labor and Human Rights in the ASEAN, April 21, 2015 
AEC 11: Trade and Economic Development is Social Development, April 25, 2015 
AEC 12: Workshop on Trade Liberalization at the APF 2015, Kuala Lumpur, April 27, 2015

Fat-Free Econ 40: IMF Irrelevance

* This is my article today in interaksyon.com.
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In a forum last Wednesday at the Philippine Institute for Development Studies (PIDS), the International Monetary Fund (IMF) director for Asia and Pacific Department, Dr. Anoop Singh, revealed a little known shift in the multilateral lender's "new" role.

According to him, their main concerns now are (a)  the rising inequality in the Philippines and other Asian economies that have been growing rather fast recently, (b) unstable macroeconomic fundamentals that can restrict potential growth, and (c) raising public finance to develop human capital and public infrastructures.

Here is one of the charts Singh showed in his talk. While inequality has stabilized in sub-Saharan Africa, or declined in the Middle East and North Africa, as well as in Latin America, inequality in the Philippines and other Asian economies has increased.

Another slide he showed pertains to the difficulty of doing business in the country -- with the Philippines ranking in the 140s globally -- and the low level of public investment in infrastructure as seen from the country's low infrastructure score.

During the open forum, I asked Singh two questions. The first is: Has the IMF become irrelevant to many Asian economies? Its focus on solving inequality and inadequate public spending on education and healthcare betrays a shift away from the lender's original mandate of helping countries suffering from balance of payments (BOP) difficulties.

The IMF was organized in 1945 to “promote international monetary cooperation… facilitate the expansion and balanced growth of international trade… promote exchange stability and avoid competitive exchange depreciation… assist in the establishment of a multilateral system of payments… and in the elimination of foreign exchange restrictions which hamper the growth of world trade… give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards… (and) shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.” This is contained in the Articles of Agreement of the IMF, Article I.

There is hardly any BOP difficulty in Asia these days , making the region the envy of the US and the EU. In fact, in the wake of the Asian financial crisis of 1997-1998, the Asean and its three biggest neighbors -- China, Japan and Korea -- organized the Chiang Mai Initiative,  which pooled money that any signatory to the agreement can draw from in case of BOP problems.

In the case of the Philippines, it no longer owes the IMF, having graduated from the lender's fiscal and macroeconomic tutelage a few years back. On the contrary, the Philippines lent $1 billion last year to the IMF to help the EU address its fiscal difficulties.

So if the problem is back in the US and the EU -- the so-called developed regions that organized the IMF and two other institutions at Bretton Woods after the Great Depression -- the million-dollar question is why the IMF persists in sending "experts" to countries like the Philippines to pontificate about issues we already know about and the solutions to which have been discussed ad naseum?

In the same vein, is it wise for the Philippines to lend money to the IMF so it could maintain a representative in the country? Why pay so much for a bureacrat, especially when talking can be done more efficiently, if not effectively, over the Internet?

In his reply to my query, Singh said addressing social inequality can help economies sustain their growth through a more productive labor force. Sounds like someone from the World Bank or the Asian Development Bank (ADB), right?

This betrays more than just irrelevance on the part of the IMF in so far as countries like the Philippines are concerned. If you check the IMF website, then you'd discover that the lender has adopted the same line as that of the World Bank and ADB: "To foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

Now this raises the issue of redundancy, which was the second question I raised during last Wednesday's forum. The IMF's fellow Bretton Woods institution, theWorld Bank was organized precisely for that: “Our work is challenging, but our mission is simple: Help reduce poverty.”

As for the ADB: “The ADB aims for an Asia and Pacific free from poverty… alleviate poverty and help create a world in which everyone can share in the benefits of sustained and inclusive growth.”

Perhaps it's time to dismantle the IMF? Enough said.

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See also:
Foreign Aid 2: Circuitous and Leaky Process, November 03, 2005
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006
Foreign Aid 8: Abolish the IMF, August 08, 2007
IMF socialism, January 04, 2009
IMF dinosaur, let it fade away, June 16, 2009

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2012
Fat-Free Econ 15: IMF and Freedom From Debt, July 01, 2012

Fat-Free Econ 38: Jobless Growth vs. Jobless Non-Growth, February 12, 2012

Fat Free Econ 39: P57,000 Public Debt Per Filipino, February 25, 2013

Population Control 7: I am Supporting the RH bill

Yes, I am supporting the government-sponsored population control measure aka the Reproductive Health (RH) bill. PROVIDED that government will also cut or discontinue some of its existing but ineffective social programs.

As of July 2011, there were an estimated 37.11 million employed Filipinos. We assume that all of them are taxpayers, directly or indirectly. This year, interest payment alone (principal amortization not included) of the national government will be P357 billion. This means that each employed person in this country would fork out something like P9,622 of taxes for interest payment alone this year. Then they have to fork out more taxes to sustain the millions of bureaucracies from the local to national government agencies, up to the multilateral and foreign aid bodies like the UN, WB and ADB who all live off on tax money.

I read that with or without the RH bill, the DOH has already alloted some P7 billion for reproductive health-related spending. People are liabilities, the government and the RH bill supporters say, so their number should be reduced by giving couples various "options and choices" to plan their household size. Never mind the taxpayers including those who have no kids, they have no choice whether to support or opt out of these new spending.

Meanwhile, a friend in facebook posted something like this after Pacquiao's split decision victory over Marquez two weeks ago:

Manny Pacquiao, you now believe in "MAJORITY DECISION." Perhaps you know now the statement from the Social Weather Stations (SWS) survey this year, "that 73% of Filipinos want to get information on all legal methods of family planning (FP) from the government and that 68% wants the government to fund all means of family planning." That's majority decision.

And I replied to him, :And if you ask also the people, 'Do you want subsidized or free healthcare and housing, subsidized or free train ride and jeepney fare, subsidized or free cell phones and electricity, subsidized or free farm tractor and fishing boats, etc., government will fully fund those subsidies?', I think 90-100% of them will say Yes. Majority decision too."

Below are some data from Dr. Jop Yap of PIDS. This is part of his paper delivered during the Philippine Economic Society (PES) conference a few weeks ago. I thanked Jop for sharing with me his data.

See the low working age / dependents ratio in Singapore, Thailand, China and Korea? This should be directly or indirectly related to their past population control policies. Soon, their oldies will be needing robots and migrant workers to take care of them as the number of their young population is small in relation to the oldies.

Welfare Economics: Philippine Institutional Issues

There were a number of good papers presented during the Philippine Economic Society (PES) Conference last week, see my previous post here, 11-11-11. Among such papers was the closing presentation by Dr. Josef "Jop" Yap, President of the Philippine Institute for Development Studies. Jop is also a friend from the UP School of Economics. He quickly sent me his powerpoint presentation when I requested for it -- thanks a lot, Jop.

Jop's presentation was rather comprehensive, from correcting certain misconceptions about the Philippine economy, to institutional issues that keep it from really developing.

My favorite part was his debunking of two such myths which even reach regional and international conferences : (1) that the Philippine economy was "second to Japan" in development after WW II, and (2) the Philippine economy lost a decade during the Martial Law period of the Marcos administration.

Here, Jop said (1) is not true. In the 50s, Thailand and/or Malaysia were more developed or have higher per capita income than the Philippines.

By 1960, the "tiger economies" of Hong Kong, Singapore, Korea and Taiwan, plus Malaysia were already much ahead of the Philippines. We were only richer than Thailand and Indonesia then.

The second myth that Jop debunked was that we "lost" two decades, not just one, from the early 80s to early 2000s. "Lost decades" here mean the absence of growth -- either a decline or a flat -- in per capita income.

Higher taxes next year?

(Note: this is my article for thelobyist.biz today)

Taxes are indirect way of government saying to the people, “Give me your money, I can spend it better for you than you yourself.” So the higher the tax rates and the plentier the number of taxes, the higher is the level of distrust of government to the personal discretion of the people to do what they think is good for themselves.

The painting on the wall is becoming louder and louder with each passing day. The Philippine government needs more money to finance the following: (1) More money to chieve the Millennium Development Goals (MDGs), especially on MDG 2, basic education for all. (b) More money for the conditional cash transfer (CCT), especially paying the new loans from the WB and ADB for this program alone. (c) More money for universal healthcare (UHC). (d) More money for housing for the poor. (e) More money for AFP and PNP modernization. (f) More money to fight man-made warming and climate change. (g) More money to control high population growth via the proposed RH bill.

All sorts of justifications and alibi are flying left and right with one central message: the government wants more money to be confiscated from the citizens, so that the government can spend more for the citizens. Say that again?

Sometime last February this year, former NEDA Director General and former UPSE Dean Philip Medalla, presented a paper at the Bangko Sentral ng Pilipinas (BSP) on fiscal policy and mentioned that we may have to accept the reality of more taxes in the near future. I questioned him on that during the open forum, see Cut income tax movement, part 1.

And sometime in January or February this year, the government economic think tank, Philippine Institute for Development Studies (PIDS) also produced a paper that in order to attain the MDGs, there is a need to hike taxes. I criticized that PIDS paper in MDGs, taxes and PIDS.

Today, there is a news in BWorld, Government working on new tax measures. The report was referring to the DOF plan to work on the proposal by former DBM Secretary and UPSE faculty member, Benjamin Diokno, to raise taxes on 3 areas: (a) raise the excise tax on cigarettes and liquor; (b) raise VAT from 12% to 15% in exchange for a cut in income tax; and (c) raise the real property tax (RPT).

Personally, I favor the first two proposals of Dr. Diokno who was my former professor two times (undergrad and graduate) at the UPSE. Raising taxes on tobacco and alcohol products I think, is long overdue. Since the government thinks – which I disagree – that healthcare is not much personal responsibility but government responsibility, then people can over-drink, over-smoke, over-eat, over-fight, etc. and when their lungs, liver, heart and other internal organs are dilapidated, they can run to the government to demand that “health is a right.” So government should raise lots of money from tobacco and alcohol products to finance its massive healthcare spending.

On raising VAT and cutting income tax, my favorite formula is a rise in VAT from 12 to 15 percent, in exchange for an income tax rate, both corporate and personal, between zero to 10 percent flat. This need not be attained within the next five years or so. A transition period of declining income tax rate from an initial flat 18 percent (again, both corporate and personal income tax) down to flat 15 percent after say five years, down to flat 10 percent after another five to ten years, ultimately to zero, or the abolition of income tax.

I have discussed the merits and advantages of raising consumption-based taxes like VAT, excise tax and entertainment tax, in exchange for drastic cut and ultimate abolition of income tax, in the above article on Cut income tax movement, part 1.

The increase in RPT is something that I think is not wise. Government should not tax, or slap only low tax, on productive land and areas. It should instead tax idle and unproductive land. An area that is full of buildings, malls, offices and houses means thousands of jobs are created there. When people have jobs, they are not likely to run to government to ask for welfare and subsidy. Developed areas also tend to be self-reliant. Malls, commercial business districts (CBDs) and residential villages usually have their own street lighting, garbage collection, road construction and maintenance, private security, so that their demand from local government for those services is minimal if not zero.

Taxing idle lands and areas is a clear message to the owners of those lands that “Your area is not creating jobs, better pay up taxes or sell your land to other people who can make it productive and create more jobs.”

Government is coercion and is financed only by coercion, taxes and other mandatory fees and contributions. Let the coercion be kept to the minimum.