Citizen Watch 3: Political and Economic Reforms After SONA 2014

Yesterday, I participated in Round 3 of Citizen Watch's Roundtable Discussion, on political and economic reforms after the 5th State of the Nation Address (SONA) of President Aquino last August. The forum was held at UP NCPAG, Diliman campus. Jointly organized by Stratbase Research Institute (SRI), and the Office of the VP for Public Affairs, UP Diliman.

The Participants were:

1. Prospero "Popoy" De Vera, the UP Vice-President for Public Affairs.

2. Ramon Casiple, Executive Director of the Institute For Political And Electoral Reform (IPER)

3. Atty. Randy Bello, Vice President For Internals of Tax Management Assn. of the Philippines (TMAP)

4. Vincent Lazatin, Executive Director of Transparency And Accountability Network (TAN)

5. Atty. Tim Abejo, Convenor of Democracy Watch

6. Atty. Ysan Castillo, Secretary General of Philippine Business for Environmental Stewardship (PBEST),

7, Francis Isaac, representative of DLSU - DLSU-Jesse M. Robredo Institute of Governance

8. Dindo Manhit, President of Stratbase Research Institute (SRI)

9. Nonoy Oplas, President of the Minimal Government Thinkers, Inc.

Wilford Wong, Secretary General of Citizen Watch, was the moderator.

In this photo, from left: Ysan, Tim, Randy, me, Francis.

On my part, I focused my discussion on the last three subjects of PNoy's SONA -- impending power shortage next year, high rice prices, and govermment budget.

On power shortage, I said that the threat of brown outs in the Luzon grid in the hot months next year is real. But there are short- and medium-term solutions. S-T solutions include (a) more peak-load plants, diesel barges, but there will be electricity rate hike as diesel is expensive compared to coal, natural gas, geothermal, hydro;

(b) reduce power demand by asking some big consumers like industrial zones, big mining firms, to have their own gen sets on peak hours of hot months.

M-T solutions include (a) reduce bureaucracies and permits required in building and commissioning new power plants, and

(b) reduce taxes and royalties on power; Malampaya royalty is an energy tax that contributes to our expensive electricity; up to P1.45/kWh.

In this photo, from left: Mon, Vince, Popoy, Dindo.

On high rise prices, I argued that the PH should embrace free trade and junk protectionism in rice trading. Vietnam and Thailand simply have huge, contiguous, well-irrigated rice land, up to 9 and 10 M hectares vs PH's only 4.7 M hectares of rice land. Rice in our two neighbors are simply cheap because of their huge production. Why should government insist on expensive rice via trade protectionism and NFA monopoly on rice trading?

Besides, NFA is a huge debt generator; currently around P155 B debt; it cannot and will not pay this debt, so very soon, we taxpayers will pay more to pay back this huge NFA debt, on top of already huge public debt of the national govt.

On fiscal irresponsibility, I argued that government should aim for budget balance, or even budget surplus, on years that there are no major crisis like severe damage by strong typhoons. When in crisis, borrow; when things are normal, pay old or new debt. Persistent borrowings means the government, its officials and bureaucracies, are simply living beyond their means. Lots of wastes and inefficiencies in government.

The Executive branch is generally wasteful; their wastes are tolerated by the Legislative branch, in exchange for their own wastes plus pork barrel. The public and media only lambast pork barrel.

From left to right: Ysan, Tim, me, Randy, Mon, Wilford, SRI staff, Francis.

The exchanges among participants were lively. There was a longer discussion on the budget and on power/energy problems. I briefly debated Mon Casiple and Tim on WESM, ERC's price cap, power situation last December, etc. Civil debate of course, focus on the issue. If there was a projector, I could have shown some charts and tables about WESM and various power plants.

The two sponsors of the discussion, right. Popoy/UP also gave each participant a bag of recent community papers and publications produced by UP. Modest but nice snacks and lunch were also served, yummy.

All photos from Citizen Watch Philippines' facebook page, except the 3rd photo, from my camera phone.

I made a paper for this forum with 10 tables and 3 charts on those 3 subjects that I mentioned above. SRI will publish it soon.
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See also:
Stratbase Forum on ASEAN Competitiveness, July 25, 2014
Free Trade 36: Taxation, Regulations, Trade and Rule of Law in ASEAN, August 05, 2014
Citizen Watch 2: On Power and Jobs, August 30, 2014

Pork Barrel 12: Why DAP is Wrong

These are my notes about the Disbursement Acceleration Program (DAP) last week, posted in my fb wall.

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DAP is wrong. Not for constitutional issues (I leave that to my lawyer friends) but for fiscal and economic issues. Those "idle"  funds were not there in the first place; they were borrowed money. If DAP is P100 B and government borrows P300 B a year, then if DBM/Malacanang left those "idle" funds unused and unspent, then govt borrowing should be only P200 B or less.

DBM Sec. Abad said at the Senate hearing last week that  "DAP is made on the principle, 'use it or lose it.'" DBM and Malacanang used it. Wrong. They should have "lost" it, by not spending it; in the process, remove the need for borrowing the same amount.

Sorry Sec. Butch but your arguments are faulty. If you "use" it for bleeding heart programs like giving free medicines to the sick and dying, drainage and bridges against flooding, then cutting borrowings, reducing the public debt stock and sparing the pockets of future taxpayers, and reducing current annual interest payment of about P330 B a year, is an even better bleeding heart goal.

Even if 100 percent of the programs funded by DAP are good, not a single centavo of it was stolen, it is still wrong. All the good and excellent programs that DAP funded could be funded by the regular budget, unless DBM will call the latter as “not good”. To cut borrowings is an even better, more bleeding heart goal, than continued fiscal irresponsibility. Of living beyond one's means. Of endless borrowings, with or without a crisis.

I argued in the past that the Freedom from Debt Coalition (FDC) is wrong in their campaigns. We can never have freedom from debt unless we have freedom from borrowings mentality and policy. Never.

Government should stop borrowings whenever possible. If projected revenue is P2 trillion, then spending should be P2 trillion and not P2.3 trillion because government will borrow P300 B. Better yet, spend only P1.8 trillion, use the P200 B surplus to pay back the debt. In times of crisis, borrow. In times of no crisis, pay.

The public debt can never be repaid by taxes alone. It is P5.6 trillion now. It is rising by around P350 B a year, with or without a crisis. The debt can be paid or at least drastically shrank by large-scale privatization + pay back via fiscal surplus. The P330 B a year interest payment alone is already huge and scandalous.

Fiscal irresponsibility works this way: All administrations say, "We are paying for debts and loans enjoyed by our predecessors. Might as well do it too. Spend-spend-spend now, let the future administrations and taxpayers worry where to get the money."

Pag sa households and micro level yan, someone who earns P50,000 a month and spends P55,000 a month, consistently, ang tawag dyan "gastador" or "maluho/magarbo”, “mayabang/hambugero", "iresponsable", "living beyond his means", etc. Pero pag gobyerno ang utang ng utang, "ok lang yan; it's for good projects naman eh" or "it's to fight poverty naman eh". People can demonize personal irresponsibility but not fiscal/government irresponsibility.

Also in the households, do not incur new spending if your resources are tied to old or recurring spending. Thus, do not buy a 2nd car yet if the 1st car can still service various household needs. This is not the case in government. They create new welfare program/s and subsidy/spending even if some old and existing welfare programs do not work as designed. Like the CCT, a huge multi-billion pesos subsidy program for the poor, without shrinking or terminating some existing subsidy programs that do not work. Basta lang gastos ng gastos, utang ng utang.

"Incurring debt is necessary to expand economic activity" is true if done on limited period. If done endlessly, wrong. In periods of no crisis, we should aspire not only for balanced budget, but budget surplus, pay some debt. In periods of crisis or emergencies (like the big earthquake of 1990, the Pinatubo eruption in 1991), borrow. Again, people can demonize personal irresponsibility but not fiscal/government irresponsibility.

The DAP controversy has also showed that political patronage has expanded from the traditional local and national politicians, to some NGOs and people's orgs (POs). Not the Napoles-type NGOs but old, grassroots, well-meaning NGOs. DAP has funded party or entirely, their programs for fisherfolks, poor patients, urban poor, indigenous people, women workers, the oldies, etc. Thus, DAP is good even if it may be unconstitutional or has violated existing laws and RAs. So long as it is our sector and NGOs that benefited, it is good.

Notice also that almost all governments around the world are fiscally irresponsible. Heavy and endless borrowing is in their DNA. Wastes and irresponsibility seems to be "built in" their system. Every year is a "crisis" or "emergency" year and thus, over-spending via borrowings is the default mode. The "idle" funds used for DAP presented a good opportunity for the President to think and act Liberal -- Liberate the taxpayers from endless burden of heavy and multiple taxation to finance government wastes and huge debt stock. But the President acted like any populist leaders where "each year is crisis year" with zero exception.

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See also:

Pork Barrel 8: Forum at DLSU Manila, October 02, 2013

Pork Barrel 9: Are PH Government Institutions Ready for Cleansing?, April 09, 2014

Pork Barrel 10: Bloated Budget, Wasteful Government, June 02, 2014

Pork Barrel 11: Impending Arrest of Sens. Enrile, Estrada and Revilla, June 19, 2014

Fiscal Irresponsibility 27: PH's P2.6 Trillion 2015 Budget

The Department of Budget and Management (DBM) has announced that the projected budget of the Philippine government next year will be around P2.6 trillion ($59.63 billion at P43.60/US$) or more than P300 billion than this year's P2.26 trillion budget. That means P2.6 trillion of taxes, fees and borrowings.

A P3 trillion budget for 2016, and P3 trillion taxes, fees and borrowings, is just around the corner. Government, national and local, keeps expanding. On years of no crisis or emergencies, a responsible government should have fiscal surplus, pay many loans and reduce the public debt, currently rising by around P400 B a year. In post-emergencies year, running a budget deficit and resume borrowings is understandable. But the government just keeps expanding and borrowing, with or without a crisis or emergencies.

While politicians and legislators, and those in the Executive branch are directly to blame for endless expansion of government, the public also share the guilt. For any problem they see, they think that more government is the solution. They seek endless government subsidies, endless government new regulations.

People should be careful what they wish for or request from the government, especially new legislations. Almost ALL government subsidy programs created by legislation are forever, they never go away as all laws here have no sunset (timetable) provisions. All new regulations create new or expand existing bureaucracies that exist forever. And the BIR will keep inventing new harassments, new requirements, to doctors, entrepreneurs, even those in informal sector, so that it can raise more tax revenues. We already saw it in the BIR-doctors love-hate affair. Expect the worst to come in the coming years.

Another disappointment for the lefties too. Big money means big temptation to steal, or at least to waste. Big expectations often mean big disappointments. 2.6 trillion of disappointment.

I am curious how much will be the interest payment alone for 2015. Public debt stock is rising by around P300 B a year, with or without a crisis or emergencies.

source: Bureau of Treasury, http://www.treasury.gov.ph/ 

Palpak din ang campaign ng Freedom from Debt Coalition (FDC). You will never have "freedom from debt" if there is no "freedom from (endless) borrowings" mentality and policy. If new welfare programs (and bureaucracies)are invented without phasing out or abolishing old and ineffective welfare programs (and bureaucracies), endless borrowings is the result. 100 percent.

Government should learn to live within its means. If projected revenues next year are P2.3 trillion, then the budget should be at that level only, not P2.6 trillion then borrow P300 billion. Government should stop borrowing even for one year. If new welfare programs have to be invented, then some old welfare programs that do not seem to work should be shrank, if not discontinued. The national government should focus on improving the institutions for rule of law implementation. The poor appreciate fast and credible delivery of justice as much as the rich. 

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A physician friend engaged me in a private discussion. His ideas are useful, I am posting our short discussion here.

Him: Sir Nonoy, we cannot continue living beyond our means. Either cut the budget, impose new taxes, cut losses due to inefficiencies and corruption or a combination of the three.

Me: Yes, that was my point. The Executive, as tolerated by the Legislative branch courtesy of pork barrel, keeps living beyond its means. Too much fiscal irresponsibility. This makes tax cut proposals become more difficult. Too many spending.

Him: well sir, there are those arguing that if government spending contracts without the private sector coming in, our economic growth will be compromised. i would prefer living within our means, whether as individuals, families, communities, or as a nation. We are lucky interest rates are down. but what if it shoots up? just the interest payments will kill us hehe.

Me: PH government interest payment alone is P330 B a year. And it should rise to P350 B yearly soon. That is killing certain sectors of the PH economy already.

If government reduces spending, it reduces heavy taxation and borrowings too, more money in the pockets of people and firms, they can expand and hire more people. If people have stable jobs, what is the need for rising government spending, except to fatten the salaries and perks of those in government.

Him: although sir there will be expenditures for certain social needs which the  private sector cannot or will not spend for (i.e. national defence). but i agree that we must spend within our means

Me: Actually defense spending here is verrryyy bloated. The big threat to the people is internal -- criminals, thieves, rapists, murderers, etc. Police function, not military function. That is why private security agencies are everywhere. Peace and order has been privatized, what a horrible government failure.

Him: regarding defense spending, Im no expert but our AFP does need upgrading. hehe. also our PNP.

Me: AFP modernization can be funded by privatizing Camp Aguinaldo, all of the proceeds should go to AFP fund, so there will be no need for new taxes, new borrowings. AFP can move to Cavite or Bataan. Their function or mandate is external defense, not internal.

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See also: 
Fiscal irresponsibility 12: More on US debt default, July 28, 2011

Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011 

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2011 

Business 360 3: Fiscal Cliff and Government Irresponsibility, January 23, 2013
Pork Barrel 9: Are PH Government Institutions Ready for Cleansing?, April 09, 2014
Pork Barrel 10: Bloated Budget, Wasteful Government, June 02, 2014

Current Account, Foreign Reserves and Philippine Economic Growth

* This is my article today in the online magazine, thelobbyist.biz.
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Three weeks ago, I made an analysis of the breakdown of the Philippines’ 7.8 percent growth in 1Q 2013 and showed how the services and industry sectors, and the construction and financial intermediation sub-sectors in particular have contributed the most to such stunning growth rate. It also showed comparative growth rates of other Asian economies and the industrial economies of the US and Europe.

This column will now look at some international aspects and contributors of such growth, and how the Philippines stacks up with its neighbors in the region as well as the industrial and emerging markets in other continents.

Numbers below compare countries in terms of their trade balance (goods and services), current account (trade balance + factor income balance, including remittances by nationals and foreigners of a particular countr), the budget balance (governments’ revenues and expenditures) and interest rates, both short- and long-term.

The Philippines has trade deficit (more imports than exports) but has current account surplus, meaning the trade deficit was more than covered up by high factor income, especially OFW remittances.

Table 1. Trade, Current Account, Budget Balance and Interest Rates, Selected Countries, Latest Data

Source: The Economist, June 8^th 2013, Trade, Exchange Rates, Budget Balances and Interest Rates

Very high debts of the governments of industrial countries, reflected in high public debt/GDP ratio, and in the above table, high budget deficit/GDP ratio, is a big drag to the economies of those countries. The tolerable level of budget deficit is generally pegged at -3.0 percent of GDP. But some countries like the US, Canada, Japan, UK, France and many other European countries have deficit ratio way above that level. This is the main generator or creator of global economic instability in the past few years. And this has repercussions on many emerging economies like the Philippines.

The saving grace despite high fiscal irresponsibility of many governments, is that aggregate savings and financial mobilization in the private sector of many countries have greatly improved. So that while many governments borrow like crazy, both short and long-term interest rates have remained low. The private sector has ample savings to lend to governments even at low interest rates. The Philippines’ private sector share this global trend and characteristic.

Below is an interesting data on international reserves of industrializing and emerging and markets from Asia, Europe, South America and Africa. The huge reserves of economies in Asia can easily dwarf the reserves of their counterparts in other continents, except for a few countries like Russia and Brazil. The Philippines’ international reserves are in the lower bracket by Asian standards, but in the medium bracket by European and South American levels.

Table 2. Foreign Reserves Including Gold, in $ Billion, 2013

* Excluding gold for China, Taiwan, Vietnam, Saudi Arabia, Israel

Primary data source: Haver Analytics

Posted in The Economist, June 6^th 2013, Foreign Reserves.

High reserves do not necessarily translate into fast growth in the short term, but more of an insurance against high volatility and instability in the international financial market in the medium to long-term. Foreign reserves are counted in the capital account of an economy or country.

The four Asian tiger economies (Hong Kong, Korea, Singapore and Taiwan) can be characterized also as having current account surplus and high foreign reserves at the same time. It is the envy of many countries and economies. Plus the fact that they have balance surpluses (government revenues larger than expenditures) or low budget deficit, case of Taiwan.

These economies may suffer low growth in the short-term but in terms of hedging their economies from another round of financial and economic turmoil that the world experienced over the past four years. The US housing and fiscal instability in 2008-2010, Eurozone public debt turmoil in 2010-2012, starring especially the PIGS -- Portugal, Ireland, Greece and Spain.

The Philippines can capitalize on many favorable developments in the region despite a weak overall global economic environment. These include (a) rising investments and revenues in the business process outsourcing (BPO) sector, (b) rising remittances from more skilled OFWs, and (c) rising interest and revenues from tourism, including health tourism.

The country’s high and young population is a huge factor for these favorable developments. Young and easily trainable manpower, not only in the schools and universities but also on the job training and actual work itself.

Dynamism and efficiency in the private sector compensate for the inefficiencies, wastes and irresponsibility in the public sector, but only up to a certain point. The Philippine government should bear this in mind and learn lessons from the US and Europe and hence, watch its fiscal condition with prudence and sensitivity to the Filipino taxpayers and entrepreneurs.

Business 360 3: Fiscal Cliff and Government Irresponsibility

* This is the article that I submitted to B360 late last month, when the "fiscal cliff" in the US was being discussed worldwide.

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Fiscal Cliff and Government Irresponsibility

The US government’s public debt, currently at $16.3+ trillion, has touched the 100 percent of GDP mark in 2011. This does not include yet debt of local governments – states, cities and counties – which also have their own public debt. This huge debt and the huge interest payment to service the principal that keeps rising each day, is the main cause of its continuing fiscal and economic uncertainties.

Other rich countries which have reached the 100 percent or higher debt/GDP mark are Iceland in 2008, Portugal and Belgium in 2010, France and Ireland in 2011, United Kingdom in 2012. Greece and Italy have reached that mark early of the last decade. Heavy borrowing and fiscal irresponsibility is the main characteristic of these and many other economies. They have been living beyond their means, maintaining extravagant and populist welfare programs, aided by heavy military spending, even if taxes and other revenues are not sufficient to sustain these.

State owned BBC said in its “Q&A: The US fiscal cliff” that "The roots of the current crisis date back to 2001, when President George W Bush's administration was trying to pass a programme of tax cuts worth $1.7bn." 

This statement is wrong on two counts. One, the "roots" of the fiscal crisis date back many decades ago, of heavy government spending and heavy borrowing as if there is no repayment of those debts tomorrow. And two, tax cut is not the villain, it is heavy spending. Tax cut means allowing people to keep more money in their pockets, bank savings or certain investments. It is their money, they worked for it, they should keep more of it. If they spend or invest it, it creates economic activities and jobs elsewhere, so there is little or no need for government spending to keep expanding "to create jobs" for the people.

Entrepreneurs and private businesses, their staff and employees, have been bailing out through various taxes and fees these bloated governments and their numerous bureaucracies for decades. America and Europe prospered on economic freedom, not on heavy welfarism. People before have welfare because they worked hard and kept ample savings for their enjoyment or future investments, and not because the state has fed and housed them for free or at huge subsidies, at money that were borrowed from elsewhere.

Unfortunately, many Asian governments are following the welfarism and fiscal irresponsibility example of the US and European governments. They too are living beyond their means as shown by persistent budget deficit annually (expenditures are larger than revenues).

Source: computed from ADB’s Key Indicators for Asia and the Pacific 2012, Table 7.1

http://www.adb.org/publications/key-indicators-asia-and-pacific-2012

Nepal government seems to be less extravagant compared to its four neighbors in the region. But this is no consolation as growth can be sustained at deficit of below 2 percent of GDP as shown by the governments of Thailand, Vietnam and Indonesia. The governments of Hong Kong, S. Korea and Singapore even run on fiscal surpluses.

Fiscal responsibility and economic sustainability can be done on a few simple principles.

One, live within one’s means. Do not persistently spend beyond one’s income. Set aside savings for the rainy days and in times of emergencies.

Two, there is big role for personal and parental responsibility in many social and economic services, and not everything is government responsibility.

And three, there is big potential for tax cuts, or at least not creating new taxes, and allow the people to keep more of their income and savings. They know their priorities better than government officials and politicians. 

Let the new year usher in new thinking, away from the old thinking of more social engineering and economic central planning by the state, politicians and foreign aid bureaucracies. Modern technology has allowed people to learn new and more skills outside the formal school system, and opened up more economic opportunities beyond their country’s borders. Overall productivity should be rising and not stagnating. This is a good ingredient to create more jobs, fight poverty and have sustained inclusive growth.

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See also:
Busiiness 360 1: Nepal and the Philippines, November 26, 2012
Business 360 2: Free market means free individuals, December 28, 2012

Fat-Free Econ 26: US Public Debt and the November Elections

* This is my article today in TV5's news portal,

http://www.interaksyon.com/business/45173/fat-free-economics-us-public-debt-and-the-november-elections
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Whoever wins in the US Presidential elections next month will govern the biggest economy in the world, which also has the largest public debt worldwide. In fact, the US public debt is larger than its gross domestic product.

At the start of the current fiscal year, October 01, 2012, the US public debt stood at $16.159 trillion, composed of (a) debt held by the public at $11.311 trillion, and (b) intra-governmental holdings at $4.848 trillion. A day after, the total moved up to $16.171 trillion or an increase of $12 billion in just one day. For a good debt clock of the US to watch that is moving every minute and every second, just refresh this link.

And here is the growth of such debt through the years.

While the US government holds the 1^st place worldwide in absolute amount of public debt, the Japanese government holds the 1^st place worldwide in terms of the ratio of public debt to GDP, followed by Greece and Portugal in 2^nd and 3^rd places.

What explains the huge spike in US public debt and spending, especially in recent years? Or where can the next administration possibly make some spending cuts in order to minimize the fiscal bleeding and reduce the need for endless borrowings?

Source: http://s.wsj.net/public/resources/images/RV-AI016A_ENTIT_G_20120831013902.jpg

The welfarist and collectivist philosophy prevents or opposes cutting such spending. The advocates of this philosophy argue that the main function of government is to redistribute income, to confiscate more money from the haves and give it to the “have nots” or “have little” through a thick layer of bureaucracy at the national and local government levels that act as middlemen between these supposedly contradicting camps.

There is a twist somewhere here. As the need for more taxes by the US government rises, the number of people who do not pay federal income tax also rises. And this contributes to a pernicious situation where expenditures keep rising while tax revenues do not follow in step.

Source: The Economist, September 18^th 2012,http://www.economist.com/blogs/graphicdetail/2012/09/daily-chart-9

The appropriate solution to reduce revenues would have been to reduce spending. Ordinary households do that. When the income is low, they cut on spending and minimize borrowings whenever possible. Most governments - the US and the Philippines among them - do the reverse. As the funding gap between expenditures and revenues rises, they keep borrowing to maintain high expenditures as if the public debt burden can be solved by Batman or other fictitious characters.

The biggest challenge for the next President of the US is how to reduce public debt and government spending without compromising the productive capacity of the citizens, the entrepreneurs and ordinary workers, who will ultimately pay off those mountains of debt that have been accumulated through decades of fiscal irresponsibility by various administrations.

And the public – in the US, Europe, the Philippines and elsewhere – have to reconsider the welfarist and forced collectivism philosophy.  There is ample room to manage or allow society to run on more personal, parental and civil society responsibility, and less on government responsibility.
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Here is the additional chart and table that were not included due to space constraints:

a. Growth of US public debt through the years:

Source:  http://www.zerohedge.com/news/2012-10-02/usa-kicks-fiscal-2013-bang-and-93-billion-jump-debt-1615948701330035

b. Top debtors, OECD member countries.

I marked in red huge jumps in the ratio, moving up by 10 percentage points or more in just one year. Except Ireland and Iceland, those huge spikes in public indebtedness among the industrialized countries occurred in 2009 and 2010, with hang over until 2011.

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See also:
Fat-Free Econ 22: Three Years of Drug Price Control Policy, August 30, 2012
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012
Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012
Fat Free Econ 25: Property Rights and the Cybercrime Prevention Law, October 01, 2012

Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012
Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2012

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.

Fiscal Irresponsibility 24: More on the PIIGS and European Debt

Below are some charts that I got from various sources, on some fiscal and economic data of Portugal, Italy, Ireland, Greece, Spain (PIIGS) and the other major EU economies. I will limit commentary to the sub-heading in each chart. These images are mostly self-explanatory anyway.

(1) Declining GDP growth while rising unemployment, PIIGS.

source: NYT,   http://www.nytimes.com/2012/05/16/business/economy/leaving-the-euro-may-be-better-than-the-alternative.html?_r=1&ref=global-home#


(2) Government spending 40 to 60 percent of GDP (They need lots of taxes to finance it; taxes not enough, so they borrowed like crazy).

source: Dr. Ed's Blog,  http://blog.yardeni.com/2012/05/europes-wonderland.html

h/t: Prudent Investor Newsletters,  http://prudentinvestornewsletters.blogspot.com/2012/05/unraveling-of-europes-wonderland.html


(3) Governments of G7 countries notorious for fiscal irresponsibility.

source:  http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4


(4) 13 European economies have unemployment rate of 10 percent or higher

source:  http://www.economist.com/blogs/graphicdetail/2012/05/european-economy-guide

Meanwhile, in a facebook discussion, my German friend posted that one has to "question the collective wisdom of markets a bit when you see them panicking on the news about Greece..."

I think those bankers and market traders were just watching how much other EU governments (Germany, France, Belgium, etc.) would use their taxpayers' money to bail out Greek pensioners, welfare dependents and the huge bureaucracy. Meaning if more taxpayers' money from other European countries are expected to flow in, those bankers and stock traders will do their usual stuff. If less taxpayers money from other countries are coming in, they will panick and head for the exit. So its a question of how much moral hazards problem is being contributed by those bail out money from other European taxpayers. The bankers and traders mainly react to those moral hazards problem and do their thing as profit-maximizing or loss-minimizing individuals.

Governments created those huge public debts, they are not personal or private debts. These are accumulation of past over-spending and excesses. So the bankers and market traders are watching how much of those excesses in the past will be reformed and thrown away, or how much will be retained or even expanded, via bail out money from other European (or Chinese) taxpayers. Internal reforms like deregulation, liberalization and privatization of some (or many) government assets, and more personal responsibility in many social sectors, do not seem to be highlighted there.

Fiscal irresponsibility, spending always larger than revenues,  living beyond one's means, heavy welfarism even if revenues are not enough to sustain it, reliance on endless borrowing. These are the marks of statism bordering on near socialism policies.

* See also Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012

Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell

The leader and chief ideologue of CORRECT Movement, Orion Perez, keeps pushing and glorifying the Parliamentary form of government, even to skeptics of any form of government like me. Among the reasons he gave are that parliamentary governments outperform the presidential and other forms of governments, in (a) Economic Freedom Index ranking and in (b) Least Corrupt Countries around the world. Here are their tables.

source: http://correctphilippines.org/parliamentary_info/

Ergo, to move from the current Presidential form to Parliamentary form of government for the Philippines will help make the country more politically stable, more economically free, and more accountable or less corrupt. Cute formulations, but I don't buy it.

See three tables below, just among other reasons why I do not want to endorse any form of government -- which Orion believes is wrong, that one MUST believe and endorse their parliamentarism hard sell, otherwise, one knows nothing, one is "myopic" (repeated several times) because they "have done extremely intensive and extensive research and we've found - based on the hundreds of pages of international PhD-authored dissertations we've gathered - what are the "best of breed" solutions for the 3 main aspects of the Philippines".


According to his warp logic, if one is still not convinced of the beauty and desirability of parliamentarism despite the voluminous arguments and tables that he has presented, one is "defeated". So his inflated ego declared that he has "defeated" me.

Really? And they have done intensive and extensive research leading to glorification of parliamentarism?

Among the most indebted, the most fiscally irresponsible, the most debt-addict and tax-hungry economies and governments around the world are the parliamentary ones.  Why can't these governments learn to live within their means, to stop glorifying forced equality and very costly welfarism, that resulted in such heavy indebtedness?

Ok, being indebted is not wrong per se, especially if one's debt is within "manageable levels", say below 30 percent or even below 50 percent of GDP. Assuming that we accept this argument, just look at those countries with gross debt 50 percent or higher of GDP, from Denmark upwards. Are these desirable figures or a glorifiable situation? I say No.

Some parliamentary fanatics can argue, so what if it's 100 percent or higher, so long as the people are satisfied or are being taken cared of by the government? I hope that no self-respecting free marketers will argue that way because that is clearly an apologetic position in favor of BIG governments.

High public debt correlates, though not perfectly, with rising economic instability, such as high or rising unemployment rates.

To have double-digit unemployment rate is bad. The unemployment rate among the younger people who just enter the labor force is even worse, sometimes twice the national average.

Fiscal irresponsibility, along with personal irresponsibility, is wrong. The economies that lead in the on-going global debt uncertainty, the PIGS (Portugal, Ireland, Greece, Spain) are all under parliamentary governments . The form of government, parliamentary or presidential or what have you, are less important than pushing the philosophy of more individual freedom and more personal responsibility, more voluntary exchange and more civil society involvement in running people's own lives. It is not just pushing for small or minimal government per se that parliamentary fanatics like Orion Perez think, is the main consideration for my agnosticism and non-admiration of parliamentarism hard sell, or even its opposite, presidentialism hard sell.

Here's another table, who are the most tax-hungry countries among the developed world plus a few South East Asian economies. High taxes is an indirect statement of the government officials and bureaucrats, whether presidential or parliamentary or communist or monarchy or what have you, that they can spend the people's money better and "more wisely" than the people themselves. This is from the annual study, WB-IFC's "Doing Business 2012 Report".

source: http://doingbusiness.org/custom-query#hReprtpreview

Parliamentary fanatics like Orion Perez would possibly be hiding this type of data to their followers. They only show tables where the parliamentary governments lead in the "Economic Freedom" and "Least Corrupt" ranking. True, but the same governments also lead in the most fiscally irresponsible, the most debt-addict, the most number of jobless people relative to their total labor force, the most tax-hungry. And soon, the most unstable economically due to these and many other social and economic factors.

Again, by criticizing this negative aspect of those parliamentary governments, this is not to glorify the non-parliamentary type of governments like those under the Presidential form. I have argued repeatedly in the past in this blog that the main role of the government is to promulgate the rule of law and protect private property rights, not expanding welfarism, indebtedness, tax-hungriness and personal irresponsibility.

For fanatics like Mr. Perez, one MUST say halleluiah to parliamentarism otherwise one is a "myopic one trick pony". One SHOULD support parliamentarism otherwise one is like a "grade-schooler". Even an "I don't care" attitude to choosing parliamentary of presidential type is not acceptable to him, one MUST choose parliamentarism.

This is an indicator of an intolerant mind and small-scale dictator and cultist, possibly aspiring to become a large-scale dictator someday in a parliamentary government that they push so heavily.

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See also:
Pol. Ideology 28: Parliamentarism Hard Sell and Free Market Deception, April 30, 2012.
That's where my recent debate with Orion started, although we have debated several times in the past. That paper also gives links to my previous articles on Political Ideology.

Fiscal irresponsibility 16: On government bail outs, September 11, 2011
Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 18: Greece Bailout, October 29, 2011
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012
Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment, March 06, 2012
Fiscal Irresponsibility 22: China Borrows, China Lends. April 16, 2012

Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment

Europe and Eurozone's fiscal problems continue to wobble their macro economy as citizens keep paying more taxes and fees while their governments keep piling up more debts to the already high debt stock. Below are screen shots of a CNN feature, "Eurozone Crisis: How the figures stack up",  http://edition.cnn.com/SPECIALS/business/euro-crisis/index.html?hpt=hp_c1

All data accurate as of January 11, 2012.

(1) Debt/GDP ratio

Greece leads the pack in this infamous category. Out of the 17 economies here, 12 have exceeded the Eurozone cap. France and Germany's ratio at 83 percent of GDP.

(2) GDP size, $ billion

The largest economies, Germany and France, naturally are the one which have the biggest capacity to bail out the most troubled member-country of the Eurozone. Germany's GDP size in 2011 was $2.567 trillion.

(3) GDP growth rate, 2011

Last year, Greece and Portugal's economies have contracted, and only five economies were able to grow by 2.9 percent or higher. Heavy debt load will naturally lead to lower economic outlook and low or negative GDP growth.

(4) Bond yield, percent

Greece, Portugal and Ireland have breached the "danger zone" in terms of high interest rates for their new debts. Unless the new debts are able to really improve the overall economic productivity of the people and hence, improve the capacity to pay the old and new loans, new borrowings will only further worsen the problem.

(5) Unemployment rate, percent

More debt, more economic uncertainty, more unemployment. Spain's 21.3 percent joblessness rate is really troublesome.

(6) Youth unemployment

The situation is even worse for youth unemployment, with 11 out of 17 economies have 18.3 percent or worse in youth unemployment rate.

The governments of those heavily indebted countries in Europe and elsewhere like the Philippines, are not exactly "helpless" and "optionless" aside from more borrowings. Those governments have lots of assets, like government-owned or controlled corporations, banks and other financial institutions, lands and national parks, universities and hospitals, to sell and privatize. The governments will not abolish these, they will only be sold these usually monopoly bodies to private enterprises. Such privatization should be accompanied with deregulation so that it will not result in government monopoly to private monopoly.

Selling those assets are a lot more acceptable to the average citizens than more taxation. But I can imagine the opposition to such proposal by the employees and officials of those government-owned and controlled bodies and assets, especially for socialist-inspired or leaning governments.

But there should be a limit and stop to the endless borrowing mentality and policy. Because there is also a limit to the capacity of lenders, be there individuals, private enterprises and banks, or foreign governments. No one would keep lending to someone whose capacity to pay back in the future is next to impossible.
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See also:
Fiscal irresponsibility 11: US debt default talks, July 18, 2011
Fiscal irresponsibility 12: More on US debt default, July 28, 2011
Fiscal irresponsibility 13: Obama on debt limit, 2006, August 02, 2011
Fiscal irresponsibility 14: Debt crisis and government failure, August 08, 2011
Fiscal irresponsibility 15: Philippine government budget 2012, August 08, 2011
Fiscal irresponsibility 16: On government bail outs, September 11, 2011
Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 18: Greece Bailout, October 29, 2011
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012