A good artice from my former teacher at UP School of Economics. The italics-red highights are mine, meaning I like them. The italics-blue highlights after the article are observations that I am skeptical or disagree with. Enjoy.
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Introspective
Raul V. Fabella
Posted on June 08, 2014 08:09:32 PM
INEQUALITY is back. The trigger is the book
Capital in the Twenty-First Century by Thomas Piketty. Three allusions to the
book have appeared in the BusinessWorld opinion section in the last month
alone. Piketty claims that ever-rising income inequality is the inevitable
harvest of unimpeded market economies. And the market cannot heal itself of
this infirmity. Piketty flies in the face of the venerable Kuznets (1955) who
claimed that in the process of development, income inequality first rises, reaches
an apex and then falls as income per capita rises. Inequality was already the
focus of the widely cited 2011 Ostry and Berg piece Inequality and
Unsustainable Growth: Two Sides of the Same Coin? They showed that income
inequality shortened the duration of growth even after taking on board other
factors.
The Piketty thesis is being subjected -- as it
should -- to a spirited academic debate. But whatever the final verdict on the
thesis, the inequality aversion it triggered is now a global staple. We can
expect this aversion in the West to wash up the shores of developing countries
and recalibrate development policy. There is great promise but even greater
risk here for developing countries.
If equity must be served, how should it be
pursued? In the past, many attempts to level the income distribution took the
form of shackling the market. The most popular form is administered prices:
price controls on basic commodities, productivity-divorced minimum wages, rent
controls, and usury laws. Another is making illegal certain markets, such as
for farm land in the rural areas. What they mostly accomplish is an empty cupboard that leaves
most everyone but especially the poorest worse off. These efforts turn pro-poor
intentions into anti-poor outcomes. This lesson has a long history.
According to Lactantius (300 AD), in the
late 3rd century AD, Emperor Diocletian issued the Edict of Maximum Prices in
an attempt to limit prices of commodities by law. As a consequence, much blood
was shed for trifles, men were afraid to offer anything for sale, and the
scarcity became more excessive and grievous than ever. Until, in the end, the
law, after having proved destructive to many people, was from mere necessity
abolished.” Unfortunately, Will and Ariel Durant’s famous paean to human
frailty still holds: History teaches but man never learns.
The fact of the matter is that equity could be
pursued without stultifying the market. The main lesson of microeconomics
venerable Second Fundamental Theorem of Welfare is that equity can be pursued
without sacrificing efficiency. While this may be an unattainable
ideal itself, the residual rule remains wise: Employ equity-pursuing policies
which give the market the widest berth. Thus, wealth taxation is preferred to income taxation and income taxation when duly collected is preferred
to commodity taxes.
If you want to help the poor, give cash
transfers to the targeted poor; don t artificially keep prices of commodities
low. Artificially low prices, say, of electricity, are leaky buckets that
benefit Forbes Park more than the poor. In general, fiscal transfers to expand
opportunities for the targeted poor and their children, such as education, are
the best equity strategy.
It is now fashionable to attract investment
through public-private partnerships (PPP). But the state must be ready to
respect the pricing provisions of the contract despite populist pressure. The
government, for example, has lately buckled on the treatment of corporate
income tax in the concession contract for water in Metro Manila. This sours the
PPP climate and will raise the cost of future procurements. As part of the
original come-on for bidders, the tax treatment provision has been priced into
the calculation and should be respected by the state.
Currently, the government via the Energy
Regulatory Board has embarked on a creeping administration of the Wholesale
Electricity Spot Market (WESM) and bilateral contract prices on the pretext of
market failure and abuse of market power. At the root of periodic spikes in
electricity prices in the recent past and the highest electricity prices in the
region is the dearth of new lower-cost baseload generation capacity coming on
stream since Electric Power Industry Reform Act (EPIRA) became law. This makes
the energy market a sellers market. If administered pricing becomes the rule,
private investment in new capacity envisioned in EPIRA will be even less
forthcoming.
The Energy Secretary recently said that there
is enough power for 2014 and 2015. If this is as much assurance as the
government can give, potential investors in the Philippines will look
elsewhere. The government can step in to procure new capacity to forestall a
looming power crisis, but EPIRA prohibits the government from directly
procuring new units unless there is a declaration of a power emergency by the
President. Shouldn t PNoy seriously consider declaring a power emergency now
and sign contracts for delivery of new baseload to ensure growth beyond 2016?
After all, a zero or negative GDP growth is peerless in growing inequity.
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I am skeptical of the observation that if you want to help the poor, give
cash transfers to the targeted poor.
Yes, but if government must invent new welfare
programs for the poor, government should also shrink or abolish other welfare
programs that do not work. Have a spending-neutral welfarist policies.
I do not like this part, Shouldn
t PNoy seriously consider declaring a power emergency now and sign contracts
for delivery of new baseload to ensure growth beyond 2016?
There are many baseload plants on
stream, they need to be assured that NO unnecessary delays be imposed, like the
usual bureaucratism (about 100+ signatures from barangay to DOE to BIR needed
to get a power plant constructed to running).
Also, price control is now practiced by
ERC at WESM. The original ceiling price of P62/kWh has been reduced to
"primary ceiling" of P32/kWh. And last April-May, a "secondary
ceiling" of P6.+/kWh was imposed. And ERC is considering of extending that
secondary price ceiling to June-July, or even longer.
Bureaucratism + price control are good
formula to discourage new power investors and hence, formula to court brown outs in the future.
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See also::
The Pope and Capitalism, December 03, 2013
Are Markets Moral?, January 05, 2014
Globalization, Mobility and Inequality, February 18, 2014
EFN 38: Report on Globalization and Inequality, Jeju Forum 2014, June 02, 2014
