Decentralization 1: It's Still More Government

I am no fan of so-called "decentralization" or "devolution" from national to local government units (LGUs). Both in principle and practice. Whether centralization or decentralization, it's the same bottom lineof MORE government and bureaucracies. The only difference is that in centralization, it's the national politicians and bureaucrats who make and implement the rules, while in decentralization, it's the local politicians and bureaucrats who do.

Below is from a friend, also from UP. He was a 3-termer councilor in a town in Pampanga, now a municipal administrator. He's got lots of insights on local govt. administration, governance, taxation, etc. For instance, he noted the wastage of our taxes on barangay leaders. The barangay chairman in pangasinan where our farm is located also narrated to me that many of his fellow brgy chairmen really enjoy being treated to red-lights entertainment (DOM style) when they go out for seminars in the cities:

Nonoy, I've been reading the essays you've been sending me. Kaya lang I don't have the time to comment on them dahil I'm loaded with a lot of work and I'm usually preoccupied with meetings, trainings and workshops.

I feel mas marami akong trabaho ngayon compared to when I was in the legislature. As municipal administrator, I'm the one who practically runs our LGU. Oh boy, it's a stressful job.

And I've been the object of relentless attacks by people who're getting hurt by the reforms and changes that I've been introducing. I have received numerous hate mails through SMS and the regular postal service. Nasty notes have been pasted on to my windshield and other stuffs lke that. It's the price I continue to pay because I got rid of excess fat and overlapping of functions,because I said "Enough of patronage hiring!" Can you blame me then if I move around with my favorite hand gun?

It is seldom noticed, Nonoy, na malaki ang waste of taxpayers' money sa mga local governments. Halimbawa, taun-taon na lang ang daming seminars and workshops ang nilulunsad ng DILG sa buong kapuluan. Ang funding ng mga iyan ay nanggagaling sa general fund ng mga municipio. Yet magtataka ka na sa kabila ng mga paulit-ulit na trainings ay di pa rin marunong bumalangkas ng badyet ang mga barangay, maging ang mga bayan. Eh paano sa halip na mag-aral ang mga delegado, they find it more convenient to visit a red light district, a local casino or some other places of amusement. Pag-usapan na lang natin ito when we get to sip a bottle of wine- - pag medyo maluwag-luwag ang sked natin.

Jun

Another friend, Bruce, made this reaction to Jun's comments:

What more proof do you need that you are doing something? Those politicians and bureaucrats that are HATED are the ones that are doing something. Those that are loved by everyone, or at least those that do not generate strong feelings, are not doing squat.

Enough of this talk of "unity" or trying to get along. Politics is about getting things done. Winners and losers. Pissing off the criminals and the corrupt officials and making great enemies. If you are a politician without great enemies, you are a politician who has done nothing of note.

Reagan, Thatcher, Bush 43 are all hated because they all had tremendous impact upon people and the world. People don't hate Pres. Jerry Ford because he did little (and for good reason - Watergate).

Will GMA be hated or will she be inconsequential?

By the way, only with strong enemies will you have strong supporters. Again, witness Reagan and Thatcher. By his enemies, you can judge him. I don't trust anyone who is not hated by the Marcoses and the Estradas.

Below is a personal testimony by an American of his experience in just renewing his car's registration in Fairfax, Virginia, can beastounding for some guys in poorer countries who thought that American bureaucracy is among the most efficient and least interventionist inthe world.

Car registration in the Philippines is not decentralized or devolved to LGUs. It's done by a national bureaucracy called the Land Transportation Office (LTO). The process is not as bureaucratic as the one in Virginia as narrated by the author, Mr. Daniel Mitchell. One difference here is that there's a regulation that amounts to a new tax. All vehicles, before they can be registered annually, have to go through a "smoke emission test" and show that it "passes". The fee for this is P300 (US$6.7 at P45/$ exchange rate). Even if your car is newly-purchased, you still have to go through this test and pay the fee. "Failure" rate in this test is very very small, but the government is still doing it anyway.

The fangs of LGU bureaucracy in the Philippines can be felt inbusiness registration, not in car registration. Read this testimony here, http://www.cato.%20org/pub_display.%20php?pub_id=,
and understand why the author considers himself alibertarian.

Below is a portion of his personal testimony
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Great Moments in Local Government
by Daniel J. Mitchell

I became a libertarian in high school and college thanks to Ronald Reagan's eloquent commentary against big government. I remain a libertarian because of Virginia's Department of Motor Vehicles.

... I went online to find out about renewing the registration, and was horrified to discover that I had to make a visit to DMV because my registration had lapsed... I woke up early so that I could avoid a three-hour line at the DMV office and managed to see someone after a wait of just 15 minutes. But when I attempted to register, I was told that Fairfax County had placed a hold on my registration because of unpaid taxes. I would like to claim that I was being a principled tax protester, but I meekly pay my car taxes...at leastwhen I'm aware that a bill is due. I don't know whether to blame the Post Office or the vehicle bureaucracy, but there are no letters from Fairfax County in my inbox.

... there is no coordination between Fairfax County and the state government. So I had to surrender my spot at the counter and go look at a sign with numbers for various local tax offices. I called Fairfax County's automated system, filled with naive thoughts about making an automated payment and then taking care of my registration.

I was surprised to learn that Fairfax County thinks I have four cars. Unfortunately, the system does not tell you the cars you ostensibly own, or which car has the unpaid tax bill. But the amount was not very large, so I was willing to pay it - even if it was for a car I didn't own. Like any sensible person, my top goal was to avoid having to make a repeat visit to the DMV.... I opted out of the automated system and eventually got to speak to live bureaucrat. For reasons that I will never understand, though,the bureaucrats can only process payments if you have a Discover card.

... I will now have to visit the Fairfax County tax office and then make a secondvisit to the DMV. And if that is all that I have to do, I willconsider myself lucky. But there is a silver lining to this dark cloud. I now am fullyre-energized in my disdain for government....
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A friend asked me why I don't agree with decentralization, and If I believe there is still a need to elect local government officials. I have clearly stated from the paper above, devolution or decentralization just retains big government. There was also nothing that I mentionioned there that I am in favor of a monolithic central or national government.

I still believe there is a role for LGUs, particularly in maintaining peace and order. I believe that there should be more barangay tanods and less policemen. I've seen the effectivity of barangay tanods in maintaining peace and order in many barangays. The tanods know most if not all residents in their barangay. The policemen, their central command coming from the national government, are often lazy, busy mostly in "anti-terrorism" campaigns and in defending the President from street demonstrators.

There should still be provincial governors, city/municipal mayors, and barangay chairmen, and their respective coteries of councilors. But the powers of these LGUs should be limited, particularly on imposing many regulations and restrictions in business and entrepreneurship. Just observe how the city government of Makati behaves for instance.

You want to rent a space in a building for your office. Before you can start anything, get barangay clearance, location clearance, MACEA clearance, then various permits in city hall (fire dept. permit, electrical permit, mechanical permit, sanitary permit, pay real property tax, etc.) before the mayor's business permit can be granted.

Once you have the business permit, you need "renovation permit" before you touch anything on the space on that building, and I heard another MACEA permit. And before you bring your office furnitures and supplies, you need a "permit to occupy" again from city hall. I am not a contractor or building/interior designer, so I don't have the details of various permits and regulations required by the local government bureaucracies.

Is this a desirable set up of "decentralized government"?
No way man. My concept of "decentralized" government is minimal government.
Very little if not zero government role in business regulation.
Regulate criminals and robbers and rapists, Yes.
But regulate, even over-regulate, entrepreneurs, No.

And if we think changing this bureaucratic procedures in local governments is easy, think twice. Or think a hundred times. Once LGUs or any other government entity have tasted power, especially the power to regulate other people's lives, the hunger for more power can only increase, not decrease. The power to tinker with even minute details of our lives, like how much we can keep from our monthly income, how much one can renovate his house and how soon he can start it, makes bureaucrats desire for more power.

Free Trade 5: Business, Rock Music and Cycling Globalization

In a news report today in the Financial Times, two very big business lobby groups in the US and Europe, voiced out their impatience at various regulatory barriers by their respective governments that hinder business and entrepreneurship. The report below:

http://www.ft.com/cms/s/10d4f960-33f0-11dc-9887-0000779fd2ac.html

Business lobby groups move to reduce barriers
By Jeremy Grant in Washington
Published: July 17 2007 03:48

The world’s two largest business lobby groups, the US Chamber of Commerce and Business Europe, will announce on July 17 a “strategic partnership” aimed at reducing regulatory barriers amid frustration at what they say is slow progress by governments on the issue...

Tuesday’s initiative, known as the Global Regulatory Co-operation Project, is a sign that business believes that government efforts should be “held to account” and progress measured by the businesses to be affected, according to Stanton Anderson, special counsel to the US president and the project’s chairman.

“There are increasingly around the world regulatory barriers being established and trade negotiations are becoming increasingly problematic both at the bilateral and multilateral level and we think this regulatory co-operation effort is a way around that problem, and that progress could be made in eliminating these barriers with regulator talking to regulator.”

Mr. Anderson's (the project chairman) adjective is "increasing" regulatory barriers around the world. The continuing failure in the Doha trade liberalization negotiations is actually one proof of this increasing market barriers posted by most governments around the world, whether rich country or poor country governments. Each failure in trade liberalization talks is an opportunity of one camp to blame the other.

I do not know how far these 2 big business lobby groups of the US and Europe will go in demanding reduction in business and trade barriers, at least of their respective governments. But I will not be surprised if someday they will go for drastic income tax cut and import tax cut advocacies. Taxes always distort prices upwards, whether domestic or imported prices.

Of course, businessmen, like ordinary producers and consumers, want double-standards. They want their products and services be protected by government barriers from more competition, but they also want their various consumption goods, their production raw materials and capital goods, to be liberalized so that they can bring down their production costs. But if you ask them if they have to drop one sentiment, which will they favor -- liberalization or protectionism -- it's clear in their consumption pattern that majority favor the former. At the end of the day, even the most protectionist farmers will want to have access to cheaper toys and shoes for their kids, cheaper clothes and jewelries for their wives or girlfriends, and cheaper tractors and spare parts for their farms. And only free trade can give them this opportunity, not protectionism, not so-called "fair trade".
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A related paper I wrote last April 11, 2007:

From Led Zep to Lance Armstrong: Street Globalization

The British rock band of the 60s to 70s, the Led Zeppelin, is considered among the pioneers of metal rock music with class. Among their famous songs, "stairway to heaven", "rock n roll", "black dog", these are still being played in Philippine radio from time to time; performed by a few Pinoy rockers, their DVDs of live concerts can be found in Quiapo and elsewhere. The band's "Led Zeppelin: BBC Sessions" live songs are in my Ipod too.

The American cycling hero, Lance Armstrong, is the greatest road racer of all time. He won the Tour de France for 7 years (1999-2005) consecutive! He was also considered "dead man winning" because he wasa survivor of testicular cancer. His feat is known not only in Europe and the US and other developed countries in the world, but also in thePhilippines. You will not meet a single serious racer cyclist in this country, even among recreational cyclists, who do not know Lance. His previous teams' (Motorola, USPS, Discovery) jerseys are worn by localc yclists, and so on.

These 2 guys/group are among the famous symbols of globalization –along with Michael Jordan, Tiger Woods, Mike Schumacher, Bryan Adams, Bruce Springsteen, Eminem, Coca Cola, Nike, Samsung, Ericsson, and so on. Their presence are felt and seen in the streets.

With the globalization of rock music (and jazz, classical, rap, othertypes), comes along the hardwares and paraphernalias that accompany such music: stereos, tv, CD/DVD players, computers, Ipod, MP3, sound systems, home theaters, etc. These goods – imported from the US, Taiwan, Europe, China, Japan, Korea, India, and many other countries –enable the people, the ordinary Filipinos especially, to enjoy such famous music and musicians. In the process, world-class Filipino rockbands were inspired and born, bands like Eraserheads, Bamboo, 6 cycleminds, Cueshe, etc.

With the globalization of cycling (and soccer, F1, beach volleyball, basketball, golf, etc.), cycling shoes, jerseys, bicycles, bike parts and tires, speedometer, heart monitors, and the goods and services provided by commercial teams competing in big international races like the Tour de France, are made available in our malls, shops and streets. And a lot of world-class Filipino racers were inspired and born – guys like Victor Espiritu, Ryan Tanguilig, Lloyd Reynante, Warren Davadilla, etc.

Seems that the only guys who do not like the full enjoyment of more and more people of those international music, sports, adventure, technology, and the competitive spirit that go with these, are the politicians, government bureaucrats, and vested, anti-free trade sectors and producers in the local market. For the latter, all sorts of excuses and alibis are recited when all they want are (a) more taxes to feed a growing bureaucracy and pork barrels, (b) more monopolization of local markets and slam-dunk local consumers with higher prices and often low-quality goods and services.

The competitive-minded among local producers love free trade. Not onlythat free trade will give them an opportunity to penetrate other foreign markets, but they will also be able to find cheaper raw materials and intermediate goods, cheaper technologies, already available abroad, to make them more efficient in their productionp rocesses.

So one important thing that globalization offers, is that it helps expose the pretentious and lazy among us, the "more taxes for more subsidies and bureaucracies please" people among us.

Ultimately,

GLOBALIZATION = MOBILITY = FREEDOM.
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See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006
Free Trade 3: Protectionism Perpetuate Poverty, September 05, 2006
Free Trade 4: FTA in APEC, July 09, 2007

Free Trade 4: FTA in APEC

The coming Asia-Pacific Economic Cooperation (APEC) summit in Sydney, Australia this coming September, is looking to produce one good result: a possible free trade area (FTA) among the 21 member-countries. Of course, like most if not all FTA visions around the world, an FTA will become a reality in 10 or 20 years from date of signing, if not longer. Nonetheless, it's better than not putting that vision at all.

This is expected to be the "fallback" position after the failed talks on reviving the Doha talks between the big and representative countries of the poor world and the rich world, and should other efforts to revive it will fail again.

Usually, agreements and communique like this among member-countries of any alliance or grouping of countries, will be full of "provided that" and other conditions, before any real free trade area can become a reality.

If countries, or better yet, trade negotiators and politicians of those countries, are serious in having free trade, no agreement with other countries is necessary. They can always declare a unilateral trade liberalization, and that's it. Hong Kong has done it; Dubai, Chile, Singapore, other smaller economies are doing it.

This means that trade "activists" who are leaning towards free market should not play along with those groups and individuals who declare, "free trade yes, on condition that...." We better address ourselves to the general public the "net gains" and benefit from free trade.

Last year, I wrote this:

Pan-Asia free trade area

September 05, 2006

A news from http://euobserver.com/9/22250/?rk=1 has this story,

Japan set to kick-start pan-Asian free trade area" by Lisbeth Kirk
21.08.2006 - 09:57

Japan minister of economy Toshihiro Nikai is set to unveil plans for a pan-Asian free trade area of 3.1 billion people, half the world'spopulation, Malaysian news agency Bernama has reported ahead of the 38thASEAN Economic Ministers meeting starting today in Kuala Lumpur.

The free trade area would include ASEAN-countries Australia, China, SouthKorea, India, Japan and New Zealand and would be promoted by a Japanese fundof 100 million US dollars....

The 39-year-old ASEAN bloc agreed already in October 2003 to set up a singlemarket by 2020, modelled on the EU. But ministers meeting this week hope to speed up the plans and get it ready by 2015. "We need to muster political will to create the AEC [Asean EconomicCommunity] by 2015, instead of 2020," ASEAN secretary-general Ong Keng Yongsaid, according to AP.

China and ASEAN have already agreed to create no-tariff zone by 2010 intheir combined market of 2 billion people.... ASEAN is the America's fourth largest trading partner. ASEAN was established on 8 August 1967 in Bangkok by Indonesia, Malaysia,Philippines, Singapore and Thailand. Brunei, Vietnam, Laos, Burma andCambodia have joined later....

This is a good development. Better than no regional or continental free trade area at all. Of course, there will be free trade among countries as early astomorrow if governments will not hinder trade.

Almost all people around the world want bargains, they want more choices. And only free trade, of big supply of various goods and commoditiesfrom everywhere, can do that. The job of trade protectionism, sometimes called "fair trade", is to restrict trade, to limit supply of various goods and services available to consumers, to limit choices.

What the governments of Japan and other countries do in the above plan is phasing out trade protectionism little by little, and any form of trade liberalization should be done with their consent first. Hence, if theywant full free trade to be realized in 20 years, or 30 years, or 50years, that's what will happen. If governments are out of the picture of regulating trade, then free trade can happen anytime. Government's main job should be to regulate and control criminals and robbers, terrorists and killers. Regulating trade that makes life easier for people, especially the poor and jobless, by giving them access to cheaper food, cheaper clothes, cheaper farm inputs, and so on, is bad and wrong "role" of government.

About the Doha round, me thinks US' Trade Rep. Susan Schwab should better talk to Prof. Jagdish Bhagwati, a famous academic economist (Indian-American, i think) in the US, than moving around talking to the trade reps of China and other countries. Dr. Bhagwati argued in some recentpapers for a unilateral trade liberalization for the US and estimated the benefits for the US economy in terms of economic growth and job creation. Hence, Mr. Bhagwati has no problem with EU's high export subsidies, high agri subsidies, and so on. But Ms. Susan Schwab has lots of angsts on such export subsidies, the same with her counterparts in the EU and Australia and Japan and many other countries.

On another note, When globalization hits home...

Globalization will definitely hit homes, wherever they may be. A city can experience job losses when a big company packs up and puts up its office or manufacturing plant in another country, the same way that the same city created new jobs when that firm that left came a few years ago, or a new firm comes in.

Many governments in developing countries are allergic to the idea of de-bureaucratizing business regulations, so many of their people are working abroad if not migrating outright to pursue their ambition and entrepreneurial spirit.

And many governments of rich countries are also allergic to the idea of reducing business taxes and of leaving wage-setting to the employers and the market. So many of their companies are leaving and putting up manufacturing plants and offices in developing countries.

These plus many other aspects of capital and labor mobility are all part of globalization. There are losers, definitely, but there are also gainers. Overall, there is net gain, or the number of gainers are plentier than the losers. But if the initial losers will learn to adjust and be flexible, they become gainers later.

One reader asked, “how much longer should the losers wait?”

It depends. A chicken farmer who has been raising chicken all his adult life and suddenly shifts to producing other livestock or crops that experience price hikes while chicken prices are going down can benefit from globalization and make money quick.

While those losers who just wait for new or additional subsidies from the state, and continue producing goods and services that experience price declines due to competition from other producers abroad, can remain losers for the rest of their lives.
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See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006
Free Trade 3: Protectionism Perpetuate Poverty, September 05, 2006

FIGs and Ratings Technocrats

Guys who used to prod fiscally-irresponsible governments (FIGs) to either create new taxes, or hike existing ones, were used to be IMF bureaucrats and consultants, aka “IMF review team”. By the way, is this term “FIGs” been used elsewhere in the past? I don’t know. In case not yet, then I can console myself of being among the first to define that term J. And for that, I call FIGs to refer to those governments, especially of poorer countries, whose concept of “public service” is “tax and tax, spend and spend; those they can’t finance by taxation, borrow and borrow.”

So, during those times, the “IMF review team”, would look and tinker with various fiscal, monetary and macro-economic data, then scare those FIGs whose debts have grown to rather unmanageable levels, that if they want “macro-economic stability”, they should either enact new taxes, or raise existing ones, and at least, never ever entertain proposals for tax cuts. These days, FIGs borrow less from the IMF, WB, and other rich governments institutions. FIGs borrow more from private lenders – bondholders, private commercial and investment banks, and so on.

When FIGs do this, the “review team” that private lenders look up to, are no longer IMF bureaucrats, but private credit ratings companies, also called “global debt watchers”. So, guys from Standard & Poor’s (S&P), Fitch, and there’s a 3rd big company on their league. So when FIGs are in a rut, the ratings technocrats make it big in national and international media by releasing their assessment of the “creditworthiness” of various FIGs. The bigger the fiscal irresponsibility of a government, the lower the creditworthiness and hence, the higher the debt premium (ie, interest rates) that private lenders will charge.

One of those FIGs in this planet is my country, the Philippines. With nearly 1/3 of annual budget of the national government devoted to paying interest payment alone for its domestic and foreign debts, the Philippines is among the “big leagues” in terms of fiscal irresponsibility. There are just too many past debts to pay; too many government personnel and bureaucrats (from national to local governments) to pay salaries; too many pork barrel (from the President to military generals to Senators, Congressmen) to set aside money for, and so on.

Now, the ratings guys are not happy with privatizing government assets, especially shares of stocks or equities, in private firms (see BWorld story for instance, “Deficit cure not in government asset sales”, http://www.bworldonline.com/BW062507/content.php?id=001). I am one of the very few souls in this country who advocate large-scale privatization as the single most important revenue source to drastically retire and reduce those huge public debts, so that some taxes will eventually have to be either slashed, if not abolished. You will note therefore, my dislike for those guys – whether government bureaucrats and politicians, or academics and media people, or technocrats of those international ratings companies – who can utter a deafening silence on FIGs’ tax and tax, spend and borrow attitude, but very vocal in opposing large-scale privatization.

FIGs really distort the incentives system in society. Many of the bright minds in society have been successfully pulled away from entrepreneurship and primary job creators, and diverted to the business of being bureaucrats and politicians, and their international cousins and counterparts – bureaucrats of multilateral institutions and technocrats of ratings agencies.

Tax Cut 5: Tax Imperialism, Privatization (PRPX 2007 Hawaii)

There was a "Pacific Rim Conference" held in Sheraton Waikiki, Honolulu, Hawaii, last May 23-24. The event was jointly sponsored by the State Policy Network (SPN), Americans for Tax Reforms (ATR), International Policy Network (IPN), Asian Forum Japan (AFJ), Lion Rock Institute (LRI), and Grassroot Institute Hawaii. I attended that forum and presented a paper too.

A friend from HK, Andrew Work, Executive Director of Lion RockInstitute, HK (www.lionrockinstitute.org) also presented a paper there on Tax Imperialism. He was attacking the EU, US and Canadian governments who tax, or want to tax, their citizens who are working and living abroad, earn income and have savings there. He says that the "secret" of HK's economic dynamism is its low and simple taxes. Meanwhile, 3 countries in the world are taxing their people abroad -- the US, North Korea and Eritrea!

So, how will the EU, US and Canadian governments tax their citizensabroad? By getting lots of data from them, and those data to be provided by the governments of those countries where their citizens currently live and work. So, imagine the tax spying that will happen around the world!

But the worst part of said Tax Imperialism, is trying to force those countries that have low, simple taxes, to raise those taxes and make the tax compliance more complicated through data mining about theb usinesses and other economic activities of citizens.

Andrew concluded his paper with this call:

"Continue to encourage your local government to engage in tax competition by simplifying and lowering taxes and resist tax imperialism wherever it rears its ugly head. The global network of business and the great experiment of humanity depend on our success in keeping the world free."

I say "Amen" to that. In the Philippines, there is realization even by Department of Finance (DOF) people that the country's taxes are among the highest (not to mention among the plentiest) in Asia. But they are in quandary where to get additional revenues if they cut down existing tax rates since there are lots of public debts to pay, millions of government employees to pay, and so on.

People are not static. You cut taxes, you don't expect the volume of economic transactions to remain at the same rate as before. There should be bigger, faster economic activities when people have more money in their pockets or bank accounts due to bigger take-home pay or bigger savings.
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Below is a portion of the paper that I presented on the panel on Privatization.

From Privatization to Tax Cut: Some Theoretical Considerations and the Philippine Experience

I. Introduction

II. Theoretical Framework

There are two major schools of thought on the existence of government enterprises. First, that which justifies SOEs’ presence, and second, that suggests no justification for the continued existence of SOEs. The former is the dominant thought advocated not only by politicians, appointed bureaucrats, as well as cronies that benefit from SOEs, but even by many academics and consultants.

A. Theory and rationale why SOEs are created

The main reason given by many governments around the world why they create government corporations and banks or SOEs, is to “further push development”. This position is also supported by many intellectuals, consultants and academics. In a paper, “Raison d’Etre of Public Enterprises, Comparative Review (by ASOSAI, 1985), among the reasons given by the governments of the following countries are:

Bangladesh: Promotion of social policy.
India: Promotion of self-reliance in strategic sectors in the economy.
Indonesia: Participate in business vital and firmly connected with the needs of the people.
Malaysia: Growth and expansion.
Pakistan: Self-reliance, deal with strategic sectors of the national economy.
Sri Lanka: Make investments where there is absence of significant private sector.

Australia: Government control, prestige; specialization for economy and effectiveness.
Japan: Strengthen nation’s power; build-up modern industry.
Korea: Promote public services, generate (additional) state revenues.

In the Philippines, one important framework justifying public enterprises is provided by the Constitution itself. In the 1987 Constitution (Article XII, National Economy and Patrimony), it says:

“Sec. 16… Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.”

B. Why creation and maintenance of SOEs is not justified

Not everyone is convinced with the above-stated philosophies, of course. Among those who offered some strict criteria by which government enterprises may be allowed is Friedrich Hayek. In his book “The Constitution of Liberty”, he wrote the following in chapter 15, “Economic Policy and the Rule of Law”:

“But though government may at any moment be best qualified to take the lead in such fields (“public goods, public works”), this provides no justification for assuming that this will always be so and therefore for giving it exclusive responsibility…

“So long as government uses any of its coercive powers, and particularly its power of taxation, in order to assist its enterprises, it can always turn their position into one of actual monopoly. To prevent this, it would be necessary that any special advantages, including subsidies, which government gives to its own enterprises in any field, should also be made available to competing private agencies.”

The second statement implies zero justification for state enterprises., because one important characteristic of public enterprises is their exemption from certain taxes and regulations imposed by the state to private enterprises. This immediately invalidates any claim for “fair play” or “level competition” by government enterprises with private enterprises.

To generalize, when SOEs exist because of any of the following conditions below, the justification for their creation, no matter how noble and developmentalist, evaporates. These conditions are:

(a) SOEs are perennial losers and just live off on annual subsidy and continued cronyism for their existence.

(b) They are “doing well” and churn out positive financial statements (ie, have regular net incomes) because: (i) They have instant big capitalization or equity infusion from taxpayers’ money and hence, need not borrow from anyone. (ii) They enjoy certain privileges like tax-exemptions, hassle-free renewal of business licenses or franchise, or freedom from extortion by national and local politicians. (iii) Their big debts and unpayable liabilities in the past were taken off their backs and passed on to the national government (NG), which the NG passed on to the taxpayers. And lastly, (iv) they are plain monopolies.

Thus, when any or all of these conditions is/are evident, the “promises” depicted in Graph 1 may not materialize at all and SOEs instead could produce opposite results. That is, instead of stabilizing or declining costs while benefits expand, you can have increasing costs while benefits decline.

Aside from the above Hayekian criteria, another theory that can disprove the necessity or justification of SOEs to deliver welfare to society, is the concept of contestable market. A market is “perfectly contestable” if entry and exit of firms is absolutely free (Nicholson, 1995). Governments’ various regulations and business-related taxes and fees already impede entry and exit of players. Introducing state enterprises and their built-in exemption from some of those business regulations, taxation, and even extortion by government bureaucrats and politicians further makes entry and exit of firms costly and risky. And with fewer sellers and producers, a society is courting an oligopolistic, even monopolistic market structure, and people can say “goodbye to choice”.

The free entry and exit of firms produce growth through time. And in the observation of one economist, “Government is the enemy of free entry and exit” (Kling, 2007).

C. Don’t Privatize All, Retain Some

There are some proposals that government corporations should only be created and maintained for (i) large, long-term projects that are beyond the reach of the market, and for (ii) activities with distant payoffs, or with great externalities, either negative or positive, that cannot be brought into the enterprise.
Though such proposal appears “neutral” between the current proliferation of SOEs and zero-SOEs argument, the argument is weak.

On activities with distant pay-offs, the state is "justified" to put up a government enterprise. Suppose there is a project to develop a rice variety that contains anti-malaria, anti-AIDS, anti-polio, anti-hepatitis, anti-tuberculoses resistance to people who eat that rice. That is a very "distant pay-off" project. So governments will put up a super-large rice research corporation, and extract super-large taxes from the citizens, to finance that super-large corporation and bureaucracy? That project is too good to be true, and if ever it will materialize, say 100 years from now, then people will be more than willing to save and buy that rice, and will not wait for any government subsidy to give that rice to them at low or zero cost.

On activities with great externalities, government is "justified" to put up a public enterprise. Farming anywhere around the world (rice farming, wheat farming, livestock farming, chicken farming, vegetable farming, fruits farming, etc.) has great externalities, positive and negative. The negative externality is the large-scale conversion of forest land into agricultural land, hundreds of millions of hectares of them. Another negative externality is regular or frequent plowing of the land, which loosens the soil, which aids soil erosion. But farming productivity for some crops will be very low if you do not plow the land and soften the compacted soil.

With such great externality of farming, will governments all over the world be justified to put up super-large farming corporations, or “nationalize” many private farms, to "internalize" those externalities that private farms cannot take in? And again, extract super-large taxes from the citizens, hire super-large bureaucracies, to supervise that super-large corporation?

The proposal therefore, is faulty, or shaky at least. And yet it can be a clever logic to justify statist thinking and intervention into the economy, into our lives, into our pockets....

Conclusions

Large-scale privatization of SOEs (GOCCs and GFIs in the Philippines), preferably all of them (ie, no SOEs left) is in the best interest of taxpayers. Not only that some taxes can be cut, personal income tax can possibly be abolished. When the endless subsidies to ever-losing government corporations and banks, the endless servicing of big public debt, and expansion of the bureaucracy in general has declined, a room for tax cut should be opened.

Some of those government enterprises may have to be sold at a big bargain to expedite their privatization. Proceeds from privatization of SOEs should be used mainly to retire public debts, both foreign and domestic loans, since a big portion of those accumulated public debts were due to the losses, wastes and underperformance of SOEs, both disposed and still existing.

Few or zero SOEs should also reduce cronyism and corruption in the government. This is because appointment to those government enterprises are often used as “rewards” to many supporters of those in the administration, especially those who cannot be given juicy positions in big departments and other agencies. That is why many retired military and police generals become instant presidents or administrators of government enterprises. Likewise, appointment in SOEs is also used to bribe some critics of the administration, including some media people and academics. At least they become silent, better if they become ardent supporters and apologists of the incumbent political leadership.

Privatization is not the end-goal; it is to have a more competitive economy that can harness the entrepreneurial energy and innovative culture of the people. Thus, liberalization and deregulation, if not de-bureaucratization, of the sectors where GOCCs operate should be done before and after privatization. This way, fears and concerns of some people that privatization will only transfer hands from government monopoly to private monopoly, will not happen.

Government should regulate and run after rapists, hold-uppers, drug pushers, carnappers, kidnappers, murderers, land-grabbers, extortionists, arsonists, other forms or variants of thieves and killers. There are so many criminals to regulate and "control" that the state should be very busy running after them. If the state should also busy itself with putting up so many corporations and bureaucracies, then there is a danger that the state can become a robber itself -- robbing the legitimate incomes and savings of the citizens for endless taxes and fees to finance those endless corporations and bureaucracies.

Foreign Aid 7: Wolfowitzoellickation of the WB

Out Mr. Paul Wolfowitz, an American, as World Bank (WB) President by June 30 this year. Coming in will be Mr. Robert Zoellick, an American, as another WB President.

Wolfowitz fell from grace after a big scandal where he gave handsome salaries and transfer package to his partner, a former WB official, then transferred to the US state department. Since the scandal broke up about 2 months ago, Wolfowitz has never recovered. What made his stay a bit longer, by about 1 month more, was the hesitation of Mr. Bush to replace him earlier.

Mr. Zoellick is former US Deputy Trade Secretary. If you follow the Iraq war, his name does not appear there. But if you follow WTO news and the Doha round of trade negotiations, Zoellick’s name can appear anytime. Just like most if not all “trade negotiators”, he’s a free trader and protectionist at the same time. That is, they say, “Yes we will liberalize our markets if you liberalize yours too.” Or, “we have to protect our markets because you protect yours too.” At the end of the day, there are always other guys to blame why free trade does not and cannot happen.

Is the WB “owned” by the US government? Not true, because governments of other countries also contribute for the capitalization of that bank. The US government “controls” the WB? Somehow yes, as evidenced by the dictum, “All WB Presidents should be American”, with a sub-title and extension, “And appointed by the US President”. It’s just a matter of finding a “more acceptable” American bureaucrat from America’s deep bench of bureaucracies, to the bureaucrats and politicians of other countries, the big contributors especially, like European and Japan governments. So that when Wolfowitz was cornered in that scandal, he became “unacceptable” not only to many WB staff but also to many representatives of foreign governments who contribute to the WB.

So, the Wolfowitzoellickation of the WB is a continuum of Pres. Bush’s (and all other US Presidents’) international policy to “develop” the world. Part of that policy is hiring tens of thousands of soldiers and gunners to “fight terrorists” in Iraq, Afghanistan, and possibly Iran, elsewhere. Another part is hiring thousands of bureaucrats and economists to “fight poverty” around the world. And a big component of that “fighting poverty” is collecting plenty of taxes from private citizens, and exempting from taxes the bureaucrats who will be the poverty fighters.

But the US government does not own the sole distinction of monopolizing presidency and leadership of a multilateral institution. The Europeans also do it, in its dictum, “All Managing Directors of the IMF should be Europeans”. And the Japs too, with their special banner, “All ADB Presidents should be Japanese”. It’s been the practice in the past, and shall be practiced in more years to come. And so if you work in the WB, IMF, ADB, OECD, other multilateral bodies and institutions, you get the double distinction of being a “poverty fighter” with fat salaries, and at the same time, exempted from income confiscation by any government around the world. Cool deal, right dude?

Meanwhile, I’m curious if Mr. Zoellick will replicate their earlier proposal to governments of poorer countries: “We can’t open up rich countries’ markets that big, but we can increase foreign aid to your governments”. If this happens, then what most of those international trade negotiations will achieve is more to enrich the airlines and hotels flying and housing those trade bureaucrats. After all, those airlines, expensive hotels and restaurants, and their respective owners and personnel pay lots of taxes to pay for the salaries and travels of those trade and foreign aid bureaucrats. Still a cool deal. Yeah man!
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The Growing Irrelevance of WB-IMF

For a number of poor and indebted economies like the Philippines, the IMF has become more and more irrelevant. The country remains indebted, yes, but not much to the World Bank and IMF anymore, but to private bondholders. And the bondholders who want to lend to debtor countries don’t look up much to the IMF for “guidance” but to private ratings agencies like S&P, Fitch, Moody’s. So much so that either the IMF should merge with other international bureaucracies to remain relevant, or collapse upon its own weight like a black hole.

The WB, sometimes it competes with the Asian Development Bank and other regional development banks in the world on convincing fiscally-irresponsible governments to borrow more from them. The politicians and bureaucrats, and sometimes the consultants, often have no qualms in wasting those money. If government officials of indebted countries can waste and steal their own people’s money, why not the tax money of the rich Americans, Europeans and Japanese, injected into those foreign aid institutions?

Besides, private financial flows -- like remittances of overseas workers (from rich countries to poor countries) approaching $300 billion a year -- are much bigger than all those foreign aid by rich countries combined. If governance of those poor countries (or better, less governance and less bureaucracies) are improved, then the big amount of such private transfers should translate to more local job creation and more economic growth.

Can a new policy of less aid, less taxes be tried by leaders of rich countries? When their citizens have more money in their pockets through lesser taxes, they’ll use that money to hire workers and nannies from poorer countries. Or buy more mangos, bananas, pineapples, other tropical products from poorer countries. Or visit the tropical white sand beaches, tropical forests and waterfalls, golf courses, of the poorer countries more often. This is a more direct people-to-people transfer of money. Unlike aid which is government-to-government.
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See also:
Foreign Aid 1: MDG Goals = More Debt Addiction, October 26, 2005
Foreign Aid 2: Circuitous and Leaky Process, November 03, 2005
Foreign Aid 3: Bob Geldoff and More Aid, November 10, 2005
Foreign Aid 4: Easterly vs. Sachs, May 01, 2006
Foreign Aid 5: Failure in East Timor, May 31, 2006
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006

Pol. Ideology 7: Individualism, Entitlement and Freedom

This is one of the exchanges in MG yahoogroups more than six years ago. From welfare, entitlement and taxes, to individualism, personal responsibility and freedom. This is 9 pages long.
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Hello Nonoy

I think the welfare system in NZ is more generous than that of Australia's. Here, for instance, there is "no effective" limit on unemployment benefits. A single mother with 2 or more dependents may actually receive more in benefits (net of taxes) than if the single mother were to work in a minimum wage-paying job. And this is one reason why the marginal income tax rates in NZ are also among the highest in the OECD and the problem too is that the top income tax rate of 39% cuts at a rather low income threshold - NZ$60,000. This is roughly US$39,000 only. So to compare, in New York, the top tax rate (state) is only 7.7% for incomes of US$500,000 (married or single). Am not sure kung how much ang federal income taxes (kung meron man). So, if you're earning an equivalent of US$39,000 in NZ, you're subject to 39% tax, kung nasa New York ka, a little over 4% lang ang tax mo. Also, here in NZ, there are no income tax exemptions. Whether you're single or married, with or without children, you're subject to the same tax rates.

Now, about your comment of 5 workers per person on welfare. This is roughly the same for NZ. Looking at that ratio on its own, it may appear like a high ratio, but if you take into consideration other factors, this ratio isn't high at all. Consider for instance the ageing population in Australia, which is one of their main problems, same with many other European countries and Japan. The ratio of workers to the elderly continues to grow at an alarming rate as the population ages and birth/fertility rates decline. Mawawalan ka ng replacement workers as some of the current workers retire. Ganyan din ang problema dito ... kawawa ang workers aged 30-45, by the time they retire, and if birth rates continue to decline (and immigration policies continue to be quite strict) there won't be enough workers to support their retirement - unfair! Kaya dito, government is trying to promote various retirement schemes to encourage people to save for their own retirement. But how can you sell this idea when people here have always been used to the idea and belief that it is the government's responsibility to take care of them when they retire - kasi they're so used to the welfare system!

This is only one angle, am trying to work on a research paper kasi about the consequences nga of the ageing population of NZ.

- Arlene

Abolishing income taxes, Retaining consumption taxes

Why income taxes can be abolished,
Consumption taxes as main government
revenue source[1]

Bienvenido “Nonoy” Oplas, Jr.[2]


A. Philosophy/Principle

1. Economic activities by productive individuals and enterprises always (a) create jobs, and (b) expand production of food, housing, clothing, transportation, other human needs. Hence, they already serve welfare functions to society, and they should not be penalized with income taxes and bureaucratic licenses and permits.2. There are plenty of consumption-based taxes already in place. In particular: (a) value added tax or VAT, (b) sales tax, (c) excise tax, (d) import tax, (e) vehicle registration tax, (f) real property tax, (g) percentage tax, (h) amusement tax, (i) travel tax, among others.

3. In addition, various bureaucracy-generated taxes, like (a) documentary stamp tax, (b) franchise tax, (c) bank earnings witholding tax, (d) insurance premium tax, (e) business permit tax, (f) fire code tax, and so on.

4. Very bureaucratic, discretionary, costly and corruption-prone to fully enforce income tax collections since people do not want to divulge their true income; cheaper to hire good accountants and lawyers and bribe revenue collectors than pay the full income tax liability. What the current income tax laws only affect are the fixed-income earners like teachers, office employees, soldiers, and so on.

5. Welfare loss to society = income taxes paid + cost of compliance (hiring accountants, lawyers, other business consultants) + cost of bribery (to avoid paying taxes or bring down their tax liabilities).

6. In addition, many people who live off on taxes, like those working in multilateral institutions (UN, WB, IMF, ADB), in other governments’ foreign aid bodies and embassies, are exempted from mandatory witholding income taxes. The more reason that those working in the private sector, those who derive their income not from taxes of other people but on business sales, should be spared from paying income tax.

B. The Numbers

1. Collections from income tax (P Billion, except %)

(a) From Individuals
2005, 112.68
2006, 132.01
2007, 154.30

(b) From corporations, enterprises, others
2005, 210.75
2006, 263.22
2007, 300.07

Percent of (a) to total tax revenues
2005, 16.0%
2006, 15.0%
2007, 12.8%

Percent of (a+b) to total tax revenues
2005, 45.8%
2006, 44.8%
2007, 37.6%

Total tax revenues *
2005, 705.61
2006, 881.62
2007, 1,208.20

* Not included here are (i) “non-tax revenues” like various fees and charges, Bureau of Treasury (BTr) income, privatization proceeds, and (ii) local government taxes and fees.

(Source: Budget of Expenditures and Sources of Financing (BESF), 2007)

2. GDP computation

Gross Domestic Product (GDP) is the sum of household consumptions (C), government consumption (G), private and government investment (I) and net exports (X-M). Alternatively, GDP is also computed as the sum of gross value added (GVA) of agriculture, industry and services sectors. Or:

GDP = C + I + G + (X-M), or
GDP = GVA Agri + GVA Industry + GVA Services.

Nominal GDP figures were:
2003, P4.316 B; 2004, P4.859 B; 2005, P5.419 B; 2006, P6.025.

3. Assumptions when income taxes, at least personal income tax, is zero:
(a) informal or underground economy will fall from 43% ** (WB estimates) to around 20% of GDP (or 80% formal economy); and
(b) GDP growth will be higher as household consumption (C) will increase. And C comprises nearly 75% of GDP; and
(c) VAT to be augmented by a national sales tax, composite consumption tax of 12%; and
(d) all other consumption-based taxes are retained; exemptions to VAT retained.

(** Note: Main culprit for the high incidence of informal sector is the high and multiple taxes and fees, the many permits and licenses to secure with various government agencies, both national and local government units)

4. Projected revenue collections under zero income tax, expanded consumption taxes, on a P8 trillion GDP:
(a) Taxable national income = (nominal GDP) x (formal economy)= (P8 trillion) x (0.80) = P6.4 trillion(b) Projected collections from VAT & sales tax alone
= (taxable income) x (12% VAT & sales tax)= (P6.4 trillion) x (0.12) = P768 billion.
This is equivalent to projected collections of (i) income tax + (ii) general sales & VAT. Projected revenue from (i + ii) in 2007 is P628 billion. As discussed earlier, there are other tax revenues which will not be affected by this initiative, like proceeds from excise tax, franchise tax, property tax.

C. Conclusion

1. One major impact of zero income tax, especially on personal income, is large-scale job creation. A household with combined witholding tax of say, P6,000/month will experience an equivalent “wage increase” of the same amount. That amount will be used to hire a “yaya” (nanny) or housemaid, or increase food consumption if the family size is big, creating new jobs in the food production sectors.

2. In addition, many employees who dream of becoming employers and job creators someday will make it easier to realize their dreams. They do not have to borrow much money as they can save their de facto “pay rise” in the form of zero income tax, for bigger equity in their entrepreneurial project someday.

3. Society’s human resources will be reallocated to more productive use. There will be lesser tax collection bureaucrats, lesser demand for tax consulting services (accounting, legal, PR, etc.) as the taxation system is more simple. If those bureaucrats and income tax consulting guys are into productive enterprises instead, then society’s production of more goods and services will expand, further creating more job opportunities.

4. People often hide their source of income, or how much they’re earning. But they flaunt their consumption – big house, big or fast cars, expensive clothes and cellphones, throwing parties, frequent travels and vacation, and so on. Taxing people on their consumption is much easier to administer because they give clear hints of what are their consumption preferences.

5. Low-income people who paid no or low income tax and low consumption tax before will not be worse off in a new situation where consumption taxes are higher. With plenty of job opportunities around, moving to high-paying jobs should be easier if one has sufficient ambition and industriousness.

6. Ultimately, consumption tax and other taxes must come down; some will have to be abolished too (as income taxes remain zero) – in a regime of small government, and bigger personal responsibilities and bigger role for voluntary organizations and civil society.

D. Timetable

1. The main goal of this taxpayers’ movement is a law that will abolish income tax, and shift revenue collection to consumption-based taxes.

2. To lessen drastic revenue adjustments, that law need not provide outright drop in income tax rate from the current 32% to zero in one year. A phase-in period of gradual reduction from 32% to zero in a period of 5 to 10 years as sales tax increase is being worked out will be instituted.

3. Meanwhile, the immediate task is to expand the number of individuals and organizations who will support this single goal. Existing organizations can affiliate with PTU. Or individuals who do not belong to any organization can form their own local taxpayers association or union (say, Pasig Taxpayers Association) and affiliate with PTU.

4. If we are strong enough, we can push a bill this year, and expect a law within 2 to 3 years (2008 or 2009).

[1] Presented during the forum on “In Search of a National Consensus”, sponsored by the Barangay San Lorenzo Business Association (BSLBA), at My Cinema, Greenbelt 3, Makati City, March 30, 2007.

[2] Secretary-General, Philippine Taxpayers Union (PTU); President, Minimal Government Movement (MGM)