A person has to work for his own personal security and his family’s household security. Securing such security is a personal and parental responsibility, not government responsibility. Thus, savings for the rainy days someday – by how much, for whom, on what services, how long to save and contribute, when to claim, where to claim – should be individually tailored because each individual has different needs and different priorities.
Person A with three or more children will prioritize education and health care for the kids; Person B with the same number of children who plans on home-schooling will prioritize a beautiful house and cars; Person C who is single with old and sick parents will prioritize healthcare for the older folks; Person D who is single with deceased parents will prioritize big pension for his/her foreign travels or lavish lifestyle someday; Person E who is either single or has family but plans to migrate abroad someday will prioritize portability of his savings and the services that he can enjoy with it; Person F who jumps from one job to another wants unemployment allowance and healthcare; and so on.
With increasing globalization and greater mobility of people across national borders and across continents, portability of savings and contribution is becoming more and more important. A person who suddenly feels the need to migrate elsewhere for whatever reason should have the flexibility to bring with him/her the value of his/her accumulated savings and contribution for both personal and household security. When such accumulated savings cannot be portable, then the providers of such security have the parochial assumption that people will not be mobile across countries, and the evil intention of utilizing such savings for their personal interests when the social security contributors have finally migrated and not come back or come back but too impatient to claim the would-be services because of complicated procedures and bureaucracies.
Here in the Philippines, social security is a business monopoly of the State: the Social Security System (SSS) for private sector personnel, and the Government Service Insurance System (GSIS) for the government personnel. Both financial institutions are State-owned and managed, even if all contributions are from private savings of the employed people.
A person employed in the formal sector, whether in private enterprises or government agencies, would see his/her monthly pay significantly shrank due to four different types of automatic deductions: personal income tax, housing tax (PAG-IBIG contribution), health tax (PhilHealth contribution) and social security tax (SSS or GSIS contribution). The government does not call the last three as "tax" but rather as "contributions". Contributions by nature, should be voluntary. Since these are non-voluntary payment and are mandatory collections because all employed person are coerced by various laws to become members of those government financial institutions, they are essentially a form of tax.
Those employed in the informal or “underground” sector are somehow lucky because their monthly income is not subject to those four automatic deductions and hence, they will have their income intact; they will just have to device some scheme to put up their own savings for the rainy days someday. The problem with this is that there will be little or no incentives for them to become bigger entrepreneurs someday because business growth will expose their heads and will attract the eyes and attention, and consequent regulations and bureaucracies, of the various government agencies that make those mandatory membership and collection.
Since private savings and contributions have been made socialized and collectivized, managed and controlled by the administrators of the collective, the State, then there is danger that said savings will be subject to socialized robbery. There is the built-in malady for instance, in the design of private social security: both the fund administrators (the SSS President and other officials) and the person who appointed the chief fund administrator (the President of the Republic) are not even SSS members (they are GSIS members), and yet they have almost full control of where the bulk of the accumulated private savings will go.
Thus, putting private citizens' pension and social security money into direct control by the State is not only risky. It is wrong. The SSS being funded by private sector employees and entrepreneurs should not be a State corporation. The State has already collected a big share of the employed people’s pay check, the personal income tax. So when the State further dips its hands in after-tax savings and contributions, there is a big likelihood that some evil intentions are being designed. Because by virtue of a financial institution being State-controlled, the appointment of such institution’s officials is subject to politics. The decision of where the savings will be invested, who can borrow big amount and who cannot borrow, will be subject to politics. Thus, all heads of SSS are thankful of, and accountable to, the one who put them there -- the President of the Republic, not to the members employed in private enterprises who were coerced by social security laws to contribute to the funds.
In a sense, this somehow explains why all past SSS administrators were not raising the issue of politicized appointments in that state corporation because they themselves were beneficiaries of such politicization of private funds’ pool.
Recently, there was wide public confusion, if not non-acceptance, of the appointment of the new SSS administrator. The incoming administrator who was then occupying another government agency has approved a supposedly government broadband network deal that involved US$300+ million, despite his earlier public admission that there was an attempt at large-scale robbery and corruption in the said project. When the controversy became too hot to handle, the project was shelved by the President. When the Senate conducted an investigation, the incoming administrator shut up and could not be compelled by the Senate to further talk when most of earlier evidences gathered by the Senate pointed to the President as the master-mind of the attempt at large-scale robbery.
What is noteworthy at this turn of events is that public discussion and debate on social security has been focused on a few personalities, namely the incoming SSS administrator and the President of the Republic. Although the issue raised – morality and integrity of the administrators of private savings – is indeed valid, the other issue, a bigger one for me, of State monopoly control of private savings and contributions, was relegated as a secondary issue or non-issue at all.
I personally know the incoming fund administrator because I was one of his staff for several years when I was still working at the House of Representatives in the 90s. And I can say that the said official is not exactly a man of high integrity. But as I have pointed out above, the appointment of whoever as fund administrator is a smaller issue compared to the fact that an institution that was built up by private savings is fully State-managed and controlled. An angel President will likely appoint an angel fund administrator and other government officials. A President who is a thief will likely appoint a thief and politics-loving fund administrator and other government officials.
One indicator or characteristic of a monopolist is lack of transparency. An enterprise that wants to get as many clients and customers as possible will strive to be as transparent as possible because people want to be assured that they get value for their money, that their savings are invested in productive projects that will give them good returns someday.
In the case of the SSS, its website alone is among the most unreliable sites in the world. For a fund with more than 27 million individual members and PhP234 billion (US$5.2 billion at P45/$) of investments, inquiries by phone or personal visits by its millions of members is costly and very inefficient. The maintenance of a reliable website therefore, is a must. But if you visit www.sss.gov.ph, either it is down or it shows only the homepage; and if you click any of its sections, it takes several minutes of “loading”, you wait for several minutes more and… voila! “Page Load Error” will show up. As of this writing, the website is down.
Many ordinary members just want an SSS ID because this is being asked or demanded by other agencies. But getting an ID alone is very time consuming. In my experience, getting an appointment for ID pictorial alone takes several days. Waiting period for the pictorial (digital camera) and e-signature was about two hours, from the time I submitted the ID application form to the time I finished everything. And waiting period for the ID to be delivered to my place was supposed to be two months, they said. But my ID came after four months!
Other SSS members though were more unlucky. Some waited six or eight months before their IDs were delivered to them. Others are worse off: they have waited 10 or 11 months and still they have not yet received their ID! See those sentiments and experiences on getting an SSS ID and the unreliability of the monopolist’s website here,
http://kulaypinay.com/2007/04/23/sss-id-application-walkthrough/.
A monopoly is often characterized by wastes and inefficiencies. This is because the administrators of a monopoly know that they have no competitors, so that their clients and the public have no other option but to patronize them. Unlike private enterprises like insurance companies who have to be extra courteous and friendly to their clients since the latter have the option of leaving them and go to the other competitors and players in the sector, a monopolist can be callous to the complaints of bad service by their clients. They can even arrogantly brush aside such complaints and demand for better service. That is why monopoly is bad and we should break all monopolies or oligopolies in the entire economy, including social security monopoly.
The social security sector should be deregulated and demonopolized. SSS and GSIS should be privatized since their funds come from private savings and the State has lots of money already from various taxes, charges and fees, mandatory contributions, and sale of its other non-performing assets. If privatization of these two financial institutions is not possible in the short-run, so that they remain as government-controlled corporations, the sector should be deregulated nonetheless.
Deregulation and demonopolization will allow the entry of new players and competitors, and membership to the SSS and GSIS should not be made mandatory. When these two institutions wake up to the reality that the public has other options, then their inefficiencies and wasteful habits, if not arrogance, will be tempered. Of course anyone can retain his/her arrogance, fine. So long as the public can retain their power to choose, then the arrogant and wasteful will slowly find themselves out of jobs, out of relevance in society.
And leadership and Presidency of both SSS and GSIS will become a secondary issue to the public. The President of the Republic can appoint an angel or hoodlum, it’s up to him or her. What is important is that the public have a choice whether to entrust their savings for their future personal and household security or not to political appointees.
Thursday, July 24, 2008
Tuesday, July 22, 2008
Anti-trust law is anti-competition
There are a number of legislations in some countries that introduce "anti-trust" regulations. A law has been passed in China and it will be implemented next month. An anti-trust legislation is also being worked in HK, in the Philippines, elsewhere.
The trouble with anti-trust laws and regulations is that they empower the anti-trust bureaucrats with the power to investigate any big firm. Small and medium-sized firms that are very efficient and innovative will ultimately become big. Sometimes even medium-sized firms can be investigated if the owners/managers of such firms are non-friendly to the administration in power.
When a firm lowers its prices relative to its competitors, the anti-trust agency can investigate on grounds of "predatory pricing.
When a firm increases its prices relative to its competitors, it can be investigated and charged with "price gouging".
When all the big firms have the same price, they can be investigated on charges of "price collusion".
Whichever you go, there will always be a ground for investigation -- and harassment and possibly extortion -- by the anti-trust regulators and bureaucrats. And this partly explains why many politicians, even some activist groups and academics, would want to become bureaucrats themselves and become anti-trust regulators.
If people want real competition and protection from monopolistic/oligopolistic system, government regulations like putting up anti-trust bodies are not the answer. Better to drastically cut multiple and bureaucratic business permit procedures, taxes and fees, to only 1 or 2, abolish the rest. Approximate a "contestable market" situation where firm entry and exit (opening up or closing a business) is almost zero, except on sectors and industries with huge "sunk costs".
A friend asked, as corporations grow larger and larger, "who will make them accountable?"
Mega-corporations emerge out of previously small corporations, the same way that some mega-corporations of yesteryears may not even be in the top 500 corporations in the world today. Here in the Philippines, today's mega-corporations SM and Robinsons/JG Summit were non-existent when Henry Sy and John Gokongwei were still teenagers about 6 or 7 decades ago. The same way that big corporations like Pantranco in luzon and Netran (bus companies) in Negros are now dead.
As corporations grow larger and larger, who will make them accountable? Us consumers. If Henry Sy screws up, we can stop going to any SM malls and go instead to Robinsons or Ayala malls or waltermart, wherever. If we think they all suck, we can stop going to any mall and we'll stay alive and kicking, we keep our money, no one will steal it from us.
When corporations become bigger and bigger, fine. They create more jobs, they create more shops, they build more buildings and malls, and they create more jobs in the construction industry. We pay not a single peso for their building or mall madness.
Compare that when government becomes bigger and bigger -- say 15 new departments to be created (dept of fishery, dept of ITC, dept of shipping, dept of climate change, dept. of Asean matters, etc.). And 50 new congressional districts to be created, 50 new partylist groups to be added, 20 new provinces to be created, etc. We'll be dead sure that instead of aspiring for a 10 percent flat income tax, the current 32 percent will be hiked to possibly 42 percent, or 52 percent?
Another way of looking at this would be, is the world better off if Microsoft, Warren Buffet's Berkshire, Intel, Toyota, GM, Shell, Chevron, and other mega-corporations don't exist? My vote is no.
The trouble with anti-trust laws and regulations is that they empower the anti-trust bureaucrats with the power to investigate any big firm. Small and medium-sized firms that are very efficient and innovative will ultimately become big. Sometimes even medium-sized firms can be investigated if the owners/managers of such firms are non-friendly to the administration in power.
When a firm lowers its prices relative to its competitors, the anti-trust agency can investigate on grounds of "predatory pricing.
When a firm increases its prices relative to its competitors, it can be investigated and charged with "price gouging".
When all the big firms have the same price, they can be investigated on charges of "price collusion".
Whichever you go, there will always be a ground for investigation -- and harassment and possibly extortion -- by the anti-trust regulators and bureaucrats. And this partly explains why many politicians, even some activist groups and academics, would want to become bureaucrats themselves and become anti-trust regulators.
If people want real competition and protection from monopolistic/oligopolistic system, government regulations like putting up anti-trust bodies are not the answer. Better to drastically cut multiple and bureaucratic business permit procedures, taxes and fees, to only 1 or 2, abolish the rest. Approximate a "contestable market" situation where firm entry and exit (opening up or closing a business) is almost zero, except on sectors and industries with huge "sunk costs".
A friend asked, as corporations grow larger and larger, "who will make them accountable?"
Mega-corporations emerge out of previously small corporations, the same way that some mega-corporations of yesteryears may not even be in the top 500 corporations in the world today. Here in the Philippines, today's mega-corporations SM and Robinsons/JG Summit were non-existent when Henry Sy and John Gokongwei were still teenagers about 6 or 7 decades ago. The same way that big corporations like Pantranco in luzon and Netran (bus companies) in Negros are now dead.
As corporations grow larger and larger, who will make them accountable? Us consumers. If Henry Sy screws up, we can stop going to any SM malls and go instead to Robinsons or Ayala malls or waltermart, wherever. If we think they all suck, we can stop going to any mall and we'll stay alive and kicking, we keep our money, no one will steal it from us.
When corporations become bigger and bigger, fine. They create more jobs, they create more shops, they build more buildings and malls, and they create more jobs in the construction industry. We pay not a single peso for their building or mall madness.
Compare that when government becomes bigger and bigger -- say 15 new departments to be created (dept of fishery, dept of ITC, dept of shipping, dept of climate change, dept. of Asean matters, etc.). And 50 new congressional districts to be created, 50 new partylist groups to be added, 20 new provinces to be created, etc. We'll be dead sure that instead of aspiring for a 10 percent flat income tax, the current 32 percent will be hiked to possibly 42 percent, or 52 percent?
Another way of looking at this would be, is the world better off if Microsoft, Warren Buffet's Berkshire, Intel, Toyota, GM, Shell, Chevron, and other mega-corporations don't exist? My vote is no.
Tuesday, July 15, 2008
Free Trade 10: More on Unilateral Trade Liberalization
Representatives of member-states of the World Trade Organization (WTO) will hold another "crucial talks" in Geneva starting July 21 this year. The negotiations will focus on agricultural issues (tariffs, domestic support, and other subsidies) and non-agriculture market access (NAMA). These are among the "unfinished agenda" from the Doha Development Round in 2001, and they contain among the most contentious issues.
Some facts here on the two basic documents: the "Revised Draft Modalities for Agriculture" (July 10 draft) is 116 pages long, single spaced, including tables. The "Draft Modalities for Non-Agricultural Market Access" (July 10 draft) is 112 pages, single spaced, including tables. Both documents are not so easy to understand for someone busy producing or trading various goods and services, or for ordinary consumers who only want as many choices as possible. But those documents can be convenient and easy to understand for someone whose job is to put up various regulations and restrictions, then meet and talk how on to slightly reduce those restrictions and schedule endless rounds of global meetings and negotiations.
From time to time, we get to read news stories and opinion articles on how this and that country's trade representatives and negotiators are blaming someone else, or group or bloc of country representatives, why the trade talks collapse. The tone of the blame-game is something like this: "We can't bring down our tariffs and agricultural subsidies because the other parties and countries are not bringing down their tariffs and non-tariff barriers on other sectors." So the current trade protectionism is justified because the other parties are equally protectionist, if not retaining and instituting even more trade restrictions.
One wonders how much money have been paid by taxpayers from the countries concerned, first to pay for the salaries, travels, and perks of their country trade negotiators, including their pool of consultants and secretariat support, in all those years. And second, how much taxes they have been paying for continued subsidies to their local producers so that the latter can sell them products and services at a cheaper price when similar products and services can be sourced and imported elsewhere at a low price and they don't have to pay a single cent of tax money for these.
Consider Hongkong. The people in this economy are busy producing various goods and services, and facilitating international trade. Why? Because it has a unilateral trade liberalization policy. They don't pay for a huge army of trade negotiators and consultants; they don't blame other parties and countries why they continue to be rigid and restrictive in allowing the exports of other countries when their own citizens demand for it. Hongkong did not ask, and is not asking, that other countries should reduce their tariffs and other non-tariff barriers first, before they will go to the negotiating table. Almost any country that has good quality products and have buyers there can bring in their commodities and pay zero tariff.
In this situation, millions of people from many parts of the world are swooping into this small but very dynamic economy to tour, dine, meet, shop, and do more shopping. Why? Because those people know that Hongkong offers plenty of choices for them, from the most expensive global brands to the cheapest products sold in huge volume. Choices that are not easily available in their country because their governments, trade negotiators, and many local producers are busy persuading other countries that they start liberalizing first before they do, busy blaming other governments if they fail to do so, or busy concocting various reasons and alibi why they should retain their trade restrictions even after other countries have started liberalizing their importation policies.
In a situation like this, the Hongkong government and economy is creating lots of jobs for its people and emigrants, and when people have jobs, they don't demand various state welfare and subsidies because they can provide for themselves and their families. And if there is less demand and clamor for various state subsidies, there is less demand and rationale for high and multiple taxes and fees. This mainly explains why Hongkong remains the freest or among the freest economies in the world.
Singapore is another country that has unilateral trade liberalization policy. And very often it is neck-and-neck with Hongkong in the annual ranking of the world's freest economy studies by various big international think tanks. It is also attracting millions of foreign visitors. Every year, the number of tourists is about twice or thrice the size of its nationals.
Dubai too, and Georgia. The latter, a small European economy, has enacted a zero-import tariff policy just a few years ago, and it is among the fastest growing economies in the European continent. Brunei, Estonia, and Chile are close to being unilateral free traders too.
Trade negotiations are being done by thousands of country trade representatives and bureaucrats, along with WTO officials and staff. Unfortunately, neither countries nor governments trade with each other. People do. And when people trade with each other, from other countries or continents, they do not set conditions. A Korean telecommunications engineer does not demand that a French fashion designer should first buy his Korean company's services or cellular phone products, before he buys the Frenchman's line of clothing. No such thing. People buy a product or service because he thinks he gets value for his money. And this forces many producers and suppliers from many parts of the world to produce good quality commodities at competitive prices, if they want to attract as many buyers and clients as possible. And people engaged in this kind of trade are better off.
For the Philippines and other developing countries, a unilateral free trade policy will serve their economies better. Among the immediate positive results are the following:
First, their people will have lots of choices for their consumer goods and production inputs, whether they are manufacturers that need good quality raw materials, or farmers that need good quality but cheap hand tractors.
Second, the economy will boost its tourism potentials as many people from other countries having high commodity prices due to high taxes and trade protectionism will come in not only to enjoy the tropical climate and white sand beaches, but also to shop, shop, and shop.
Third, the economy will generate plenty of new jobs, from manufacturers who can produce more efficiently and cheaply with more options for their production technologies and raw materials, to farmers who can produce more with cheaper farm machineries and modern post-harvest machines. This also includes tourism-related industries like airlines, hotels, malls, shops, restaurants, and beach and mountain resorts.
Fourth, the economy will worry less about so-called "external aggression". Take Hongkong again. Any potential aggressor country, assuming there is any, will think not only twice or thrice, but a hundred times, before it will ever attempt to invade and colonize that economy. This is true even if it has a very small air force, navy, and army, or even if we assume that China will not give it protective cover. Why? Because among the biggest American and Canadian companies, among the biggest British, French, German, Italian, other European companies, among the biggest Japanese, Korean and Australian companies, have branches, offices, and shops in Hongkong. So any potential aggressor country will face the most ruthless fighter planes, the most modern battle ships, and the most battle-tested soldiers of these big and rich countries who will protect their respective business interests and nationals that are based in that territory. So it is safe to assume and assert that if you are a unilateral free trader and a unilateral low tax economy, you will attract some of the biggest companies in the world, and you will attract no external enemy.
This list of the benefits of unilateral free trade is not exhaustive and complete; it only outlines some of the most basic arguments. To summarize: If we want more economic growth, more job creation, let us minimize if not stop trade negotiations, go straight to a unilateral trade liberalization. If we want peace, let us have free trade and free market.
Consumer choice and free trade
High unemployment and underemployment rates are among the scourge of modern economies today, both in rich and poor countries. People would want to be productive, to be economically useful to their family and community. It's just that there are a number of man-made restrictions that prevent them from being hired by other people, or from employing themselves through entrepreneurship. In a number of countries though, there are plenty of subsidies and allowances given to jobless people, single parents, etc. So there are some "incentives" to become irresponsible because they are "entitled" to certain social and economic benefits anyway. But that is not the subject of this paper. It is those who were rendered economically unproductive due to man-made restrictions like high taxes, bureaucratic business regulations, and trade protectionism.
Trade protectionism comes in two forms: high tariffs and high non-tariff barriers (NTBs) like plentiful trade requirements and regulations. Any or both of these happening can cause damage to the economy, the entrepreneurs, their employees and the jobless people in particular.
Take the case of Hong Kong. There are no tariffs or import taxes, so imported goods – except those explicitly prohibited like hazardous wastes and ozone-depleting substances – come in duty free. Aside from zero tariff policy, international trade is facilitated and very much encouraged through the following additional policies: (a) no laws for valuing goods for customs purposes (since there are no tariffs). (b) no rules of origin or certificate of origin required, (c) no rules on anti-dumping and countervailing measures or any "safeguard" actions. These policies amount to zero NTBs. In addition, there are no State-owned trading enterprises that can cause unfair competition to private sector traders. For the exporters, there are no export-related duties and taxes, no "local content" requirements for exports, no subsidy to exporters.
What all these mean is that the government will hire very few customs personnel and inspectors, and importers too will not need to hire additional lawyers, accountants, other "negotiators" with government customs officials since there are very few requirements to comply with. Since there is very little demand for such kinds of jobs and services, young people will see it and they would rather become traders and entrepreneurs when they grow up.
When there is zero tariff, zero NTBs (zero tax for countervailing, anti-dumping or other safeguard measures, zero fees for other trade regulations like rules of origin certificates, and so on), landed price of imported goods is low and cheap. So when you add up those two important factors, (i) plenty of entrepreneurs + (ii) cheap imported commodities (whether for household consumption or production inputs and intermediate goods), the result is more economic growth, more job creation, possibly a full-employment economy.
Full employment does not mean zero unemployment rate. It could mean 2 or 3 percent unemployment rate because some people are "jobless" at the time of a labor force survey because they have a high "reservation wage". Meaning a job is awaiting for them anytime but they refuse to take it because they are waiting for another job offer with higher pay or better package (say car and housing, travels, commissions, etc.).
Resistance to free trade through very small or zero tariff and very small or zero NTBs, comes from three groups of people. These are the protected sectors and businessmen, the left-leaning NGOs and lobby groups, and the government bureaucracy and politicians. Let us tackle them one by one.
The protectionist businessmen and sectors can be understandable because they feel threatened that their products might be spurned by local consumers who might find imported substitutes not only cheaper but better in quality. But the same protectionist businessmen and sectors also want free trade in other products and commodities that they do not produce. A rice farmer is biased only against imported rice but he wants free trade and more choices when it comes to fertilizers and hand tractors, shoes and clothes for his children, tv and other appliances for his house, etc. When they realize that they actually benefit from free trade for their household needs and farm inputs, plus the possibility that they can export their surplus rice at a higher price when their productivity improves due to more modern farming tools and practices, their opposition to free trade can weaken.
The second group, the left-leaning NGOs, trade unions, media and other professionals are harder to please because of very often, plain envy and ideological hatred of free markets. They hate to see some people becoming very rich and prosperous because of the big economic opportunities opened up by free trade. They hate to see inequality and temporary economic dislocation as a result of resource reallocation in society. And some of them are on the payroll of big businesses who benefit from trade protectionism and absence of foreign competition. But being consumers, deep inside they want free trade, they want more choices, they want bargains, for their various personal and professional needs, from shoes and jeans to food and drinks, to cell phones, laptops and cars.
The last group, the government trade bureaucracy and politicians, are the hardest to please, the hardest to convince of the evils of trade protectionism. Mainly because they live off on taxes, and high tariff means high tax revenues. Or high tariff and NTBs mean difficulty for entrepreneurs and hence, higher incentives for the latter to pay them bribes or other favor in exchange for facilitating trade. When a country is protectionist, the trade bureaucrats and some politicians enjoy vast arbitrary powers: who can trade and who cannot trade; where they can export and import and where they cannot; by how much quantity they can trade; how much fees to pay and many papers and documents to submit; and ultimately, how quick or late they can allow trade. Arbitrary powers mean arbitrary mean and opportunity to amass wealth at the expense of consumers, especially the poor and the jobless.
Unlike businessmen, farmers, labor unions, media people and other professional groups, consumers are not organized. The power of the consumers is in their purchasing capacity, in the expression of their preferences and priorities as reflected in the goods and services they buy. Their power is therefore, not fully articulated in media and Congress, but in various market places like malls, shops and public markets. The absence or non-articulation of power by consumers is also reflected in the level of poverty and joblessness in society.
It is important therefore, to continue explaining the importance of free trade if society is to attain full employment and assert consumer choice and freedom. And it is equally important to explain and expose the reasons and vested interests of some groups of people who are opposing free trade.
Meanwhile, the WTO has just released its World Trade Report 2008: Trade in a Globalizing World. The main message of that report is simple: Trade and globalization have brought greater prosperity to hundreds of millions as well as greater stability among nations.
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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 5: Business , Rock Music and Cycling Globalization, July 17, 2007
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007
Free Trade 7: Class War, Eco-protectionism and Climate, April 02, 2008
Free Trade 8: Global RIce Price, May 13, 2008
Free trade 9: Parallel Importation of Medicines, May 22, 2008
Some facts here on the two basic documents: the "Revised Draft Modalities for Agriculture" (July 10 draft) is 116 pages long, single spaced, including tables. The "Draft Modalities for Non-Agricultural Market Access" (July 10 draft) is 112 pages, single spaced, including tables. Both documents are not so easy to understand for someone busy producing or trading various goods and services, or for ordinary consumers who only want as many choices as possible. But those documents can be convenient and easy to understand for someone whose job is to put up various regulations and restrictions, then meet and talk how on to slightly reduce those restrictions and schedule endless rounds of global meetings and negotiations.
From time to time, we get to read news stories and opinion articles on how this and that country's trade representatives and negotiators are blaming someone else, or group or bloc of country representatives, why the trade talks collapse. The tone of the blame-game is something like this: "We can't bring down our tariffs and agricultural subsidies because the other parties and countries are not bringing down their tariffs and non-tariff barriers on other sectors." So the current trade protectionism is justified because the other parties are equally protectionist, if not retaining and instituting even more trade restrictions.
One wonders how much money have been paid by taxpayers from the countries concerned, first to pay for the salaries, travels, and perks of their country trade negotiators, including their pool of consultants and secretariat support, in all those years. And second, how much taxes they have been paying for continued subsidies to their local producers so that the latter can sell them products and services at a cheaper price when similar products and services can be sourced and imported elsewhere at a low price and they don't have to pay a single cent of tax money for these.
Consider Hongkong. The people in this economy are busy producing various goods and services, and facilitating international trade. Why? Because it has a unilateral trade liberalization policy. They don't pay for a huge army of trade negotiators and consultants; they don't blame other parties and countries why they continue to be rigid and restrictive in allowing the exports of other countries when their own citizens demand for it. Hongkong did not ask, and is not asking, that other countries should reduce their tariffs and other non-tariff barriers first, before they will go to the negotiating table. Almost any country that has good quality products and have buyers there can bring in their commodities and pay zero tariff.
In this situation, millions of people from many parts of the world are swooping into this small but very dynamic economy to tour, dine, meet, shop, and do more shopping. Why? Because those people know that Hongkong offers plenty of choices for them, from the most expensive global brands to the cheapest products sold in huge volume. Choices that are not easily available in their country because their governments, trade negotiators, and many local producers are busy persuading other countries that they start liberalizing first before they do, busy blaming other governments if they fail to do so, or busy concocting various reasons and alibi why they should retain their trade restrictions even after other countries have started liberalizing their importation policies.
In a situation like this, the Hongkong government and economy is creating lots of jobs for its people and emigrants, and when people have jobs, they don't demand various state welfare and subsidies because they can provide for themselves and their families. And if there is less demand and clamor for various state subsidies, there is less demand and rationale for high and multiple taxes and fees. This mainly explains why Hongkong remains the freest or among the freest economies in the world.
Singapore is another country that has unilateral trade liberalization policy. And very often it is neck-and-neck with Hongkong in the annual ranking of the world's freest economy studies by various big international think tanks. It is also attracting millions of foreign visitors. Every year, the number of tourists is about twice or thrice the size of its nationals.
Dubai too, and Georgia. The latter, a small European economy, has enacted a zero-import tariff policy just a few years ago, and it is among the fastest growing economies in the European continent. Brunei, Estonia, and Chile are close to being unilateral free traders too.
Trade negotiations are being done by thousands of country trade representatives and bureaucrats, along with WTO officials and staff. Unfortunately, neither countries nor governments trade with each other. People do. And when people trade with each other, from other countries or continents, they do not set conditions. A Korean telecommunications engineer does not demand that a French fashion designer should first buy his Korean company's services or cellular phone products, before he buys the Frenchman's line of clothing. No such thing. People buy a product or service because he thinks he gets value for his money. And this forces many producers and suppliers from many parts of the world to produce good quality commodities at competitive prices, if they want to attract as many buyers and clients as possible. And people engaged in this kind of trade are better off.
For the Philippines and other developing countries, a unilateral free trade policy will serve their economies better. Among the immediate positive results are the following:
First, their people will have lots of choices for their consumer goods and production inputs, whether they are manufacturers that need good quality raw materials, or farmers that need good quality but cheap hand tractors.
Second, the economy will boost its tourism potentials as many people from other countries having high commodity prices due to high taxes and trade protectionism will come in not only to enjoy the tropical climate and white sand beaches, but also to shop, shop, and shop.
Third, the economy will generate plenty of new jobs, from manufacturers who can produce more efficiently and cheaply with more options for their production technologies and raw materials, to farmers who can produce more with cheaper farm machineries and modern post-harvest machines. This also includes tourism-related industries like airlines, hotels, malls, shops, restaurants, and beach and mountain resorts.
Fourth, the economy will worry less about so-called "external aggression". Take Hongkong again. Any potential aggressor country, assuming there is any, will think not only twice or thrice, but a hundred times, before it will ever attempt to invade and colonize that economy. This is true even if it has a very small air force, navy, and army, or even if we assume that China will not give it protective cover. Why? Because among the biggest American and Canadian companies, among the biggest British, French, German, Italian, other European companies, among the biggest Japanese, Korean and Australian companies, have branches, offices, and shops in Hongkong. So any potential aggressor country will face the most ruthless fighter planes, the most modern battle ships, and the most battle-tested soldiers of these big and rich countries who will protect their respective business interests and nationals that are based in that territory. So it is safe to assume and assert that if you are a unilateral free trader and a unilateral low tax economy, you will attract some of the biggest companies in the world, and you will attract no external enemy.
This list of the benefits of unilateral free trade is not exhaustive and complete; it only outlines some of the most basic arguments. To summarize: If we want more economic growth, more job creation, let us minimize if not stop trade negotiations, go straight to a unilateral trade liberalization. If we want peace, let us have free trade and free market.
Consumer choice and free trade
High unemployment and underemployment rates are among the scourge of modern economies today, both in rich and poor countries. People would want to be productive, to be economically useful to their family and community. It's just that there are a number of man-made restrictions that prevent them from being hired by other people, or from employing themselves through entrepreneurship. In a number of countries though, there are plenty of subsidies and allowances given to jobless people, single parents, etc. So there are some "incentives" to become irresponsible because they are "entitled" to certain social and economic benefits anyway. But that is not the subject of this paper. It is those who were rendered economically unproductive due to man-made restrictions like high taxes, bureaucratic business regulations, and trade protectionism.
Trade protectionism comes in two forms: high tariffs and high non-tariff barriers (NTBs) like plentiful trade requirements and regulations. Any or both of these happening can cause damage to the economy, the entrepreneurs, their employees and the jobless people in particular.
Take the case of Hong Kong. There are no tariffs or import taxes, so imported goods – except those explicitly prohibited like hazardous wastes and ozone-depleting substances – come in duty free. Aside from zero tariff policy, international trade is facilitated and very much encouraged through the following additional policies: (a) no laws for valuing goods for customs purposes (since there are no tariffs). (b) no rules of origin or certificate of origin required, (c) no rules on anti-dumping and countervailing measures or any "safeguard" actions. These policies amount to zero NTBs. In addition, there are no State-owned trading enterprises that can cause unfair competition to private sector traders. For the exporters, there are no export-related duties and taxes, no "local content" requirements for exports, no subsidy to exporters.
What all these mean is that the government will hire very few customs personnel and inspectors, and importers too will not need to hire additional lawyers, accountants, other "negotiators" with government customs officials since there are very few requirements to comply with. Since there is very little demand for such kinds of jobs and services, young people will see it and they would rather become traders and entrepreneurs when they grow up.
When there is zero tariff, zero NTBs (zero tax for countervailing, anti-dumping or other safeguard measures, zero fees for other trade regulations like rules of origin certificates, and so on), landed price of imported goods is low and cheap. So when you add up those two important factors, (i) plenty of entrepreneurs + (ii) cheap imported commodities (whether for household consumption or production inputs and intermediate goods), the result is more economic growth, more job creation, possibly a full-employment economy.
Full employment does not mean zero unemployment rate. It could mean 2 or 3 percent unemployment rate because some people are "jobless" at the time of a labor force survey because they have a high "reservation wage". Meaning a job is awaiting for them anytime but they refuse to take it because they are waiting for another job offer with higher pay or better package (say car and housing, travels, commissions, etc.).
Resistance to free trade through very small or zero tariff and very small or zero NTBs, comes from three groups of people. These are the protected sectors and businessmen, the left-leaning NGOs and lobby groups, and the government bureaucracy and politicians. Let us tackle them one by one.
The protectionist businessmen and sectors can be understandable because they feel threatened that their products might be spurned by local consumers who might find imported substitutes not only cheaper but better in quality. But the same protectionist businessmen and sectors also want free trade in other products and commodities that they do not produce. A rice farmer is biased only against imported rice but he wants free trade and more choices when it comes to fertilizers and hand tractors, shoes and clothes for his children, tv and other appliances for his house, etc. When they realize that they actually benefit from free trade for their household needs and farm inputs, plus the possibility that they can export their surplus rice at a higher price when their productivity improves due to more modern farming tools and practices, their opposition to free trade can weaken.
The second group, the left-leaning NGOs, trade unions, media and other professionals are harder to please because of very often, plain envy and ideological hatred of free markets. They hate to see some people becoming very rich and prosperous because of the big economic opportunities opened up by free trade. They hate to see inequality and temporary economic dislocation as a result of resource reallocation in society. And some of them are on the payroll of big businesses who benefit from trade protectionism and absence of foreign competition. But being consumers, deep inside they want free trade, they want more choices, they want bargains, for their various personal and professional needs, from shoes and jeans to food and drinks, to cell phones, laptops and cars.
The last group, the government trade bureaucracy and politicians, are the hardest to please, the hardest to convince of the evils of trade protectionism. Mainly because they live off on taxes, and high tariff means high tax revenues. Or high tariff and NTBs mean difficulty for entrepreneurs and hence, higher incentives for the latter to pay them bribes or other favor in exchange for facilitating trade. When a country is protectionist, the trade bureaucrats and some politicians enjoy vast arbitrary powers: who can trade and who cannot trade; where they can export and import and where they cannot; by how much quantity they can trade; how much fees to pay and many papers and documents to submit; and ultimately, how quick or late they can allow trade. Arbitrary powers mean arbitrary mean and opportunity to amass wealth at the expense of consumers, especially the poor and the jobless.
Unlike businessmen, farmers, labor unions, media people and other professional groups, consumers are not organized. The power of the consumers is in their purchasing capacity, in the expression of their preferences and priorities as reflected in the goods and services they buy. Their power is therefore, not fully articulated in media and Congress, but in various market places like malls, shops and public markets. The absence or non-articulation of power by consumers is also reflected in the level of poverty and joblessness in society.
It is important therefore, to continue explaining the importance of free trade if society is to attain full employment and assert consumer choice and freedom. And it is equally important to explain and expose the reasons and vested interests of some groups of people who are opposing free trade.
Meanwhile, the WTO has just released its World Trade Report 2008: Trade in a Globalizing World. The main message of that report is simple: Trade and globalization have brought greater prosperity to hundreds of millions as well as greater stability among nations.
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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 5: Business , Rock Music and Cycling Globalization, July 17, 2007
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007
Free Trade 7: Class War, Eco-protectionism and Climate, April 02, 2008
Free Trade 8: Global RIce Price, May 13, 2008
Free trade 9: Parallel Importation of Medicines, May 22, 2008
Thursday, July 10, 2008
Sir John Templeton, 95
I just read today in the news,
http://www.iht.com/articles/2008/07/09/america/obits.php
and in the Atlas website,
http://atlasnetwork.org/sir-john-templeton-passed-away-at-the-age-of-95/
that Sir John Templeton -- was among the world's richest men, put up charities that give away about $70M a year -- has died.
He's 95 years old, renounced his American citizenship and lived in Bahamas. The news reports say his deep interest were on the nexus of science and religion, discoveries and faith.
I hear his name every year when Atlas economic research foundation gives away competitive prizes to some free market think tanks around the world that work on certain categories.
Sir John has lived a full and very productive life.
Perhaps his death is the culmination of his continuing journey in faith and discovery.
A noble life, and noble after-life journey.
My deep respect for the man, and condolence to his family and close friends.
http://www.iht.com/articles/2008/07/09/america/obits.php
and in the Atlas website,
http://atlasnetwork.org/sir-john-templeton-passed-away-at-the-age-of-95/
that Sir John Templeton -- was among the world's richest men, put up charities that give away about $70M a year -- has died.
He's 95 years old, renounced his American citizenship and lived in Bahamas. The news reports say his deep interest were on the nexus of science and religion, discoveries and faith.
I hear his name every year when Atlas economic research foundation gives away competitive prizes to some free market think tanks around the world that work on certain categories.
Sir John has lived a full and very productive life.
Perhaps his death is the culmination of his continuing journey in faith and discovery.
A noble life, and noble after-life journey.
My deep respect for the man, and condolence to his family and close friends.
Thursday, July 03, 2008
Agri Econ 3: Dr. Samran Sombatpanit and WASWC
My two articles the past three weeks....
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June 17, 2008
Meeting Dr. Samran Sombatpanit
Before going to Hong Kong the other week to attend the Pacific Rim Conference (see my previous article, "Individual liberty in the Pacific Rim"), I passed by Bangkok, upon the invitation of a Thai friend, Dr. Samran Sombatpanit. He is the immediate past president of the World Association for Soil and Water Conservation (WASWC). My route was Manila-Bangkok-Hong Kong-Manila. By making two foreign trips in one exit at the Manila airport NAIA, I would pay only once the extortion charges of travel tax of Php1,620 (about US$37 at Php44/US$1) and terminal fee of Php750 (about US$17), instead of paying twice.
I got to know Dr. Sombatpanit through a Moroccan friend, Nahid Elbezaz, who was my ‘batchmate’ in an international training on "Sustainable Agriculture" in late 2003 held in Sweden. I have been managing an agro-forest farm for a decade-and-a-half now, and the farm is owned by the Millora family, a friend whom I consider my second family here in Manila.
I contributed a paper for WASWC on building stone terraces for small water path to control soil erosion. This system not only minimizes and controls soil erosion, but also somehow conserves the eroded soil through well-arranged stone terraces that act as soil trap. Then I would also contribute to Samran some short papers on some of my observations and experience in agro-forestry, climate change literature, and so on.
Samran and his fellow editors and agriculture scientists recently published a book called "No Till Farming". It's a bit of a ‘revolutionary’ approach in farming for the following reasons. First, not tilling the soil is leaving it undisturbed; regular plowing and tilling can be harmful to the soil and the farm by making the soil loose and easily eroded during heavy rains and strong winds. Second, for many countries, government distribution of tractors to farmers at heavily subsidized price is among the more expensive public expenditures that taxpayers have to bear. And third, plowing by tractors and other mechanical devices can be expensive at this time of high oil prices.
Thus, the no-till farming philosophy can (a) save the soil from becoming loose and easily eroded, thus retaining nutrient-rich topsoil; (b) save taxpayers of the high cost of additional farm subsidies, (c) save farmers of the high cost of oil and tractor maintenance, and (d) save rivers and lakes from heavy siltation due to eroded topsoil due to heavy and frequent tilling of soil. From a number of farm results, crop yield is not that far from farms that experience regular tilling, leaving farmers with higher net income. So when you come to think of it, farming should not be too subsidy-dependent from the State – a principle that negates the ever-expanding agricultural bureaucracies and budget in many governments around the world.
If farming is left to agro-entrepreneurs and not distorted by heavy state subsidies, regulation and taxation – like NFA monopolization of rice importation for many decades, abuse and moral hazards problem in government agri credit programs, and rich countries' high domestic support and subsidies for their local agricultural production – a more dynamic market of supply-demand situation in food production, distribution and international trade will emerge. And the recent drastic food spikes could have been averted. This is because farming is an entrepreneurial activity, not a “social welfare” activity. Entrepreneurship requires less regulation, taxation, and subsidies, whereas social welfare requires the opposite. There should be big profit in farming and hence, state subsidies should be unnecessary because farming is mainly on food production, and everyone in this planet needs food.
Furthermore, if agri subsidies are kept at the minimum, if not abolished, then only those who can make profitable farming should stay in the business, unlike in many societies now where many farmers stay in the sector not because they are making enough money, but because they are receiving lots of state subsidies. And this is true in many rich countries like the European Union’s Common Agricultural Policy (CAP).
It is good that the Comprehensive Agrarian Reform Program (CARP) is not extended for another five years. The program is among the major factors why many agro-entrepreneurs are hesitant to develop and expand investments in their farms because when the farm is becoming prosperous and making good income, officials from the Department of Agrarian Reform (DAR) would come to them and tell them that their now prosperous land will be subjected to land redistribution to farm workers. That is why the current CARP as implemented will really have no time table. Which means uncertainty in agricultural investments will remain and the thick bureaucracy in DAR will only grow, not be reduced, in number.
Meanwhile, while we were in Thailand (my wife and our daughter came along), Dr. Sombatpanit toured us to Ayudhya and surrounding areas – Bang Sai, the King's summer palace, Ayuthaya, and other tourism areas. The development of Thailand's tourism industry, like its agricultural development, is somehow impressive. Of course it helps that Thailand does not experience strong typhoons like the Philippines; that it has a wide flat land, unlike the Philippines' archipelagic nature; and it has plenty of long and wide river systems that provide ample irrigation to its farms. The development of its new, big, and beautiful international airport that was opened only two years ago is a big bonus to foreign visitors who come to that country.
---------
-----------
June 17, 2008
Meeting Dr. Samran Sombatpanit
Before going to Hong Kong the other week to attend the Pacific Rim Conference (see my previous article, "Individual liberty in the Pacific Rim"), I passed by Bangkok, upon the invitation of a Thai friend, Dr. Samran Sombatpanit. He is the immediate past president of the World Association for Soil and Water Conservation (WASWC). My route was Manila-Bangkok-Hong Kong-Manila. By making two foreign trips in one exit at the Manila airport NAIA, I would pay only once the extortion charges of travel tax of Php1,620 (about US$37 at Php44/US$1) and terminal fee of Php750 (about US$17), instead of paying twice.
I got to know Dr. Sombatpanit through a Moroccan friend, Nahid Elbezaz, who was my ‘batchmate’ in an international training on "Sustainable Agriculture" in late 2003 held in Sweden. I have been managing an agro-forest farm for a decade-and-a-half now, and the farm is owned by the Millora family, a friend whom I consider my second family here in Manila.
I contributed a paper for WASWC on building stone terraces for small water path to control soil erosion. This system not only minimizes and controls soil erosion, but also somehow conserves the eroded soil through well-arranged stone terraces that act as soil trap. Then I would also contribute to Samran some short papers on some of my observations and experience in agro-forestry, climate change literature, and so on.
Samran and his fellow editors and agriculture scientists recently published a book called "No Till Farming". It's a bit of a ‘revolutionary’ approach in farming for the following reasons. First, not tilling the soil is leaving it undisturbed; regular plowing and tilling can be harmful to the soil and the farm by making the soil loose and easily eroded during heavy rains and strong winds. Second, for many countries, government distribution of tractors to farmers at heavily subsidized price is among the more expensive public expenditures that taxpayers have to bear. And third, plowing by tractors and other mechanical devices can be expensive at this time of high oil prices.
Thus, the no-till farming philosophy can (a) save the soil from becoming loose and easily eroded, thus retaining nutrient-rich topsoil; (b) save taxpayers of the high cost of additional farm subsidies, (c) save farmers of the high cost of oil and tractor maintenance, and (d) save rivers and lakes from heavy siltation due to eroded topsoil due to heavy and frequent tilling of soil. From a number of farm results, crop yield is not that far from farms that experience regular tilling, leaving farmers with higher net income. So when you come to think of it, farming should not be too subsidy-dependent from the State – a principle that negates the ever-expanding agricultural bureaucracies and budget in many governments around the world.
If farming is left to agro-entrepreneurs and not distorted by heavy state subsidies, regulation and taxation – like NFA monopolization of rice importation for many decades, abuse and moral hazards problem in government agri credit programs, and rich countries' high domestic support and subsidies for their local agricultural production – a more dynamic market of supply-demand situation in food production, distribution and international trade will emerge. And the recent drastic food spikes could have been averted. This is because farming is an entrepreneurial activity, not a “social welfare” activity. Entrepreneurship requires less regulation, taxation, and subsidies, whereas social welfare requires the opposite. There should be big profit in farming and hence, state subsidies should be unnecessary because farming is mainly on food production, and everyone in this planet needs food.
Furthermore, if agri subsidies are kept at the minimum, if not abolished, then only those who can make profitable farming should stay in the business, unlike in many societies now where many farmers stay in the sector not because they are making enough money, but because they are receiving lots of state subsidies. And this is true in many rich countries like the European Union’s Common Agricultural Policy (CAP).
It is good that the Comprehensive Agrarian Reform Program (CARP) is not extended for another five years. The program is among the major factors why many agro-entrepreneurs are hesitant to develop and expand investments in their farms because when the farm is becoming prosperous and making good income, officials from the Department of Agrarian Reform (DAR) would come to them and tell them that their now prosperous land will be subjected to land redistribution to farm workers. That is why the current CARP as implemented will really have no time table. Which means uncertainty in agricultural investments will remain and the thick bureaucracy in DAR will only grow, not be reduced, in number.
Meanwhile, while we were in Thailand (my wife and our daughter came along), Dr. Sombatpanit toured us to Ayudhya and surrounding areas – Bang Sai, the King's summer palace, Ayuthaya, and other tourism areas. The development of Thailand's tourism industry, like its agricultural development, is somehow impressive. Of course it helps that Thailand does not experience strong typhoons like the Philippines; that it has a wide flat land, unlike the Philippines' archipelagic nature; and it has plenty of long and wide river systems that provide ample irrigation to its farms. The development of its new, big, and beautiful international airport that was opened only two years ago is a big bonus to foreign visitors who come to that country.
---------
JULY 03, 2008
Tilling and soil erosion: sugarcane farms
I was born and grew up in Negros Occidental province in central Philippines. It is the sugar plantation capital of the country. In my past travels to almost all 81 provinces in the country, I would say that in terms of land utilization, no other province could beat it because one will hardly see vacant or idle land there. Almost all lands are fully utilized, for residential/commercial/industrial use, and planted with sugarcane or any other crops (coconut, banana, fruit orchard, a few rice land). This makes me feel proud of my province.
Huge tracts of land planted mainly to sugarcane, from midway of mountains down to the lowlands, means huge volume of harvested sugarcane being transported from the farms to huge sugar milling companies. During peak harvest and milling season, hundreds of over-loaded 6-wheeler trucks, up to long 18-wheeler trucks, all carrying several tons of sugarcane per truck, would be seen plying the provincial roads everyday. This plus bad public governance where the quality of newly-constructed or newly-repaired roads is often suspect, explains for the bad road network in the province.
I was not too observant of “topsoil level” before. After going through several pages of “No Till Farming” book published by the World Association for Soil and Water Conservation (WASWC), I became more aware of the threats to topsoil erosion by regular tilling and plowing of agricultural lands.
Sugarcane farms are perhaps the most tilled lands in the Philippines and other countries, after rice farms. But in the latter, rice farmers use only small hand tractors, if not farm animals like “carabao” (water buffalo) or bulls. In addition, rice fields are terraced so the ground is flat, that even water is impounded and trapped up to a certain height; hence, soil erosion is minimized and controlled. In sugarcane farms, they are using regular tractors which are big and heavy, so the plowing of the soil is deeper and wider. Many sugarcane fields are also not on flat soil, rather on hilly and rolling terrain. So when there is heavy rain and the soil has just been tilled and not yet planted to sugarcane, the volume of eroded soil can be huge.
In my recent visit to my province just last week, I observed that a number of sugarcane fields are several inches below the average ground level. Some are even 1 or 2 feet lower, especially those on non-flat terrain and those beside a canal. I surmised that the difference between current sugarcane fields’ level and the normal soil level, say on the shoulder of the provincial road, or those planted to bananas and coconut trees, is the amount of soil that has been eroded through time. If this difference or depth is only a few hectares wide, there could be no problem much. But if it covers thousands of hectares, then the problem can be big.
So, if a big volume of topsoil has been eroded through time, where does it go? By the law of gravity, the eroded soil go to lower areas – in creeks and rivers, ultimately into the ocean. The immediate result is that many creeks have disappeared after soil and small stones have covered their deeper portions, and everything were shallow and flat. There is still small water flow coming from upstream springs, but some lowland natural springs were covered and disappeared.
A similar thing happened in rivers. Many rivers’ depth have declined, meaning the rivers have become shallower, with regular deposit of eroded soil and rocks from the uplands and midlands. But rivers’ width have increased on average, as strong flash floods would “eat up” unstable and soft river banks, and as the rivers are now shallower. Mangrove forest species and related vegetation, like “nipa” and palms would help in stabilizing otherwise unstable river banks.
I think not all sugar planters are into yearly plowing of their farm, but I assume that their number is small. With the current expensive fuel prices though, I would assume that some sugar planters will be forced to reduce their tilling, say once every 2 cropping season or every 2 years, or even once every 3 years. Planting of sugarcane tops through manual boring will not only be a cheaper alternative, but also more sustainable in both short- and long-term as the slightly compacted soil is left undisturbed by heavy tractors and deep plowing.
As sugar planters slowly realize the virtue of no-till farming, aided mainly by expensive fuel prices, I hope that topsoil erosion will be minimized in my province. Although high prices and profitability of sugarcane for biofuel production could spur more sugar planters to continue the old ways of regular, annual deep tilling of their sugarcane farms, since high fuel prices for tractor plowing can be offset by high profit for biofuel production. Ultimately, it is the realization of the environmental value and long-term economic benefits of no-till farming that will convince many sugar planters to take this agricultural practice.
Huge tracts of land planted mainly to sugarcane, from midway of mountains down to the lowlands, means huge volume of harvested sugarcane being transported from the farms to huge sugar milling companies. During peak harvest and milling season, hundreds of over-loaded 6-wheeler trucks, up to long 18-wheeler trucks, all carrying several tons of sugarcane per truck, would be seen plying the provincial roads everyday. This plus bad public governance where the quality of newly-constructed or newly-repaired roads is often suspect, explains for the bad road network in the province.
I was not too observant of “topsoil level” before. After going through several pages of “No Till Farming” book published by the World Association for Soil and Water Conservation (WASWC), I became more aware of the threats to topsoil erosion by regular tilling and plowing of agricultural lands.
Sugarcane farms are perhaps the most tilled lands in the Philippines and other countries, after rice farms. But in the latter, rice farmers use only small hand tractors, if not farm animals like “carabao” (water buffalo) or bulls. In addition, rice fields are terraced so the ground is flat, that even water is impounded and trapped up to a certain height; hence, soil erosion is minimized and controlled. In sugarcane farms, they are using regular tractors which are big and heavy, so the plowing of the soil is deeper and wider. Many sugarcane fields are also not on flat soil, rather on hilly and rolling terrain. So when there is heavy rain and the soil has just been tilled and not yet planted to sugarcane, the volume of eroded soil can be huge.
In my recent visit to my province just last week, I observed that a number of sugarcane fields are several inches below the average ground level. Some are even 1 or 2 feet lower, especially those on non-flat terrain and those beside a canal. I surmised that the difference between current sugarcane fields’ level and the normal soil level, say on the shoulder of the provincial road, or those planted to bananas and coconut trees, is the amount of soil that has been eroded through time. If this difference or depth is only a few hectares wide, there could be no problem much. But if it covers thousands of hectares, then the problem can be big.
So, if a big volume of topsoil has been eroded through time, where does it go? By the law of gravity, the eroded soil go to lower areas – in creeks and rivers, ultimately into the ocean. The immediate result is that many creeks have disappeared after soil and small stones have covered their deeper portions, and everything were shallow and flat. There is still small water flow coming from upstream springs, but some lowland natural springs were covered and disappeared.
A similar thing happened in rivers. Many rivers’ depth have declined, meaning the rivers have become shallower, with regular deposit of eroded soil and rocks from the uplands and midlands. But rivers’ width have increased on average, as strong flash floods would “eat up” unstable and soft river banks, and as the rivers are now shallower. Mangrove forest species and related vegetation, like “nipa” and palms would help in stabilizing otherwise unstable river banks.
I think not all sugar planters are into yearly plowing of their farm, but I assume that their number is small. With the current expensive fuel prices though, I would assume that some sugar planters will be forced to reduce their tilling, say once every 2 cropping season or every 2 years, or even once every 3 years. Planting of sugarcane tops through manual boring will not only be a cheaper alternative, but also more sustainable in both short- and long-term as the slightly compacted soil is left undisturbed by heavy tractors and deep plowing.
As sugar planters slowly realize the virtue of no-till farming, aided mainly by expensive fuel prices, I hope that topsoil erosion will be minimized in my province. Although high prices and profitability of sugarcane for biofuel production could spur more sugar planters to continue the old ways of regular, annual deep tilling of their sugarcane farms, since high fuel prices for tractor plowing can be offset by high profit for biofuel production. Ultimately, it is the realization of the environmental value and long-term economic benefits of no-till farming that will convince many sugar planters to take this agricultural practice.
* See also:
Agri Econ 1: Food Prices and Government, April 13, 2008
Agri Econ 2: Rice Laissez Faire vs. Subsidies, May 06, 2008
Saturday, June 28, 2008
Public health robbery through price control
In both textbook economics course and everyday common sense, people would normally understand that one important reason why the price of a certain commodity is high is due to the scarcity, if not absence, of its supply relative to people’s demand. For instance, the price of tomatoes can fall down to Php5 (about US$0.09) per kilo, even Php2 a kilo, during the summer months of March-April in a number of provinces in the Philippines. During the rainy season, the same quality of tomatoes harvested and sold in the same municipality and province can go as high as Php40 to Php50 (about US$1) a kilo, or even higher. What explains the big jump in price for the same commodity sold in the same locality in a span of just three to four months? Were there “tomato cartels” suddenly formed during the rainy months? Were there massive pest attacks that affect tomatoes every year?
People understand the “seasonality” of certain commodities, and they understand the downward or upward swings in the prices of those commodities. So they do not ask for more government intervention like tomato price control, or new taxes to subsidize tomato farmers during summer months, or the establishment of another bureaucracy like a Tomato Development Authority.
Entrepreneurs, both new and incumbent, would flock to an industry or sub-industry that experiences fast demand growth, or projected to experience fast consumer demand in the near future. When suppliers in the market become plentiful, the price of the supplied commodity or service can go down, the consumers benefit, and some producers will lose money. They will then try to innovate and produce a “hybrid” product or service that will hopefully attract a new set of consumers and buyers.
Government mentality though is often more myopic and conspiratorial than what consumers and producers would normally comprehend. Many people in government cannot appreciate the importance of just leaving the entrepreneurs or producers, and the consumers to interact with each other. That is why governments tax both producers (income tax, business permit tax, franchise tax, etc.) and consumers (value-added tax, import tax, excise tax, etc.). Aside from taxation, governments also impose more sinister forms of regulation like price control.
By imposing price control, governments think the “evils” in society are the producers of innovative and revolutionary goods and services. That is why consumers rush to purchase that new product or service, resulting in higher-than-normal price hike. And governments think these innovative producers should be disallowed from making “extra high profit”, even if these producers paid extra high costs, waited extra long years to develop their product, and endured extra high taxes and regulations.
In the recently-enacted “Cheaper Medicines Law” (Republic Act No. 9052) signed into law early this month, with the implementing rules and regulations (IRR) currently being drafted by concerned government agencies, price control is among the measures that the State – through the President and upon the recommendation of the Secretary of Health – can impose to make effective and safe, yet “expensive” medicines be made more accessible and affordable to the people. As mentioned above, the premise here is that the pharmaceutical companies that produce those medicines sought after by many patients are seen by the State not as innovators and revolutionary inventors of safe and effective medicines, but as “evil” cohorts that are only after big profit at the expense of poor patients.
But is it fair to impose price control after the State itself has imposed uncontrolled taxes and uncontrolled regulations, and devised a scheme (disrespect of patent and intellectual property right through parallel importation) that can pave the way for uncontrolled entry of unsafe and ineffective drugs, a.k.a. counterfeit medicines?
My bet is that people who understand and appreciate the role of profit to embolden entrepreneurs to take high risks, to face and incur huge losses in case they will not succeed in producing an innovative and successful product, will answer ‘NO’ to this question, while bureaucrats, politicians, and people driven by envy and hatred of profit and markets will answer ‘YES’.
Even assuming, for the sake of argument, that the bureaucrats and the envious are correct in saying that the State has the right to impose uncontrolled taxes and uncontrolled regulations then control the price of medicines later, what if the price of raw materials and intermediate goods, not to mention the salaries of research scientists and pharmacologists, have increased to high levels. Is the State still justified in keeping a price cap to the final product, in this case, safe, and effective medicines?
The case of huge spikes in the price of raw materials and intermediate goods for making effective medicines has happened in India. The Indian government has that cute and magic formula to keep medicine prices low: price control through its Drug Price Control Order (DPCO) enacted in 1995. Unfortunately, the prices of raw materials and intermediate products have recently risen very steeply, by up to 100 to 200 percent, due to tight supply of such products from China. And yet the Indian government allows price hikes of active pharmaceutical ingredients (APIs) to only 10 percent. Those chemical inputs constitute up to 80 percent of the total cost of bulk drugs.
The immediate result of this situation is that many bulk drugs manufacturers will be forced to stop producing. This is according to the President of the Bulk Drugs Manufacturers Association (BDMA) of India, Narayan Reddy. So if patients need those bulk drugs and manufacturers will limit, if not stop, producing those drugs due to government price control, who will suffer, the patients or the demonized drug manufacturers? Unfortunately, both will suffer, but more so the patients. Despite this situation, the Indian government is said to be dragging its foot in addressing this issue. Do we need the same thing to happen in the Philippines?
Finally, as I have noted in my recent paper, “Promoting innovation and public health through less government intervention”, price control will allow a corrupt President and/or Secretary of Health to use the measure for extortion. Like going to big pharmaceutical companies and telling them, “Hey, we’re going to issue price controls to your best selling drugs, unless you pay us…” Not that I am saying that the current Health Secretary is corrupt, but a price control measure will encourage an ‘extortionary’ and corrupt behavior to top officials of the Health Department or Office of the President.
I have other arguments in my paper why price control is bad public policy. I just hope that the writers of the IRR of RA 9052 will consider them. Otherwise, the country will be courting future public health risks by putting the interests of the extortionists and interventionists ahead of the interest of the patients.
People understand the “seasonality” of certain commodities, and they understand the downward or upward swings in the prices of those commodities. So they do not ask for more government intervention like tomato price control, or new taxes to subsidize tomato farmers during summer months, or the establishment of another bureaucracy like a Tomato Development Authority.
Entrepreneurs, both new and incumbent, would flock to an industry or sub-industry that experiences fast demand growth, or projected to experience fast consumer demand in the near future. When suppliers in the market become plentiful, the price of the supplied commodity or service can go down, the consumers benefit, and some producers will lose money. They will then try to innovate and produce a “hybrid” product or service that will hopefully attract a new set of consumers and buyers.
Government mentality though is often more myopic and conspiratorial than what consumers and producers would normally comprehend. Many people in government cannot appreciate the importance of just leaving the entrepreneurs or producers, and the consumers to interact with each other. That is why governments tax both producers (income tax, business permit tax, franchise tax, etc.) and consumers (value-added tax, import tax, excise tax, etc.). Aside from taxation, governments also impose more sinister forms of regulation like price control.
By imposing price control, governments think the “evils” in society are the producers of innovative and revolutionary goods and services. That is why consumers rush to purchase that new product or service, resulting in higher-than-normal price hike. And governments think these innovative producers should be disallowed from making “extra high profit”, even if these producers paid extra high costs, waited extra long years to develop their product, and endured extra high taxes and regulations.
In the recently-enacted “Cheaper Medicines Law” (Republic Act No. 9052) signed into law early this month, with the implementing rules and regulations (IRR) currently being drafted by concerned government agencies, price control is among the measures that the State – through the President and upon the recommendation of the Secretary of Health – can impose to make effective and safe, yet “expensive” medicines be made more accessible and affordable to the people. As mentioned above, the premise here is that the pharmaceutical companies that produce those medicines sought after by many patients are seen by the State not as innovators and revolutionary inventors of safe and effective medicines, but as “evil” cohorts that are only after big profit at the expense of poor patients.
But is it fair to impose price control after the State itself has imposed uncontrolled taxes and uncontrolled regulations, and devised a scheme (disrespect of patent and intellectual property right through parallel importation) that can pave the way for uncontrolled entry of unsafe and ineffective drugs, a.k.a. counterfeit medicines?
My bet is that people who understand and appreciate the role of profit to embolden entrepreneurs to take high risks, to face and incur huge losses in case they will not succeed in producing an innovative and successful product, will answer ‘NO’ to this question, while bureaucrats, politicians, and people driven by envy and hatred of profit and markets will answer ‘YES’.
Even assuming, for the sake of argument, that the bureaucrats and the envious are correct in saying that the State has the right to impose uncontrolled taxes and uncontrolled regulations then control the price of medicines later, what if the price of raw materials and intermediate goods, not to mention the salaries of research scientists and pharmacologists, have increased to high levels. Is the State still justified in keeping a price cap to the final product, in this case, safe, and effective medicines?
The case of huge spikes in the price of raw materials and intermediate goods for making effective medicines has happened in India. The Indian government has that cute and magic formula to keep medicine prices low: price control through its Drug Price Control Order (DPCO) enacted in 1995. Unfortunately, the prices of raw materials and intermediate products have recently risen very steeply, by up to 100 to 200 percent, due to tight supply of such products from China. And yet the Indian government allows price hikes of active pharmaceutical ingredients (APIs) to only 10 percent. Those chemical inputs constitute up to 80 percent of the total cost of bulk drugs.
The immediate result of this situation is that many bulk drugs manufacturers will be forced to stop producing. This is according to the President of the Bulk Drugs Manufacturers Association (BDMA) of India, Narayan Reddy. So if patients need those bulk drugs and manufacturers will limit, if not stop, producing those drugs due to government price control, who will suffer, the patients or the demonized drug manufacturers? Unfortunately, both will suffer, but more so the patients. Despite this situation, the Indian government is said to be dragging its foot in addressing this issue. Do we need the same thing to happen in the Philippines?
Finally, as I have noted in my recent paper, “Promoting innovation and public health through less government intervention”, price control will allow a corrupt President and/or Secretary of Health to use the measure for extortion. Like going to big pharmaceutical companies and telling them, “Hey, we’re going to issue price controls to your best selling drugs, unless you pay us…” Not that I am saying that the current Health Secretary is corrupt, but a price control measure will encourage an ‘extortionary’ and corrupt behavior to top officials of the Health Department or Office of the President.
I have other arguments in my paper why price control is bad public policy. I just hope that the writers of the IRR of RA 9052 will consider them. Otherwise, the country will be courting future public health risks by putting the interests of the extortionists and interventionists ahead of the interest of the patients.
Friday, June 27, 2008
Abolish Income Tax 1: Low, flat tax and economic growth
While the series of oil, food, and other commodity price hikes have punctured deep into the pockets of many Filipinos and other people around the world, they have also forced the Philippines to undertake what could be unthinkable if those price spikes did not happen: an income tax cut.
Under the Comprehensive Tax Reform Package (CTRP) that became a law in 1997, personal income tax system was among the most confiscatory in the world. Under that scheme, when a person has gross annual income of Php500,000 or more (net of a few deductions), the State will confiscate Php125,000 of the Php500,000 (leaving him/her with only Php375,000 disposable or after-tax income), and any amount above Php500,000, the State will further confiscate 32 percent of it. Perhaps a Php500,000 annual income was a “big” amount in 1997 when legislators made that law. But by mid-2000s, that amount was not that big and the tax system could push a middle income family into poverty level if there are plenty of expenses, like high health care cost for a sickly family member.
The new tax relief law, Republic Act No. 9502, promises to “correct” the confiscatory provisions by, among others, exempting minimum wage earners from paying personal income tax. In Metro Manila, at Php382 a day of basic pay and cost of living allowance, that’s equivalent to Php8,400 per month (22 working days/month) or Php109,200 per year (including 13th month pay). In addition, they increased personal exemption from Php25,000 to Php50,000 for all taxpayers, and additional deduction for qualified dependents from Php8,000 to Php25,000.
I think that the best tax policy that any government can give to its citizens is zero income tax, both personal and corporate, and for government to shift its main revenue source to consumption-based taxes. There are plenty of these types of taxes currently in place: value-added tax (VAT), excise tax, import tax, travel tax, amusement tax, real property tax, vehicle registration tax, and so on. An increase in VAT from the current 12 percent to 14 or 15 percent will not meet strong opposition if there is corresponding abolition, even a drastic cut, of income tax. In addition, there are plenty of business-related taxes currently in place: documentary stamp tax, percentage tax, franchise tax, capital gains tax, withholding tax on transactions with government, business permit tax, and so on.
Income tax is wrong both in theory and practice. Theory, income tax penalizes work and performance by productive people; while rewarding (recipient of tax collections) those in government bureaucracies and political leadership, and some less-industrious, less ambitious, or economically unlucky people. A number of people are poor because of laziness and personal irresponsibility, plus the incentives of various subsidies given by the state if one is poor.
Practice, out of 34 million employed Filipinos, both in public and private sectors, only less than 3 million are filing personal income tax. Well, if those who don't have to file because of automatic deduction are included, the figure could be around 10 million, but still too far from 34 million employed people. So many people are not paying income taxes, both rich and poor; professionals, and those in informal economies. In addition, those who work for multilateral institutions like the United Nations, the World Bank, the International Monetary Fund, the Asian Development Bank, the Organization Economic Cooperation and Development, USAID, the ASEAN Secretariat, and foreign embassies are not subject to automatic personal income tax deduction. If they file and pay income tax later, fine; if they don't, fine too. And people working in these institutions, especially the technical staff and consultants are earning big, many in six-digit monthly income, tax-free!
So a move to abolish personal income tax is simply to give justice to fixed-income earners, especially those in the private sector, and to correct the inefficiency of the tax system and the tax administration. In addition, any money retained in the paychecks of people and not taken in by the State in the form of income tax is money that will be spent on many other commodities and services. A tax cut is de facto "salary increase" and will go back to the economy in the form of higher domestic consumption, say repair or remodel an old house, or buy a new one, buy more hamburger and shoes, more office and school supplies, or hire a nanny for the kids, or more domestic travel. Even more international travels should not be spurned since other foreigners also come and spend their savings here.
In the case of corporate income tax, this is an illusion. This is because corporations do not pay taxes, people do – the firm owners and stockholders in the form of lower profit and investors equity, and the consumers in the form of higher prices. Corporations are just legal entity; they are not people.
Aside from higher domestic consumption, there will be billions of dollars of foreign investments that will come in – companies from high-tax countries in Europe and North America looking for "tax havens" that recognize their hard work. The jobs to be created locally will be enormous.
But a zero income tax is next to impossible to happen in this country. No country has also done it yet. So a low, flat income tax, say 10 percent – both personal and corporate – is the next best alternative which will give respite to many struggling businessmen and employees, as well as give additional revenues for the government. Even at this rate, the potential of big influx of foreign investors wanting to come in and escape the high taxes in Western Europe and North America should be considered. Think of the hundreds of thousands, if not millions, of jobs that will be created. Many Filipinos currently working abroad and endure the pain of being away from their families and relatives will have another employment alternative – right in the country itself.
One country that experienced fast economic growth because of the introduction of low, flat tax, is Slovakia. From being a communist state under the former Soviet Union, it adopted a market economy in 1991, after the Berlin wall collapsed. In 1994, it enacted a flat tax of 19 percent for both personal and corporate income. The effect was quick: in a few years, Slovakia became the "Detroit of Europe" with the entry of plenty of foreign car manufacturers – Western European, American, Japanese, and Korean car producers. GDP grew high and unemployment went down drastically.
Ireland is another "radical" economy: from 48 percent corporate income tax, it was cut down to a mere 12 percent! The volume of economic activity that transpired after this move, all other things being equal, was huge.
One consideration that other people ask if income tax has to come down to say, 10 percent flat rate, is where to get the money for more and better roads and other infrastructure. Simple: get the money from those consumption-based taxes. Better yet, allow more toll roads. Expenditures for these infrastructures will not come from taxes, but from corporate savings and investments that will make money from motorists who will use the road more often. This is very fair. If the toll road expressway is in Luzon, taxpayers from the Visayas and Mindanao will not be burdened in building and maintaining those highways. And even among those in Luzon, those who don't use the roads (say they don't have a car) need not fork out extra taxes for those roads; only those
who frequently use those toll roads.
A citizens’ movement to push a low, flat tax leading to an ultimate zero income tax after a few years transition, is now a big challenge for us.
Under the Comprehensive Tax Reform Package (CTRP) that became a law in 1997, personal income tax system was among the most confiscatory in the world. Under that scheme, when a person has gross annual income of Php500,000 or more (net of a few deductions), the State will confiscate Php125,000 of the Php500,000 (leaving him/her with only Php375,000 disposable or after-tax income), and any amount above Php500,000, the State will further confiscate 32 percent of it. Perhaps a Php500,000 annual income was a “big” amount in 1997 when legislators made that law. But by mid-2000s, that amount was not that big and the tax system could push a middle income family into poverty level if there are plenty of expenses, like high health care cost for a sickly family member.
The new tax relief law, Republic Act No. 9502, promises to “correct” the confiscatory provisions by, among others, exempting minimum wage earners from paying personal income tax. In Metro Manila, at Php382 a day of basic pay and cost of living allowance, that’s equivalent to Php8,400 per month (22 working days/month) or Php109,200 per year (including 13th month pay). In addition, they increased personal exemption from Php25,000 to Php50,000 for all taxpayers, and additional deduction for qualified dependents from Php8,000 to Php25,000.
I think that the best tax policy that any government can give to its citizens is zero income tax, both personal and corporate, and for government to shift its main revenue source to consumption-based taxes. There are plenty of these types of taxes currently in place: value-added tax (VAT), excise tax, import tax, travel tax, amusement tax, real property tax, vehicle registration tax, and so on. An increase in VAT from the current 12 percent to 14 or 15 percent will not meet strong opposition if there is corresponding abolition, even a drastic cut, of income tax. In addition, there are plenty of business-related taxes currently in place: documentary stamp tax, percentage tax, franchise tax, capital gains tax, withholding tax on transactions with government, business permit tax, and so on.
Income tax is wrong both in theory and practice. Theory, income tax penalizes work and performance by productive people; while rewarding (recipient of tax collections) those in government bureaucracies and political leadership, and some less-industrious, less ambitious, or economically unlucky people. A number of people are poor because of laziness and personal irresponsibility, plus the incentives of various subsidies given by the state if one is poor.
Practice, out of 34 million employed Filipinos, both in public and private sectors, only less than 3 million are filing personal income tax. Well, if those who don't have to file because of automatic deduction are included, the figure could be around 10 million, but still too far from 34 million employed people. So many people are not paying income taxes, both rich and poor; professionals, and those in informal economies. In addition, those who work for multilateral institutions like the United Nations, the World Bank, the International Monetary Fund, the Asian Development Bank, the Organization Economic Cooperation and Development, USAID, the ASEAN Secretariat, and foreign embassies are not subject to automatic personal income tax deduction. If they file and pay income tax later, fine; if they don't, fine too. And people working in these institutions, especially the technical staff and consultants are earning big, many in six-digit monthly income, tax-free!
So a move to abolish personal income tax is simply to give justice to fixed-income earners, especially those in the private sector, and to correct the inefficiency of the tax system and the tax administration. In addition, any money retained in the paychecks of people and not taken in by the State in the form of income tax is money that will be spent on many other commodities and services. A tax cut is de facto "salary increase" and will go back to the economy in the form of higher domestic consumption, say repair or remodel an old house, or buy a new one, buy more hamburger and shoes, more office and school supplies, or hire a nanny for the kids, or more domestic travel. Even more international travels should not be spurned since other foreigners also come and spend their savings here.
In the case of corporate income tax, this is an illusion. This is because corporations do not pay taxes, people do – the firm owners and stockholders in the form of lower profit and investors equity, and the consumers in the form of higher prices. Corporations are just legal entity; they are not people.
Aside from higher domestic consumption, there will be billions of dollars of foreign investments that will come in – companies from high-tax countries in Europe and North America looking for "tax havens" that recognize their hard work. The jobs to be created locally will be enormous.
But a zero income tax is next to impossible to happen in this country. No country has also done it yet. So a low, flat income tax, say 10 percent – both personal and corporate – is the next best alternative which will give respite to many struggling businessmen and employees, as well as give additional revenues for the government. Even at this rate, the potential of big influx of foreign investors wanting to come in and escape the high taxes in Western Europe and North America should be considered. Think of the hundreds of thousands, if not millions, of jobs that will be created. Many Filipinos currently working abroad and endure the pain of being away from their families and relatives will have another employment alternative – right in the country itself.
One country that experienced fast economic growth because of the introduction of low, flat tax, is Slovakia. From being a communist state under the former Soviet Union, it adopted a market economy in 1991, after the Berlin wall collapsed. In 1994, it enacted a flat tax of 19 percent for both personal and corporate income. The effect was quick: in a few years, Slovakia became the "Detroit of Europe" with the entry of plenty of foreign car manufacturers – Western European, American, Japanese, and Korean car producers. GDP grew high and unemployment went down drastically.
Ireland is another "radical" economy: from 48 percent corporate income tax, it was cut down to a mere 12 percent! The volume of economic activity that transpired after this move, all other things being equal, was huge.
One consideration that other people ask if income tax has to come down to say, 10 percent flat rate, is where to get the money for more and better roads and other infrastructure. Simple: get the money from those consumption-based taxes. Better yet, allow more toll roads. Expenditures for these infrastructures will not come from taxes, but from corporate savings and investments that will make money from motorists who will use the road more often. This is very fair. If the toll road expressway is in Luzon, taxpayers from the Visayas and Mindanao will not be burdened in building and maintaining those highways. And even among those in Luzon, those who don't use the roads (say they don't have a car) need not fork out extra taxes for those roads; only those
who frequently use those toll roads.
A citizens’ movement to push a low, flat tax leading to an ultimate zero income tax after a few years transition, is now a big challenge for us.
Monday, June 09, 2008
Pol. Ideology 9: Liberty and Choice, Atlanta and HK Conferences
I attended two international conferences recently. First, the Atlas Liberty Forum in Atlanta, Georgia, USA last April, and the Pacific Rim Policy Exchange in Hong Kong this week. One article per conference below.
(1) Liberty and Choice vs. Dictation and Extortion
April 30, 2008
The Atlas Economic Research Foundation (www.atlasusa.org), a think tank based in Arlington, Virginia, USA, held its 8th Liberty Forum in Atlanta, Georgia, USA last April 25-26, 2008. Atlas gave me a modest travel grant, so I was able to go there as one of the 300+ participants from many countries.
The Liberty Forum is an annual event organized by Atlas and held in several cities in the US. Its main purpose is to gather many leaders of free market-oriented think tanks and public policy institutes, as well as some scholars and corporate leaders who believe in individual liberty and free market, enable them to meet and network with each other. There are also lectures and fora on selected topics, like this year, one session was “Promoting freedom in difficult countries” and the speakers were from Iran, Ghana, Mongolia and Venezuela.
When we formed our own think tank here in Manila, the Minimal Government Thinkers, Inc., our goal is very clear and well-defined: to advance a society of free, responsible and self-reliant individuals who demand less government, less taxes and less regulations. In short, a society that gives utmost importance to individual liberty and choice, and fights dictation in many facets of our lives, dictation and regulations that often invite extortionary behavior from those who think individuals should be guided upon, even dictated upon, on how they should conduct their lives. Like how much they can keep from their monthly income, who should be over-taxed, who should be over-subsidized, and who should administer those taxation, regulation and subsidization.
That is how I and our think tank got known to fellow free market-oriented institutes in Asia and other continents of the world, like Atlas in the US and the International Policy Network in UK.
Here in the Philippines, the attempts by the state, from local to national government units, as well as from some multilateral institutions, to forcibly collectivize many aspects of our lives, is numerous. Many of which were successful and are simply being implemented, like those high and multiple taxes and fees, trade protectionism, regulations in starting and expanding a business, and so on.
A number of those forced collectivization attempts are still being planned and need institutionalization through legislation. Among these are various price control schemes for rice, petroleum, housing, wages and medicines.
This coming May 1, the President and the top legislative leaders want two new big laws: exempting the minimum wage earners from paying personal income tax, and enactment of the “cheaper medicines” bill. The former is very rationale, it even looks cute, except that the state will also adjust upwards the taxes for those earning above minimum wage.to “compensate for revenue losses”. The second is always a populist propaganda, and two schemes the Health Department and the House of Representatives have thought of, are “generics only, no branded drugs” in physicians’ prescription, and medicine price control.
If the latter bill becomes a law, it will have 2 perverse results. One is killing choice – physicians will have no more option to choose and prescribe a certain medicine brand that they think can cure their patients given their particular illness. And two, create an extortionary environment. If the President and/or the Secretary of the Health Department are corrupt, all they have to do is go to the biggest pharmaceutical companies (generics or branded) and tell them, “hey, we will put your best-selling drugs under price control, unless you pay us.”
The price system is always the best indicator of the usefulness and availability of a certain product or service. Cheap ones are always attractive, but there are dangers that those cheap goods are of bad quality and in the case of medicines, could be unsafe and fatal. Expensive products are unattractive, but they often bring with them reliable names or brands for their manufacturers and producers, which translate to effective and safe products.
There are many factors why a product becomes expensive. Among the prominent ones are one, government taxes and fees – they are always inflationary, they always make the taxed products become more expensive. Two, the high cost of product research and development (R&D) and innovation. Copycats are always cheap because their manufacturers did not spend a single amount in product development and innovation. Three, monopolistic or oligopolistic structure of the market; ie, the fewer the sellers, the greater the tendency of the few or lone seller to abuse the market and bleed the consumers.
Note that in 2 or all of the 3 major factors mentioned above, government is involved. R&D and the cost of innovation is always very costly because of strict government health, sanitary and environmental regulations.
And so, if government intervention is costly and make things expensive, why would we seek another set of government intervention – through wage control and higher taxation of skilled laborers, those earning above the minimum wage, and medicine price control, as well as killing choice for physicians and patients?
Not only are we hoodwinked of the excesses and distortions by past government intervention and dictation. We are also hoodwinked to believe that we need more of the same abuses and dictations.
If we value our individual liberty, not their liberty to dictate to us what is supposedly good for us, then let us say NO to their attempts and dangerous legislations.
(2) Individual Liberty in the Pacific Rim
Individual liberty is a subject that is often subsumed, if ever considered at all, under general concepts like collective liberty and national sovereignty. This is wrong because if liberty and freedom are to have serious meanings, they must redound to individual liberty. The collective is composed of individuals. If individuals are considered as plain adjuncts and appendages of the collective, then only the leaders of the collective have liberty and power to selectively choose what rights and liberty the individuals can have, and what rights and liberty they cannot have.
This subject is the theme of the recent “Pacific Rim Policy Exchange” held in Hong Kong on 04-05 June 2008. It was sponsored by four free market-oriented think tanks: the U.S.-based Property Rights Alliance, the Americans for Tax Reforms, U.K.-based International Policy Network, and Hongkong-based Lion Rock Institute.
The HK meeting was the second event after the first “Pacific Rim Conference” held in Honolulu, Hawaii in May 2007. It was jointly sponsored by the same institutes, plus the US State Policy Network and the Asia Forum-Japan. I have attended both conferences, courtesy of IPN sponsorship.
The HK event was composed of six panels or subjects, three per day. These were (1) Real property rights: traditional rights, formal protection and economic growth; (2) Taming the beast: accountability, deregulation and transparency; (3) Free market health care reform: keeping healthy with a healthy market; (4) Intellectual property rights: protecting the engine of innovation; (5) Adaptation or accommodation: energy production and its consequences; and (6) Globalization: trade, regulation and international markets. And the speakers came from China, India, S. Korea, Sri Lanka, Taiwan, Hong Kong, Australia, Canada, US, UK and Peru. Other participants came from other Asian countries.
Among the panels that attracted me most were those on real property rights, intellectual property rights, and taming the beast (the State). It’s very enlightening, or perhaps depressing, to know that many governments around the world are responsible for very complicated, time-consuming and costly procedures in registering property so that many real owners of land, for instance, do not have peace of mind in saying that they indeed have full control of their lands, whether to keep it for whatever use, or sell and exchange it for money or other real properties.
Protecting intellectual property – someone’s song composition, research data and methodology, technological invention, medical innovation, and so on – is also very important. If another singer can just steal a lesser-known musician’s songs and record them and claim them as his own composition, the latter would feel robbed. If other companies, including state enterprises, can just steal the formula of an effective and best-selling pharmaceutical product because they were allowed to do so by the State in the name of “national emergencies”, the company that invented that medical product (and spent many years and several hundred million dollars in R&D) would also feel robbed. And there are many governments, upon the prodding of some activist groups, itching to do this kind of intervention and legalized stealing.
To me, such unnecessary bureaucracies in registering real or physical properties, and disrespect of the IPR of an innovator company, are examples of “government failure”. I firmly believe that protection of the citizens’ right to life, right to dignity, and right to private property, are the State’s main function. Running and operating banks, power plants, pension funds, hospitals, universities, or engaging in rice trading and broadband deals, are secondary or unnecessary State functions because these are better left to the private sector in a deregulated and competitive business environment. There is pressure on private enterprises to perform well and satisfy customers in a competitive and level playing field, while there is complacency, resulting in mediocrity, when a service is under the hands of government. This is because private enterprises depend on revenues from customers who voluntarily come to get their services, while government enterprises depend on subsidies from taxes and fees that are forcibly collected from the people.
And how could one tame the beast? A speaker from Hongkong suggested to “declaw it, one claw at a time, and blind it, if you can”. I agree with this proposal, although achieving it is very difficult because the number of claws, those various regulations, seem to be increasing, not decreasing. And very often, those regulations are not transparent; one would not know them all, including the fees, hidden requirements, and the number of days, weeks, or months to wait, until he/she gets there, in front of the concerned regulatory office. Forcing the government, both national and local, to become more transparent should be a good challenge for citizens since the total cost of (a) taxes and fees + (b) cost of compliance can be high which siphons the people’s energy and resources away from actual productive undertaking.
Aside from the six panels, the conference also featured two luncheon speakers and two dinner speakers during those two days, and all of them were articulate speakers. But the most influential of them all was Jimmy Lai, founder of Next Media communications in HK. He was also the main character in a documentary called “The Call of the Entrepreneur” produced by the Acton Institute. The man had a typical rags-to-riches story due to non-typical character of super-hard work and strict business ethics. He was emotional in the documentary when he related how difficult his and his family’s life was, both in mainland China until he was a teen-age migrant worker in HK, and how his philosophy in life changed after he read Friedrich Hayek’s “The Road to Serfdom”.
Is democracy a political condition? Many people would nod in answering this question. But Jimmy Lai says NO, because for him, democracy is a moral issue. The freedom that people enjoy in a democracy is a deep moral right, something that they will not experience in a dictatorship where the citizens are worth nothing except as adjunct and slaves of the State and State leaders, the dictators. Most importantly, Jimmy Lai says that what matters most is individual responsibility, how individuals should conduct their lives. Yes, individuals have the option whether they can be ambitious and hard-working, or be lazy and dependent on family or State subsidies. So his message to the State, “Leave us alone.” Incidentally, the recently published book by the President of the Americans for Tax Reform foundation, Mr. Grover Norquist, has the same title, “Leave us Alone”.
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See also:
(1) Liberty and Choice vs. Dictation and Extortion
April 30, 2008
The Atlas Economic Research Foundation (www.atlasusa.org), a think tank based in Arlington, Virginia, USA, held its 8th Liberty Forum in Atlanta, Georgia, USA last April 25-26, 2008. Atlas gave me a modest travel grant, so I was able to go there as one of the 300+ participants from many countries.
The Liberty Forum is an annual event organized by Atlas and held in several cities in the US. Its main purpose is to gather many leaders of free market-oriented think tanks and public policy institutes, as well as some scholars and corporate leaders who believe in individual liberty and free market, enable them to meet and network with each other. There are also lectures and fora on selected topics, like this year, one session was “Promoting freedom in difficult countries” and the speakers were from Iran, Ghana, Mongolia and Venezuela.
When we formed our own think tank here in Manila, the Minimal Government Thinkers, Inc., our goal is very clear and well-defined: to advance a society of free, responsible and self-reliant individuals who demand less government, less taxes and less regulations. In short, a society that gives utmost importance to individual liberty and choice, and fights dictation in many facets of our lives, dictation and regulations that often invite extortionary behavior from those who think individuals should be guided upon, even dictated upon, on how they should conduct their lives. Like how much they can keep from their monthly income, who should be over-taxed, who should be over-subsidized, and who should administer those taxation, regulation and subsidization.
That is how I and our think tank got known to fellow free market-oriented institutes in Asia and other continents of the world, like Atlas in the US and the International Policy Network in UK.
Here in the Philippines, the attempts by the state, from local to national government units, as well as from some multilateral institutions, to forcibly collectivize many aspects of our lives, is numerous. Many of which were successful and are simply being implemented, like those high and multiple taxes and fees, trade protectionism, regulations in starting and expanding a business, and so on.
A number of those forced collectivization attempts are still being planned and need institutionalization through legislation. Among these are various price control schemes for rice, petroleum, housing, wages and medicines.
This coming May 1, the President and the top legislative leaders want two new big laws: exempting the minimum wage earners from paying personal income tax, and enactment of the “cheaper medicines” bill. The former is very rationale, it even looks cute, except that the state will also adjust upwards the taxes for those earning above minimum wage.to “compensate for revenue losses”. The second is always a populist propaganda, and two schemes the Health Department and the House of Representatives have thought of, are “generics only, no branded drugs” in physicians’ prescription, and medicine price control.
If the latter bill becomes a law, it will have 2 perverse results. One is killing choice – physicians will have no more option to choose and prescribe a certain medicine brand that they think can cure their patients given their particular illness. And two, create an extortionary environment. If the President and/or the Secretary of the Health Department are corrupt, all they have to do is go to the biggest pharmaceutical companies (generics or branded) and tell them, “hey, we will put your best-selling drugs under price control, unless you pay us.”
The price system is always the best indicator of the usefulness and availability of a certain product or service. Cheap ones are always attractive, but there are dangers that those cheap goods are of bad quality and in the case of medicines, could be unsafe and fatal. Expensive products are unattractive, but they often bring with them reliable names or brands for their manufacturers and producers, which translate to effective and safe products.
There are many factors why a product becomes expensive. Among the prominent ones are one, government taxes and fees – they are always inflationary, they always make the taxed products become more expensive. Two, the high cost of product research and development (R&D) and innovation. Copycats are always cheap because their manufacturers did not spend a single amount in product development and innovation. Three, monopolistic or oligopolistic structure of the market; ie, the fewer the sellers, the greater the tendency of the few or lone seller to abuse the market and bleed the consumers.
Note that in 2 or all of the 3 major factors mentioned above, government is involved. R&D and the cost of innovation is always very costly because of strict government health, sanitary and environmental regulations.
And so, if government intervention is costly and make things expensive, why would we seek another set of government intervention – through wage control and higher taxation of skilled laborers, those earning above the minimum wage, and medicine price control, as well as killing choice for physicians and patients?
Not only are we hoodwinked of the excesses and distortions by past government intervention and dictation. We are also hoodwinked to believe that we need more of the same abuses and dictations.
If we value our individual liberty, not their liberty to dictate to us what is supposedly good for us, then let us say NO to their attempts and dangerous legislations.
(2) Individual Liberty in the Pacific Rim
Individual liberty is a subject that is often subsumed, if ever considered at all, under general concepts like collective liberty and national sovereignty. This is wrong because if liberty and freedom are to have serious meanings, they must redound to individual liberty. The collective is composed of individuals. If individuals are considered as plain adjuncts and appendages of the collective, then only the leaders of the collective have liberty and power to selectively choose what rights and liberty the individuals can have, and what rights and liberty they cannot have.
This subject is the theme of the recent “Pacific Rim Policy Exchange” held in Hong Kong on 04-05 June 2008. It was sponsored by four free market-oriented think tanks: the U.S.-based Property Rights Alliance, the Americans for Tax Reforms, U.K.-based International Policy Network, and Hongkong-based Lion Rock Institute.
The HK meeting was the second event after the first “Pacific Rim Conference” held in Honolulu, Hawaii in May 2007. It was jointly sponsored by the same institutes, plus the US State Policy Network and the Asia Forum-Japan. I have attended both conferences, courtesy of IPN sponsorship.
The HK event was composed of six panels or subjects, three per day. These were (1) Real property rights: traditional rights, formal protection and economic growth; (2) Taming the beast: accountability, deregulation and transparency; (3) Free market health care reform: keeping healthy with a healthy market; (4) Intellectual property rights: protecting the engine of innovation; (5) Adaptation or accommodation: energy production and its consequences; and (6) Globalization: trade, regulation and international markets. And the speakers came from China, India, S. Korea, Sri Lanka, Taiwan, Hong Kong, Australia, Canada, US, UK and Peru. Other participants came from other Asian countries.
Among the panels that attracted me most were those on real property rights, intellectual property rights, and taming the beast (the State). It’s very enlightening, or perhaps depressing, to know that many governments around the world are responsible for very complicated, time-consuming and costly procedures in registering property so that many real owners of land, for instance, do not have peace of mind in saying that they indeed have full control of their lands, whether to keep it for whatever use, or sell and exchange it for money or other real properties.
Protecting intellectual property – someone’s song composition, research data and methodology, technological invention, medical innovation, and so on – is also very important. If another singer can just steal a lesser-known musician’s songs and record them and claim them as his own composition, the latter would feel robbed. If other companies, including state enterprises, can just steal the formula of an effective and best-selling pharmaceutical product because they were allowed to do so by the State in the name of “national emergencies”, the company that invented that medical product (and spent many years and several hundred million dollars in R&D) would also feel robbed. And there are many governments, upon the prodding of some activist groups, itching to do this kind of intervention and legalized stealing.
To me, such unnecessary bureaucracies in registering real or physical properties, and disrespect of the IPR of an innovator company, are examples of “government failure”. I firmly believe that protection of the citizens’ right to life, right to dignity, and right to private property, are the State’s main function. Running and operating banks, power plants, pension funds, hospitals, universities, or engaging in rice trading and broadband deals, are secondary or unnecessary State functions because these are better left to the private sector in a deregulated and competitive business environment. There is pressure on private enterprises to perform well and satisfy customers in a competitive and level playing field, while there is complacency, resulting in mediocrity, when a service is under the hands of government. This is because private enterprises depend on revenues from customers who voluntarily come to get their services, while government enterprises depend on subsidies from taxes and fees that are forcibly collected from the people.
And how could one tame the beast? A speaker from Hongkong suggested to “declaw it, one claw at a time, and blind it, if you can”. I agree with this proposal, although achieving it is very difficult because the number of claws, those various regulations, seem to be increasing, not decreasing. And very often, those regulations are not transparent; one would not know them all, including the fees, hidden requirements, and the number of days, weeks, or months to wait, until he/she gets there, in front of the concerned regulatory office. Forcing the government, both national and local, to become more transparent should be a good challenge for citizens since the total cost of (a) taxes and fees + (b) cost of compliance can be high which siphons the people’s energy and resources away from actual productive undertaking.
Aside from the six panels, the conference also featured two luncheon speakers and two dinner speakers during those two days, and all of them were articulate speakers. But the most influential of them all was Jimmy Lai, founder of Next Media communications in HK. He was also the main character in a documentary called “The Call of the Entrepreneur” produced by the Acton Institute. The man had a typical rags-to-riches story due to non-typical character of super-hard work and strict business ethics. He was emotional in the documentary when he related how difficult his and his family’s life was, both in mainland China until he was a teen-age migrant worker in HK, and how his philosophy in life changed after he read Friedrich Hayek’s “The Road to Serfdom”.
Is democracy a political condition? Many people would nod in answering this question. But Jimmy Lai says NO, because for him, democracy is a moral issue. The freedom that people enjoy in a democracy is a deep moral right, something that they will not experience in a dictatorship where the citizens are worth nothing except as adjunct and slaves of the State and State leaders, the dictators. Most importantly, Jimmy Lai says that what matters most is individual responsibility, how individuals should conduct their lives. Yes, individuals have the option whether they can be ambitious and hard-working, or be lazy and dependent on family or State subsidies. So his message to the State, “Leave us alone.” Incidentally, the recently published book by the President of the Americans for Tax Reform foundation, Mr. Grover Norquist, has the same title, “Leave us Alone”.
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See also:
Pol. Ideology 5: Have Movements for Liberty Progressed? June 26, 2006
Pol. Ideology 6: Quotes from Adam Smith, February 04, 2007
Pol. Ideology 7: Individualism, Entitlement and Freedom, April 30, 2007
Pol. Ideology 8: Ideas on Liberty, September 15, 2007
Pol. Ideology 7: Individualism, Entitlement and Freedom, April 30, 2007
Pol. Ideology 8: Ideas on Liberty, September 15, 2007
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