By Mario M. Galang
The second Million People March held last October 4, 2013 at Ayala Avenue had all the looks of rage reined in. The scrap-pork marchers have far little to show by way of numbers, but there is some to offer in terms of reason. The riftt among them was real, but restrained – for how long, that is the question.
It started as an overwhelmingly spontaneous action on August 26 at the Luneta, sparked by a 10 billion-peso scam involving a pork barrel item named Priority Development Assistance Fund (PDAF). The crowd was without a leader, individual or group, and it was largely unorganized. Ground rules governed the event, ensuring that no one ruled over anybody: imaginary cordons confined each organized group within its assigned area, and kept the organized from the unorganized; you could speak to a crowd but only in your group. You raised your own call, brought your own demands, showed your own placards—all about pork. Nobody could speak on behalf of the whole crowd.
Festive and playful but never flippant, it was an action of Filipinos flying into a rage. The arrow flew as the bow released its tension, but it was an arrow without a head.
The second, October 4 event saw the ground rules changed, lending it the features of a unified action, a political rally in the classic sense. Speaker after speaker took center stage in their turn addressing a common crowd. Its number would depend on your bias, but falling within the range of 3 to 10 thousand.
After more than a month since August 26 the pork busters have finally come around to agreeing on what they want – the arrow has seemed to find its head. Put forward during the rally was the #ScrapPork Network’s “consolidated” set of eight demands.
Looking quickly at the list, four demands address the Congress (as taken up below); one addresses presumably the Ombudsman, “To have all cases against the lawmakers involved in the pork barrel scam filed no later than 5 pm on Dec 6, 2013;” another one the COA (Commission on Audit), “to release its audit of presidential funds under Aquino’s term;” and one addresses civil society organizations, “to be involved in the budget process of local government units.”
Let me take up selectively those demands that I feel are most problematic.
One of the four demands addressed to the Congress calls on the “Senate to remove all forms of pork barrel from the 2014 budget.” “Pork barrel” as used here, may mean, in its narrow sense, the ex-PDAF item. But the #ScrapPork Network’s definition covers a far broader meaning, as set out in its Unity Statement 2.0, like this: “We define pork barrel as all state funds subject to discretionary use and/or allocation by officials in all branches and in all levels of the government.”
The definition singles out “discretionary” fund because it is assumed vulnerable to corruption, which is correct. But correcting for vulnerability does not instantly demand scrapping the fund altogether; clarifying accountability, transparency, or stricter monitoring may in fact do the job. (The demand for the Congress “to pass the People’s Freedom of Information bill” is relevant here.)“Discretion” is given to allow for management flexibility. Which of the funds serve the purpose and which do not, will never be known by looking for all discretionary funds, labeling them “pork”, and throwing them all into a pit.
Another demand asks the “legislative branch of government to create an independent commission to review all laws and orders creating lump-sums in the government budget for specific purposes, and check the efficiency of these allocations.” Like discretionary fund, lump-sum fund is singled out because of vulnerability, but this demand avoids arbitrariness by merely calling for a “review” of all laws creating lump-sums. Its problem lies elsewhere. Both Houses of the Congress have respective permanent committees in charge of the annual budget, so what’s the need for an “independent commission” to do the job? Besides, unless you need a law to create this commission (in which case, why?), the “legislative branch” is not the proper body to do it.
Presumably addressed also to the Congress is the demand to “realign the President’s Social Fund and Special Purpose Funds to line agencies.” Why zero in on these funds? I think for at least three reasons, each known by its key word: presidential, discretionary and lump-sum. If so, why waste time going through the motion that the two preceding demands are expected to set into? This demand suffers again from the indiscriminate habit of some budget experts to shovel all funds into one heap because these are lump-sums and under the discretion of the President, and call them “presidential pork”. They confuse propaganda with policy.
Finally, calling on “the Aquino administration to open the bicameral budget deliberations to the public,” is a good one but misplaced: “bicameral” is bicameral, not presidential.
The arrow head looks blunt.
And now for some stuff that’s a bit over my head but which you might find worth thinking about. Here for your edification is a two-part article from Jon Frost, an economist at De Nederlandsche Bank (DNB), the central bank of the Netherlands.
Undervaluation: a second-best solution for growth? – part I by Jon Frost
In a chapter of Philippine Institutions: Growth and Prosperity for All (2010), Filomeno S. Sta. Ana III of Action for Economic Reforms makes the case for an undervaluation strategy for the Philippines. By this, he means not a specific nominal value for the exchange rate (a fixed regime) but rather a policy – led by the government, with central bank support – aiming at real depreciation of the peso, as measured by the real effective exchange rate.
He argues that this strategy would support export-led growth and help prevent costly balance of payments crises resulting from bouts of overvaluation. He notes that this is a “second-best” means of promoting growth, given that reform of institutions and markets – the “first-best solution” – will take a long time to be effective.
In this, he cites work by Harvard’s Dani Rodrik, which shows that real exchange rate undervaluation can have a positive and significant effect on growth for developing countries in general. Rodrik’s point that focusing only on institutions is like “telling developing countries that the way to get rich is to get rich” is well-taken.
Yet aside from Rodrik, there are other well-known economists who have made arguments along these lines. John Williamson, who coined the term “Washington Consensus”, also supports some undervaluation for developing countries, and also “intermediate exchange rate regimes” in between fixed and fully floating. Former Fed chairman Frederic Mishkin, who is cited several times in the paper for his 1997 paper with Bernanke, has pushed for a more flexible approach to inflation targeting – which could allow central banks to pursue an exchange rate goal alongside low inflation.
The experience of China and some others shows that undervaluation may be helpful for domestic growth and exchange rate stability – even during the crisis, when financial contagion and the impact on growth were relatively limited. Of course, this also relates to China’s closed capital account, and says nothing of spillover effects of the fixed exchange rate regime on other countries.
I appreciate Mr. Sta. Ana’s point that the government should adopt the strategy first to ensure consistency with the central bank. Policies like fiscal responsibility – through strengthened taxation and avoiding populist spending – and limiting foreign borrowing would be important. These would support the exchange rate policy and ensure the central bank and government are not pursuing incompatible goals. I have a couple of further thoughts on this line of argument, some critical, some supportive.
First, not every country can have an undervalued exchange rate. As the experience at both the global level and in Europe shows, there are two sides to every coin. Exchange rate regimes have been one factor in the massive global imbalances between China and the oil producers on the one hand, and the US and some others on the other. Persistently higher inflation rates in Greece, Spain and Ireland, combined with wage moderation in Germany, have led to huge imbalances within the euro area. The problem is generally larger on the side of deficit than of surplus countries.
Yet, if the Philippines has an undervalued exchange rate, and with it current account surpluses, and export growth, someone else must have an overvalued exchange rate, and hence current account deficits, and import growth. The exchange rate is a relative price between two currencies, and by definition not all countries can pursue undervaluation. There could be an argument that developing countries should be the beneficiaries of undervaluation, as growth is a clear policy priority – also for the developed world, which spends significant sums on development aid each year. After all, the relative impact (cost) for the global economy is likely much smaller and more broadly borne than the impact (benefit) for the Philippines. Yet someone else would have to bear the burden of overvaluation.
Second, this is precisely the sort of question that should be discussed multilaterally. Specifically the IMF would be the forum to bring this up. It is true that it is difficult for countries like the Philippines to get strong backing for a change in IMF policy (and policy advice) on their own. But it is the job of the IMF to serve as “the machinery for consultation and collaboration on international monetary problems” (Article I.i of the Articles of Agreement) and to “promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation” (Article I.iii).
The last point is very sensitive in practice, especially given the criticism of China’s exchange rate regime, and the considerable pressure from the US. The IMF has recently done new work and created a methodology to assess exchange rate misalignments as part of the External Balance Assessment. This allows policymakers to better understand external imbalances. But this applies only to imbalances in the big systemic economies, i.e. China, the US, UK, Euro area, Japan, and a number of larger advanced and emerging economies. A little bit of undervaluation in a developing country could probably be tolerated, if this is seen as support for a development strategy. Yet it should be presented and discussed multilaterally.
Third, there is an important link with other policy areas like capital account openness, due to the so-called impossible trinity. In the next column, we will look at implementation of an undervaluation strategy, and specifically the relationship with inflation targeting and capital account liberalization.
Undervaluation: a second-best solution for growth? – part II by Jon Frost
If an undervaluation strategy can indeed help support growth, how can it be implemented? Indeed, how does such a strategy relate to inflation targeting and to capital account liberalization?
Mr. Sta Ana is proposing a real exchange rate target, i.e. real undervaluation. As we know from the “impossible trinity”, a central bank cannot pursue a (nominal) fixed exchange rate, open capital accounts and an independent monetary policy simultaneously. One solution could be to (partially) diverge from one or both of the latter.
In the discussion on inflation targeting, I agree that a less doctrinaire approach could look at longer-term inflation prospects, which are also dependent on exchange rate stability. A mature monetary policy could also seek to prevent overvaluation, which could lead to sudden depreciations and hence risks to inflation over the longer term. Yet a change of approach should be well thought out, also for the impact on financial stability. In Europe and the US, there is a discussion on taking financial bubbles into account in monetary policy, which may require raising rates or “leaning against the wind” to prevent growing imbalances. But note that this latter strategy would go in the opposite, more “hawkish” direction. If monetary policy seeks to keep down the exchange rate – i.e. lowering interest rates more than justified by inflation expectation, a “dovish” policy – this can lead to negative real interest rates and the emergence of financial bubbles. This lends credence to the so-called “Tinbergen Rule”, that for each policy target there must be one tool, and that conversely, one tool cannot achieve two goals consistently. Look at what is happening in Turkey right now, where the central bank (CBRT) is clinging to a low policy rate to discourage capital inflows, even as inflation rises. Reserve requirements are being used in parallel, but are so far only partially effective in slowing credit growth. This is also clearly political; Turkish Prime Minister Erdoğan has attacked what he calls the [foreign] “interest rate lobby” and CBRT Governor Başçi has said that Turkey has “the most creative monetary policy in the world”. It is yet to be seen how effective this policy will be. In any case, this underlines that the central bank cannot achieve undervaluation alone, and again that consistency with government (especially fiscal) policy is needed. Run-away inflation would undermine real undervaluation.
One could also consider restrictions on the capital account. The case for a market-based control on inflows (i.e. a Brazilian tax on portfolio flows, or Chilean Unremunerated Reserve Requirement) is well-presented, but not uncontroversial. The IMF has also recently worked on a framework for capital flows, including capital flow management policies, and there has been significant debate on the issue. In the 1990’s, the IMF argued that, like trade restrictions, capital controls are an unnecessary distortion. This point of view has changed. There is some acceptance that – while the first-best strategy is more financial deepening and the development of a strong macroprudential framework – there could be a case for developing countries to liberalize capital accounts slowly, and even reinstate capital controls when other policy options have been exhausted. The point is that, while open capital accounts may be optimal in an idealized world of efficient financial markets, bringing risk diversification and savings to the most productive places, these conditions are not given in practice due to both national and global factors. In the volatile post-crisis environment, with financial de-leveraging and spillovers from unconventional monetary policy, we are even further from the idealized neo-classical world (if we were ever there in the first place). Kose, Prasad and Taylor (2009) argue that there are thresholds in financial development, below which it is not optimal to open the capital account. I am partial to this view, which seems to have informed the IMF’s recent work. Meanwhile, Rodrik (2008) ever the pragmatist, thinks that capital controls should simply be a permanent part of the international monetary system. This loses sight of the fact that capital controls tend to lose their effectiveness and be circumvented over time. Moreover, there are macro-prudential policies, such as limits on foreign exchange-denominated borrowing or open foreign exchange positions, which work similarly without explicitly targeting foreign investors. As Romeo L. Bernardo has written in this paper, such tools are also used in the Philippines. In the longer run, a sound macro-prudential framework, of the kind being developed in many developed and developing countries, could support financial stability, de-burden other areas of macro-economic policy and address the specific risks of cross-border flows. Yet for an intermediate phase toward development, it may be wise to be cautious with international investment flows, and to work on building the pre-conditions for open capital accounts (sound supervision, deepening, open equity markets) before the first-best solution can be pursued.
The author is an economist at De Nederlandsche Bank (DNB), the central bank of the Netherlands. The views expressed here are his own and do not necessarily reflect those of DNB.
**The articles were first published in BusinessWorld’s Yellow Pad.
by Filomeno S. Sta. Ana III
Green taxes, and we use the term in the broader and liberal sense to include user charges, are an essential component of a green economy. Green taxes perform three important functions, namely:
1. They generate significant revenues, which contribute to financing development, promoting equity, and maintaining macroeconomic stability.
2. They correct for the external costs of market failure. Specifically we refer to failure to capture the full costs of economic activities, including consumption that damage the environment or threaten the wellbeing of future generations. The taxes capture (or internalize) the full costs of the negative effects or spillovers.
3. Similarly, green taxes serve the sumptuary objective of altering people’s consumption behavior by increasing prices of goods that are environmentally harmful.
Biodiversity, environmental sustainability, and slowing down climate change are all public goods. In fact, amidst climate change, these are all global public goods. As public goods, government intervention is inescapable. And it goes without saying that green taxation is one of the principal tools for collective action, be this at the national level or the supra-national level.
Green taxes do yield substantial revenues, for the goods and transactions they cover are part of the day-to-day lives of peoples. Every one has a carbon footprint; almost everyone cannot avoid using non-renewable resources. The full costs of such consumption, ordinarily not reflected in the market price, can only be accounted for through taxation.
Thus even a modest tax rate translates into big revenue gains. In turn these additional revenues can be used not only to protect the environment in particular but likewise to finance development in general, especially in developing countries.
Take the case of the carbon tax. Its main objective is to address the market failure (or the negative externality) that leads to environmental damage. At the same time, the (potential) revenues from a carbon tax are huge. In June 2005, writing for Project Syndicate, Joseph Stiglitz wrote that “at current carbon prices, the value of carbon sequestration by tropical rainforests likely equals or exceeds the current level of international aid being provided to developing countries.”
Progressive taxation is a cardinal principle. That is to say, the rich or the better-off classes have to pay higher taxes or higher tax rates than the poor or the lower income group.
One can argue that green taxes are generally progressive. After all, it is the rich or the upper-class people who have a much bigger carbon footprint than the poor. They ride airplanes; they own gas-guzzling SUVs; they turn on air-conditioning units 24/7; they have all the latest entertainment gadgets that use up a lot of energy; and they wear precious metals mined from the mountains of Africa and Asia.
But of course, the poor also consume non-renewable resources and engage in activities (e.g., cutting wood for cooking or doing slash and burn for a living) that also destroy the environment.
In this context, even the poor must be subject to green taxation and regulation. After all, such taxation and regulation will ultimately be for their benefit, since they are the most adversely affected by the problems arising from climate change and environmental destruction.
Nevertheless, policy-makers can find ways to moderate the impact of the tax that affects the poor. For example, a tax imposed on petroleum can be designed in a way that poor farmers or fishermen can purchase fuel at a lower rate through, say, a voucher system. Further, the price increase in transportation from a tax hike in petroleum can be offset by a subsidy for energy-efficient mass transportation.
Such principle of progressive rates and even subsidies can likewise apply to the consumption of environment-related goods or non-renewable resources.
by Filomeno S. Sta. Ana III, Yellow Pad/Business World
I am sorry for being a party pooper; I have always been skeptical of stock market bull runs and oversubscription of foreign borrowing as indicators of a healthy economy. They manifest exuberance for the short term but do not predict and in many instances threaten long-term growth.
Undoubtedly, the surge of the local stock market and the oversubscription of the peso-dominated bonds in the global financial markets is a sign of investor bullishness toward the Philippine economy.
The Philippine Stock Exchange index has reached a record-high level of 4,000, and it is expected to breach the mark of 5,000 in 2011. The peso-denominated ten-year bond easily raised US$1.billion (or PhP44.1 billion). In fact, the peso-denominated bond were heavily oversubscribed, with demand reaching US$13.3 billion. Hence, Finance Secretary Cesar Purisima said that the bond issuance was “a landslide vote of confidence by the global financial markets” for the Philippine economy and the national leadership.
Dean de la Paz of Business Mirror takes a look at Gloria’s accomplishments.
Arroyo’s chicken-ranch economy
Through the Looking Glass/Business Mirror
OF Gloria Arroyo’s political promises, on the same credibility level as those on December 30, 2002, that lied about ambitions, eradicating poverty within a decade is another for the books.
This is the second part of the essay Filomeno S. Sta.Ana III wrote for Business World’s Yellow Pad last Monday.
Being Pro-Business is Good
by Filomeno S. Sta. Ana III
In the article titled Populism and Being Anti-Business (BusinessWorld, 16 June 2008), I said that Gloria Arroyo’s populism, while pandering to the masses, is ultimately anti-poor as well as anti-business. It is a brand of populism that weakens macroeconomic fundamentals and productivity and therefore harms the whole nation.
Her being anti-business is politically partisan, and the economic consequence of this antagonism is damaging.
In her spite toward business community members who oppose or criticize her, she has unleashed the State’s instruments to intimidate or demolish them. Corporations of businessmen sympathetic to or active in the anti-Arroyo movement are subject to tax harassment, threat of takeover, and arbitrary change of rules. Even the apolitical segment of business is hurt by corruption, cronyism, and the State’s arbitrariness in undermining contracts and reversing policies.
Being anti-business is part and parcel of Arroyo’s hostile governance that has exacted huge economic costs, especially in terms of foregone investments and jobs. The current consumer-led growth could have attracted or generated a much bigger amount of investments, if we only had a business-friendly regime. Foreign direct investments (FDI) in the Philippines, for example, pale in comparison to communist Vietnam’s FDI flows. Vietnam gets three times as much FDI as the Philippines.
The flipside of being anti-business— being pro-business— can be the catalyst to propel the country towards rapid and sustained growth. India’s success story illustrates this.
In Business World’s Yellow Pad, Filomeno Sta. Ana III, coordinator of Action for Economic Reforms, takes a look at Gloria’s pseudo-populism and finds it’s anti-poor and anti-business.
Populism and being Anti-Business
Filomeno S. Sta. Ana III
The soaring prices of oil and food, which can ignite political unrest, has led Mrs. Gloria Arroyo to undertake populist measures.
The list of populist proposals from Mrs. Arroyo and her allies in Congress is long. The measures include bringing down electricity rates, making SMS (short messaging service) or text messages free, ordering the lowering of toll rates charged by the North Luzon Expressway (NLEX), granting food and cash subsidies to the poor, and passing the legislative bill that raises the income tax exemption to a generous level.
The current populist rhetoric and actions are similar to those taken by Mrs. Arroyo before the 2004 elections. Recall that she reduced the Napocor tariffs and set about a spending binge for her to look handsome and secure partisan support before the elections. Which leads some to ask: Is Mrs. Arroyo setting her sights on the 2010 elections?
One adverse consequence of unsound populist measures is the aggravation of the fiscal situation. Thus, after the 2004 elections, the Philippines suffered a fiscal crisis. Government had to cut spending on health, education and infrastructure and impose higher taxes such as increasing the rate of the value-added tax from 10 percent to 12 percent.
The fiscal problem continues to haunt us. Tax effort remains low, and some taxes—those on sin products—are not adjusted to inflation. The brand of populism that Mrs. Arroyo promotes is exacerbating the problem.
The string of populist measures attempts to accomplish multiple objectives. Appease the economic discontent of the masses and prevent them from pouring out into the streets. Stem the growing political isolation of Mrs. Arroyo. Punish the businessmen who are critical of her. And divert public attention from the corruption scandals that can lead to her unseating. It is a kind of populism that has gone berserk, to borrow the phrase of law professor and Inquirer columnist Raul Pangalangan.
This provocative article by our colleague, Filomeno S. Sta.Ana III, appears in Business World’s Yellow Pad column, January 14, 2008.
Temper the appreciation, says GMA. Is that enough?
by Filomeno S. Sta. Ana III
Mrs. Gloria Arroyo has always trumpeted the appreciating peso as one of her major economic accomplishments. But in a recent speech on the occasion of the 107th anniversary of the Manila Police district, Mrs. Arroyo sings a slightly different tune. She said, “Now our problem is not how to defend the peso but to somehow temper the peso’s strength.”
Why she said this before the Manila police is puzzling. The police are not really knowledgeable about economics. But that Mrs. Arroyo spoke about the appreciating peso in a gathering of supposedly economically illiterate police indicates that almost everyone is now aware of the problems created by an appreciating currency. Possibly, members of the Manila police also depend on the remittances of wives or mistresses working overseas. Or possibly, some of Manila’s Finest are having a difficult time mulcting local businessmen who are complaining about losses from the currency appreciation.
But wait. Mrs. Arroyo’s statement is confounding. Even as she belatedly recognizes the pitfalls of an appreciating peso, she thinks it is still good to have a strong peso. For she likewise said that the appreciating currency is “a better problem rather than the other way around.”
That’s a confounding statement. Either it’s a pure
and simple spin or it betrays her ignorance of sound
In Business World’s Yellow Pad, Filomeno S. Sta.Ana III takes a close look at FFD.
How Relevant is Financing for Development?
Filomeno S. Sta. Ana III
FFD (Financing for Development) and MDG (Millennium Development Goals) have become ubiquitous in the development community. Democratically elected leaders, dictators, World Bank (WB) and International Monetary Fund (IMF) technocrats, United Nations (UN) bureaucrats, neo-liberals, demagogues, reformists, journalists, anti-globalization radicals, grassroots activists, and everyone else involved in making a better world are familiar with FFD and MDG.
FFD and MDG have become the buzzwords to fight poverty and bring about prosperity, especially for the less-developed countries. A commonly repeated statement, a stylized fact, is that without augmented financing (FFD), the MDG cannot be met.
The Millennium Development Goals consist of eight core goals, namely wiping out poverty and hunger, achieving universal primary education, promoting gender quality, reducing child mortality, improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, and fostering global partnerships for development. Each goal has specific, time-bound targets.
Obviously, all these goals are laudable. And they are plain and straightforward; in fact, they are mainly motherhood statements. The difficult part is how to achieve these goals.
In Business World’s Yellow Pad, JPEPA is given a once over.
JPEPA Ratification: Threat Economics
By Rene Ofreneo and Nepomuceno Malaluan
In their paper titled “JPEPA: Why the Need to Ratify”, economists Josef Yap, Erlinda Medalla and Rafaelita Aldaba outlined the arguments in support of the ratification of the Japan-Philippines Economic Partnership Agreement (JPEPA). In brief, the arguments include the following claims: a positive impact on gross domestic product (GDP), generation of jobs, and poverty reduction. Such impact is expected to result from greater access to the Japanese market in terms of trade and movement of natural persons and from declining prices, rising incomes, and increased Japanese foreign direct investment (FDI). Fail to ratify, and we lose all these opportunities.
This is the same kind of threat economics that economists deployed in the 1994 World Trade Organization (WTO) debate. In that debate, the executive, with the support of free trade economists, bamboozled everybody by saying that if we did not ratify the country’s membership in the WTO, we would lose the opportunity to create half a million new jobs in industry and another half million jobs in agriculture every year.
Now we are back in the same old game: Ratify or we lose trade, ratify or we lose markets, ratify or we lose jobs, ratify or we lose investments. They are pointing a gun at us.