Fighting Corruption is Not Enough….Once Again

I was scanning the INQUIRER today and came across another piece of from favorite economist from the “progressive left”. What I read tempted me to post an “In the News” article. But, I figured, this is much too delicious to treat like a news story. Ok, ’nuff said. The good news – Walden Bello agrees with AP that fighting corruption is not enough. Walden points out that – Corruption, however, is unlikely to be the main cause of poverty. Wrongheaded policies are, and clean-cut technocrats have been responsible for more poverty than corrupt politicians. Which is what I have been asserting all along, last Jan 2010, in Noynoy: Wrong on Corruptionadministrative reforms are not enough and need to be partnered with a social empowerment component.

However, where Bello prescribes protectionism, I advocate a free market. But first, let’s go through what the eminent economist from the left wrote:

Afterthoughts
Why Fighting Corruption is not Enough

By Walden Bello
INQUIRER.net
First Posted 05:02:00 03/22/2010

After nine years of witnessing increasing poverty among the masses and spiraling corruption in high places, it is understandable that Filipinos see a strong correlation between corruption and poverty. And the judgment of many is probably correct that the candidates that are free of the taint of corruption stand the best chance of turning this country around. Moral leadership may not be a sufficient condition for successful leadership but it certainly has become a necessary condition in a country that has been so deprived of exemplary public figures like the Philippines.

Corruption, however, has become the explanation for all our ills, and this brings with it the danger that, after the elections, campaign rhetoric might substitute for hard analysis on the causes of poverty, leading to wrong, ineffectual prescriptions for dealing with the country’s number one problem.

Let me be more explicit: Corruption must be condemned and corrupt officials must be prosecuted because being a violation of public trust, corruption undermines faith in government and leads to an erosion of the moral bonds among citizens that serve as the foundation of good governance. Corruption, however, is unlikely to be the main cause of poverty. Wrongheaded policies are, and clean-cut technocrats have been responsible for more poverty than corrupt politicians.

The complex of policies that have pushed the Philippines into the economic quagmire over the last 30 years might be summed up in that formidable term: structural adjustment. Also known as neoliberal restructuring, it involved prioritization of debt repayment; conservative macroeconomic management that involving huge cutbacks in government spending; trade and financial liberalization; privatization and deregulation; and export-oriented production. Structural adjustment came to the Philippines courtesy of the World Bank, International Monetary Fund, and the World Trade Organization, but it was internalized and disseminated as doctrine by local technocrats and economists as doctrine.

Prioritizing Debt Repayment

Corazon Aquino was personally honest and her contribution to the reestablishment of democracy was indispensable, but her submitting to the International Monetary Fund’s demand to prioritize debt repayment over development brought about a decade of stagnation and continuing poverty. Interest payments as a percentage of total government expenditures went from 7 percent in 1980 to 28 percent in 1994. Capital expenditures, on the other hand, plunged from 26 percent to 16 percent. Since government is the biggest investor in the Philippines—indeed in any economy—the radical stripping away of capital expenditures goes a long way toward explaining the stagnant one percent average yearly growth in gross domestic product in the 1980’s and the 2.3 per cent rate in the first half of the 1990’s.

In contrast, our Southeast Asian neighbors ignored the IMF’s prescriptions. They limited debt servicing while ramping up government capital expenditures in support of growth. Not surprisingly, they grew by 6 to 10 percent from 1985 to 1995, attracting massive Japanese investment while the Philippines barely grew and gained the reputation of a depressed market that repelled investors.

Trade and Financial Liberalization

When Fidel Ramos came to power in 1992, the main agenda of his technocrats was to bring down all tariffs to 0 to 5 percent and bring the Philippines into the World Trade Organization and the ASEAN Free Trade Area (AFTA), moves that were intended to make trade liberalization irreversible. A pick-up in the growth rate in the early years of Ramos sparked hope, but the green shoots were more apparent than real, and they were, at any rate, crushed as a result of another neoliberal policy: financial liberalization. The elimination of foreign exchange controls and restrictions of speculative investment attracted billions of dollars in the period 1993-1997. But this also meant that when panic hit the ranks of foreign investors in Asia in the summer of 1997, the same lack of capital controls facilitated the stampede of billions of dollars from the country in a few short weeks in mid-1997. This pushed the economy into recession and stagnation in the next few years.

The Estrada administration did not reverse course, and under the presidency of President Gloria Macapagal-Arroyo, neoliberal policies continued to reign. New liberalization initiatives in the next few years were initiated on the trade front, with the government negotiating free trade agreements with Japan and China. These pacts were entered into despite clear evidence that trade liberalization was destroying the two pillars of the economy, industry and agriculture.

Radical unilateral trade liberalization severely destabilized our manufacturing sector, with textile and garments firms, for instance, being drastically reduced from 200 in 1970 to 10 in recent years. As one of Arroyo’s finance secretaries admitted, “there’s an uneven implementation of trade liberalization, which was to our disadvantage.” While he speculated that consumers might have benefited from the tariff liberalization, he acknowledged that “it has killed so many local industries.”

As for agriculture, the liberalization of our agricultural trade after we joined the World Trade Organization in 1995 transformed the Philippines from a net food exporting country and consolidated it into a net food importing country after the mid-1990’s. The year 2010 is the year that the China ASEAN Trade Agreement (CAFTA) negotiated by the Arroyo administration goes into effect, and the prospect of cheap Chinese produce flooding our markets has made our vegetable farmers fatalistic about their survival.

Depressive Fiscal Policy

What likewise became clear during the long Arroyo reign were the stifling effects of the debt repayment-oriented macroeconomic management policy that came with structural adjustment. With 20-25 percent of the national budget reserved for debt service payments owing to the draconian Automatic Appropriations Law, government finances were in a state of permanent and widening deficit, which the administration tried to solve by contracting more loans. Indeed, the Arroyo administration contracted more loans than the previous three administrations combined.

When the deficit reached gargantuan proportions, the government refused to take the necessary steps to contain the key factor acting as the main drain on expenditures; that is, it refused to declare a debt moratorium or at least renegotiate the terms of debt repayment to make them less punitive. At the same time, the administration did not have the political will to force the rich to take the brunt of bridging the deficit by increasing taxes on their income and improving their collection. Under pressure from the IMF, the government levied this burden on the poor and the middle class via the adoption of the expanded value added tax (EVAT) of 12 percent on purchases. The tax was passed on to poor and middle class consumers by commercial establishments, forcing them to cut back on consumption, which then boomeranged back on small merchants and entrepreneurs in the form of reduced profits, forcing many out of business.

Facing the Policy Challenge

The straitjacket of conservative macroeconomic management, trade and financial liberalization, and a subservient debt policy kept the economy from expanding significantly, resulting in the percentage of the population living in poverty, according to the World Bank, increasing from 30 to 33 percent between 2003 and 2006. By 2006, there were more poor people in the Philippines than at any other time in the country’s history.

The country’s plight under the lash of wrong policies over the last four administrations becomes even clearer in a comparative perspective. According to the United Nations Development Program Human Development Report, the Philippines registered the second lowest average yearly growth rate, 1.6 percent, in Southeast Asia in the period 1990 to 2005 —lower than that of Vietnam (5.9 percent), Cambodia (5.5 percent), and Burma (6.6 percent). The only country registering average growth below that of the Philippines was Brunei, which, being an oil-rich high-income country, could afford not to grow.

So yes, we must wage an unrelenting campaign against corruption because it destroys faith in government and weakens the moral fiber of the country. And yes, let us by all means punish corrupt officials and elect morally unquestionable people to power. But let us not mistake corruption as the principal cause of poverty and believe that anti-corruption crusades provide the main response to the country’s economic ills. The main source of our lack of economic dynamics is a wrong policy paradigm that we have allowed ourselves to be straitjacketed into.

It is disturbing that the policy errors that have led to our present state are hardly mentioned in the presidential debates. It is unfortunate that we are not taking advantage of the current international economic crisis that has dragged down our local economy to debate the wisdom of the policies of globalization and liberalization that have brought us to this impasse. Yes, the issues of corruption, management experience, and bureaucratic reform that dominate these debates are vital, but unless the winning team has the courage to reverse 30 years of failed neoliberal economic policies, the country will remain in the economic doldrums, unable to take off, with poverty possibly rising to the point of no return.

Having gone through that, these are the key points when dealing when the left’s raises the issues of protectionism and liberalization:

Bello raises the myth that high tariffs and import restrictions save Filipino jobs – nothing can be further from the truth

Tariffs are tools that can be used to further national policy – thus tariff can promote or dampen trade.  Given a competitive environment, the “progressive left” has the option of not lowering the tariffs. When there is no trade due to high tariffs, will the left step up to the plate and use their intellect to create products and innovate? Thus, far the “progressive left” has yet to show a flash of brilliance of what it means to be progressive. Instead of innovating, being creative, being competitive – the “progressive left” would rather have the Philippines remain a perpetual infant..

High tariff and import restrictions destroy Filipino jobs. Opening up the economy moves jobs from high relative cost sectors of an economy (that cannot compete) to low relative cost sectors (that can compete). This happens because imports undermine high-cost domestic activities. However, since imports are paid for with dollars, when those dollars are spent by foreigners in the Philippines, they increase employment in exporting sectors. While it is true that when there is protection, there will be more people employed in the protected activities, but this will be offset by the cost of fewer people employed elsewhere in the economy. For short, with protectionism there is a net job loss instead of gain.

Temporary protection does create higher returns in activities under competitive pressure, BUT it also reduces the incentives for adjustment. If there are technologies or organizational changes that will make an industry competitive, the expected profits will provide the necessary capital for such investments, regardless of protectionist barriers. If, on the other hand, no technology or organizational change will make an industry more competitive, then the increased income that temporary protection creates will not be reinvested by a rational manager but will be devoted to other activities (quite pronounced in our protected companies like PLDT, BAYANTEL, MAYNILAD, MERALCO, GLOBE, SM, BPI, RFM, etc.). Consequently, the evidence indicates that once protection is granted, productivity and unit costs generally deteriorate even further relative to other industries.

It is no surprise that the Philippines domestic industries have enjoyed a lot of protection for the past 30 years without notable recovery or that protectionist policies have not returned the Philippines to its once dominant position in Asia. The protectionist clauses of the more-or-less permanent Philippine constitution that restricts foreign equity and foreign ownership of real estate have also  given new meaning to the word temporary.

Foreign Direct Investments generate revenue that accelerate repayment of foreign debt AND/OR pay for public services

By restricting foreign equity and foreign ownership of real estate – the Philippines was not able to match the environment provided by the more foreign investor-friendly policy regimes of Thailand and Indonesia, despite matching the tariff rates of said competitors. Given all things being equal – tariff, productivity, labor policy, fiscal incentives – our competitors had a competitive advantage – they were not as deeply protectionist as the Philippines explicit Constitutional limits – they found a legal pathway for foreign investors to own real estate – something one which they can construct their office, their buildings, and their houses. Compared to the Philippines, you either had to get dual citizenship, renounce your previous nationality, or resort to bribery, dummies, and other fraudulent activities. As you see, Matilda, foreign investors would rather go to where there’s a lesser headache – tadada.. Indonesia and Thailand. The investor goes to the Philippines as a last alternative – in ASEAN.

While it is true that “government is the biggest investor in the Philippines—indeed in any economy” – it does not have to be the only investor, it does not have to do it alone. It can have foreign investors getting engaged in various BOT agreements. The thing is – no matter how beautifully written the BOT law is – the Constitution’s protectionist claused on foreign equity is a major turn off  – the Philippines might as well have placed the sign  – FOREIGN INVESTORS ARE NOT WELCOME IN THE PHILIPPINES. It’s not a depressed market that scared investors away, it’s a market that scared investors away with the protectionist clauses, thereby depressing the market..

Half Baked Financial and Trade Liberalization will not yield Spectacular Results

Liberalization of the Financial and Trade sectors without the accompanying liberalization in the Property ownership regime will negate competitive advantages. The “progressive left” keeps on pointing to the debt repayment factor as a hindrance. Perhaps, the “left needs to be reminded” that due to the liberalization measures pushed by FVR the Philippines was able to repay a significant portion of its debt and emerge from IMF supervision. The next logical step to unleash the full potential would have been to complete the liberalization of the economy and remove the protectionist clauses of the Constitution which placed a cap on foreign equity and foreign ownership of real estate. Meanwhile, our neighbors in ASEAN refined their legislation to allow foreigners to own land while providing for their national interests.

While we were debating the merits and demerits of liberalization and protectionism – our neighbors were reaping the benefits of liberalization. So by the time we take a breather from our incessant chatter, our neighbors just flash their mullah – and we just head to their embassy and apply for jobs in Thailand, Singapore and Indonesia.

The policy challenge boils down to this – amend the constitution to remove the protectionist clauses of the constitution; allow foreigners to own land on which they will build their business and residence – and investments in schools, hospitals, and playgrounds; large scale plantation type operations can be restructured into grower-type arrangements thus causing the economic benefits to rush down to the Filipino who does the actual tilling of the soil.

Epilogue

I agree with Walden Bello that fighting corruption is not enough. However, I disagree that liberalization is the culprit.

I assert the contrary position, pursuing liberalization policies halfheartedly within a protectionist constitution is a catastrophe that has already happened – it’s called “the Philippines”.

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4 comments

  1. Bello kind of shoots his own foot off with this statement:

    “In contrast, our Southeast Asian neighbors ignored the IMF’s prescriptions. They limited debt servicing while ramping up government capital expenditures in support of growth. Not surprisingly, they grew by 6 to 10 percent from 1985 to 1995, attracting massive Japanese investment while the Philippines barely grew and gained the reputation of a depressed market that repelled investors.”

    He’s overlooking that most of the other SE Asian countries also aggressively courted foreign investment as part of their whole package of growth initiatives. I tend to agree with him that Cory’s not repudiating the leftover debt was a mistake, but since she didn’t do that, what was a bigger mistake was to try to satisfy it while keeping foreign money out. An aggressive program of attracting foreign investment along with honoring the IMF directives, on the other hand, would have made the Philippines a superior option to the other SE Asian countries, from the point of view of the foreign investor.

  2. There’s a trend among these bloggers. They only look at the local case without comparing it to other countries. They seem to have a rejection of looking without our borders for solution. They seem fixtured on the sentimental statement that “the answer is withing ourselves”. Too bad they can’t distinguish between “ourselves” and “our own borders.” There’s a deadly anti-foreignism going around.

  3. OMG. You get it. I hope that more people are enlightened that protectionism leads to economic peril.

  4. […] this campaign, AP has pointed out the various flaws in Noynoy Aquino’s positions on corruption, the economy, oligarchs, Noynoy’s performance, hacienda luisita, and credibility – […]

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