My recent talks on TRAIN, inflation and Dutertenomics

Last month, BMAP wanted a speaker from BusinessWorld for one of their monthly membership meetings. A BWorld staff they know, Mark Cunanan, gave my name. So I was the guest speaker in their meeting last September 21.

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My 24-slides ppt is here, https://www.slideshare.net/Noysky/debriefing-dutertenomics-inflation-train-peso-depreciation-gdp-slowdown.

Then when I went to Gonzaga, Cagayan early this week, my friend and former classmate in UPSE-PDE, Dr. Vic Balatico who hosted me and also President of the CSU-Gonzaga faculty club or association, asked me to give a basic discourse on TRAIN and its implication on local transportation, tricycles, no taxi there, and agriculture.

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My 21-slides ppt is here, https://www.slideshare.net/Noysky/train-talong-at-tricycle.

Thank you.

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Trip around North Luzon, some observations

Last October 07, I travelled from Manila to Bugallon, Pangasinan, 200 kms. I transferred some personal stuff to my little hut in Bugallon.

Then October 08, I took this 620+ kms trip. Left Bugallon, Pangasinan around 6:30am Monday, arrived Gonzaga, Cagayan 2am Tuesday. Multiple rides, 5 bus rides, 19 hours. Tiring but good sights of northern Luzon.

Luzon trip

  1. Bugallon to Dagupan, I forgot the name of the bus, ordinary, no air-con bus Mangatarem-Dagupan.
  1. Dagupan-Pozorubio, Victory bus, ordinary. I made a mistake in taking this bus, I was in a hurry and did not check properly the signboard and just boarded the departing bus. I should have taken the bus to Agoo.
  1. Pozorubio to Vigan, Partas (first bus that came), air-con but no CR.
  1. Vigan to Laoag, Viron bus, air-con but no CR. Slow bus.
  1. Laoag to Gonzaga, Florida bus, air-con with CR. Left Laoag 8+pm.

I went to Gonzaga to visit a good friend, Dr. Florante Vic Balatico, professor at Cagayan State Univ. (CSU) Gonzaga campus. His only child is my godson. Two nights of drinks with exotic pulutan that Vic and wife Au prepared. Blue marlin sashimi, crabs, shrimps, eel, other fishes, vegetables, awww. No chicken or pork, big change from my regular food in Manila.

We did not go to Sta Ana anymore, I’ve been there before, have photos with Coast guard and Navy men there, about 15 years ago. I also gave a lecture on TRAIN law, inflation, etc. at CSU Gonzaga campus’ faculty and non-academic staff last October 10.

Last October 11, I took this 615 kms. trip, left Gonzaga, Cagayan 8am Thursday, arrived Cubao/Manila 1:30am Friday.

Gonzaga-Manila

  1. Gonzaga to Tuguegarao, aircon van or UV Express.
  1. Tuguegarao to Cubao/Manila, 5 Star aircon bus with CR.

I also strolled briefly around the newly-opened Robinson’s Mall Tuguegarao, nice place, lunch.

Among my observations on those trips:

First and foremost, too many motorcycles and tricycles now in the highway except tollways. The poor no longer ride cows or bicycles. The poor also use cell phones and FB, email to communicate, not slow mails or smoke signals. GDP growth is real and broad-base.

But these slow tricycles drive in the inner lane instead of the outer lane, they can cause vehicle congestion if the roads are going up, or in curves.

Second, many provincial buses now have CR, deluxe bus and fare difference with regular aircon bus is small. One can drink beer or lots of water inside and not worry about the next bus stop with CR.

Third, very few mini bus or jeepney in between provincial cities. Aircon vans or UV express are now the dominant transpo services. So if the poor don’t ride motorcycles to travel 30, 100 kms, they ride aircon vans, the fare is not big because of competition among many vans.

Gonzaga to Tuguegarao is 133 kms and fare is only P200. But the vans travel fast, a bit uncomfortable at first if one is used to driving slow like me. Then they stop in some areas to wait for passengers then drive fast again.

Four, lots of palay or corn drying on the highway. It’s good that many national and provincial roads are now 4-lanes, sometimes 6-lanes.

Five, a disease by some LGUs or DPWH itself, they destroy not-so-ugly roads, replace them with new roads, causing slow traffic and vehicle congestion. They do this mainly to spend excess budget before the year ends and ask another big budget the next year. There are still many barangay roads that need concreting, public money should be spent there instead….

More AI and robots = more job creation

Last year, October 12, 2017, I posted this quote and photo and argued that this further disproves the point by those who argue that “Robots, AI and modern machines will cause massive displacement of labor.”

“Computers in the future may weigh no more than 1.5 tons.”
-Popular Mechanics prediction, 1949

computer 40s

I argued then that more artificial intelligence (AI) and robots = more job creation. Why?

  1. ALL those machines, robots need humans to design them, manufacture their parts, assemble the parts, repair when they get “sick”, upgrade them, make “firewalls” vs hacking, etc.
  1. Self-driving cars, they can be hacked and the hacker will decide whether to bring the passenger to his/her destination, or at the nearest post or deep bridge at high speed. So another demand for labor to have multiple/redundant security features.
  1. Mobile phones mainly replace snail-mails, telegrams, pagers. Now there are lots of cp technicians and repair men and women, sellers and vendors of gadgets and accessories, etc.
  1. CCTVs and dash cams. More people are selling these stuff, more people will repair these stuff, upgrade, or dispose and replace them. These jobs were absent or unthinkable until about 3 decades ago.
  1. Drones will soon become like mobile phones where almost all offices and rich households will have 1, 2 or 3 drones flying, taking videos and photos. Related jobs to explode into hundreds of thousands of people selling drones, repair shops for drones, accessories for drones, and so on.

Meanwhile, many of those AI are already here — ATMs supposedly displacing bank tellers; mobile phones that displaced telephone operators, mail men/women, telegram delivery people; washing machines that displace laundrymen/women, etc.

I do not see massive displacement of labor. On the contrary, I see massive creation of new jobs that were not there or “unthinkable” some 2-3 decades ago.

In farming, very few Filipino rice farmers now use animals (cows, carabaos) for land tilling, they use hand tractors or rotor-cultivators or big tractors. On the way out are manual harvesting of rice as more combine harvest + threshing tractors are used. Farmers’ output and net income is higher with the use of machines.

The poor now seldom ride bicycles or cows, they drive their own motorcycles, tricycles, or 2nd/3rd-hand cars. With faster mobility, they can do more things, which helps improve their productivity.

AI and robots were invented because there is a demand for them. Companies and producers want to lower their production cost, consumers want to lower their buying cost. And AI, robots were invented and pleased both producers and consumers, they both win.

Meanwhile, producers and businesses that enjoy higher profit by using AI either invest more, or expand their investment somewhere else, and that creates new jobs. Or they spend more, instead of having only 1 big house, they have 2 or 3 big houses, and that spurs construction and demand for steel, cement, appliances, other capital and consumer goods.

Engineers, managers, employees of a company that employs lots of AI will experience higher income as the company makes bigger profit. What do they do with their higher income? Obviously they don’t burn or throw away the extra money, they will (a) invest part of it, the firms that get their investments can expand and hire more people. Or (b) they spend more, instead of eating out once a week, they eat out 2x or more a week, which creates or sustains jobs in the resto, hotel, bars, related businesses.

Meanwhile, yesterday’s bicycle mechanic becomes today’s motorcycle mechanic. Tomorrow he becomes a car or bus mechanic and if he perseveres further, he can become a plane or chopper mechanic in the coming years.

Trivia: from the movie “Blast from the Past”, see this quote: “He has a computer…in the house?”  https://www.youtube.com/watch?time_continue=4&v=Fs8q80NG41s

Having a one-ton computer in the house was unimaginable then.

Inflation king of Asia, world’s second worst stock market

* This is my column in BusinessWorld last October 08, 2018.

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The Philippines’ inflation rate has been rising nonstop ever since the TRAIN law was implemented: 2.9% in December 2017, 3.4% in January 2018 (first month of TRAIN law), 3.8% in February, 5.7% in July, 6.4% in August, and 6.7% in September.

This is the country’s highest inflation rate in nearly a decade, since 7.2% in February 2009. The increase largely came from the food and non-alcoholic beverages index, a big component of the overall consumer price index (CPI), which increased to 9.7% last month.

So the Philippines is now the undisputed inflation king or queen of Asia. Year to date (Ytd, January to September), 2018 inflation is already 5.0%, a lot higher than the government target of 2-4% full year 2018.

Numbers below, those with updated January-September 2018 data are Indonesia, Philippines, S. Korea, Sri Lanka, Thailand and Vietnam. The rest have January-August only (see Table 1).

Table1_100818

In the stock market, the Philippine Stock Exchange (PSEi) as of Oct. 5 closing was the second worst performing in the world. China (Shanghai) has been the #1 worst performing for several months this year but last week, it has recovered while the Philippines and Turkey continued their slide.

Last 52 weeks, PSEi (-14.8%) is also the second worst in the world after China (Shanghai, -15.8%).

Table2_100818

To control high inflation, the most visible action by the government comes from the Bangko Sentral ng Pilipinas (BSP) raising domestic interest rates. I do not think that this will be effective since the current inflation is largely cost-push, starting from TRAIN tax hikes in January and exacerbated by high world oil prices. This is not demand-pull inflation.

Another action is agricultural import liberalization, expanding rice importation to help reduce domestic rice prices, and replacing quantitative restrictions (QR) with tariffs of up to 35%, the bill is being hastened in Congress. The impact so far is not clearly felt as rice prices remain high.

One ‘action’ by government is non-action on fare hike petitions by buses, jeepneys, taxi, and air-con vans or ‘UV Express.’ The government has become terribly insensitive and Machiavellian in pinning down public land transportation operators to endure very high oil prices with no corresponding fare hike, except the P1 increase in jeepneys which is still not sufficient.

Domestic airlines’ petition to have fuel surcharge on ticket prices have been granted and this will have inflationary pressure from October onwards. Another pressure will come from a series of wage hikes.

One single most important measure that government can do to reduce inflation is to cut the VAT rate from 12% to around 8% and significantly reduce the exempted sectors. My best example for suggesting this is Malaysia. It had a gross sales tax (GST) of 6% until May then it was abolished in June. Its average inflation rate three months before (March 1.3%, April 1.4%, May 1.8%) was 1.5%, became 0.3% three months after (June 0.8%, July 0.9%, August 0.2%).

High and multiple taxes are always inflationary. To help reduce high inflation, taxes should be smaller and fewer. The number of politicians, bureaucrats and subsidies forever should be smaller and fewer too.

Mandatory and coercive welfarism by private enterprises

* This is my article in BusinessWorld last October 04, 2018.

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The private sector and civil society groups are the domain of voluntary exchange and volunteerism. In a competitive environment, people sell something, a commodity or service. If the price is good and attractive to many buyers and donors, sellers can prosper; if the price is high compared to quality, buyers and donors will shy away and sellers/providers can go bankrupt.

The government and state is the domain of force and coercion. People should not steal or damage/burn properties by others, people should not abduct, harm, shoot or kill others even if they have a valid complaint. The state will penalize them hard.

When the government coerces private enterprises to do mandatory services, to coerce price discounts and yet the state will not give a tax rebate for the decline in revenue and reduced profit, then the state abuses its coercive power and this will result in negative, unintended consequences to society.

In the Philippines, there are many new mandatory services, mandatory price discounts — on top of existing ones — proposed in Congress:

  1. Mandatory maternity leave with pay for 100 days (HB 4113) or 120 days (SB 1305), parental leave with pay for adoptive parents, additional 30 days for solo mothers (same SB). It has passed the bicameral committee.
  1. Requiring all employers to pay their employees a 14th month pay (HBs 402, 3815 & 8095).
  1. Security of Tenure (SoT) bill (SB 1826) aka Anti-ENDO bill, certified as urgent by President Duterte.
  1. Granting bereavement leave of 10 working days with pay to employees on death of an immediate family member (HBs 4071, 6043, 6581), or five working days with pay (HBs 5711 & 6119).
  1. Expanded students’ 20% fare discount (SB 1597) – to become year-round, to cover all Filipino students from elementary to college and in technical-vocational schools, to apply even during weekends, holidays and sem break, and cover all means of transportation from buses, jeepneys, taxis, tricycles, transport network vehicle services (TNVS), MRT, LRT, to airlines and passenger ships. The Senate has passed this bill on third and final reading.

Proposal #1 will lead to less hiring of women in the formal sector, so more women workers will be relegated to the informal sector where multiple labor and related laws are often not enforced.

#2, #3 and #4 will lead to less hiring of workers, men and women, and more employers will use more machines, robots and AI in work that are generally repetitive. Their customers demand stable or cheap prices so they must cut costs somewhere. Employees already have vacation leave, sick leave with pay of 15 working days each, maternity leave with pay of 60 days, etc.

#5 will lead to higher fares in land, sea and air public transportation. Since there will be many students, senior citizens, and persons with disabilities that must be given 20% discount all year round, the fare of non-students, non-senior citizens must rise to compensate for reduced revenues.

Oplas-100418Again, those proposals are on top of existing mandates and forced price discounts. These will further raise the cost of hiring people so companies will either hire less people and use more machines and unemployment can rise. Or some companies will dishonor those new laws and bribe labor inspectors instead as government corruption remains high until today.

The Philippines also has high corporate income tax (CIT) compared with many neighbors in Asia. Tax competition is very real as many countries and economies further reduce their CIT to attract more investors and make them stay.

CIT_100418

The TRABAHO (aka TRAIN 2) bill in Congress, if enacted into law, intends to remove many fiscal incentives by 2019 but will reduce CIT from 30% to 20% by 2029. Sigurista.

Since the country’s business competitiveness will be adversely affected by those mandatory welfarism by private enterprises, the government should compensate by having a deep tax cut in CIT. An 18-20% starting 2019 will improve our competitiveness.

Duterte inflation in prices and political insecurity

* This is my article in BusinessWorld on September 27, 2018.

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President Duterte’s government can be described currently as having double inflation in both consumer price index (CPI) and political insecurity index.

His economic managers’ usual and repeated alibi on why the country’s inflation rate is high is mainly because of external factors like high world oil prices and high US interest rates. This is a half-truth. The main reason is the TRAIN law that was implemented starting January this year.

From the monthly data of inflation rate, the January to August 2018 or year-to-date (ytd) average is taken. These Asian economies have complete data until August. Those with incomplete data (Cambodia, Bangladesh, etc.) are not included here (see table).

So while world oil prices and US interest rates increase, five countries have experienced lower inflation this year compared to 2017, between -0.2 (Singapore) to -2.5 (Malaysia) percentage points. Four countries have mild increase of up to 0.5% in 2018 compared to 2017: Japan, Thailand, China and Pakistan.

The Duterte government’s dishonesty in admitting the significant contribution of their TRAIN law — especially the tax hikes of oil products — disables them to realize that part 2 of oil and coal tax hikes this coming January 2019 will create another round of higher inflationary pressure.

The political insecurity index of the Duterte administration can be proxied by the latest Pulse Asia survey on the Approval and Trust ratings of the President. Its Approval rating has declined from 88% in June 2018 to 75% in September 2018 while its Trust rating has also declined by similar figures for the same period.

The consistent persecution and jailing of very vocal opposition legislators — first Senator De Lima and now Senator Trillanes — is one proof of President Duterte’s political insecurity and intolerance. While Sen. Trillanes has posted bail and is free temporarily, he can still go to jail if the administration will find other ways. After all, the coup d’etat charge again confronting him is a non-bailable offense.

They cannot arrest the spiraling inflation — only 2.9% in 2017, 3.4% in January 2018 or first month of TRAIN law, up to 6.4% in August 2018 — so they arrest vocal opposition leaders.

The government’s performance can be depicted in this hypothetical chart.

ConsumerPriceIndex_092718

Instead of aspiring to be in point A, the administration further moves away, outwards to point B where both price index and insecurity index are high.

One important policy that the government can undertake is to reduce VAT from 12% to 8% with very few exempted sectors. There is a concrete and very recent example why this policy can work.

Malaysia abolished its gross sales tax (GST), the equivalent of our VAT, as a result of an election promise in May 2018 fulfilled by PM Mahathir. With GST of 6%, Malaysia inflation rate was 1.4% in April then 1.8% in May 2018. When GST moved from 6% to zero last June, inflation rate significantly declined to 0.8% in June, 0.9% in July, and 0.2% in August. Massive, large-scale price decline across many sectors by the simple abolition of GST.

 

So President Duterte and his economic team can try the Malaysian model so that it can hopefully move towards point A in the illustration. Cut the VAT rate from 12% to 8% with very few exempted sectors.

The fast rising price of ‘Dutertenomics’

* This is my first article in the Asia Times, published last month. More than 2,700 shares as of today, thanks readers.
http://www.atimes.com/article/the-fast-rising-price-of-dutertenomics/

atimes

Inflation is finally catching up with Philippine President Rodrigo Duterte’s high octane economic stimulus measures, a fast growth-geared policy push known locally as “Dutertenomics.”

Statistics released this week showed inflation rose 5.7% in July, the fastest rate in over five years, according to the National Economic Development Authority, a state agency. It marked the fifth consecutive month that inflation breached the central bank’s 2%-4% target band, leading to market speculation that it will soon hike interest rates.

The surge in prices has sparked a local debate over whether global or local factors are more to blame. Economic analysts note that inflation rates were modest as recently as late last year, clocking in at 3% and 2.9% in November and December respectively.

However, Duterte’s controversial Tax Reform for Acceleration and Inclusion (TRAIN) law came into force in January, a broad-based tax hike that many believe has driven the inflationary trend. Indeed, inflation has steadily risen in recent months: 3.4% in January, 3.8% in February, 4.3% in March, 4.5% in April, 4.6% in May, 5.2% in June, and 5.7% in July, or almost double the December 2017 level of 2.9%.

Duterte’s tax law was passed to help finance the government’s ultra-ambitious infrastructure spending plans, estimated at 8 trillion pesos (US$150 billion) over six years, as well as social welfare programs that aim to reduce poverty from 21% to 15% by the end of his term in 2022. While taxes have risen, widespread infrastructure-building has largely failed to materialize.

Still, the Philippines has recently been among Asia’s fastest growing economies, with gross domestic product (GDP) growth of 6.9% in 2016 and 6.7% last year. But that growth is now decelerating as inflationary pressures start to weigh against consumption and investment. Second quarter GDP growth fell to 6%, from 6.6% in the first quarter. That means first half GDP growth was only 6.3%, down significantly from the government’s full-year target of 7%.

Duterte’s economic managers, including officials at the Department of Finance (DOF), National Economic Development Authority (NEDA), Department of Budget and Management (DBM) and Department of Trade and Industry (DTI), have played down the TRAIN tax’s impact on galloping prices while at the same time scrambled to offer credible alternative explanations for the inflationary surge.

They have generally pointed to three main factors supposedly beyond their policy control, namely rising global oil prices, a recent fast depreciation of the peso which is currently among Asia’s worst performing currencies this year, and “profiteering” by big and small private businesses that have allegedly unscrupulously marked up their prices.

While the TRAIN law has cut personal income taxes, it has raised several other levies, especially for energy sources such as oil, liquefied petroleum gas and coal. Sin taxes for sugary drinks and tobacco have also been upped, while an expanded 12% value-added tax (VAT) now covers more economic sectors, including electricity transmission and foreign currency-denominated sales.

Official attempts to mostly blame higher global oil prices for the local surge in prices, however, doesn’t hold statistically when compared with other net-fuel importers in the region. Indeed, other oil-importing nations such as Thailand, South Korea and Sri Lanka have all seen a decline in inflation in the first half of this year compared to their full year 2017 rates.

Philippines-inflation2

The inflation differential for developed countries between January-June 2018 vis-a-vis 2017 is also statistically miniscule, measuring -0.1 for the United Kingdom, 0.1 for Germany, 0.4 for France and the United States, and 0.6 for Canada.

Instead, it is mostly domestic factors that are driving the Philippines’ inflation situation. First and foremost, inflation is hitting the poorest 30% of Filipino households harder than other demographic groups. In the first half of 2018, overall Philippine inflation was 4.3% but for poor households it was higher at 5%.

That’s because while “food and non-alcoholic beverages” comprise only 38% of the overall Consumer Price Index (CPI) basket, used for calculating the national inflation rate, the products constitute 61% of the poor’s consumption. The telling statistics were calculated by Dr Dennis Mapa, dean of the University of the Philippines School of Statistics (UPSS).

Nor is there any near-term relief in sight. Fare hikes for taxis, buses and point-to-point air-conditioned vans will soon come on-stream, as will phase two tax hikes on oil, LPG and coal in January 2019. A third phase tax hike on energy will be imposed in January 2020 as part of the Train tax reforms. Firms are also expected to start raising wages due to labor demands over TRAIN’s impact on prices, leading to a potential virtuous cycle of inflation.