PES conference amidst reduced risk and uncertainty

* This is my article in BusinessWorld last November 6, 2017.

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The Philippine Economic Society (PES) annual conference is probably the most cerebral event in the field of economics and business in the country. The reason is that in the afternoon, there are eight simultaneous panel discussions on eight different topics within 1 ½ hours, each panel with 3-4 presenters giving technical papers. A coffee break then another 7-8 simultaneous panel discussions, a total of 15-16 different topics with a total of about 50 speakers and panelists, in just one afternoon.

The morning session is devoted to big personalities in government (Cabinet Secretaries, Congress leaders), multilaterals, and sometimes corporate leaders. Except on few cases, I don’t give these speakers much weight because their presentations are generally presented and discussed somewhere else and in media.

So I became a lifetime member of PES and I have attended all the past PES annual conferences in the past decade or more. The next PES annual conference will be this coming Wednesday, Nov. 8 at Novotel Hotel in Cubao, Quezon City.

This year’s theme is “Growing Amidst Risk and Uncertainty.” I have developed skepticism to subjects with generally pessimistic or alarmist titles so I checked certain numbers to see if indeed there are more economic and social risks and uncertainties now and the near future, both global and national, compared to the past few years.

My skepticism is justified because I found out that there are less risks and uncertainties, not more, now and at least next year compared to the recent past. In particular:

(1) Projected gross domestic product (GDP) growth among the world’s biggest economies US, Canada, Germany and Japan are faster than the last four years. There is projected growth slowdown in China and India, the world’s #1 and #3 biggest economies in GDP-PPP values but the rates are still high at nearly 7%.

In the ASEAN-6, the same pattern of higher growth this year and the next compared to the past four years except in Singapore.

(2) In consumer prices, projections for 2017 are higher than the last four years for the industrialized west but the uptick is not scary nor alarming. For Asia’s big economies, either there is projected decline or the rise will be mild.

(3) It is in fiscal irresponsibility, in the spend-spend-spend culture of many governments around the world, where long-term risks can materialize because of their persistent budget deficit (revenues lower than expenditures). Still, it is good to see that some welfare states like Germany and S. Korea are posting fiscal surplus this year. (see table)

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For the Philippines, note that The Economist/EIU pool of forecasters project a crack in growth momentum next year. The past Aquino administration has managed to post really strong growth compared to many countries in the planet, growth momentum until this year but expected to somehow crack starting 2018.

Sadly, I cannot attend the PES meeting this year because I am going to the US for another conference this week and hence, first time in many years that I will miss this big event. If I could attend, of the 15 different topics in the afternoon, I would attend the Energy Policy Development Program (EPDP) panel on “Power Economics: Prices, Generation and Use” or Trade topic in session A. In session B, I would attend the Friedrich Naumann Foundation for Freedom (FNF) panel on “Climate Change and the Economics of Natural Disaster” or Ateneo School of Government (ASoG)’s panel on infrastructure.

I have written a number of papers in this column on the merits of cheaper, stable energy from conventional sources and the lousiness of unstable, intermittent, expensive renewables that depend on subsidies and priority dispatch to make them “viable.” In Germany, there is a growing momentum of policy reversal in climate and energy policies because the German liberals Free Democratic Party (FDP) and politically wild Alternatives for Germany (AfD) have surged high in the recent Bundestag/Parliament elections last September and these two parties are very explicit in questioning continued renewables cronyism and endorsing cheaper, stable energy from coal.

To summarize: (a) There are less risks and uncertainties now and the near future compared to recent years; (b) Endless fiscal irresponsibility by governments will create long-term risks with rising public debt; (c) Dutertenomics of tax-tax-tax aside from kill-kill-kill in its drugs war may crack starting next year; and (d) Climate and renewables alarmism will see slow policy reversals in more countries soon.

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The sin of smuggling and corruption in the Sin tax law

* This is my article in BusinessWorld last October 23, 2017.

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The intent or purpose of higher taxation is to further penalize an act, work, or consumption, hoping to discourage them by making their prices higher while giving government and lobbyists more freebies and more money.

The unintended result of higher taxation is to encourage illicit trade, production of cheaper but lower quality goods and services while giving the corrupt and extortionists in government more money.

Such may be the experience of the Sin Tax law of 2012 or RA 10351. It has raised lots of money for government, benefitted the universal health care program of DoH-PhilHealth while enriching the smugglers, illicit traders and their government protectors.

Revenues from sin tax has significantly increased in 2013, the first year of implementation of the law. Tobacco tax in particular has more than doubled from P32B in 2012 to P70B in 2013. Meanwhile, estimates of cigarettes smuggling have also increased from 35 million packs in 2012 to 40 million packs in 2013 (see table).

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The CRC estimates are partly derived from the Oxford Economics report in 2016, “Asia: Illicit Tobacco Indicators 2015.”

The rise in smuggling and illicit trade of cigarettes is also shown by the haul of the BoC and BIR in raids in November 2016 in Bulacan, Pampanga and Pangasinan where more than P1 billion worth of illegally produced cigarettes and counterfeits were discovered. In Pangasinan alone, an illegal factory was raided, which led to the discovery of fake stamps and cigarette making/packing machines that can produce up to 3.6B cigarettes a year.

So claims by the government and advocates of RA 10351 that “8 million Filipinos have stopped smoking since the passage of the law” or “at least 70,000 smoking-related deaths have been averted since 2013” and similar pronouncements may not be true after all? Or are these numbers exaggerated?

The numbers in the table and the huge number of discovered smuggled cigarettes by government raids mean one thing — demand and consumption for tobacco products remained high despite the tax hike. Consumers simply shifted from higher-price to lower-price products, and from legal to illegal or informal sources of tobacco and alcohol products. Like lambanog and tuba.

I made an informal, verbal survey of some small sari-sari stores in a rice farming village in Bugallon, Pangasinan when I went there last month, accompanied by a local. I asked the store owners, “Has smoking and drinking incidence by the people declined, stayed about the same, or increased?”

They replied that they do not have the numbers but they observe that smoking and drinking incidence did not drop or decline. Poor people simply shifted to cheaper brands as new brands with cheap products like Mighty sprouted. The well-off continued patronizing the established higher-price brands despite the rise in prices, they simply reduced their smoking by several sticks a day.

For alcohol products, San Miguel beer is literally wiped out in poorer villages because of its higher price but the consumption of Ginebra, Emperador, Red Horse, and other products has remained the same if not increased. Drinkers usually start with the high alcohol drinks and before going home or elsewhere, they wind down to Red Horse.

Sen. Manny Pacquiao introduced Senate Bill 1599 that aims to increase the unitary excise tax on tobacco products from P30 to P60 per pack, and the annual increase be raised from 4% to 9%. His goal is to parrot the goals of the Sin tax law of 2012 — more money for government, less smoking incidence by the people.

Given the above numbers and facts on the ground, what the boxer-Senator would achieve if his bill becomes a law would be more illicit trade and more corruption in government while gaining more political pogi points for his political plans in 2022.

Instead of introducing another round of higher sin tax, legislators and executive agencies should focus on strictly implementing the existing law and plug loopholes. The proliferation of counterfeit products and stamps mean there is proliferation of corruption in government that allowed such things to happen for several years.

There is a limit to state nannyism and government intervention on how people should run their own lives. Government should limit its unlimited itch to tax-tax-tax, regulate-regulate-regulate, spend-spend-spend.

US economic growth of 3%, due to deregulation?

If we exclude the years 2008-09 because they were outliers (global financial upheaval), the Obama years seem to be the weakest since 1990. Never experienced growth of 3% or higher.

US gdp
https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/

Early peek of the Trump admin first 3 Quarters of 2017, experienced 3% growth in the last 2 quarters (Q2 and Q3).

US gdp2
https://tradingeconomics.com/united-states/gdp-growth

US gdp3Fastest 6-months growth since 2014, because of Trump or Yellen or something else? One of Financial Times’ headlines today.

If the 3%+ is retained in Q4, it will be called the “fastest 9-months growth since ____”.

This chart below could be one explanation — US stocks growth the past year was rather fast compared to other major markets (China/Shanghai, Japan/Nikkei, Germany/DAX).

US stocks

http://www.wsj.com/mdc/public/page/mdc_us_stocks.html?refresh=on

The 2008-09 crash was a product of multi-decades of moral hazards problem in housing finance, not just 8 years of the Bush Jr. era.

A friend noted that “an institutional collapse like 2008 is followed by many years of slow growth and stagnation. The Philippines had the same experience from 1983 through the 90’s. From 1991, Japan nearly had two decades of below-average growth.”

Good points, he was arguing the slow growth momentum, which actually applied also to the rest of  G7 economies. But not to China, India, other Asian economies.

My hypothesis for the rather fast growth of the US economy in the last 2 quarters —  somehow a growth momentum due to some of his deregulation, de-bureaucratism policies. And the big tax cut plan, it’s seeping into business decisions, big investments may be coming to the US from abroad and big investments in the US won’t migrate to other countries anymore.

Decline in global poverty

Cool, useful chart below. Global poverty has declined, significantly. To read it, choose a level of annual income on the vertical or y-axis and then use the blue and red lines to find on the horizontal or x-axis the corresponding share of the world population living with less than that income.

If you think the poverty line should be $1,000 per person per year, the 2003 line shows that 48% of the world population was below this poverty line; and ten years later, in 2013, 29% was below this line. A decline of 20 % points in one decade relative to this poverty line.

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Source: “No matter what extreme poverty line you choose, the share of people below that poverty line has declined globally”, April 05, 2017 by Max Roser, https://ourworldindata.org/no-matter-what-global-poverty-line

The rich are getting richer, the poor are getting middle class status. Not all of course but many of them. The poor used to ride bicycles or cow de carabao, now they ride motorcycles or 2nd, 3rd-hand cars.

Build-build-build is possible without new taxes

* This is my article in BusinessWorld last October 9, 2017.

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Among the biggest alibis given by Dutertenomics as to why we need new or higher taxes is the fact that the government needs more money to bankroll “build-build-build” hybrid PPP (public private partnerships) plans. Then warnings were issued by both government and its nongovernment allies that “no new taxes, no build-build-build.” For me, this is blackmail and should not easily be accepted by the public. Here are my three reasons.

One, there have been many past PPP projects in operation and current PPP projects under construction that did not necessitate large-scale new taxes or tax hikes (see table).

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Two, an integrated PPP (construction then operation and maintenance (O&M) under one private entity or consortium) will accomplish the task at little financial exposure and burden for the government and taxpayers. And there would be no or little need for many of these taxes. But Dutertenomics is inclined to favor hybrid PPP (construction is government via foreign loans/ODA and/or annual budget/GAA, O&M is private) for some unholy reasons like implicitly favoring China loans, China contractors, and banks. Or using administration cronies as contractors in exchange for big favors.

Compare the motive of an administration with only six years in office (only 4+ years in the case of the current regime) vs. big local companies which have been around for the past 30, 50, or 100+ years and intend to be here for the next 50, 100+ years. The former has the tendency to amass wealth quick and worry about political scandals later. The latter would try to avoid political and business scandals as they have corporate brands to protect and will bank on those brands for many decades to come here and abroad.

Three, more integrated PPP portfolio for big local firms and consortia means wider experience and more confidence in the field, bigger business opportunities to join PPP projects in our neighbors in the ASEAN and beyond. Philippine-based construction and infrastructure consortia will soon become big multinationals and players in the region and the world.

Reducing the country’s personal income tax (PIT) rate should be a social goal and a public service in itself. Earning P500,000 (little less than $10,000) or higher per year and be slapped with 32% income tax is very confiscatory and immediately qualifies the government as creator of poverty. This has been going on for many years now and should be changed asap — without raising or creating new taxes somewhere.

In Singapore, the 22% top PIT applies only for incomes of $240,000/year or higher. In Malaysia, the 28% top PIT also applies for incomes of $240,000/year or higher. The Philippines should have top PIT of 28% or lower and apply at $100,000 or higher.

Nonetheless, Dutertenomics’ TRAIN will be passed very soon because (1) Congress and Malacañang act like one-party state with no serious significant opposition or fiscalizer, and (2) dishonesty and even some blackmail were effectively used to make the public accept tax hikes. In short, coercion and deception were put to use.

After the current package of TRAIN, there will be TRAIN 2 to be introduced next year. The current administration will have been emboldened enough to create new taxes or raise existing ones anytime it wants to because Congress coercion and public deception are going well.

A government that intervenes the least, that taxes the least, is conducive to more growth, more job creation, more production of goods and services, and less inflation, less state dependence. We will hardly see that under the current administration.

Integrated PPP vs hybrid PPP

I have a video in BusinessWorld on public private partnerships (PPP), two minutes long posted some three weeks ago. So far 14k+ views, thanks readers/viewers.

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One good example why a straight, integrated PPP (construction then O&M under one entity or consortium) is better than hybrid PPP (government/ODA will do or sub-contract the construction phase, then give the O&M function to local firms/consortium later).

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I have two other videos in BW still under editing. Thank you.

Free tuition and irresponsibility

This is my article in BWorld last August 17, 2017.

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There are many reasons why the new law providing for free tuition for all students — rich and poor alike — in all state universities and colleges (SUCs) is wrong, but for this piece, we will limit them to only four arguments.

One, the government has no extra cash to cover extra spending on these already substantial expenditures. This means the deficit — which happens when revenues are lower than spending — that will require new borrowings will become bigger. The projected budget deficit rose from P353 billion in 2016 (during the Aquino government) and projected to rise to P482B this year to P524B in 2018, P576B in 2019 (see Table 1).

table1-081717

Note that the deficit is based on the cash budget, “the actual deposits and withdrawals of cash of national government agencies from the Bureau of Treasury (BTR) for payment of current and previous year’s obligations.”

If the obligation budget, “the proposed amount of commitments that the government may incur or enter into for the delivery of goods and services in a fiscal year” is considered, the deficit will be much bigger: P923B in 2017, P927B in 2018 and P968B in 2019. The law calling for free tuition in SUCs — enacted in August 2017 while the proposed 2018 budget was submitted to Congress in July 2017 — would fall in the obligation budget.

Two, spending in public elementary and secondary education is still limited and it is unwise to further expand spending in public tertiary education.

Numbers below show that out of the 16 countries and economies (10 in the ASEAN, six in Northeast Asia), hiring of teachers in the Philippines was 2nd lowest in primary/elementary education, second only to Cambodia. In secondary education, Philippines was 3rd lowest, next to Cambodia and Myanmar (see Table 2).

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Three, students who are absolutely destitute do not reach university level. They drop out after elementary or after high school and start working, especially now with the K+12 years of pre-college schooling. So those who reach universities are lower middle class to rich students.

If one sees the cars and SUVs in the University of the Philippines and many other SUCs, one will wonder why these students are getting subsidies. Budget Sec. Ben Diokno even oppose this new law and said that this welfarist program alone will cost P100B/year — on top of existing deficit and high spending.

Four, people’s values will be corrupted because personal and parental responsibility will be assumed by the state. As a result, children’s education from elementary to university level will no longer be the responsibility of their parents but of the state.

Health care is already largely a state responsibility. Soon more parents will be drinking or partying or gambling more often because their children’s education will no longer be their responsibility.

Before you know it, proponents and supporters of this lousy free tuition law will demand that each student in SUCs should be given free laptops and free Internet access. Or that the monthly water and electricity bills of the poor be paid for by the state as well.

The number of free riders, irresponsible people, and tax-hungry bureaucrats and consultants, welfare-dependents and people pretending-to-be-poor will increase.

For any problem, their “solution” is more government, more “tax-the-rich” schemes. Then people will complain of massive wastage, inefficiency, and plunder in government. As government expands, stupidity and irrationality expands.

There are several remedial measures about this new law. One is that it can be questioned and rendered void at the Supreme Court for being anti-taxpayers, anti-fiscal responsibility.

Second, it can be replaced with a new law that will void or drastically revise it, like no free tuition for rich students in SUCs while extending limited subsidies to poor students in private universities.

Three, taxpayers should remember the main authors in the House and Senate and penalize them in the next round of elections.

As someone said: “A government that’s big enough to give you everything you want is also big enough to take everything you’ve got.”