Economic freedom in Asia means faster growth, lower prices

* This is my article in BusinessWorld the other day.

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Thanks to its rapid economic growth, the Association of Southeast Asian Nations (ASEAN) is being looked up to by other economic blocs as it celebrates its 50th anniversary this month in Manila.

The pace of trade liberalization until this decade is perhaps the world’s fastest both among ASEAN member-states, and even among those outside the group.

Free trade creates good will among people and governments across the globe. It gives foreign trade partners greater access to the home market and, in the process, these trade partners tend to open up to more ASEAN countries’ exports and investments.

Here are two tables that show the economic wonders of free trade policy — not exactly zero-tariff and minimal non-tariff barriers (NTBs) but approaching there — for the emerging economies of Asia. We will use the purchasing power parity (PPP) values of gross domestic product (GDP) to somehow equalize valuation of goods and services across the world.

Overall, the GDP size of the world at PPP values was $40.3 trillion in 1996 and it rose to $120 trillion in 2016 or an expansion of more than three times in just two decades.

ASEAN-5 refers to Indonesia, Malaysia, Philippines, Thailand, and Vietnam. G7 countries are the US, Canada, Japan, UK, Germany, France and Italy.

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Table 1 numbers show the following:

  1. Emerging and developing Asia (including China and India) is now the world’s biggest economic bloc with GDP size of $38 trillion in 2016, overtaking the G7. The expansion of GDP size in just two decades was six times, an astonishing feat. The per-capita GDP also expanded almost five times, the fastest in the world.
  2. ASEAN-5 GDP size of $6.5 trillion in 2016 was larger than the combined economies of the CIS or developing Europe or Sub-Saharan Africa. Per capita GDP expanded more than two and a half times over two decades which is larger than that attained by many other economic blocs.

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Table 2 numbers further show that:

  1. While emerging and developing Asia is only the 3rd largest bloc in the exports of goods and services in the world, selling $3.9 trillion in 2016, the size of exports has expanded 7.2 times after only two decades, the fastest in the world. In terms of price inflation, the region also showed consistent price decline and stability at only 2.9% in 2016, the lowest among developing blocs in the world.
  2. Sub-Saharan Africa and MENA remain burdened with high prices and slow expansion in exports.

Giving local consumers and manufacturers more economic freedom where they can buy and sell the various goods and services that they need and produce means empowering the whole economy. Price declines and price stability are proof that freer trade is working and are instrumental in stabilizing the supply of various traded goods and services.

There are winners and losers in free trade, the same way that there are winners and losers in protectionism. But overall, “net gains” from trade trump “net losses” from protectionism because locals are deprived by policies that limit choices and options.

20170425fd31aIt is important therefore, that emerging Asian economies like the Philippines should never lose sight of the potentials of free trade and resist protectionist aspirations that penalize the consumers while protecting local vested business interests.

Bienvenido S. Oplas, Jr. is the President of Minimal Government Thinkers and a Fellow of SEANET; both are members of Economic Freedom Network (EFN) Asia.

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Rule of law in Asia and drugs-related murders in PH

* This is my article in BusinessWorld on March 30, 2017.

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While there is continuing (legal and political) debate whether extrajudicial killings (EJK) are happening in the Duterte administration or not, there is no debate that thousands of mysterious murders, often drug-related, have occurred since President Duterte won the May 2016 elections.

So far, death toll of drug-related murders from mid-May 2016 to February 2017 is estimated at 7,000+. The Philippine National Police (PNP) released its official data, indicating that from July 1, 2016 to Jan. 24, 2017, some 2,539 “killed during police operations.”

I have no sympathy with drug lords, drug pushers, and hardened drug users/addicts who steal and commit other crimes just to sustain their addiction and trade. But I also believe that all suspects should be given due process. Armed agents of the state (PNP, NBI, PDEA, sometimes the AFP) should go through the legal process of investigation-apprehension-prosecution cycle and not commit shortcuts of outright murders based on flimsy reasons like “nanlaban eh” (fought the officers) even inside police precincts or even inside the prison cells.

There are many drug-related murders that are outside the “killed during police operations” and these were committed by armed vigilantes. Some of these “vigilantes” were found to be policemen themselves like the two officers caught in Mindoro last October 2016 after they murdered a woman.

To better address the drugs problem and related corruption and murders, we can learn from our neighbors in Asia how they enforce the rule of law, the criminal justice system in particular.

The World Justice Project (WJP) produces an annual study, the “Rule of Law Index” (ROLI) and score countries based on their performance on eight factors and 44 sub-factors. The eight factors are: (1) Constraints on Government Powers, (2) Absence of Corruption, (3) Open Government, (4) Fundamental Rights, (5) Order and Security, (6) Effective Regulatory enforcement, (7) Civil Justice, and (8) Criminal Justice.

The WJP’s Index team has developed a set of questionnaires based on the Index’s conceptual framework, then it engaged 2,700 expert surveys in 113 countries and jurisdictions and involved more than 110,000 households as respondents to the experts’ questionnaires.

Below is a summary table from ROLI 2016 in Asia. The Philippines’ scores in ROLI 2014 and 2015 reports are also included. The following acronyms stand for: SG Singapore, SK South Korea, JP Japan, HK Hong Kong, MY Malaysia, ID Indonesia, TH Thailand, PH Philippines, CN China, and CM Cambodia (see table).

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The numbers point to the following:

One, Singapore, South Korea, Japan, and Hong Kong are developed economically mainly because they have high observance and respect for the rule of law as reflected in their high ROLI scores, also high scores in component #8, the criminal justice system. In contrast, communist China and Cambodia have low respect for rule of law and have low scores.

Two, ASEAN 5 — Malaysia, Indonesia, Vietnam, Thailand and Philippines — have middle scores in overall ROLI, which is somehow good news. But in component #8, Indonesia and Philippines have low scores.

Three, the Philippines has shown consistent low scores in component #8 for the past three years. In particular, very low scores in the four highlighted items — CS Adjudication and Correctional system are not effective, the Justice system is highly discriminatory and due process is not properly observed.

Some of our developed neighbors like Singapore have death penalty against drug-related crimes, true. The difference is that the accused are given due process and the chance to prove their innocence and not summarily executed just based on suspicions.

What deters criminal behavior is stricter observance of the rule of law, the near-certainty of apprehension and imprisonment of violators, even if they may be the law enforcers themselves. This is the kind of criminal justice system that we need. Not state-sponsored or state-inspired or state-tolerated murders.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET; both institutes are members of EFN Asia.

Taxation in East Asia and PH tax reform bill

* This is my article in BusinessWorld on March 24, 2017.

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The current tax reform proposal of the Duterte administration promises to improve the Philippines’ competitiveness mainly by reducing income tax rates and cutting exemptions in value-added tax (VAT) and other fiscal incentives. The proposal has somehow created three myths in taxation.

  1. REDUCING THE INCOME TAX RATE CAN LEAD TO REVENUE LOSS.

No, for two reasons. (a) The Laffer Curve is a good reminder that tax revenues can go down as tax rates increase. High taxes are disincentives to honest business and that is why many companies are hiring good law and accounting firms to either take advantage of legal loopholes and reduce tax payments, or find technicalities bordering on dishonest tax payment. And (b) Hong Kong and Singapore are good examples that low income tax rates do attract more local and foreign businesses, which further expand the tax base.

  1. THE NEED TO RAISE EXCISE TAX FOR VEHICLES AND OIL PRODUCTS TO COMPENSATE FOR REVENUE LOSS IN INCOME TAX CUT.

No, for two reasons. (a) Vehicles and oil products are necessary for more business creation — petroleum is a public good, after all. Petroleum allows huge trucks, buses, airplanes, and ships to transport more people and goods, activities which again expand the tax base; and (b) raising the oil tax (by P6/liter across the board) further raises the cost of doing business in the country.

In the table, the Philippines is third highest in tax payment as percent of commercial profit.

While the taxes on profit and corporate income is comparable to many of its neighbors, its “other taxes” like VAT, documentary stamp tax, franchise tax, capital gains tax, excise tax, etc. charge high rates. So raising the excise tax on vehicles and oil products is a raise on “other taxes” and that will dent the attractiveness of lower income tax.

  1. NO NEED TO LOWER VAT, JUST REDUCE THE NUMBER OF EXEMPTIONS.

No. For two reasons: (a) Many industries and sectors have succeeded in their lobby for VAT exemption precisely because the 12% is high; and (b) among ASEAN countries, the Philippines, at 12%, has the highest VAT rate%; five countries have only 10% (Cambodia, Indonesia, Laos, Thailand, and Vietnam), Singapore 7%, Malaysia 6%, Myanmar 5%, Brunei 0.

See the column on tax post filing index (PFI), distance to frontier (DTF), 100 being the highest score. The Philippines has a low score of 49.8 mainly due to VAT non-refund policy. Economies with scores of 63 and above either do not have VAT or have VAT but have low compliance time with paying their corporate income tax (CIT) (see table).

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So a good compromise will be to bring the VAT back to 10% and remove all exemptions except for raw agricultural and fishery products.

Another observable point from the above numbers is that many countries in Asia (and other continents) were socialistic in their income tax policy, started after World War II until the 1980s. For instance in 1980, Malaysia, Thailand, and Taiwan have income tax rates of 60%, Philippines has 70% and South Korea has almost 90%. The faster pace of globalization from the late 1980s onwards made many governments realize that the Laffer Curve indeed is correct, that the higher the tax rate, the lower will be the business activities and overall tax revenues.

To plug endless fiscal irresponsibility also known as endless and yearly budget deficit that require endless search for higher taxes, certain public spending and subsidies must be cut and certain government offices and bureaucracies must shrink or be abolished. Governments should learn to live within their means, even live below their means, especially during years without crises so they can have fiscal surpluses and pay their ever-rising public debt stock.

Bienvenido Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET. Both institutes are members of EFN-Asia.