State central planning vs Household decentralized planning

* This is my article in BusinessWorld last week.

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“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design… Planning leads to dictatorship because dictatorship is the most effective instrument of coercion and the enforcement of ideals and, as such, essential if central planning on a large scale is to be possible.”— Friedrich Hayek

The bigger the socioeconomic unit like a state, the less central planning should be. And the smaller the socioeconomic unit like a household, the bigger the planning should be. The family is a good example of this. Parents take care of their children until they grow up. Once the kids feel they are independent enough, they move out of the house. And moving out is an expression or an attempt at independence of the kids from the nitty-gritty of support and intervention by the parents or guardians.

In contrast, in many countries including the Philippines, as the population expands and as the needs and aspirations of the growing population further diversifies, the state bureaucratizes further and regulates and imposes more taxes. Meaningful decentralization and federalism is muted by high taxes and regulations from the central or federal government so that the states, provinces, and cities are left with little leeway for tax adjustments and regulations.

2017061563250The current tax reform program of Dutertenomics known as TRAIN (Tax Reform for Acceleration and Inclusion) is generally based on envy. While its income tax cut for the low income earners is good and commendable, its tax hike for upper middle class and the rich is not. And the government will hike the taxes of many other products and services including those consumed by the poor and lower middle class — cars, petroleum products, sugar-sweetened beverages, more services that will be covered by VAT.

This government therefore, its politicians and bureaucracies, feel that they have more entitlement to the income and wealth of the upper middle class and the rich. The implicit message is that if people aspire to become upper middle class and rich, the state will go after them, demonize them if they resist paying more taxes. And this is where the advice of Friedrich Hayek above becomes appropriate.

During the BusinessWorld Economic Forum last May 19, 2017 at Shangri-La at the Fort, one of the impressive speakers in the afternoon session was Ms. Vicky Abad of Kantar. She discussed what are the income ranges of upper and lower middle class households and their aspirations. Below is the income class differentiation she made. ONCR means Outside of the National Capital Region (NCR) or Metro Manila (See table).

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Three things are worthy of note in Ms. Abad’s presentation.

One, middle class households in C1, C2, and D classes comprise some 72% of the population or nearly three out of four households. Those in D should include previously bicycles- or jeep-riding people who now drive motorcycles or second, third-hand cars.

Two, while middle income class C1 and C2 are big consumers of fast-moving consumer goods (FMCG) or consumer packaged goods, the class D households drive about 62% of the FMCG market in value contribution.

Three, the key, constant driver of middle class aspirations is being able to provide for the needs of family. Family basic needs, health, and savings are the top three concerns. Followed by friends/bayanihan, car and house, value of work, and social status/rewards like travel.

Many of these things are not sufficiently provided by the government. There is public education, yes, but many middle class including government officials and personnel bring their kids to private schools and universities. There is public health but these people go to private hospitals and clinics when they are unwell. There is public peace and order by the police but these people employ lots of private security agencies to secure their villages, schools, shops, banks, buildings. There is public welfare department but many people still dig deep into their pockets and savings to help their fellow Filipinos struck by severe natural calamities.

With this wide gap between government taxation and low quality of public services, and the rising aspirations of the people, government central planning should decline, and households should be given more leeway, more take home pay via deep income tax cut across the board. Household planning should prevail over state central planning.

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

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Asia stockmarkets the past year

Stockmarkets, one year. PH, ID, TH and MY, respectively. Is PDu30 inspiring to business or not? Data from http://markets.wsj.com/asia

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CN’s Shanghai, Shenzhen, HK, TW, respectively. Stocks sentiment in PH seems similar with CN. Could be one reason why Du30 loves

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SG, JP, KR and IN, respectively. In these 11 economies, PH and CN are the laggards for the past 12 months.

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Investors see political and business instability in both CN and PH. Instability in the leadership of Xi and Du30, distrust in the lack of rule of law in these two countries.

Sugar tax and nanny state

Why the DOF’s sugar tax bill in Congress is lousy.

  1. The state is further addicted to tax-tax-tax mentality and policy.
  2. This 2-tier taxation (higher tax for imported sugar) is anti-WTO rules, DFA is correct.
  3. State nannyism (‘protect public health’ alibi) is fuelling more state interventionism. Tax alcohol, tobacco, soft drinks, juices. Soon it will tax litson baboy, litson manok.

See this report from BusinessWorld last week.

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That the state has hiked the tax on alcohol and tobacco products is generally accepted by the public. But taxing further soft drinks, powdered juice drinks, etc. is OA state nannyism. People own their body, not the state and politicians, not the health NGOs, etc. Simple joys by the poor like drinking powdered juice, the state will make these products become more expensive, and certain sectors like health NGOs, medical groups are clapping partly because they will get more tax money.

Earlier, a lady Senator wanted to file a bill banning unlimited rice (“unli-rice”) in restaurants. The usual alibi is “public health concern.” Trying-hard state nannyism, those politicians and state bureaucrats think they are so bright they can plan other people’s lives. Next they will penalize climbing trees and climbing roofs because they might fall and it’s bad for their health and it’s bad for public health budget.

The silent motive here is that Dutertenomics will need lots of tax-tax-tax because it will go into endless borrow-borrow-borrow from China. Improving public infra is good and there are many big private companies, local and foreign, willing to bankroll many infra projects, but this administration intends to please China — the communist dictatorial government, its banks and contractors.

PPP vs ODA, Part 2

* This is my article in BusinessWorld last week.

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“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
— Thomas Sowell (US economist and political philosopher)

This paper is a continuation of the same topic in this column last June 8. To summarize previous arguments:

  1. User-pay principle via public-private partnership (PPP) means only those whose the service or facility will pay for its construction and maintenance. As a result, the rest of the population in other parts of the country will be spared of such cost.
  1. All-taxpayers-pay principle means projects are paid by current taxpayers through the annual general appropriations act (GAA) or by future taxpayers through official development assistance (ODA). Taxpayers from Visayas and Mindanao will also pay for toll roads, dams, airports even if they hardly use these since these are located in Luzon.
  1. It is not true that infrastructure projects funded by official development assistance (ODA) and/or taxpayers through the GAA are more beneficial to the public than PPP-funded projects. Iloilo Airport — which was funded by ODA — took longer to build and incurred cost overruns compared to the PPP-funded Mactan-Cebu Airport, which remains on schedule despite initial delays.
  1. There are inherent problems and risks to the public under GAA- and ODA-funded projects since ODA funding normally has strings attached. Thus, a project funded by China ODA may require the government to hire Chinese contractors, suppliers, managers, and even workers.

We now add more reasons why the Dutertenomics’ shift from PPP to ODA (mainly from China) funding of its build-build-build plan is unwise and risky.

  1. In a Management Association of the Philippines (MAP) forum two weeks ago, finance expert Vaughn Montes cited the big contrast between ODA-funded Subic-Clark-Tarlac Expressway (SCTEx) and the PPP-funded Tarlac-Pangasinan-La Union Expressway (TPLEx). SCTEx took seven years from government approval to completion, two years delayed, and cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.
  1. Investor confidence in the Philippine economy has gained momentum compared to some of our neighbors in the region and it is not wise to constrain such confidence by ditching many PPP projects and shift to ODA and GAA funding.

The expansion of FDI in the Philippines from 2000 to 2009 (last year of the Gloria Arroyo administration) was not significant (less than twice). However, during the same period, FDI expanded almost five times in Singapore, about four times in Indonesia and Vietnam, about three times in Thailand, Cambodia, South Korea, and Taiwan.

But from 2009-2015 or just six years, FDI in the Philippines expanded two and a half times while there was only two times expansion in Singapore, Indonesia, Vietnam, and Myanmar; and less than two times expansion in Thailand, Malaysia, Hong Kong, South Korea, and Taiwan. It is this kind of investor confidence and momentum that can greatly propel the Philippines into more investments and job creation, faster growth and infrastructure buildup.

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  1. The government’s PPP Center noted that “most PPP bids received in recent years have come at lower than the approved government costs. If in the instance that actual project costs turned out higher than approved government costs, the private sector partner assumes or shoulders cost overrun risk.”
  1. 201706146745fThe China government is the least trustworthy source of ODA funding considering that it is acting belligerently and aggressively in bullying the Philippines and other ASEAN neighbors that have claims over the many islands and islets in the South China Sea or West Philippine Sea (WPS). Note also that recent China-funded projects in the country were notoriously scandal-ridden — North Rail and National Broadband Network (NBN)-ZTE projects.

The insistence of the Duterte administration to compromise the income and savings of Filipino taxpayers — even if there are many big private investors, local and foreign, that are willing to shoulder the costs and risks of infrastructure projects — may result in shenanigans and large-scale corruption.

And its consistent pronouncement of relying more on the money and contractors of the bully state across the WPS would further weaken the Philippines’ territorial claims to those islands and exclusive economic zone and weaken the rule of law.

Honest minds in the Duterte Cabinet should remind the President of the economic and political dangers that it is treading on.

US and China stockmarkets, huge divergence

One year until yesterday, US vs China stocks, below.

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What does this mean: that global investors have rising trust of the US economy but flat or rising distrust of the China economy? More trust in Trump policies but less trust in Xi policies?

I checked CNN and BBC’s business sections, seems they did not make any report of this. NYT has one. https://www.nytimes.com/…/19reuters-usa-stocks.html

CNN, BBC, NYT, others are among the top anti-Trump media outlets.

The report says it’s the tech and health companies that were the main attractors,  http://www.foxbusiness.com/…/wall-st-hits-record-highs

Then there’s this news, “Oil falls to seven-month low on more signs of growing crude glut.” This could mean that US shale producers are gaining the upperhand over OPEC countries, so back to low world oil prices. I’m waiting for sustained below $40/barrel in the coming few weeks or months. http://www.foxbusiness.com/…/oil-falls-to-seven-month

I checked Hong Kong’s Hang Seng index, while the China stocks are declining, HK’s are rising, faster than the growth in US stocks actually.

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I am a non-finance guy so I asked several friends about this development, including my friend in HK, Andrew S. if this means that there is a growing divergence in investor trust between the economies of the mainland and the HK SAR.

Andrew offered a different perspective. He said that “Of the 10 biggest companies that make up the hang Seng index.  Probably less than 5% of their combined revenue/profit comes from Hong Kong.  The Hang Seng Index is of zero value as a reflection of HK’s economy.”

I’m inclined to believe that the HK stock market has a positive, non-zero value to the overall HK economy because there is more rule of law, more policy stability in HK market than say, the PH or TH or ID or MY markets.

Mr. Trump has been making plenty of economic, fiscal, energy policies that almost reverse the 8-yrs policies of Mr. Obama. I am curious if Trump’s policies were factored in positively by investors in the US stock market. Like the recent decline in world oil prices as reflection that Trump’s energy policies are doing positively for the US. Shale oil frackers, coal producers, they are improving. And manufacturing, transport firms that are energy-intensive like airlines.

From a WSJ oped last week, June 15:

“Remember the “energy independence” preoccupation of not so long ago? The U.S. is now emerging as the world’s energy superpower and U.S. oil and gas exports are rebalancing global markets. More remarkable still, this dominance was achieved by private U.S. investment, innovation and trade—not Washington central planning.

Thanks largely to the domestic hydraulic fracturing revolution, the U.S. has been the world’s top natural gas producer since 2009, passing Russia, and the top producer of oil and petroleum hydrocarbons since 2014, passing Saudi Arabia.

Trump’s reversal of Obama energy policies is a big contributor to this. More shale gas and oil, more coal, production and exports. To surpass Russia in gas production and surpass Saudi Arabia in oil production is one big achievement.

From the reports, biggest gainers yesterday were some pharma firms since Trump is trying to get rid of Obamacare. Like United Health Group, up 14.5% since Nov 6 2016.

Meanwhile, China’s market is “very very expensive for a long while” according to another friend, Peter A. This means the bubble is slowly crashing already? Hard to predict because China’s communist government will never allow Freedom of information, will hide the real data.

More globalization means more mobility of capital, labor and technology to markets worldwide that have more rule of law.

ASEAN trade expansion and RCEP

* This is my article in BusinessWorld last June 09, 2017.

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Despite various protectionist rhetoric by many world leaders against free trade, deep inside they know that there are “net gains” from trade and there are “net losses” under protectionism and restricted trade. Thus, while the multilateral trading agreement under the World Trade Organization (WTO) is not moving significantly, bilateral and regional free trade agreements (FTAs) are everywhere.

Trade within the Association of Southeast Asian Nations (ASEAN) is among the most dynamic in the world because of their consensus on faster unilateral trade liberalization policy and near zero tariff for all 10 member-countries since 2016. The region of some 630 million consumers would naturally attract the attention of its neighbors that want to source many of their needs and imports and want to export many of their products and services.

Thus, the ASEAN + 6 (Japan, China, South Korea, India, Australia, New Zealand) evolved and later these 16 countries moved towards creating the world’s biggest FTA covering half of the planet’s total population + the Regional Comprehensive Economic Partnership (RCEP).

Plenty of negotiations still ongoing but member-countries are hoping that RCEP will be formalized within the next two years. The main thorn in the agreement is not on tariffs but on non-tariff barriers (NTBs) or non-tariff measures (NTMs).

Last May 8, Stratbase-Albert del Rosario Institute (ADRi) organized a small group economists’ roundtable discussion on the “Global Geopolitical Situation: its Impact on Australian and Philippine Economies” at the Manila Peninsula Hotel. The main speaker was Mark Thirlwell, chief economist of Australia Trade and Investment Commission (Austrade).

It was a good forum with lots of useful data and insights. Among Mark’s points were the following: (a) Global tariffs are still low but have stopped falling, (b) Free Trade Agreement (FTA) coverage has grown but may have plateaued, (c) Non-tariff barriers are rising, including temporary barriers like anti-dumping, countervailing duties and safeguards, (d) trade liberalizing measures are surpassed or outnumbered by discriminatory/protectionist measures, and (e) ASEAN countries fit this global pattern as shown in these two very clear charts.

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During the ASEAN Summit in Manila, Malaysian PM Najib Razak reemphasized the need to reduce the NTBs or non-tariff measures (NTMs) in the region, which have surged from 1,634 in 2000 to 5,975 in 2015.

Mark also said that e-commerce is also enabling trade citing the role of eBay, Amazon, and he asked if the world has already attained “peak trade” as global trade/GDP ratio has somehow plateaued at around 63% over the past few years. I argued during the open forum that like “peak food” (formulated by Thomas Malthus and later by Paul Ehrlich, others) and “peak oil” (formulated in the ’70s, reformulated in the ’90s), “peak trade” will not happen.

The average merchandise exports/GDP ratio from 2010-2015 of these Asian economies are as follows: Hong Kong 352.2%, Singapore 260.7%; Vietnam 152.7%; Malaysia 134.7%; Taiwan 114.6%; Thailand 113.6%. Yearly data I got from the ADB’s Key Indicators, November 2016 report. These are exports of goods alone. If exports of services are included, the ratio will grow much higher.

20170608bc46cASEAN countries should proceed with further trade liberalization and reduce the number of NTBs/NTMs at least among themselves. There is economic prosperity in trade expansion and misery in protectionism.

Income tax and the politics of envy

* This is my article in BusinessWorld yesterday.

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“The income tax created more criminals than any other single act of government.”
— Barry Goldwater (US businessman and five-term senator)

“The difference between death and taxes is death doesn’t get worse every time Congress meets.” 
— Will Rogers (US actor, humorist, columnist)

The tax reform plan of Dutertenomics known as Tax Reform for Acceleration and Inclusion (TRAIN) is composed of (a) overall personal income tax (PIT) cut, (b) hike in excise tax for cars and oil products, (c) hike tax for sugar-sweetened beverages, and (d) hike in number of sectors covered by the value-added tax (VAT).

This paper will focus on the income tax reform: Minimum-wage earners and those earning P250,000/year and below will pay zero income tax. The 13th month pay and other bonuses not exceeding P100,000 are also exempted from income tax. The number of tax brackets has been reduced from seven to six. And the top PIT rate of 32% for taxable income of P500,000/year or higher has been increased to 35% for taxable income of P5 million/year or higher.

To better appreciate the current PIT and proposed changes in the policy in the Philippines, let us compare the rates with our neighbors in the ASEAN.

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The proposed PHL-TRAIN indeed deserves compliment because current PIT policy is highly confiscatory and makes Barry Goldwater’s statement so accurate. Imagine earning an annual income (net of some deductions) of only $10,000 and the Philippine government automatically confiscates one-third of that.

But what the Department of Finance (DoF) and Congress did is to adopt the “increase tax rates elsewhere to compensate for lower PIT rate” philosophy. This is wrong and there are four reasons why.

First, it is possible to abolish income tax, zero, and yet government will still survive and prosper via other revenue sources. Currently there are 10 countries in the world which have zero income tax policy: Bahamas, Bahrain, Bermuda, Brunei, Cayman Islands, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. Their governments rely and thrive on selling petroleum, natural gas, lands, and/or earning from consumption-based taxes and financial transaction taxes.

Second, lower PIT rate can expand the tax base and can potentially increase overall tax revenues. More entrepreneurs and professionals from abroad as well as Filipinos working abroad will be encouraged to do business here to take advantage of lower income tax rate and hence, bigger take home pay.

Stated in a simple equation: Tax revenue (T) is a product of tax rate (t) multiplied by the number of taxpayers (N). Or (T = t x N). A decline in t can encourage the increase in N so that overall T can potentially increase, not decrease.

The DoF and Congress leaders have taken the linear and simplistic argument that lower tax rate means automatic lower revenues. They did not consider potential increase in N and T when income tax rate is significantly reduced.

Currently, Asian economies with low, flat income tax rates are Mongolia with only 10%, Macau with 12%, and Hong Kong with 15%.

Third, lower PIT even for high-income people means more take home pay, more domestic consumption which are captured by other consumption-based taxes like VAT, excise tax, property tax, motor vehicle tax, entertainment tax, travel tax and so on.

And fourth, the politics of envy is wrong. The philosophy of “demonize and overtax the rich, subsidize the poor forever” creates moral hazards problem. The implicit message is: Be careful when you become rich because the government will silently demonize you and explicitly overtax you. Aspire to remain poor, poor forever if possible because (a) your minimum wage income plus bonuses will be tax-free, (b) you get lots of freebies and subsidies, and (c) these are no timetable, forever subsidies and transfers.

When there are plenty of poor people, the government is silently saying two things: “Congratulations” and “Thank you.” Here’s how:

  1. “Congratulations — you are entitled to many subsidies and freebies: free cash transfer, free health care, free education until university, free or highly subsidized housing, free or highly subsidized e-tricycle, tractor, etc. No timetable, for life, can extend to your children and grandchildren, so long as they continue to be poor.”
  2. “Thank you — we have more justifications and alibi to harass and confiscate more from the income, wealth, properties and inheritance of the rich and super-rich (especially if they are not friends of the administration).”

Therefore, instead of raising the top PIT rate to 35%, Congress should bring it down to 25% to be more comparable with Malaysia; better if it is only 20% to be more comparable with Singapore rate.

2017060866507Society should reward people who become rich and wealthy via entrepreneurship and efficient professional work, not demonize and overtax them. We should have more millionaires and billionaires, not less; we should have more super rich people, not less.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET and Stratbase-ADRi.