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.

Asians’ march to liberty and progress

* This is my article in BusinessWorld last January 30, 2017.

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“Progress by its very nature cannot be planned. It is knowing what we have not known before that makes us wiser men… Progress is movement for progress’ sake, for it is in the process of learning, and in the effects of having learned something new, that man enjoys the gift of his intelligence.”

— Friedrich Hayek, Chapter 3,
“The Common Sense of Progress,”
The Constitution of Liberty (1960)

Many Asian societies have experienced economic and social upheavals and ups and downs in growth and political stability for more than the past two decades. These have been expected because people aspire for improvement and, as a result, they demand change.

After going through these upheavals, societies emerge somehow stronger, better, and more dynamic.

There are many indicators of growth and development and among them is the ability of the people in developing Asian economies to (a) travel by plane, (b) buy new models of mobile phones for communication and information, and (c) have access to the Web and the Internet.

Below are the numbers for selected Asian economies, grouped into three: (1) developing north and south Asia, (2) developing South East Asia, and (c) developed Asia plus Australia. For purposes of brevity, countries with small populations, those three million and below — Bhutan, Brunei, Maldives, Mongolia — are excluded from this list (see table).

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The above numbers show the following:

(1) The pace of expansion in mobile phone subscriptions and Internet use in developing economies has been very fast over the past decade and a half, especially for India, Bangladesh and Nepal; Cambodia, Laos, Myanmar and Vietnam (CLMV). As a result, people now can learn new and more skills, or simply be regularly connected with their families, clans, and friends.

(2) The same pattern can be seen in air travel, as indicated by the number of airline passengers in the region. Indonesia and the Philippines experienced fast rate of growth in this area, along with China, India, and CLMV.

(3) Expansion in developed Asia + Australia is muted and modest compared to their developing neighbors.

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Therefore, Hayek is correct in his observation about human progress. It is the less-planned and less socially-engineered economies that are experiencing faster improvement at least in these three indicators. This is partly because the developed economies are dealing with plenty and rising government regulations that tend to restrict faster growth.

The subject of human and social progress in Asia will again be discussed in the forthcoming “Asia Liberty Forum” (ALF) in Mumbai, India, Feb. 9-11. This big international conference will be jointly sponsored by the Center for Civil Society (India), Atlas Economic Research Foundation (USA) and the Friedrich Naumann Foundation for Freedom (FNF, Germany).

Among the important topics to be discussed will be (a) overview of what’s happening in the freedom/liberal movement around the world and Asia, (b) State, private sector and liberty in a digital world, (c) Regulations for a prosperous and innovative market economy, (d) Property rights as a human right, and (e) Education of choice for all: the role of budget private schools.

The Economic Freedom Network (EFN) Asia is also participating by sending some of its regular and long-time partners in the region to the ALF. Aside from holding its own annual EFN Asia Conference, EFN is also participating in the annual ALF and the Jeju Forum for Peace and Prosperity in South Korea.

Through continuing involvement in these three important regional and global annual meetings and conferences, EFN Asia is doing its share in securing a more prosperous, more developed Asia through the path of less government planning and more market competition, deregulation, and innovation.

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

Japan and China courting the Philippines

japHere’s a news report from forbes last January 14, 2017. I think both will win. Both will have greater access to the PH’s

(a) big, young population as consumers or needed migrant labor,

(b) SE Asia’s fastest growing big economy since about 2009,

(c) nice tropical tourism destination for their people,

(d) both have quarrel over a small island that’s obviously closer to Japan than China, so both have issues over international rule of law,

(e) both have ageing population, so both would need an infusion of young migrant labor from the PH, today or tomorrow.

While many support the state-sponsored population control (aka RH law to prevent “unwanted pregnancies” that become “unwanted babies” that become “unwanted workers” and entrepreneurs someday?), the Japs, Europeans, etc. envy the PH’s big, young population. https://www.bloomberg.com/…/japan-turns-to-asia-s

(f) Both have huge, big governments that are heavily indebted (220%+ of GDP for Japan, 40%+ for China but if the debt of their state corporations and banks, local governments, private corporations are included, about 240% of GDP). So both will need the money of middle class and rich Filipino tourists who can afford to travel to more countries around the world.

Top 10 projections for Asian economies

* This is my article in BusinessWorld last January 12, 2017.

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Taking off from the paper by a friend and fellow columnist Romy Bernardo’s “Wishes for the economy in 2017” last Monday, this paper will make some raw projections of GDP size until 2026.

The base document is the IMF’s World Economic Outlook (WEO), October 2016 database. In the table below, GDP size is based on purchasing power parity (PPP) values, not nominal or current values. Actual data for 2006, 2016, and 2021 are IMF projections.

Now this paper will take a longer but very raw view by projecting potential GDP size by 2026. Here is the raw and crude methodology.

(a) Take the GDP multiple or expansion from 2026 to 2021 per country, call it Y.

(b) Assume that the same degree of expansion will occur from 2021 to 2026.

(c) GDP 2026 = GDP 2021 x (1 x Y).

Readers with more advanced data and econometric tools will scoff at this raw methodology but please understand that this is just an attempt and the limitations of the assumption have been stated. So here is what we can project in the next few years.

From this table, we can summarize important projections for selected Asian economies.

  1. In 2016, four Asian countries would remain in the 10 largest economies in the world: China, India, Japan, and Indonesia.
  1. Six of the 10 ASEAN countries would belong to the Top 40 largest economies in the world in 2016: Indonesia, Thailand, Malaysia, Philippines, Vietnam and Singapore.
  1. By 2021, Indonesia will overtake Brazil in the seventh spot and will be in a striking distance to dislodge Russia in the sixth spot.
  1. Also by 2021, the Philippines will rise to the 26th spot and Malaysia will rise to the 27th spot, overtaking Argentina and Netherlands. Malaysia and the Philippines will also belong to the club of trillion-dollar economies by around 2018 or 2019.
  1. Vietnam will rise from its 36th spot in 2016 to 33rd or 32nd in 2021, overtaking UA Emirates, Algeria, and Iraq, and possibly South Africa.
  1. By 2026, assuming that the raw projections will somehow hold, the combined size of China and India will be larger than the combined economies of US, Japan, Germany, Russia, Brazil, UK, France, Mexico, and Italy.
  1. Also by 2026, Indonesia will become the 5th largest economy in the world, overtaking Japan, Germany, Russia, and Brazil.
  1. And the Philippines will rise to the 22nd spot, further overtaking Taiwan, Nigeria, and Poland. It will also be in a striking distance to overtake Thailand and Australia by then.
  1. Pakistan and Vietnam, also having big and young population like India, Indonesia, and Philippines, will also significantly expand their economic sizes and improve their ranking.
  1. While Japan is expanding marginally, South Korea will sustain its growth. Now, a collapse of North Korea (possible within the next six to eight years) and unification of the two Koreas will possibly make them overtake France in the #10 spot.

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Many things will happen in the coming years so those IMF projections for 2021 and the assumptions made in this paper for 2026 can be considered as suggestions with some material basis. We still take actual numbers as they become available as basis for policy reforms.

 

Other Asian governments should take lessons from the experience of Europe and Japan: an ageing population will be a drag in further economic expansion. Policies that control population or heavily restrict migration are wrong, as wrong as trade protectionism, heavy taxation, and stifling business regulations. Governments should avoid these policies.

Economics, politics and inequality

A number of my friends have posted in facebook in agreement with this article from The Economist, “To be relevant, economists need to take politics into account.” so I will post to contradict it. This article or its title is misleading if not wrong because:

(1) It is saying that economists writing about plain economics are not relevant, so to make them relevant, they must write about economics + politics + sociology + anthropology + history + genderology + …?

(2) Consider a simple demand-supply price equilibrium theory. A big storm damaged crops in a major food producing region that substantially supplies food in M.Manila, so the supply goes down, the price goes up since demand remains the same. No need for politics, history, anthro, sociology, gender, etc. to inject into the analysis to make it relevant.

Now comes politics, government imposes price control on food items supplied by other regions not affected by that big storm “to protect the poor.” Things become awful, formal supply goes down, turns to “black market” supply. It is politics inserted into normal economic phenomena that distort things. And people think economists should always factor in politics, history, etc. in an otherwise simple situation. Lousy.

(3) Economists who comment on political issues — politics around the world, political ramifications of federalism and parliamentarism, revamp of the constitution, etc. — then they must insert politics, history, etc. in their analysis.

Consider this paper, “Economics versus Politics: Pitfalls of

Policy Advice” by Daron Acemoglu and James A. Robinson, Journal of Economic Perspectives—Volume 27, Number 2—Spring 2013. http://economics.mit.edu/files/10403

“Our argument is that economic policy should not just focus on removing market failures and correcting distortions but, particularly when it will affect the distribution of income and rents in society…” (last par. of the paper)

Can people, economists “remove market failures”? Wow. Only central planners would think that way. Consider these:

  1. Mr. X and his friends demand a 500 GB USB that is sold for only P1,000. Demand is there but supply is zero, so market failure.
  1. Mr. Y and his friends supply a rice variety that is said to cure 10 types of common diseases and sold at P800/kilo, no one buys their rice. Supply is there but demand is zero, so market failure.

Anyone, anytime and anywhere can create a market failure, as shown by 2 examples above. Some guys like economists (and politicians, etc.) think they can stop or remove that? Wow.

On inequality, it’s part of nature, it’s good. Otherwise people will work only few hours a day and demand that their pay, their house, healthcare, etc should be at least 1/5 that of the privileges enjoyed by Bill Gates and Henry Sy or John Gokongwei, etc. to have equality in society. The world has progressed because of respecting inequality, not forcing equality like socialist countries.

Now consider this drama by Oxfam and many other groups, institutions like the UN. https://www.oxfam.org/…/just-8-men-own-same-wealth-half

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Ok, the incomes and wealth of Bill Gates, Zuckerberg, etc. have expanded up to the troposphere, did they make people’s lives, our lives, poorer and lousier? Do we have lousy and despicable lives because Zuckerberg got richer each year because of facebook?

No. On the contrary, we enjoy more comfortable, more convenient lives because of the inventions of these super rich people. If people think that Zuckerberg et al are creating a more despicable world because of their inventions and companies, they better opt out of fb, youtube, google, iphone, etc because everytime they use those things, they contribute to further enrichment of these super super rich people.

The world enjoys more comfort, more welfare because of the innovations made by these super-efficient, super-ambitious and super-rich people. Soon people will be working only 4 or 3 days a week and still get high pay because of rising productivity (and rising inequality) introduced by those super-efficient people. We should support the expansion of more super rich people instead of demonizing them. The politics of envy is only for the envious, like Oxfam and the UN 🙂

The only way to stop rising inequality is via dictatorship. Put a gun on people’s heads and tell them to stop being too innovative, too inventive, too revolutionary in business, to stop and limit excellence.

Central planners would clap this scenario. They get huge pay and various political perks doing all types of social engineering to force equality in the world.

Top 10 positive news in Asian trade

* This is my article in BusinessWorld last January 04, 2017.

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Global trade has significantly slowed down in 2015 which is ironic because it was the start of significant oil price declines. After recovering from the 2009-2010 global financial turmoil that started in the US, global exports reached $18.3 trillion in 2011, $19.0 trillion in 2014, but declined to $16.5 trillion in 2015.

Nonetheless, there are some good news in Asian trade which battled this global trend in export decline.

Below is my list of these positive developments.

1 China, Vietnam, Hong Kong, and the Philippines did not follow this global trend. Their exports in 2015 were higher than their 2011 levels. For the Philippines, exports reached $58.6 billion in 2015, higher than 2011’s $48.3 billion.

2 Many Asian economies remain leading exporters and importers in merchandise or goods trade, led by China, Japan, South Korea, and Hong Kong.

3 Five ASEAN countries are important players in global merchandise trade with at least $150 billion in exports. The Philippines is playing a far catch up with Indonesia and Vietnam.

4 In services trade (including revenues from tourism and business process outsourcing (BPO) firms) many Asian economies still remain part of the big- and medium-size players, at par or even larger than the average European economies. The $915-billion revenues in 2015 is for all 28 EU economies.

5 Within the ASEAN, the Philippines is a medium-size services exporter while Indonesia did not belong to the top 50 in 2015 (see Table 1).

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6 In some sectors, the Philippines ranked #10 globally in 2015 in the exports of telecommunications, computer, and information with revenues of $3.5 billion, and #6 in exports of computer services with revenues of $3.2 billion.

7 Of the economic blocs and free trade areas (FTAs) in the world, ASEAN is the third biggest next to the European Union and North American FTA (NAFTA). They are followed by the Gulf Cooperation Council (GCC), European FTA (EFTA), SAARC Preferential Trading Arrangement (SAPTA), and Mercado Común del Sur (MERCUSOR).

8 An expanded ASEAN + 6 (China, Japan, South Korea, India, Australia, New Zealand) under the Regional Comprehensive Economic Partnership (RCEP) will easily overtake both the EU and NAFTA in total merchandise exports. Those six partners are huge exporters except New Zealand (see Table 2).

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9 The statement “this is the Asian century” in terms of trade and GDP growth will become true starting this decade. The main factor to sustain this momentum is Asia’s huge and generally young population especially in India, Indonesia, Philippines, and Vietnam, comprising 1.7 billion people with an average age of only 24-25 years old which is one-half of the average age of Japan and many developed countries in Europe.

10 The statement “If America (or Europe) turns protectionist, Asia loses” is wrong. Whoever starts serious protectionism is the loser. Free trade creates good will with other countries while expanding the choices and options for local consumers and manufacturers, which expand their productive capacity.

Should Mr. Trump proceed with his campaign promise to ditch the Trans-Pacific Partnership (TPP), it can be good news for other Asian economies that are outside of the five Asian economies that are part of the TPP. They are expected to suffer some exports decline to big markets of the US, Canada, and Japan due to trade diversion from non-members to TPP members.

Freer trade and fewer restrictions in the movement of goods and people are becoming the norm in emerging and transitioning economies of Asia than in developed Asia, Europe, and America.

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

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