Global commodity prices, trade and growth

* This is my article in BusinessWorld yesterday.

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One of the beauties of free trade and global economic integration is that countries can benefit from low commodity prices as improvement in technology and processes in other countries result in bigger output for the same land area and other inputs. The downside of course is that when commodity prices go up, economies that are more dependent on imported products would tend to wobble.

The period from 2008 to 2014 was characterized by generally high food and commodity prices.

For instance, price of corn was only $98/ton in 2005 but it shot up to $223 in 2008. I think it was the momentum of the biofuels law in the US in 2005, spurring huge demand in the US, Brazil, other countries. The price mellowed in 2009-2010 during the global financial turmoil that started in the US, but shot up again to nearly $300 in 2011-2012.

The global spike in rice prices (aka as “rice crisis of 2008”) from $288/MT in 2005 to $700 in 2008 was caused by several factors, among which are (a) price hikes in major energy sources oil, natural gas, and coal in 2008, and (b) rice export restrictions by India, Vietnam, Brazil, other countries.

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Maize (corn) — US No.2 Yellow, FOB Gulf of Mexico, US price
Rice — 5% broken milled white rice, Thailand nominal price quote
Swine (pork) — 51%-52% lean Hogs, US price
Poultry (chicken) — Whole bird spot price, Georgia docks
Sugar — Free Market, Coffee Sugar and Cocoa Exchange (CSCE) contract no. 11 nearest future position
Coffee — Other Mild Arabicas, International Coffee Org. New York cash price, ex-dock New York

Crude Oil (petroleum) — West Texas Intermediate 40 API, Midland Texas

Natural Gas — Indonesian Liquefied Natural Gas in Japan, $/million metric British thermal units of liquid

Coal — Australian thermal coal, 1200 btu/pound, less than 1% sulfur, 14% ash, FOB Newcastle/Port Kembla

Among the reasons why world oil prices rose to record levels in 2008 was the high energy demand in the two biggest countries in the world in population, China and India. Prior to 2008, from 2003-2007, China’s GDP growth was always double-digit, averaging 11.7% per year. India’s growth during that period was also high, averaging 8.8% per year.

Implications for the Philippines

Among the things that the Philippines should optimize given these price fluctuations in world commodity prices are the following:

  1. Rice trade liberalization should have been started in 2010 when the Aquino administration took power. After short price spikes in 2011-2012, rice prices went downhill. The Duterte administration should proceed with full rice liberalization this year because of high medium term outlook for rice output and exports by our neighbors, Thailand and Vietnam especially.
  2. Sugar liberalization should be pursued too as world sugar prices have declined from their peak prices in 2010-2012 average of around 22 US cents per pound.
  3. Trade of corn and swine, even poultry should also be liberalized. Prices of rice, corn, swine, poultry and other food products are among the major contributors of the overall consumer price index (CPI) which are used to compute the inflation rate.
  4. Energy-intensive industries like manufacturing, hotels, construction, and transportation (on air, land, water) can expand their production and fleet to take advantage of lower prices of oil, natural gas, and coal.
  5. Two hindrances here: (a) the planned hike in excise tax for oil products by P6/liter across the board, and (b) continued onslaught by feed-in-tariff (FiT) and soon, renewable portfolio standards (RPS) that will result in expensive electricity. The purpose of trade and energy revolution is to make global energy prices become cheaper. The purpose of government in this case to make cheaper energy more expensive. These two measures should be abandoned and reversed someday.
  6. Among the ASEAN-6 big economies (Indonesia, Malaysia, Thailand, Singapore, Vietnam and Philippines), the Philippines registered the highest average GDP growth per year from 2010-2015: Thailand 3.7%, Indonesia and Malaysia 5.7%, Singapore and Vietnam 6.0%, and Philippines 6.2%. There was something good that the previous Aquino administration was doing that the new Duterte administration should somehow continue.

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

Mobility of goods, capital, and people in Asia

* This is my article in BusinessWorld last Tuesday.

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One big issue that failed to land on front pages during the ASEAN Prosperity Summit last week is the creeping protectionism, not through rising tariffs but rising non-tariff barriers (NTBs).

Malaysian Prime Minister Najib Razak pointed out during the Summit that NTBs and non-tariff measures (NTMs) from 2000 to 2015 have surged by nearly four times to 5,975 from 1,634. This despite the zero tariff regime for intra-regional trade and the creation of the ASEAN Economic Community (AEC) or the regional single market.

While ASEAN was created initially for defense cooperation against regional communist revolutions in the ’60s and ’70s, it has evolved into a platform for freer movement of goods, people and services, and capital or investment. It was a good development and it should be pursued.

This coming November, the Philippines will host the ASEAN partners’ meeting composed of ASEAN + 6 (China, Japan, South Korea, India, Australia, and New Zealand) + Russia and US. Mr. Putin, Mr. Xi, and Mr. Trump and other leaders will be coming to Manila.

The US exit from the Trans Pacific Partnership Agreement (TPPA) and China-Japan leadership in the Regional Comprehensive Economic Partnership (RCEP) are important developments.

By how much have Asian economies improved based on freer mobility of goods, services, investments, and tourism? Here are some basic data (see table).

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Those that have expanded by more than seven times in just 15 years are the following:

  1. Vietnam: 11.2x in exports, 10.6x in imports, 9.1x in investments, and 10.6x in tourism receipts.
  2. Myanmar: 7.2x in imports, 12.1x in investments, 12.9x in tourist arrivals; also high expansion in tourism receipts.
  3. Cambodia: 14.2x in investments, 10.3x in tourist arrivals, and 24x in tourism receipts.
  4. Laos: 9.3x in imports, 10.4x in tourist arrivals and 36x in tourism receipts.
  5. China: 9x in exports, 7.5x in imports, almost 6x in investments, and 7 to 7.5x in tourist arrivals and receipts.
  6. Japan: 7.4x expansion in international tourist arrivals.
  7. India: 7.5x in exports, 12.3% in imports, and 7.8x in exports.

The Philippines also experienced modest growth in all the above indicators but not fast enough to create more jobs and businesses to its 104 million people. We should take hard lessons from our two small neighbors with huge economic achievements, Singapore and Hong Kong.

Singapore with only 5+ million people and just 3 1/2 hours by plane south of Manila, has 6x more exports, 11x more FDIs, attracts more than 3x foreign tourists and more than 4x in tourism receipts than the Philippines.

Hong Kong with only 7+ million people and less than 2 hours by plane north of Manila, has 8x more exports, 32x more FDIs, attracts nearly 7x foreign tourists, and nearly 8x in tourism revenues.

What small economies Singapore and Hong Kong have that the Philippines lacks are two important policies: free trade (zero tariff, minimal NTBs) and stricter rule of law (the law applies equally to both rulers and ruled, applies equally to unequal people).

So while we have improved our GDP size and material wealth via freer trade, freer movement of people and capital, we need to free up more.

We should allow more islands and provinces to have their own industrial zones to attract more investments and foreign trade. To have their own international airports and seaports to attract more investments and more tourism.

More modern infrastructure, simpler rules, and freer trade will help the Philippines attain what our developed neighbors have already achieved. Drastic reduction in NTBs and the removal of rice quantitative restriction (QR) and protectionism for instance. And less politics, taxes and bureaucracies, more respect for the law by politicians and bureaucrats.

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

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.

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.