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.

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.

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.

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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Disruptions in Asia and the world

Below are some slides given by Suraj Moraje, Managing Partner of McKinsey and Co. Manila, “No Ordinary Disruption”, during the BWorld ASEAN Regional Forum last November 24, 2016 at Conrad Hotel, http://bweconomicforum.com/index.php/morning-session/. The commentaries are mine, not Suraj’s.

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My first and last visit to Shenzhen, China was in 1998. There were many tall buildings already, roads are wide, but not as many as shown in the photo below.

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Good comparison by Suraj here. ASEAN economies are modernizing and urbanizing fast while keeping their average population young. Modern technology will quicken the pace of productivity improvement of these young ASEAN people. It is really global enterprise competition and their endless innovation that modernize things faster, that results in mass production of many things, not so much due to government programs.

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Big, young population. Many countries and blocs of countries like the EU salivate at this big advantage of the ASEAN. Big but ageing population means two requirements — more migrant workers (from Asia), and/or more robots. But robots cannot change adult or baby diapers with warmth and smiles. This is also one reason why I never supported the PH state-sponsored population control aka RH law. Using taxpayers money and government agencies to “suggest” to people that big population is wrong.

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On the technology aspect, I find these slides by Suraj very enlightening. But despite the “labor displacing” image of modern technology (self-driving cars, trucks, mechanized construction, etc.), I believe otherwise. I think that more modern technology will mean more jobs — people who will manufacture, assemble, repair, upgrade those machines, engines and robots. All machines and bots will get “sick” and they will require people to fix them, upgrade or dispose and replace them.

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One slide and arguments presented by Suraj that I don’t agree with, the latter slide. Inequality is not a problem, poverty is. More inequality due to endless innovation and competition actually pulls up hundreds of millions of people out of poverty. Poor people who used to ride cows, carabaos and bicycles to work now ride motorcycles, e-bikes, 2nd-hand cars, or air-con vans and buses. They move faster, do multi-tasking and accomplish more things, so their income and network increases.

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Thanks for those wonderful insights and information, Suraj. One more reason why BWorld fora are indeed very enlightening and highly educational.