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.

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.