THE FINANCIAL EXECUTIVE
Business World
With the expanded value-added tax (VAT) law finally implemented, we thought we can sleep soundly knowing we are on the road to fiscal sustainability.
Indeed, the country has begun to reap the rewards of taking this landmark measure, which can be seen in financial market gains.
To think the President did not initially support this (in fact, she called for the repeal of the VAT early into her 2004 term), but after her conversion, competent fiscal managers at the Finance department and enlightened legislators with the support of business and academia managed to carry it through.
Alas, Malacanang could not live well enough alone. Now this initiative to push for legislated minimum wages. It is hard to fathom why.
Since Tita Cory's time, the country has veered away from politicizing wage fixing and relied on regional wage boards instead to balance needs of generating employment, cost of living, and different local conditions. This has been working well so far with minimum wage increases exceeding inflation on average.
It is thus puzzling why this is now being put on the table.
According to economists from government, academia and business, the VAT reform bill, even counting already the 2-percentage point increase still to take effect next year, should not lead to an increase of more than 2.5% in the average cost of living of households.
If Congress is urged to intervene in wage setting it is highly unlikely that it will pass a mere 2.5% wage increase legislation, which translates to around P7 to P8 per day.
Indeed what we read in the papers are proposals to increase wages by P125 (roughly 40%), completely out of line with both inflation and productivity increases.
Indeed, that exactly is why government has moved away from a politicized wage setting process, realizing such politicized process that does not reflect market and competitiveness considerations is a recipe for driving away investments.
Already most job creation in recent years has been in the self-employed and informal sectors. Raising minimum wages will drive businesses underground to the informal sector or under the ground, shrinking not just employment, but output and government's already imperiled fiscal base (not to mention raising government's wage bill which already takes up almost a third of its budget). Worse, an increase that far surpasses inflation and productivity can only feed into a wage-price spiral (especially with second round impacts on inflation, e.g., from reversal of peso appreciation) and will hurt the poorest most.
So why is the Economist in Chief pushing for this?
The view propounded by friend Alex Magno in his column is that she has been swayed by PR advisers that this is good for her image.
Perhaps due to oversight, she has failed to consult her economic managers. Those who are not her admirers think it not likely that a brilliant economist like her can possibly suffer such a lapse of judgment; and postulate that she is also a brilliant political tactician.
Why not create an issue that will preoccupy her detractors both of the Makati Business Club and the Akbayan group types and throw them at each other's throats, so that they are diverted from the central issue that has occupied the nation.
I cannot believe that the President of a country will play with fire like so. (I have an economics professor friend though who does and I expect there are many like him. He told me I should stop arguing against high minimum wage legislation, even if it were to lead to a disastrous wage-price spiral. Says he, "I've gotten to the point where I don't give a damn. Let the place burn down. Sometimes it's the only way to get rid of rats.")
Waving free lunches and quick fixes is something one can expect from those who have no responsibility to deliver; not from a leader who has the task of articulating a clear vision and educating citizens on collective sacrifice needed over the long haul for the country and everyone to be better off.
The President should listen more to her economic managers who want to "firewall" the economy from the political clatter.
Mr. Bernardo is former undersecretary of the Department of Finance.
