Business World
Introspective
At a recent forum organized by the IMF-UP School of Economics- Philippine Economics Society, four speakers - one IMF economist, two UP professors (Philip Medalla and Ben Diokno) and I - were asked what we thought were needed to raise potential growth for the Philippines. This column is a shortened version of my remarks.
Basically, I think IMF Resident Representative Dennis Botman already summarized these solutions quite well. These include: a) raising the tax effort, b) increasing public investment, and c) reducing the cost of doing business by improving governance. I have little to add to what has already been said by most observers and would like to try to answer the corollary question, how to get it done politically, an important and difficult question to answer in a complex free-for-all democratic setting like the Philippines.
I offer some reflections based on a paper my colleague Christine Tang and I did on the subject of political economy of reform during the Ramos administration as part of a case study series for the Growth Commission of the World Bank. (The full report can be accessed at:
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
We looked at what it took the Ramos administration to successfully push for reform in telecom de-monopolization, water privatization, and oil de-regulation working against strong special interests (including from affected businessmen, labor constituencies, political ideologues) and using instruments, both formal and informal, at the disposal of the presidency in an environment of weak, lethargic, or sometimes obstructive and compromised institutions.
Even though the three reform case studies were on specific initiatives done during the Ramos administration, the basic reform agenda was a continuation or, if you will, a fuller articulation and execution of the framework of stabilize, privatize and liberalize as a way to improve growth performance adopted during the time of President Cory Aquino (the Aquino 1 administration).
While the Aquino 1 government in 1986 had the advantage of having the Filipino people geared up for wide-scale political economic and social reforms, with the President clothed with full legislative powers early in her term, it also had to contend with the task of rebuilding democracy and its institutions after a 15-year dictatorship. This meant needing to have on her team people with sharply divided views on economic policy and, even more unfortunately, having to contend with seven coup attempts. This led them to score victories in some areas (e.g., tax reform, trade liberalization), duds in others (encouraging investments), and in one field a complete disaster (under-provision of power that led to two years of economic contraction).
The Ramos government, on the other hand, because of the President's background and an orderly succession that was the lasting legacy of the Aquino 1 administration, was not fettered by coup challenges, but rather the normal challenges that a presidency faces such as pushing for laws to a Congress where the President's party was not the majority.
In that respect, the setting that President Noynoy Aquino faces is more like that of a normal president. Additionally, he has an advantage that President Ramos did not enjoy - a more resounding electoral victory and an unprecedented trust rating of 88% - valuable political capital that needs to be used optimally. (One can wickedly observe, though, that as with most things, trust rating is not a question of size, but what one does with it.)
The lessons we took from the reform experience during those years can be stylized under the following headings: articulating a vision; scoring early success; political will; effective communication and constituency building; and opportunistic timing, pragmatism, judicious haste and persistence. I try to discuss each with the best intentions of sharing what I personally have learned.
1. Articulating a vision.
The Ramos administration's vision had been to pursue reforms that would create a Philippines 2000, which as my fellow Introspective columnist Toti Chikiamco characterized as a carefully crafted strategic vision that brought coherence to his government. Policies like 'leveling the playing field', dismantling monopolies, privatizing state assets and services, embracing liberalization and globalization, forging peace agreements with the MNLF and the rightists, etc, were adopted to make the country an Asian economic tiger, or at least a tiger cub.
We look forward to President Noynoy's State of the Nation Address that will mark his transformation from being just a 'reactionary' leader, elected on anti-Arroyo sentiments and admiration for his parents, into a visionary one.
2. Scoring early success
A new president has six years to make a difference and needs to score early wins to build confidence for future reform efforts.
During the Ramos administration, the immediate problem, and opportunity, was getting the economy on track after debilitating outages that saw the GDP contract by 0.6% - to put back the lights back on both literally and in terms of business confidence. This was achieved in a record of 15 months, thanks to Mr Ramos's no-nonsense leadership and empowerment of known achievers such as Energy Secretary Del Lazaro and NPC President Sonny Viray. Such a victory set the stage for reviving investments and rallying public support behind other reforms to improve global competitiveness.
There is no one thing as dramatic as putting the lights back on this time around, but it is clear that this administration is aware of the importance of early wins. Indeed, it has already scored well in terms of both signaling and getting the support of the people for regime change in two areas: a) ending the use of sirens by the powerful and as we say it coloquially the feeling powerful, and b) aggressive filing of charges against tax evaders starting with a Lamborghini-owning billionaire. (Though one has to question whether requiring market vendors and tricycle drivers to issue receipts make the cut for early success.)
Packaged with other meaningful actions that show determination in improved governance and in getting things done, these steps can restart the process of reversing the 10-year deterioration in international indicators of governance and transparency, global competitiveness, and ease of doing business as well as in our credit ratings which we have all lamented.
My candidates for demonstration of resolve and early success are topped by the following:
a). Getting the wasting NAIA Terminal 3 operational for international air traffic. This structure otherwise stands as an almost decade-old national monument to folly, corruption and, for failing to find a solution on how to use it, stupidity.
b). More train cars in MRT 3 and fewer buses along EDSA to decongest traffic. The economics or even just common sense of additional cars with little incremental costs for a system that is already in place is so compelling. The only possible reason that this has not been done in the past is the tainted procurement dispute among competing interests, perhaps a la ZTE. The excess of buses racing through EDSA like Formula One cars for scant passengers during non-rush hours has been linked to a surplus of franchises and to illegal operators rumored to be under the protection of generals.
c). Taking steps to scrap the NFA and stop financial hemorrhage. The NFA lost P37 billion in 2008 and P63 billion in 2009. According to a World Bank study, it cost the NFA an estimated average of P5 to deliver P1 subsidy to the poor, reflecting the wastes, leakages, and governance deficit in its administration. It does nothing for the poor farmers who especially at a time of high prices (like now) are deprived of the benefits of a remunerative price. Start by having leadership in DA and NFA that understand and can be committed to such a long overdue reform measure. This can also be matched by scaling up the conditional cash transfer program to gain greater public acceptability.
3. Political will
Reform requires a lot of political will on the part of the leader. For example, in the case of the telecom demonopolization, the situation in 1992 was perhaps best captured by a remark attributed to then PM Lee Kuan Yew - The Philippines is a country where 98% of the residents are waiting for a telephone line, and the other 2% are waiting for a dial tone.
An estimated 800,000 applicants, 75% of the country's capital (Metro Manila), were then queuing for a telephone.
The PLDT, which owned the nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder, the Cojuangco family, was politically well connected, its influence extending across the three branches of government as well as media. According to a report by then Far Eastern Economic Review writer Bobbi Tiglao, If he loses this duel with the Cojuangco clan...the president's credibility as a strong leader will be severely dented.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics. These ranged from encouraging the formation of consumer groups that took to the streets and clamoured for change, to boardroom battles where the President replaced government's representatives in the PLDT board, to behind-the-scenes manoeuvres to increase the concerned parties' receptiveness to reform.
As a result, twin executive orders that the President issued within six months of each other in 1993 (i.e., within one year of his assumption of office) opened the floodgates to investment in the sector. This was followed by pushing legislation to insulate the reform from reversal.
Similar demonstrations of political will were evident in the largest water privatization at that time, which required raising water rates prior to selling and reducing the MWSS work force, and in pursuing oil deregulation despite ideological opposition and a nullification of the first law by the Supreme Court.
In light of relative weaknesses of Philippine institutions, where the system of checks and balances put in place to stem abuses is often exploited by those opposing reform to block or at least delay it, carrying out the needed changes would have been very difficult if not impossible without the President's vision and strength of conviction.
Will the new administration have the political will to take on similar powerful interests that block the path to a globally competitive Philippines?
4. Effective communication and constituency building
This entailed establishing a Legislative Executive Development Advisory Council (LEDAC) where the executive met weekly with leaders of Congress, pacifying militant elements of society by granting amnesty to rebel soldiers, repealing the law that outlawed the Communist Party, and launching peace talks that led to the 1996 peace agreement with the MNLF.
This also included a penchant for summitry, which earlier annoyed me as a finance undersecretary since I sometimes found little by way of substantive output from them. That was my sentiment until I began to appreciate that the most important output at the end of the day was the process. It allowed stakeholders to participate in and understand what government had in mind and to buy into what government was trying to do.
5. The reform process - opportunistic timing, pragmatism, judicious haste, persistence
Compared to the resolution of the power crisis, the three reforms discussed may be considered elective surgery, i.e., mending a non-crisis situation. Therefore, they demonstrate better the reform process in a democratic setting where the leader himself has to generate the impetus for reform through his vision and persuasion and to craft the approaches that are politically feasible. The case studies show that the Ramos administration had to address the problems in each area in ways that were possible given the timing, the window of opportunity, conditions prevailing, and other prospects available.
These considerations are perhaps useful in weighing the timing for pushing tax policy reforms needed for fiscal sustainability, immunizing the economy from global financial turbulence, and generating needed resources for social and infrastructure spending.
I have argued that the best time to push for this is early in the administration - while the government is at the height of its trust and popularity rating and some of the responsibility for needed, possibly unpopular, reform measures can still be rightly laid at the doorstep of its predecessor, and where the new administration can earn credibility dividend from the financial markets that translates into front-loaded savings. One can argue that such an opportunistic approach was observed with the Ramos reforms.
While I can appreciate the reluctance to pass laws on new taxes, I cannot see why some of these measures cannot be pushed as refinements and broadening of the tax base to make it fairer or even as plugging the loopholes. I would easily put in this category the rationalization of fiscal incentives which leads to an even playing field in business.
One can even push the argument further that a retroactive indexation of sin taxes, say, on liquor and tobacco, does not mean new taxes but simply a restoration of the real value of taxes eroded by inflation (even if these two items will not really yield much, tax adjustments are clearly called for on health grounds).
Sooner or later, government should also push for correcting the relative under-taxation of oil products, a more robust progressive source by far, either as a stand-alone or with proceeds earmarked for spending to ease public acceptance.
The best timing for pushing such an increase in oil taxes measures and other difficult measures like an increase in VAT coupled with or without a reduction in income taxes is a political call the leader and his economic managers and Congress team will need to make. Waiting too long to do tax policy reform and relying only on administrative measures, however, runs the risk of having a fiscal crisis dictate non-elective surgery. Or if we are not too unlucky, muddling through several more years of unremarkable economic performance.
Mr. Romeo Bernardo is board member of The Institute for Development and Econometric Analysis, Inc., and a GlobalSource partners advisor. He was formerly undersecretary of Finance during the Aquino1 and Ramos administrations.
