Good, not great

December 2, 2018 | 10:22 pm

Introspective

By Romeo L. Bernardo and Marie Christine Tang

I am pleased to share with readers the executive summary of our quarterly economic outlook report for GlobalSource Partners (globalsourcepartners.com) written by Marie Christine Tang and me last Nov. 22, 2018. The second part of this column is a statement of the Foundation for Economic Freedom supporting TRAIN 3, on property valuation for taxation purposes issued Nov. 30, 2018.

Local moods have soured over the past several months as inflation rose, economic growth slackened, the trade deficit ballooned, the peso fell and asset returns dropped. The string of bad news may be traced to: global events, particularly the triple whammy of US monetary tightening, surging oil prices and an escalating US-China trade war, that have contributed to risk-off sentiments; as well as domestic developments, particularly the badly managed rice import policy and the many chokepoints caused by lagging infrastructure that have led to the economy’s greater import dependence.

More recent news of stabilizing world oil prices and easing local inflation have given rise to hopes that the worst may be over. Indeed, optimists are apt to bet that slower US growth would reduce the number of Fed rate hikes going forward, that the US and China are likely to reach some agreement to ward off the imposition of even higher tariffs next year, and that locally, not only would the visit of President Xi Jinping speed up execution of China-funded infrastructure projects and deepen trade and investment ties in other areas but a new law freeing up rice imports would send prices of the basic food staple down. Should these happen, as the argument goes, emerging markets would benefit from improved financial market sentiments and risk appetites that would bring about a virtuous cycle of capital flows and asset price recoveries and face lower risk of a trade-related China slowdown and its adverse knock-on effects on regional growth; separately, the Philippines would gain from expanding trade and investments with China, and the specter of rising inflation would recede from consumers’ memories, raising confidence anew.

Wishful thinking? Rosy certainly and in the event, the headwinds are unlikely to disappear completely. As it is, oil prices are still projected to remain at current high levels, the US Fed is still on course to tighten once more this year and anywhere from 50 to 100bp next year, a high degree of uncertainty surrounds the US-China trade dispute where both sides appear prepared to set aside WTO rules, and locally, most Filipinos continue to eye the rewards of Chinese projects with suspicion, including opportunities for job creation, and with regards to the proposed law to “tariffy” rice, it remains unclear at this point whether it would truly free up rice trade.

Moreover, election season lasting through May 2019 is upon the Philippines during which time, work on the executive’s tax reform proposals, particularly the unpopular Package 2 dealing with corporate investment incentives, is widely expected to be put on hold, keeping investors in suspense about the future corporate tax regime. In the meantime, any boost to domestic demand from election spending may simply translate into higher imports, especially with all the construction works spurred by public spending adding to the economy’s chokepoints in the interim. As well, second round impacts from all the supply shocks this year are still working their way through the economy and expected to keep inflation outside monetary authorities’ target band through mid-2019.

All things considered, the Philippine growth outlook is still a good one. Our baseline view forecasts GDP growth remaining above 6% in the next 12 months, among the highest in the region However, the downslide in output growth would continue in the face of external headwinds and internal supply bottlenecks. Upsides to growth include better than expected exports of both goods and services, including tourism, as well as lower inflation, particularly rice prices. Downsides include an escalating trade war, more by way of confidence than direct trade impact which is expected to be manageable, and a multiplicity of geopolitical risks, including another runup in oil prices.

                                            FEF STATEMENT ON THE VALUATION REFORM ACT

We, the Foundation for Economic Freedom, support the proposed amendments to the country’s real property valuation system under Package 3 of the government’s Comprehensive Tax Reform Program.

The main objective of Package 3 is to develop and maintain an equitable and efficient real property valuation system.

It will address the present problem of multiple, overlapping valuations through the adoption of a uniform valuation standard and establishment of a single valuation base for taxation purposes.

Conflicting land values result in right-of-way compensation problems — leading to delays in implementation of government infrastructure projects and additional costs to the government.

It also will make the Bureau of Local Government Finance (BLGF) to develop and maintain implementation of uniform valuation standards in compliance with international best practices, under the Department of Finance (DoF) oversight while assessment levels and tax setting will remain a function of the Sanggunian of the Local Government Units (LGUs). Separating valuation from political bodies will also ensure that the practice is free from undue politicization.

It will further ensure timely updating of the Schedule of Market Values (SMVs). At present, only 38.8% of LGUs and half of Regional Development Offices have updated SMVs. Outdated and below market valuation means foregone government revenues from property ownership and conveyances.

Setting up of an electronic database on real property will ensure transparency and accessibility of data.

On average, real property taxes contribute around 31% of the LGUs local source of income. The proposed reform will increase government revenues and at the same time increase local autonomy as it will improve LGU financial self-sufficiency. Package 3 does not intend to create and impose new taxes but rather improve efficiency in real property tax collection.

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

‘Never waste a good crisis

November 11, 2018 | 11:45 pm

Introspective

By Romeo L. Bernardo

There has been much hand-washing among our legislators on TRAIN 1. The unfortunate part about this is they were responding to fake news.

Much of this is likely limbic (also referred to as lizard and “fight or flight”) thinking which has sadly characterized much of discourse lately, fanned by social media and live news. Tweets, live feeds, and text messages or phone calls for instant reactions. They discourage deliberate thought grounded on evidence and serious research, which at the same time educate the public.

Though often together, this shouldn’t be confused with the kind of more calculated political moves that pander to voters, short-term fixes at the expense of more long-term public good. The classic case of this is wasteful spending that leads to unsustainable fiscal deficits, macro instability, hyperinflation, ultimately immiseration of the people, especially the poor. We have seen such a sorry tale unfold in Chavez’s Venezuela and Mugabe’s Zimbabwe.

Serious analysts observed this may have been at play here with the passage of the costly P50 billion-a-year “free tertiary education” in the SUCs bill. Despite fact-based research by government’s think tank, the Philippine Institute for Development Studies, and the forceful well-argued opposition by the Secretaries of Finance, Economic Planning, and Budget, and the head of CHED, this populist bill passed.

Evidence was disregarded that this badly targeted, hugely costly bill is faulty use of public resources for educating the young for future jobs, especially the poorest. This may also corrode the quality of education and training systems as students and teachers move away from private institutions to quality-challenged SUCs, some no more than diploma mills (see the PIDS study and the economic managers’ statements.).

The folly of a bill costing so much and so narrowly focused on free tuition in SUCs became even clearer to me upon listening to a panel on “Technology and Inclusion in Asia” during the recent Annual Conference of the Federation of ASEAN Economics Associations. The panel consisted of PCC Chair Arsenio Balisacan, ADB Chief Economist Yasuyuki Sawada, Professors Emmanuel Esguerra (UP), Erika Legara (AIM), Euston Quah (Nanyang Technological University) and Ayala Corporation Chairman Jaime Augusto Zobel de Ayala.

My key takeaway from them is that to meet the challenges of technological disruption on our economy (especially BPO and manufacturing ) and to find future jobs for our youth, “it will be important for the private sector (industry and academia) to work hand in hand with the government to plan out a roadmap to create both a national upskilling program and to create a longer term educational reform program to design education and training for a technologically enabled and digitally-led economy.”

Similar observations as that bill have been made of other inadequately studied and targeted programs, e.g. free irrigation, increasing the pensions of SSS retirees, VAT exemptions for senior citizens, more so-called pro-labor legislation that lead to rigidity in labor markets, less investments and jobs. Contrast these to the Conditional Cash Transfers program, started four administrations ago, which was well studied, carefully piloted, and now showing good results in reducing poverty and keeping children in school.

Election season is upon us, however, and perhaps we should be more understanding of populist knee-jerk moves. An appeal to our politicians: please study the premises; thrash the fake news.

FAKE NEWS ON TRAIN

Fake News 1: TRAIN caused inflation

In September 2018, the top 10 contributors to inflation, largely raw food items, accounted for 5.5 percentage points (ppt) of the 6.7 percent inflation (see Figures 1 and 2). Of these products, the DOF estimates that TRAIN contributed around 25% of personal transport inflation, 5% of utilities inflation, 100% of non-alcoholic beverages inflation, and 20% of tobacco inflation.

Overall, TRAIN’s contribution to inflation is around 0.4 to 0.7 ppt. The Department of Finance (DOF), National Economic and Development Authority (NEDA), and Bangko Sentral ng Pilipinas (BS) all arrived at comparable estimates using different methods to model the legislated tax increases.

In comparison, rice prices alone accounted for 1.03 ppt of the 6.7% inflation rate.

Fake News 2: TRAIN has not yielded collections as targeted.

“Falsehood flies, and the Truth comes limping after it,” Jonathan Swift once wrote. It was hyperbole three centuries ago. But it is a factual description of the post-truth society we live in today, so much so that even conscientious media consumers can be taken in by false information.

For example, in her column last week, our much-loved favorite Prof. Winnie Monsod cited from some news source that “revenues collected from TRAIN were 74.1 percent short of target.” This is in stark contrast to a report given by DOF saying that in the first half of 2018, where complete data is available, TRAIN revenue collection is on the dot.

The target for the first half is set at P30.1 billion. This is around 48 percent of the P63.3 billion target for the full year. This is lower than the P89.9 billion reported in the budget as the revenue from e-invoice (P6.6 billion) and fuel marking (P20 billion) were moved to succeeding years given that both projects needed more time to prepare.

TRAIN revenue collection is estimated at around PHP 33.7 billion or 12 percent above target.

HOW TO LICK RICE INFLATION — END NFA MONOPOLYThere have been an abundance of learned articles and studies over decades on why Quantitative Restrictions/NFA monopoly on rice importation needs to go, and for importation to be left to the private sector, subject to a tariff. And with tariff collections to be used for investments in agri diversification, raising productivity, and safety nets for affected marginal farmers. Most recently, the following articles made the case blindingly clear, and recommended the way forward.

1. FEF Statement on Rice Policy, Foundation for Economic Freedom, 12 April 2017

2. Red flags in rice tariffication, Ramon L. Clarete, Introspective, BusinessWorld, 8 October 2018

3. Rice policies and fallacies, Cielito Habito, Philippine Daily Inquirer, 2 October 2018

4. Wanted: A new rice industry road map after lifting of quantitative restrictions, Emil Q. Javier, Manila Bulletin, 28 July 2018

5. NFA needs major role change to remain relevant — PIDS, Philppine Daily Inquirer, 22 October 2018

The Department of Finance has also issued an excellent summary in favor of passing this bill. It can be read in this link.

As I said in my last column: With our rice prices double or higher than our neighbors, this monopoly has profoundly aggravated poverty, dampened manufacturing investments and job creation through wage uncompetitiveness, and periodically inflation shocks our macroeconomy, like now. The FEF’s position on this is well articulated in various statements and columns over the years, most recently by Toti Chikiamco, in his most recent Introspective column. “Abolish the NFA rice importation monopoly and fully liberalize rice importation. The bill passed by the House is defective: it allows the NFA to continue licensing and regulating traders. The Senate should completely abolish the NFA’s rice import monopoly and remove its regulatory and licensing functions”.

This bill has been in Congress for over a year now. Legislators have an opportunity to do something about inflation in the last few months of this session, and not just for now, but for decades to come. And stop the corruption and accumulation in government-guaranteed NFA debt and lift millions of our people out of poverty.

Dear legislators, please act. “Never waste a good crisis”

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Capitalism and inclusion under weak institutions

Capitalism and inclusion under weak institutions

October 21, 2018 | 9:56 pm

Introspective

By Romeo L. Bernardo

One could not have thought of a better title for the latest book of UP Economics Professor, former Dean and National Scientist Raul Fabella, a deceptively slim volume (120 pages) but a real heavyweight. It has amazing sweep and depth on what ails our economy, and provides possible solutions, cogently pulling together literature and research on what has worked here and elsewhere.

There is a reason why we have only one National Scientist in Economics (possibly all the social sciences). Professor Fabella is without peer in profundity and originality of thought. And in the elegant and compelling way he explains these ideas.

I have been a fan of Raul’s writing since we, then strangers, met as fellow travelers and Pinoy graduate students at a bus station in DC in 1976. He would write long letters to his friends (in paper and ink, pre-internet) on his observations of US society and academic life at Yale University. It was a correspondence I could not sustain, being more inclined to be lateral than literary. (The best I could do was send him postcards of Williams College I sent everyone. )

Fast forward to 1998, my learning from Raul would resume as our paths crossed again in lively social dinner discussions with like minded academics, former public officials and private professionals united in advocating good governance and market-oriented reform. This would later metamorphose into the Foundation for Economic Freedom (fef.org.ph). Its founding members included, among others, Mahar Mangahas, Philip Medalla, Calixto Chikiamco, Alex Magno, Simon Paterno, Cayetano Paderanga (+) and Francis Varela (+).

In honor of Dondon and Francis and their life’s work in doing public good and advancing our common advocacies, our current President, Toti Chikiamco and Chairman, Bobby de Ocampo, initiated the Paderanga-Varela Memorial Lecture, now on its third year. The last two lectures featured FEF Fellows Dr. Vicente Paqueo (“Does Ending ENDO Contribute to Inclusive Economic Growth”) and Dr. Art Corpuz, (“On a National Land Policy in the Philippines”).

Later this month, Professor Raul Fabella will present his book’s findings and recommendations. Just a sample of my favorite takeaways:

1) Crisis of Inclusion in Capitalism: Poverty Incidence vs. Income Inequality. The overarching problem of the Philippines is poverty, not the income inequality of Piketty that has become banner of the Trump and Brexit nativists and their counterparts in other rich countries. The two are not the same, nor are their solutions. This is well illustrated in the case of China under the leadership of Deng Xiaoping where, thanks to market-oriented reforms, “poverty incidence has been reduced from 64 percent in 1990 to 4 percent in 2015, even while income inequality (measured by the Gini ratio ) rose from 31 percent to 42 percent.”

2) Taming Overreach: “The genius and heresy of Deng Xiaoping was in recognizing that there are spheres of provision other than the state and that these can do better than the state in many domains. The state, however strong, may be overreaching, that is operating beyond its domain of competence.” Professor Fabella’s (and my) favorite case in point of how private sector can do better in social provision and inclusion is the highly acclaimed MWSS Public Private Partnership. He wrote a chapter on this in the Asia Foundation book Built on Dreams, Grounded in Reality (downloadable for free in this link — http://regulationbodyofknowledge.org/wpcontent/uploads/2016/08/BuiltonDreamsGroundedinReality_AsiaFoundation_2011.pdf).

3) The Impulse for Size: “One very salient feature of current Philippine economy is the unmistakable presence of conglomerates competing in many markets….The vent for size is more urgent in weak governance environments (such as the Philippines’).” I have had direct learning of the built in advantage of bigness when my late father left me a few hectares of land not too far from what has become Metro Manila, which would have been ideal for mass housing. My enthusiasm for developing it was quickly doused from step one by the difficulty of enforcing my ownership rights against illegal settlers. I happily sold to a major developer, part of a conglomerate, which has the knowhow and connections to solve this, navigate government permitting labyrinth and dealing with “revolutionary tax collectors.”

4) Conglomerates and Inclusion: “Do conglomerates contribute in a positive way to inclusion in its normal profit-motivated way? The answer is ‘Yes.’” Professor Fabella then proceeds to illustrate how conglomerates have done this in various fields, from telecom, water provision, tertiary education, not to mention through their Corporate Social Responsibility (CSR) Initiatives.

5) The Way Forward: “Rather than threaten to shackle the conglomerates in our midst, we should re-channel them to the Tradeable goods sector, such as food production, or towards the segment of the Non-traded goods that is ancillary to the Traded goods sector-power generation.” And I may add, create more room in Public-Private Partnerships in other infrastructure needed to support our global competitiveness — airports, seaports, mass transport and telecommunications.

Picking up on the last item, from what I know of the sector as a Board Director of Globe Telecom, the controversial proposal to limit the number of telecom tower operators to only two is a case of overreach. It is also anti-competitive. Quoting below the blog of Peter Wallace on the subject.

DON’T LIMIT TOWERS

Why would we limit the building of cell site towers to two companies? A tower is not exactly a highly technical thing to build. The equipment that goes on it is, but that’s provided separately by the cellphone companies who lease space on the tower.

Get specific specifications that must be met, then leave it to companies to bid for construction at the various sites. Sites identified by the cellphone companies who know where to locate to provide the best signal. This includes areas that are not considered as densely populated but nevertheless need connectivity and mobile services. With the backlog of 50,000 towers we are currently facing, the more companies who are willing and able to build according to agreed specifications should be allowed to build. This should include incumbent telcos and whoever is the chosen 3^rd player because this is part of their mandate.

NFA MONOPOLY

Another live instance of government overreach is the NFA monopoly. With our rice prices double or higher than our neighbors’, this has profoundly aggravated poverty, dampened manufacturing investments and job creation through wage uncompetitiveness, and periodically inflation shocks our macroeconomy, like now. The FEF’s position on this is well articulated in various statements and columns over the years, most recently by Toti Chikiamco, in his Introspective column last week —

“Abolish the NFA rice importation monopoly and fully liberalise rice importation. The bill passed by the House is defective: it allows the NFA to continue licensing and regulating traders. The Senate should completely abolish the NFA’s rice import monopoly and remove its regulatory and licensing functions.”

As a wise guy said: “ Let’s not waste a good crisis.”

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a governor of the Management Association of the Philippines. He was Finance Undersecretary during the administrations of Corazon C. Aquino and Fidel V. Ramos.

romeo.lopez.bernardo@gmail.com

End of the road for federalism

September 2, 2018 | 8:40 pm

Introspective

By Romeo L. Bernardo

IN his third State of the Nation Address (SONA) in July, President Rodrigo Durterte urged Congress to work on his proposal to change the Constitution to enable the Philippines to shift from the current presidential to a federal form of government. Curiously as we observed in our brief, he did it less forcefully then what many had expected considering that federalism, along with the drug war and anti-corruption drive, had been an oft-repeated subject of his lengthy monologues. Today, a month after that speech, the drive for federalism seems to be waning.

What happened? To start with, there was never popular support for federalism, nor even awareness, of what the proposal was about. Then on the day of the SONA, the fiercest champion of federalism in Congress, the then speaker, was ousted and replaced with former President Gloria Arroyo who does not seem to share her predecessor’s enthusiasm for fast-tracking the proposal. Then, when asked, the President’s own economic team was critical of the proposal’s dire fiscal impact with the Finance Secretary telling members of the Senate that he would “absolutely” not vote for it. The economic team’s position was soon echoed by business and civil society in a rare joint statement issued by seven large business groups and 19 advocacy organizations. Too, the Supreme Court’s ruling granting local governments a larger stake in national taxes may have helped assuage some of the regional discontent with “Imperial Manila.”

And yet, the fuss over federalism is continuing with Malacañang now promoting voter education for public support. Is this another example of a strongman trying to get his way no matter what?

Those who charge the President with chiseling away at Philippine democratic institutions would readily agree, and perhaps they have grounds to believe so.

Nevertheless, there is another possibility that we find hard to refute. This view argues that for President Duterte, the federalism campaign is just a matter of keeping options open. The ultimate objective, per this line of reasoning, is effective succession planning, one that would allow him to escape Philippine democracy’s disturbing cycle of successive leaders sending their predecessors to jail. Indeed, many have observed that in the country’s post-democracy era, only President Corazon Aquino had managed her succession successfully.

If this is the case, then fate has favored him with an unequalled ally in the person of Speaker Arroyo. The former president, who had been under hospital arrest during most of her successor’s term, had tried to amend the Constitution through various means during her presidency ( though she preferred then a unitary parliamentary to a federal presidential system). From all indications, Speaker Arroyo remains committed to this vision. She has, however, only nine months remaining in her third and last congressional term and has dismissed the former speaker’s plan to cancel the 2019 mid-term elections (supposedly to give Congress time to work on federalism).

What will she do then? For one who considers politics the art of the possible, she would most likely have several cards under her sleeve and close to her chest. For now, she has put the onus of setting the President’s proposal aside on the Senate, which has refused to participate in a constituent assembly, the President’s preferred avenue for changing the Constitution. Meanwhile, she has busied herself tending to matters that the President has no appetite for, i.e., the economy, and possibly filling a vacuum in leadership. The months ahead will reveal how the stars will align for the two most powerful people in the country.

In the meantime, the success of the President’s daughter (the mayor of Davao City) in forming a formidable alliance between her regional party (Hugpong Ng Pagbabago or HNP) and nine other national and local parties has opened up another path that may allow the President to retire in peace to his hometown at the end of his term. Of course, he still has four years to go in his term and in Philippine politics, that is light years away.”

Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations. He is a fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines.

romeo.lopez.bernardo@gmail.com

Legislation that Matters

August 5, 2018 | 8:58 pm 

BusinessWorld Introspective

Much drama accompanied the State of the Nation Address the other week. Hopes are high that action follows suit.

There are grounds for optimism.

We were pleasantly surprised by the President’s statesman-like demeanour as he articulated a clear legislative agenda for this Congress in its remaining months before election season. Most of them are foundational legislation for peace and prosperity.

His first ask was for the Bangsamoro Organic Law — which Congress passed and he signed forthwith. We in the Foundation for Economic Freedom vigorously welcomed it, calling it “a giant step toward peace and development in Mindanao.” We encouraged the future Bangsamoro Autonomous Government “to anchor their development efforts on free market principles but steered by a responsible elected government assisted by competent, efficient and honest bureaucracy,” noting there is “no reason why the BAR cannot be like Hong Kong and Shenzen in China,” exemplars “of free market principles combined with good governance.”

The President likewise asked Congress to urgently pass two pieces of priority legislation. One, the proposal to liberalize rice importation and shift away from quotas to tariffs, as a way to lower rice prices. The recent spike in rice prices and overall inflation owed much to the continued mismanagement by NFA. Its decades long monopoly has consistently led to cost of rice for our people being as much as twice as high as our neighbors’, as well as over P200 billion of unpayable debt guaranteed by the national government.

Two, passage of TRAIN, not just the second package on lowering corporate income taxes and rationalizing fiscal incentives, but also pertaining to tax amnesty, capital income taxation, and “sin taxes.” Package 2 is essential to make the Philippines competitive with its neighbors tax-wise and encourage investments and jobs. It will also favor the 90,000 small and medium size businesses which, unlike a small number of large firms, do not enjoy “forever fiscal perks.”

The election of the new Speaker, Gloria Macapagal-Arroyo, a Phd from the highly respected UP School of Economics, has been widely welcomed. People who have paid close attention to the economy when she was President know well how key economic initiatives then contributed critically to the improved performance we have been seeing — over 6% GDP growth for 12 straight quarters, manageable inflation, low interest rates, higher levels of public and private investments.

I underline in particular two milestone pieces of legislation, the Electric Power Industry Reform law and the Reformed VAT law.

The first reengineered our electricity sector. Competition and private sector efficiencies have made shortages a thing of the past, and at a more affordable cost of electricity. Just as crucially, it offloaded from government and taxpayers the burden of financing power sector investments, and helped improve our fiscal position.

The RVAT law on the other hand is well recognized by credit rating agencies, multilateral financial institutions, and the broader financial community as a game changer in improving our macroeconomic position and ushering upgrades in our credit rating. Then-President Arroyo was very hands on in ensuring its passage in good form, without being mangled as typically happens with tax legislation.

A case study Christine Tang and I did for the ADB (Managing Reforms for Development, Chapter 2 “Political Economy of the Reformed Value-Added Tax in the Philippines,” downloadable for free at http://www20.iadb.org/intal/catalogo/PE/2013/11631.pdf), told the story of how Ms. Arroyo drove this reform effort — getting the reform on the legislative agenda, forging consensus among not just legislators but also key stakeholders (including captains of industry whom she assembled at her home and Congress leaders whom she bent to her will.)

This kind dogged persistence is needed from President Duterte, and from her as Speaker of the House of Representatives where tax legislation needs to originate, to get TRAIN 2 and the succeeding packages going. It seems stuck despite the vigorous efforts of Secretary Dominguez backed by the strong analytical studies of the technocrats in the Department of Finance, and weighing in of civil society, including eminent economists and former finance secretaries. ( ee for example columns of Prof. Raul Fabella, “TRAIN 2: The failures it addresses” and my “Eight former Finance Secretaries support TRAIN 2,” both in this column space.)

The Foundation for Economic Freedom likewise welcomes the President’s push for the passage of the Land Use Act, but with some caveats. Permit me to quote FEF Fellow Art Corpuz, a known expert in City and Regional Planning (PhD and former Lecturer, Cornell University; former Professor of Urban and Regional Planning in UP).

“The importance given by the President to the NaLUA is well-founded. This is an opportunity to pass legislation on land use that serves to increase productivity, generate employment, reduce poverty, and protect the environment. Unfortunately, current drafts of the NaLUA are focused on imposing land use restrictions that penalize efficiency, discourage investments, encourage violations and corruption, and hamper the protection of lands that need to be protected. For example,
• In rural areas, the myth of food self-sufficiency is perpetuated instead of tapping market demand to raise productivity and farmers’ incomes.

• In urban areas, the need for growth is ignored, which contributes to uncontrolled expansion and land conversion, while disregarding and thus hampering the established role of cities to lead innovation and productivity gains, attract investments and generate employment, and therefore serve as prime venues for poverty reduction.

Unlike the national land use policies of other countries that have moved forward, the current NaLUA drafts have no references to competitiveness, innovation, and technology; the critical role of connectivity, strategic geopolitical considerations, and drivers of future growth (consistent with the PDP/Ambisyon 2040) are ignored.

The drafts are outdated, mired in a shotgun protectionist mode that assumes unrealistic levels of competency in the bureaucracy.

Instead, the NaLUA should remove constraints to investments in agriculture, promote urban and economic growth, especially at densities that discourage sprawl and allow more efficient infrastructure, and provide for the immediate identification and protection of environmentally constrained lands at the ground level.”

I pray that Congress will devote its remaining months to legislation that improves productivity of the economy, generates investments and jobs, and uplifts the lives of our people, instead of allowing itself to be distracted by Federalism as the solution. As the UP School of Economics Lecture topic said — “If Federalism is the answer, what is the question?”

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.
romeo.lopez.bernardo@gmail.com

Strongman in the Palace

BusinessWorld Introspective
June 25,2018
Romeo L. Bernardo

I am pleased to share with you the political section of our latest quarterly report, (“Of Deficits and Rising Risks,” May 20, 2018) for GlobalSource Partners, a New York-based network of independent analysts (globalsourcepartners.com). Our subscribers are principally global asset managers and banks who are mostly focused on the more quantitative economic sections of our reports. Christine Tang and I are their Philippine Advisors.


“President Rodrigo Duterte has emerged as the country’s most powerful leader since the return of democracy in 1986. He has the support of a supermajority in both houses of congress and, with the removal of a vocal critic in the person of the former Chief Justice, an even friendlier Supreme Court. He will moreover have opportunities in the coming months to further consolidate power through his appointing authority. Most immediate are replacements for the ousted chief justice as well as the country’s chief watchdog, the Ombudsman, another critic who will retire in July. Additionally, those monitoring the retirement dates of current Supreme Court justices have counted 8 additional posts to be filled by the President this year and next, plus another 3 before he steps down in 2022.


Separately, the President’s enormous power may be gleaned from (a) his continuing high popularity, which (b) also gives his endorsement considerable weight in next year’s national and local elections, (c) media reportedly practicing self-censorship to avoid his verbal attacks, and (d) the attention he is getting internationally, not only in connection with a bloody drug war but also in upending the regional balance of power between the US and China.


Indeed, with the system of institutional checks and balances essentially out the window, many more are worrying that the President’s pragmatism in courting Chinese infrastructure support and other investment, aid, and trade cooperation may have extended too far. Not only are criticisms about his refusal to assert the country’s victory in the UN-backed arbitral ruling recognizing the Philippines’ territorial claims in the West Philippine Sea (South China Sea) continuing, but observers are pointing out the risk of the Philippines falling into what they call “China’s debt trap diplomacy.”


This comes in the wake of revelations elsewhere (e.g., Sri Lanka, Pakistan) that China’s generously extended loans for infrastructure have benefited it more than the borrowing government with the latter ending up saddled with huge debts and under China’s control.

The President appears unperturbed by all this, reminding critics that the Philippines does not have the military might to enforce its claims in the disputed waters, arbitral ruling or not, and that China is an important ingredient in his administration’s infrastructure program.

This leaves the job of policing China-funded projects to the President’s economic team, who has announced the setting up of separate guidelines exclusively for assessing China-assisted projects.
In the meantime, some are wondering what Mahathir Mohamad’s reentry in Asia’s political scene would mean for President Duterte’s strongman image. The Prime Minister, at 92, appears to be standing up to China by putting all China projects in Malaysia under review.

Aside from China, a second concern is the President’s push for a federal form of government that majority of Filipinos are not in favor of.

In our last outlook report, we concluded that the task, which involves changing the Constitution primarily to adopt federalism and possibly also open up nationality restrictions, faces an uphill climb and despite aggressive attempts in the [House of Representatives], is unlikely to happen anytime soon. Although some of the hurdles we cited have become less daunting, we still think our conclusion the right one given time constraints.

Rather, the immediate priority appears to be the Bangsamoro Basic Law (BBL), a proposed ingredient to the peace process that will set up an autonomous Muslim Mindanao which President Duterte has promised his Muslim supporters. The BBL has become much more urgent following the fighting in Marawi last year that razed the city to the ground and left over two hundred thousand homeless. The plan calls for congress to pass the proposal and submit it to a referendum in next year’s elections. Expectations are that with the President championing it, Filipinos will vote for it precisely to prevent the radicalization of young Muslims by ISIS elements that precipitated the Marawi crisis.

But that does not mean that federalism is no longer in the cards.

After all, the President had early this year formed a 19-member consultative committee headed by a former chief justice, who is a known federalism advocate, to review the Constitution and recommend changes within the year.

Members of Congress have their own ideas too although the finance secretary has been heard to privately worry about the fiscal nightmare that the emerging federalism bill in the [House of Representatives] will usher.

The thinking now among the President’s economic managers is to use the BBL as a pilot project of sorts for policy makers to learn more about federalism. Learnings from that experience can then inform charter change initiatives, which may still happen before the President’s term ends.
While a reasonable proposition, it remains to be seen whether the President would be willing to take this slower but perhaps, more prudent route.”

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Eight former Finance Secretaries support TRAIN 2

May 27, 2018 | 9:25 pm

Business World Introspective By Romeo L. Bernardo

In a remarkable show of support for the public good, eight former finance secretaries signed a statement of support for TRAIN package 2.

They are in chronological order of their years in service: Former Prime Minister Cesar Virata, former Finance Secretaries Roberto de Ocampo, Salvador Enriquez, Jose Pardo, former Senator Alberto Romulo, Former Secretaries Jose Isidro Camacho, Margarito Teves, and Cesar Purisima, who served both in President Arroyo and President Aquino III administrations. Some of us former Undersecretaries are also co-signatories.

This is noteworthy not only in that these gentlemen served across several Presidencies, most succeeding each other in less than cordial political circumstances, but also in that there is no fiscal crisis now that compels either the current reform program, or this kind of show of national unity.
Typically, tax reform legislations everywhere are driven by crises. Or at least some kind of financial pressure coming from multilateral institutions like the IMF, international credit rating agencies or financial markets. This time around, reform is being pursued at a time when our fiscal situation has never been better.

Record low public and external debt to GDP ratios, low and manageable fiscal deficits, prices, interest rates and borrowing spreads, and record high international reserves.

The Philippines has also received continuing credit rating upgrades to above investment grade — the product of reforms done by his predecessors, as Sec. Dominguez graciously acknowledges.

It is a tribute to the current economic team that it has taken a long view, and is moving boldly to achieve an ambitious medium- term program that would lift our GDP growth to 7% and higher, and improve the lives of most of the quarter of our people who are jobless and living below the poverty line.

It is also a recognition of the quality of the technical work done by Finance Usec Karl Chua and his team that such wide support for a complex piece of legislation is forthcoming. Not just from these highly respected men of probity and integrity, but also from esteemed organizations like the Foundation for Economic Freedom (fef.org.ph) and the Management Association of the Philippines (www.map.org.ph).

Quoted at the end of this column is the statement of support.

TRAIN 1 is getting unfair flack for the recent spike in inflation.

Recall that this package, addresses the inequity in the personal income taxes, widens the tax net by plugging loopholes in VAT, and imposes additional taxes on goods with negative economic externalities like oil and sugary products. It also raises additional resources for government’s “Build Build Build” program and social investments in health and education.

Let me repeat here what Sec. Dominguez said in Congress on inflation since there continues to be gross misunderstanding, most disappointingly even by our better respected senators.

They are asking for a TRAIN 1 suspension, or worse a suspension of the collection of excise taxes on oil. This will undo the good the TRAIN 1 law that they passed will do, including the equitable reduction in personal income taxes for the lowly salaried. This will not do a whit for inflation — as inflation did not primarily emanate from TRAIN 1.

“TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two thirds of last April’s 4.5% inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand.

TRAIN contributes only four tenths of a percent to the inflation rate. This means that for every additional peso our people have to spend because of inflation, only 9 centavos can be attributed to TRAIN.

It is also important to note that TRAIN’s biggest price impact is on tobacco and sugary beverages.
But in the case of these “sin” products, the tax rate is intentionally punitive to improve the health of Filipinos. At any rate, the inflationary impact of TRAIN is expected to diminish over the next few months.”

On his last point, we are already observing a slowing in the momentum of inflation on a month on month basis. This will only improve as government rice imports come in, and with the liberalization of rice import policy.

STATEMENT OF SUPPORT FOR THE COMPREHENSIVE TAX REFORM PROGRAM — PACKAGE 2 OF THE DEPARTMENT OF FINANCE

We, former Secretaries and Undersecretaries of the Department of Finance, reiterate our support for the administration’s comprehensive tax reform program (CTRP) and strongly encourage the government to urgently pursue the tax reform’s second package, aimed to modernizing the fiscal incentives regime and lowering corporate income tax rates.

We continue to share the country’s goal of becoming a prosperous, predominantly middle-class society. Achieving this will require an equitable tax system and robust public investment, which the first package of reform began to address.

Alongside strong and strategic public spending, tax policy must enable a fair, competitive, and growing business sector. Standard corporate rates must be reasonable, to encourage compliance, broaden the tax base, unburden small and medium enterprises, and create strong domestic value chains. At the same time, fiscal incentives must be treated as public investment: the economic benefits must outweigh the cost in foregone revenue; and the tax incentive regime must align with the country’s socioeconomic priorities.

We therefore believe that the fiscal incentives regime, made complex and costly by years of neglect and abuse, needs modernization, so that incentives are more transparent, performance-based, targeted, and time-bound. Modernizing the fiscal incentives regime will spur country development and public investment by incentivizing investment in less development areas and releasing local governments from a system that allowed registered enterprises to pay preferential rates in lieu of all taxes, including local taxes.

We likewise support effort to expand the TIMTA, consolidate tax incentives into a single menu, and harmonize the granting of incentives through the fiscal Incentives Review Board (FIRB) to be chaired by the Secretary of Finance.

We also believe that the corporate income tax (CIT) regime, burdened by the highest standard rate among ASEAN countries, at 30%, is in urgent need of reform. We strongly support the reduction of corporate income tax alongside the rationalization of tax incentives. Coupled with measures to simplify the tax system and improve tax compliance, reforms in the CIT regime will make the system simpler, fairer, and more efficient.

We see that the proposal of the Department of Finance is fair and well-crafted as it encourages equitable and inclusive growth, a competitive business environment, and strong countryside development. We therefore express our strong support for package 2 and urge members of Congress to ensure its timely passage.

Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations and board director of Institute for Development and Econometric Analysis, Inc. (IDEA)

romeo.lopez.bernardo@gmail.com