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

TRAIN, inflation, and competitiveness

Business World Introspective
By Romeo Bernardo
March 11, 2018


The government’s Tax Reform for Acceleration and Inclusion (TRAIN) began to make an impact on inflation this January and February, with a spike of 3.9% under the revised series. In line with international practice, the consumer price index (CPI) series is rebased periodically by the Philippine Statistics Authority to ensure that the prices in the basket of goods being measured stay relevant and representative.

Though this was not unexpected, Finance Undersecretary Karl Chua explained that other factors were the bigger contributors to inflation than TRAIN. These include higher corn, fish, tobacco, and personal transport prices, all of which grew double digits. Interestingly, the spike in tobacco prices are driven by the success of the government in compelling Mighty,now under Japan Tobacco, Inc. (JTI), to pay the right taxes. The larger part of the increase in oil prices are due to the increase in global crude prices and the peso depreciation.

Allow me to excerpt from a statement presented by the Foundation for Economic Freedom (FEF) at a Senate Hearing in February that puts this price hike in perspective.

“FEF believes that TRAIN has safeguards in place to mitigate any inflationary effects which as estimated by the Department of Finance to result to 0.7 percentage point increase in inflation for 2018 with food prices rising by .03 percentage points and transportation by 0.1 percentage points.
These include:

1. Built-in cash transfer programs in TRAIN which have to be implemented effectively by the Government to benefit the poor;

2. The TRAIN has provisions for reaching informal sectors which currently do not pay income taxes. This broadens the tax base which helps reduce the fiscal deficit and inflationary pressures. Many in the informal sector are not poor, but are exempted by self-election from any income taxation. It is only fair that they pay their share of taxes;

3. It is not accurate to look at TRAIN’s impact solely from the tax side without reference to expected increase in public expenditures for education and health, which are very progressive; and

4. The higher infrastructure spending will likewise have a positive impact on the country’s medium to long term growth path and will lift the poor out of poverty.

Further, over the past long years of significant economic reforms which achieved fiscal consolidation, the restructuring of the central bank, and the creation of an independent central monetary authority, foreign exchange liberalization, and flexible exchange rates, the Philippines today benefits from a monetary policy framework that gives monetary authorities effective tools to pursue inflation targeting to ensure that inflation and inflation expectations are properly anchored.

The Bangko Sentral ng Pilipinas (BSP) has the instruments to anticipate any possible build-up of inflationary pressures from TRAIN beyond what is warranted from current inter-industry structure of the economy.”

Speaking before the Management Association of the Philippines (MAP), BSP Governor Nestor A. Espenilla, Jr., reinforced this message. Correcting the misimpression of some market players that the reduction in the reserve requirements represented an untimely easing in monetary policy, he stressed that the BSP is just executing an operational adjustment, part of phased reduction in our ultra-high reserve requirements with ensuing liquidity to be replaced by open market operations, with neutral effect on monetary policy.

Moreover, he reassured that the inflation impact of TRAIN is expected to be transitory, and that government has enough tools to properly anchor inflationary expectations. I made the observation as the forum moderator that liberalization of the rice trade can do much to lower rice prices, and lessen price volatility induced by government’s monopoly, an advocacy of the FEF. He said that the BSP strongly supports this reform effort.

Moving now to TRAIN 2, allow me to excerpt from a forthcoming letter to the Secretary of Finance from the leadership of MAP.

“The Management Association of the Philippines (MAP) respectfully submits this expression of support for the government’s TRAIN 2 program.

“We agree with the Department of Finance that TRAIN 2, as a package, will help the country become more competitive with the rest of the world by lowering the corporate income taxes from the current 30%, the highest among our ASEAN peers.

“We agree with the need to rationalize and modernize the tax incentive system to make incentives time-bound, performance based, and not excessively complex with far too many different, even overlapping laws, rules, and regulations.

“It is necessary to widen the tax base and enforce better compliance. The relaxation of our bank secrecy laws, coupled with proper safeguards against abuse, is an essential tool in doing that. It will also encourage more to avail of a general tax amnesty, which we support.

“We think that lowering the optional standard deduction (OSD) of 40% to 20% will only make taxpayers revert to the itemized deduction and to avoid paying correct taxes. The 40% should be retained.

“We believe it is important to commit to a definite timeline for the reduction of income tax rates to have predictability that can help decision making on investments and business plans. But we suggest starting in 2019 rather than 2020. Our ASEAN neighbors are contemplating even further reductions in their income tax rates — making this an important step. And, raising the need to go beyond 25% to 20%, even 15% as soon as it can be afforded.”

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.

Wishes for the economy in 2018

Business World Introspective

By Romeo L. Bernardo

January 8, 2018

Happy New Year, dear readers!

We start 2018 on a positive note: My wishes for the economy in January 2017 were largely realized. (To read my wishes last year, please visit http://bit.ly/2017wishes).

1 Passage of Package 1 of TRAIN. Check, after a hard slog.

2 Appointment of a qualified, credible governor for the Bangko Sentral ng Pilipinas, preferably an insider. Check, and with an excellent outcome.

3 Efforts to change the Constitution and shift to federalism would be pursued responsibly, giving time for deeper study, informed debates, and awareness activities. The third, however, is a work in progress. Hopefully, future efforts to pursue extra-constitutionally (via a “revolutionary government” initiative or similar railroad variations) have been shelved for good. (See FEF Press Statement on Talks for a Revolutionary Government: http://bit.ly/FEFRev)
Allow me now to share our wishes for 2018, as posted on Global Source Partners, a subscriber-based network of independent analysts (globalsourcepartners.com). My colleague Christine Tang and I are its Philippine advisors.

Here are my three wishes for the economy in 2018:

1. MUCH MORE ACTIVITY UNDER BUILD-BUILD-BUILD.

The government’s massive P8.1- trillion medium-term infrastructure program has been likened to a battleship that will be hard to stop once it has gathered momentum. The passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Act puts some P80 to P90 billion in new money in the hands of government in 2018 that people expect will largely be used for upgrading and expanding the country’s networks of water, power, road, rail and air/seaports. Government is targeting to increase its investments in infrastructure from 5.4% in 2017 to 7.3% of GDP by 2022, to help ease supply bottlenecks and allow the economy to scale a higher growth path.

However, despite assurances from the Department of Budget and Management of improving disbursement rates overall, the 50% disbursement ratio as of November 2017 of the Department of Transportation leaves much room for improvement.

2. PASSAGE OF PACKAGE 2 OF THE DUTERTE ADMINISTRATION’S COMPREHENSIVE TAX REFORM PROGRAM.

Package 2 seeks to lower the corporate income tax rate (CIT), currently at 30% and higher than the statutory tax rates in most ASEAN economies. To compensate for expected revenue losses, the Finance Department wants to remove a plethora of fiscal incentives that costs government about 1% of GDP annually. The plan is to calibrate CIT cuts so that revenue losses will be roughly offset by revenue gains from removing fiscal incentives. While Package 2 will not be a revenue measure, it is expected to (a) make the economy more competitive and attractive to foreign investments with a lower CIT and (b) widen the tax base with fewer activities given tax incentives.


3. MODERATE INFLATION PRESSURES THAT WILL GIVE THE BSP MORE FREEDOM TO MANAGE DOMESTIC AND EXTERNAL RISKS.


This includes tightening global financial conditions expected to accompany a wider current account deficit. Local prices are expected to rise in 2018 due to higher consumption taxes from the TRAIN Act, adding roughly one percentage point to the headline rate per BSP estimate. One policy response to tame inflation that local economists have long pushed for is freer importation of rice, which account for close to 9% of the CPI basket. Local rice prices have remained elevated in recent years despite softer world prices, an oddity tied to the fact that rice imports are subject to quantitative restrictions (QR). While removing the QR would require a change in law, experts think that with enough political will, government can administratively ease up on imports, e.g., by setting a high, non-binding import volume, and improving the handling of import permits.

Given that wishes are free, I would add two more:

4. FAVORABLE RESOLUTION OF DISPUTES ARISING FROM FAILURES OF THE LAST ADMINISTRATION TO COMPLY WITH LONG-STANDING PPP OBLIGATIONS.

These include:

a) the arbitrary interpretation of MWSS concession agreements with Manila Water and Maynilad. We need to restore a working two-decade old concession model that was broken by the last administration.

b) non-adjustment of toll road tariffs of NLEX, Cavitex, and Star Tollways, and

c) the contractual tax issue with the Malampaya consortium.
If these fester much longer in one venue or another, the current administration’s no-nonsense image will suffer, dampening private investments in needed public goods and services, not to mention wasting public funds to pay for costly international litigation.

5. IMMEDIATE IMPLEMENTATION OF A COMPREHENSIVE PROGRAM TO REHABILITATE MARAWI CITY.

The plan will incorporate the cultural aspects important to the Maranaos such as preservation of heritage and Islamic sites. While reconstruction of infrastructure is critical, such a program should prioritize the provision of services to allow over 200,000 refugees to return to normal life such as education, particularly literacy for the adults and technical training for livelihood and employment as well as loans and capital infusion for the business sector.

Marawi City has become a fertile ground for violent extremism, a justification used for Martial law extension.

Addressing the needs of the population, majority of whom have been displaced for over six months and brought to new lows of poverty, is critical if government is to prevent the spread of extremist sentiment. Business progress in Mindanao and the nation requires peace and stability. Armed conflict is the major roadblock on the road to development. To remove this barrier, not only is the rehabilitation of Marawi essential but the passage of the long-awaited Bangsamoro Basic Law as well.

Devoting government resources and political capital to address this political problem soonest to preserve our economic momentum is non-elective. In contrast, headline news for a change in government to one version or another seems like needless distractions from the economic managers’ agenda of improving our people’s lives.

Finally, allow me to echo a New Year’s toast from Benjamin Franklin. “Be at war with your vice, at peace with your neighbors, and let every new year find you a better man.”


Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during the Corazon Aquino and Fidel Ramos administrations.