Get the best out of the crisis debate

Sta. Ana is the coordinator of Action for Economic Reforms. Thisarticle was published in the Yellow Pad column of Business World, 27September 2004 edition.

{mosimage}The fiscal crisis has generated a wide range of responses. The GloriaMacapagal Arroyo (GMA) administration initially packaged its revenuestrategy by stringing together eight revenue measures, which thePresident outlined in her State of the Nation Address (SONA). In apaper published by BusinessWorld (Yellow Pad column, Aug. 9 2004), Icriticized the revenue package of eight measures for being half-bakedand ill-conceived.

This package also served as a backdrop, or a context, of the paperauthored by the 11 faculty members of the University of the Philippines(UP) School of Economics (or the UP 11) titled “The Deepening Crisis:The Real Score and Deficits and the Public Debt.”

The UP 11 paper – notwithstanding its clear critique of government’seconomic, including fiscal, policy – was kind and gentle in itstreatment of GMA. This, at first glance, was surprising, consideringthat some of the coauthors are known for their outspoken,no-holds-barred criticisms (they call a spade a spade, to borrow SolitaC, Monsod’s favorite line). But a constructive paper, with a mild tone,was meant to get GMA to listen. Call it a benign tactical approach; itnevertheless paid off in moving GMA to declare a fiscal crisis and inproducing a sustained, vigorous debate on the issue.

Soon after, symbolic acts – sadly, including cheap gimmicks – dominatedthe news. The alumni of Silliman University, during their homecoming,donated their jewelry in a spontaneous display of patriotism. Takingthe cue from private initiatives, politicians came out with assortedfund-raising events that attracted media coverage-for example, the”piso-piso” drive and the million peso donation from every bigbusinessman, which turned out to be tax deductible. In the meantime,GMA redirected the debate towards the less painful, less controversialperipheral issues such as the reduction of Congress’s pork barrel andthe cut in the salaries and perks of the executives of statecorporations.

The use of symbols, including gimmicks, has not diverted publicattention from the substantive aspects. The UP 11 paper has become areference point, but not the definitive paper, even as the government’scontroversial eight measures continue to stand.

The different components of the Left movement are severe in theircriticisms of the positions of both government and the UP 11. Thenational democrats, spearheaded by Bayan and Bayan Muna, oppose newtaxes, arguing that measures such as the excise tax on petroleum, theincrease in the rate of the value-added tax (VAT), and the hike inpower rates are “regressive.” (It must be clarified nevertheless thatin the case of gasoline and power, the main users are not the poor.)Instead, they want government to focus on fighting tax evasion andimproving tax collection efficiency. This, too, has been the stance ofmany legislators, whose populist streak remains unchecked, as themajority of them seek reelection in 2007.

Meanwhile, the paper of Walden Bello, Lidy Nacpil and Ana MariaNemenzo, titled “The UP School of Economics report: Overdue, selective,not daring enough,” criticizes GMA and the UP 11 for failing to includein their menu, among other things, the “reversal of tradeliberalization” and the “devaluation” of the debt.

The Left has been criticized for having an ideological bias and”reflex.” But the reality is everyone possesses that reflex.Objectively, the positions put forward by all parties, including the UP11, have a certain worldview and standpoint. No one can escapeideological or philosophical assumptions.

What is common between the papers of the UP 11 and Bello et al. is thattheir prescriptions go beyond the immediate horizon, as both recognizethe long-standing need to restructure or overhaul the Philippineeconomy. Their models, of course, are poles apart. One supports furtherliberalization and privatization; the other prefers an alternative thatis highly critical of integrating the domestic economy into the globaleconomy.

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The paper of Bello et al., though seen as flawed by PhD students fromthe UP School of Economics who enthusiastically came to the defense oftheir professors, cannot be dismissed outright. (See “The Bello, et al.critique: Biased and economically unsound,” authored by Marife LouBacate et al., published by the Philippine Daily Inquirer, Sept. 52004.) The call of Bello et al. for a “reversal of tradeliberalization” finds resonance in the business community. In arecently held dialogue to address the fiscal challenge, cutely titled”Taxing Conversations” (Sept. 6 2004), different organizations andpersonalities from the business sector articulated a position askinggovernment to “revisit the tariff reduction program.”

These businessmen pointed out that our existing tariffs are quite low,way below the bound rates set by the World Trade Organization (WTO).Increasing tariffs without undermining WTO rules can thus be a sourceof badly needed revenues. A marginal increase in tariffs does notnecessarily mean a reversal of trade liberalization. Rosario Manasan ofthe Philippine Institute for Development Studies (PIDS) estimates thatan across-the-board import surcharge of 2% can generate P16 billion.

The businessmen (representing influential organizations likePhilexport, Federation of Philippine Industries, Makati Business Cluband the American Chamber of Commerce) who participated in the “TaxingConversations” dialogue have also consolidated their position on othertax measures. For example, they favor the phaseout, if not abolition,of fiscal incentives that are duplicative and inefficient. They alsosupport the indexation of sin taxes, a specific tax on petroleum,excise taxes on affluent consumption, and a variety of measures tocombat smuggling and improve collections of the Bureau of Customs. Atthe same time, they oppose the general tax amnesty and the increase inthe VAT rate. The business sector would rather have government plug thehuge leakage in VAT by broadening coverage or limiting exemptions,checking overvaluation of VAT input, arresting smuggling, etc.

To return to the paper of Bello et al., far more controversial andproblematic is the position to “devalue” the debt, which is a euphemismfor debt default. An argument goes this way: If debt reduction andcancellation were accepted as a way out of the debt crisis in the midand late 1980s, a position adopted by the UP School of Economicsfaculty then, why could not this be part of the solution now?

The answer is actually not that complicated. Conditions then and noware vastly, and qualitatively, different. Debt default in the wake of afull-blown economic crisis then was justified and necessary (in1984-1985, the economy plunged into its worst recession), simplybecause the economy could no longer service the debt. And to continueto do so then would have led to worse consequences on society. At ourcurrent juncture, the main challenge is precisely to avert a full-blowncrisis, and the key task is to significantly increase revenues and thusreduce debt dependence.

By all means, we should negotiate hard for better terms from thecreditors even as we are constrained by the high-risk premium arisingfrom the heavy debt and the low revenue effort. But debt default atthis time is premature; it would in truth precipitate the full-blowncrisis that we wish to avoid.

Amid all these proposals from the economists, from business, and fromthe Left, Congress has begun deliberations on the tax measures.

What is most disturbing though is that Congress is off track. A billcertified by Malacanang is the granting of a tax amnesty, whichCongress has given priority, but which the academe, business,nongovernmental organizations, and the Left reject. Also gaining groundin Congress is the bill to return to an ad valorem tax for sinproducts. This is very favorable to tax evaders, simply by setting updummy middlemen so that the manufacturer could escape higher taxation.Even the version of the indexation bill sponsored by some legislatorsis a complicated one that would result in lower yields for government.

Former Economic Planning Secretary Felipe Medalla, a co-author of theUP 11 paper, nonetheless is optimistic. He is willing to bet P2 forevery peso that an economic crisis can still be avoided in the next twoor three years because “government and Congress will see that the onlyway to avert the crisis is to shape up.”

But given the current behavior of Congress and the presidency, I am tempted, against my own wishes, to call Mr. Medalla’s bet.

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