Get the best out of the crisis debate

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

{mosimage}The fiscal crisis has generated a wide range of responses. The Gloria Macapagal Arroyo (GMA) administration initially packaged its revenue
strategy by stringing together eight revenue measures, which the President outlined in her State of the Nation Address (SONA). In a paper published by BusinessWorld (Yellow Pad column, Aug. 9 2004), I criticized the revenue package of eight measures for being half-baked and ill-conceived.

This package also served as a backdrop, or a context, of the paper
authored 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’s
economic, including fiscal, policy – was kind and gentle in its treatment of GMA. This, at first glance, was surprising, considering  that some of the coauthors are known for their outspoken, no-holds-barred criticisms (they call a spade a spade, to borrow Solita C, 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; it nevertheless paid off in moving GMA to declare a fiscal crisis and in producing a sustained, vigorous debate on the issue.

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

The use of symbols, including gimmicks, has not diverted public
attention from the substantive aspects. The UP 11 paper has become a
reference point, but not the definitive paper, even as the government’s
controversial eight measures continue to stand.

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

Meanwhile, the paper of Walden Bello, Lidy Nacpil and Ana Maria
Nemenzo, titled “The UP School of Economics report: Overdue, selective,
not daring enough,” criticizes GMA and the UP 11 for failing to include
in their menu, among other things, the “reversal of trade
liberalization” 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 UP
11, have a certain worldview and standpoint. No one can escape
ideological or philosophical assumptions.

What is common between the papers of the UP 11 and Bello et al. is that
their prescriptions go beyond the immediate horizon, as both recognize
the long-standing need to restructure or overhaul the Philippine
economy. Their models, of course, are poles apart. One supports further
liberalization and privatization; the other prefers an alternative that
is highly critical of integrating the domestic economy into the global


The paper of Bello et al., though seen as flawed by PhD students from
the UP School of Economics who enthusiastically came to the defense of
their professors, cannot be dismissed outright. (See “The Bello, et al.
critique: Biased and economically unsound,” authored by Marife Lou
Bacate et al., published by the Philippine Daily Inquirer, Sept. 5
2004.) The call of Bello et al. for a “reversal of trade
liberalization” finds resonance in the business community. In a
recently held dialogue to address the fiscal challenge, cutely titled
“Taxing Conversations” (Sept. 6 2004), different organizations and
personalities from the business sector articulated a position asking
government 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 source
of badly needed revenues. A marginal increase in tariffs does not
necessarily mean a reversal of trade liberalization. Rosario Manasan of
the Philippine Institute for Development Studies (PIDS) estimates that
an across-the-board import surcharge of 2% can generate P16 billion.

The businessmen (representing influential organizations like
Philexport, Federation of Philippine Industries, Makati Business Club
and the American Chamber of Commerce) who participated in the “Taxing
Conversations” dialogue have also consolidated their position on other
tax measures. For example, they favor the phaseout, if not abolition,
of fiscal incentives that are duplicative and inefficient. They also
support the indexation of sin taxes, a specific tax on petroleum,
excise taxes on affluent consumption, and a variety of measures to
combat smuggling and improve collections of the Bureau of Customs. At
the same time, they oppose the general tax amnesty and the increase in
the VAT rate. The business sector would rather have government plug the
huge 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 and
problematic is the position to “devalue” the debt, which is a euphemism
for debt default. An argument goes this way: If debt reduction and
cancellation were accepted as a way out of the debt crisis in the mid
and late 1980s, a position adopted by the UP School of Economics
faculty then, why could not this be part of the solution now?

The answer is actually not that complicated. Conditions then and now
are vastly, and qualitatively, different. Debt default in the wake of a
full-blown economic crisis then was justified and necessary (in
1984-1985, the economy plunged into its worst recession), simply
because the economy could no longer service the debt. And to continue
to do so then would have led to worse consequences on society. At our
current juncture, the main challenge is precisely to avert a full-blown
crisis, and the key task is to significantly increase revenues and thus
reduce debt dependence.

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

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

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

Former Economic Planning Secretary Felipe Medalla, a co-author of the
UP 11 paper, nonetheless is optimistic. He is willing to bet P2 for
every peso that an economic crisis can still be avoided in the next two
or three years because “government and Congress will see that the only
way 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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