Looking at Economic Performance from a Skeptical Perspective

Sta. Ana coordinates Action for Economic Reforms.  This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, November 6, 2006 edition, page S1/5.

A skeptical mind—i.e., having a critical and questioning attitude—is a desirable quality; a mark of a good academic or scholar.   We obtain more accurate information and deeper knowledge through a scientific method of probing, testing, and falsification.

A skeptical mind is a distinctive quality found among academics who venture into the world of shaping public opinion and public policy.

Take Paul Krugman, the professor of economics at Princeton who writes a column for The New York Times.  Mr. Krugman has always been critical of the way the George Bush administration has run the US economy even though US growth performance surpasses that of other mature economies.  His being critical is a function of his scholarly training, not because he dislikes the nitwit who claims credit for the resilient US growth.

In the Philippines, Cielito Habito, an economics professor at the Ateneo de Manila and a columnist for the Philippine Daily Inquirer, asks a lot of tough questions even though the domestic economy is growing at an unexpected, respectable rate of 5.5 percent. This likewise is the stance of Solita Monsod of the University of the Philippines School of Economics, who writes for both BusinessWorld and Inquirer.  They are critical because that is the way that they have been trained, not because they treat Mrs. Gloria Arroyo as a midget economist.

The critical, or skeptical, analysis of the economy does not lack articulators, Mr. Habito, Ms. Monsod, the School of Economics, Action for Economic Reforms, and others have time and again pointed out the contradictions of current economic performance.  Let us recapitulate this critical view:

Growth has proven to be resilient.  The economic performance, indicated by the GDP growth rate of 5.5 percent in 2006 and expected to breach 6 percent in 2007, does not match the pace of China, Vietnam and, India; but it is good enough.  The current growth, though it is early to establish a trend, is above the Philippines’ long-term growth rate average.

Furthermore, government has managed to alleviate the fiscal crisis.  The national government’s debt as a proportion of GDP has declined although it remains at a high level.  Revenues have increased, thanks to new tax legislation, including the expanded coverage of the value-added tax (VAT), the increase in the VAT rate from 10 percent to 12 percent, and the increase in the excise tax for sin products.

The consolidated public sector financial health has likewise improved.   A crucial factor was the increase in the National Power Corporation’s tariffs.

All told, the new measures being implemented can generate revenues equivalent to more than 2.5 percent of GDP.

Nevertheless, the quality of fiscal reforms—specifically the sustainability of revenue gains—is suspect.

The excise tax on sin products is badly compromised. The original intention of the law was to index the specific tax to inflation, which did not happen.

Tax administration remains a serious problem.  Even as revenues have increased, the revenue collection agencies are hard-pressed to meet their targets.  In 2005, their actual collection was below the programmed level.  Government under-spending and Bureau of Treasury income mainly accounted for the lower national government deficit in 2005. Infrastructure, health and basic education—all necessary to have long-term growth—have suffered heavily from government’s under-spending.

Moreover, after the passage of several revenue-enhancing measures, over-confidence or complacency has set in. Malacañang has signaled to the Senate to defer the deliberation on the bill on the rationalization of fiscal incentives.  Insiders, in fact, say that Mrs. Arroyo prefers the Lower House version of granting more (redundant) fiscal incentives.

Worse, a reversal of policy has taken place in tax administration.  The Bureau of Internal Revenues (BIR) has instituted a tax amnesty program, which it calls tax abatement.  This, however, is bad from an institutional perspective; it creates the moral hazard problem that encourages taxpayers not to pay taxes in the future.

Aside from the fiscal problem, the other bone of contention in macroeconomic policy is the exchange rate.  The peso has indeed been appreciating, which Mrs. Arroyo claims shows an economic upswing.  While the currency appreciation may indeed be good news for financial markets, it is bad news for the real sector of the economy—the exporters, the domestic producers, and their workers.  Exporters lose price competitiveness, and domestic producers compete with much cheaper imported goods.  Of course, a peso appreciation is not good for the millions who depend on the remittances of overseas Filipino workers.

In fine, the debate on current economic performance should continue.  In doing so, however, we must not lose sight of the vision of having sustained high level of growth for the long term.

We have had instances in the past where almost everyone celebrated the good economic news, only to find out that the pattern was temporary.   Can we now say with firmness that the country has broken out from the boom-bust cycle?

Economists agree that institutions are a deep determinant of long-term economic growth.  Some economists, William Easterly (2006) for example, are more provocative by arguing that national policies are not a “sure and principal determinant of growth.”  What has to be avoided is “extremely bad policies,” which is simple common sense. Well, it is apparent that the Philippine government both past and present, is capable of making “extremely bad policies.”

Nevertheless, good policies can lead to good institutions.  Effective tax administration and policy can curb tax evasion behavior.  A competitive exchange rate can change the behavior of investors and workers.

The central question, however, is:  Do we have now in place good institutions that will create the conditions for long-term growth?  Are there institutional reforms being carried out that are responsive to long-term growth?

The recent Supreme Court decisions that address institutional questions, especially on the attempt to change the Constitution through the people’s initiative, reflect the kind of institutions that we have.

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