Pondering Malacanang’s Priority

Mr. Sta. Ana coordinates Action for Economic Reforms.  This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, October 16, 2006 edition, page S1/5.

Gabby Claudio is an articulate, intelligent person.  Trained by the Jesuits, he is proficient in English, and he speaks clearly and coherently but without the Manglapus accent.  So it may come as a surprise to hear or read a muddled statement from Mr. Claudio.

Take this statement that BusinessWorld (10  October 2006) quoted:  “Regardless of its status as a priority bill, its timetable is tentatively affected by the delay … in other priority measures.”  Mr. Claudio is referring to the Senate bill 2411, sponsored by Senator Ralph Recto, regarding the rationalization of fiscal incentives.

What do we call a priority bill that has to give way to other priority measures?  Second priority?  Third priority?  Fourth priority?  Mr. Claudio enumerates the other priority measures: the anti-terrorism bill, the General Appropriations Act of 2007, the bio-fuels bill and the restoration of perks to certain economic zones.

It is striking to note that one priority bill that intends to restore perks to some eco-zones is the opposite of the rationalization of fiscal incentives. Senator Recto’s bill calls for the repeal of numerous laws that grant overgenerous incentives to investors, resulting in huge foregone revenues for a cash-strapped government.

When Mr. Claudio’s statement becomes muddled, it’s not because he does not know what he’s saying.  He is no nitwit; to repeat, he’s intelligent.  So a muddled statement from him means that either:

1)  He is stoned—but Mr. Claudio has been a sober and straight guy, even during his high school years when popping LSD was the norm. He did sport long hair, not an indication of being a dope, and he preferred playing Dave Clark Five music, which was neither heavy nor psychedelic.

2) Or he is engaged in the art of dissembling, which he may have learned from the Jesuits.

I do not wish to hurt an Atenean; so let a La Sallite, a former economic planning secretary, do the talking.  This La Sallite—intelligent and articulate, too—says that double speak is the standard language of the Arroyo administration that Mr. Claudio represents.

While Mr. Claudio assures us that the rationalization of fiscal incentives is a priority, though not even a second priority, his president, Mrs. Gloria Arroyo tells the business community the following:   “I want to assure you that our policy is to keep and to improve the incentives the Philippines offers strategic foreign and domestic
investors, especially exporters.”  Intended to please the business crowd, Mrs. Arroyo says: “I know some of you are worried, that’s why I want to assure you that we will not support proposals that have that effect of reducing competitiveness.”

Naturally, the businessmen applauded Mrs. Arroyo’s statement.  As BusinessWorld reported, “Businessmen present took this as meaning that Mrs. Arroyo was not supporting SB 2411, a stand confirmed by a Cabinet official who requested anonymity.” A big section of the business community, including the foreign chambers of commerce, opposes the rationalization of fiscal incentives, invoking as justification the loss of competitiveness.

Worse, Mrs. Arroyo is said to favor the House version of the fiscal incentives bill (House bill number 3295), which provides more tax incentives.  A friend in the Department of Finance says that the House bill is “the most irrational rationalization ever.”

The truth is, many of the incentives granted by government are redundant. That is, even without the incentives, the investments would still have been made.

Renato Reside, Jr. sums up the arguments in his paper titled Fiscal Incentives and Incentives in the Philippines (2006). Two conditions make incentives redundant.

The first condition is a situation where the investments have above-average or high returns.  Reside’s research shows that the ex ante rates of return are 15 percent or above for at least 90 percent of projects approved by the Board of Investments. Such rates of return are high, by both international and national standards.

The second condition pertains to the underlying investment motivation.   Drawing from the literature, Reside cites three main factors, namely market-seeking, resource-seeking, and efficiency-seeking motives.

Market-seeking investments are motivated by the size and the strength of the domestic market.  In this case, the incentives are of secondary importance for the firms to do business in the domestic market.  The highly lucrative telecommunications industry and the real estate sector are examples of the market-seeking category. Note that these industries are non-tradable and hence not affected by global competition

Resource-seeking investments are attracted by the presence of inputs that cannot easily be found elsewhere.  Mining is a good example; mining corporations will seek the country’s minerals, especially at a time that global prices of minerals are soaring, even without the fiscal incentives.

It is the efficiency-seeking motivation that has a high sensitivity to fiscal incentives.  The costs of inputs adjusted for productivity are crucial to be competitive.  Efficiency-seeking investments are in the main export-oriented, although not all exporters (mining corporations, for example) cannot be included in the efficiency-seeking category.

The Recto bill rationalizes incentives on the basis of the conditions defined above.  Clearly, incentives should be narrowed and given only to the efficiency-seeking investments.

Sadly, Malacañang has rejected the Recto bill.  We cannot, however, blame Mr. Claudio for his muddled statement on the priority given to Recto’s incentives bill.  He merely echoes the position of his President, whose priority is political survival.  And her political survival is best served not by inchoate public interest but by well-organized and highly financed vested interests.

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