Uncertainty and danger

The author is coordinator and member of the management collective of Action for Economic Reforms, a policy research and advocacy NGO focused on macroeconomic policy and governance issues.

War is looming. And like it or not, the Philippines is not spared. The
Economist, which incidentally is pro-war, believes that the country
will suffer heavily once the full-blown war in Iraq erupts.

Not surprisingly, the exchange rate has become volatile, with the peso
vis-a-vis the dollar reaching a two-year low. The Philippine currency
is not at all overvalued, if we consider the surprisingly sustained low
inflation rate. The depreciation is simply an indicator of the
investors’ nervousness amidst the imminent war in Iraq.

No doubt about it, the US war against Iraq has shattered investors’ and
consumers’ confidence globally. It also goes without saying that a
global economic slowdown (a global recession cannot be discounted as a
possible scenario) has an adverse impact on the Philippine economy.
Both investments and international trade will suffer. In 2002, overall
capital formation declined by 0.6%; fixed capital grew by a meager
2.1%. Exports (merchandise exports and nonfactor services) increased by
3.3%, in the same period. We cannot expect investments and exports to
rebound amidst war and terrorism.

And even though the US attack has yet to begin, the threat of war and
its attendant uncertainty has led to steep oil prices. The breakout of
war will further escalate the rise in oil prices. Moreover, the welfare
of thousands of Filipinos working in the Middle East is put in
jeopardy. Their possible displacement means loss of income and
remittances. We cannot belittle the value of our overseas workers’
remittances in shoring up the economy.

Some analysts hope and expect the US war to be swift and short so as
not to prolong the agony and the uncertainty. But a quick victory on
the military front does not guarantee stability. The US invasion of
Iraq will provoke Muslims all over the world. It will fan the flames of
extremism, and will be exploited by terrorist groups to recruit fresh
militants and renew attacks against the US and allies. To paraphrase,
Malaysian Prime Minister Mahatir Mohamad, a US invasion of Iraq is the
trigger for World War III.

It is likewise wrong to argue that the war will be good at least for
the US economy. For one thing, unlike in the Gulf War in which Arab
countries funded almost 80% of the war bill, this time, the US will
overwhelmingly shoulder the costs.

What is disturbing is that the cost of war compounds the US’ structural
budget deficit – one that arose from George W. Bush’s misguided policy
of permanent tax cuts. At the same time, the war can hardly “stimulate”
the economy since the US will neither mobilize new troops nor produce
new war materiel in invading Iraq.

Stressing the economic impact of the war on Iraq does not, however,
mean it is the only factor that is adversely affecting the performance
of the Philippine economy.

Internal developments also contribute heavily to the gloomy situation.
The factors include the war in Mindanao as well as the insurgency, the
2004 elections, the unpredictability of policy, and the proposed
changes in the Philippine Constitution.

The military offensives against the Moro Islamic Liberation Front
(MILF) and the New People’s Army (NPA) have incalculable social and
economic costs. The bombing of the Davao International Airport
resulting in the death or maiming of scores of civilians and the
sabotage of transmission lines leading to a power outage throughout
Mindanao show the intense backlash of an all-out war policy.

President Gloria Macapagal Arroyo has embraced the strident, hard-line
position of the US in the war against terror, even bringing to our
shores US armed troops to fight local bandits whose links with the al
Qaeda are tenuous. The presence of US troops in Mindanao, in the guise
of war exercises, has the unintended consequence of projecting the
Philippines as a terrorist haven, thus discouraging potential investors
and tourists.

President Arroyo has kowtowed to US foreign policy – in the hope of
gaining aid that does not seem forthcoming for now. The administration
badly needs financial resources, and it is this financial desperation
that drives the President to act as the US poodle in East Asia.

The fact, however, is that the Philippine leverage is weak; US compensation has been and will continue to be minimal.

Moreover, a lesson learned from our special relationship with the US is
that courting US financial assistance makes government complacent in
the pursuit of reforms that address the chronic gap in investments,
public spending and foreign exchange. It poses a moral hazard problem.

The national elections in 2004 also contribute to the uncertainty of
the times. The attitude of investors is: Why invest now when rules can
change in the aftermath of the presidential elections? Emmanuel de Dios
explains that the Philippine boom-and-bust cycle coincides with the
election cycle. (See Mr. de Dios’s paper The Boom-Bust Cycle in The
Philippine Economy: Alternatives for the 21st Century, edited by Dante
Canlas and Shigeaki Fujisaki, 2001). Further, the electioneering and
political jockeying for the 2004 elections distract policymakers from
paying serious attention to the crafting of economic reforms that are
necessary to pave the way for sustained growth. Several important bills
on economic reforms await the legislature’s approval (for example, the
indexing of the specific tax on liquor and cigarettes), but it is
doubtful whether Congress will pass sound, rigorous legislation as
politicians pander to populism and resort to horse-trading.

Ms. Arroyo’s announcement not to run for the presidency in 2004 drew a
positive response from a wide range of sectors. Her decision not to run
gives her the opportunity to initiate and implement the bold reforms
without being constrained by the forthcoming elections.
President Gloria Macapagal-Arroyo’s announcement not to run for the
presidency in 2004 drew positive response from a wide range of sectors.
Her decision not to run gives her the opportunity to initiate and
implement the bold reforms without being constrained by the forthcoming

But again, reminiscent of the period during her accession to the
presidency in the wake of EDSA II, she is squandering the opportunity
and losing the momentum. The problem is that she does not have a
coherent agenda for reforms.

She prides herself in coming out with bold, unpopular decisions.
Unfortunately, the unpopular decisions she has made are not exactly
worth supporting.

Take, for instance, the controversial but in fact foolish pronouncement
concerning the shift to English as the primary medium of instruction in
public schools. This decision flies in the face of substantial evidence
that the vernacular language is the most effective medium for students
to absorb knowledge, grasp concepts, and articulate their ideas.

But where it matters, the bold decisions are not coming. What is now an
intractable budget deficit can be resolved through a combination of
unrelenting tax administration reforms and decisive tax policy. The
Bureau of Internal Revenue is trying to make up for last year’s setback
in revenue collection, but its effort is not enough. The administration
must introduce new taxes and reduce fiscal incentives. But GMA has not
cracked the whip. The bill on indexing sin taxes to inflation is dead
in the water.

And in an instance in which her Finance secretary took the initiative
of issuing a revenue regulation, the action did more harm than good.
Finance Secretary Jose Isidro Camacho jumped the gun on Congress by
issuing a revenue regulation restricting the exemption on the excise
taxation of ten-seater motor vehicles, even as Congress is about to
finish its deliberation on the bill regarding the excise tax on such
vehicles based on selling price.

While the objective of the revenue regulation is laudable-an attempt to
plug the loophole in the law that allows the nonpayment of excise taxes
by some manufacturers, its timing is dubious. This, again, is an
example of a rule that creates uncertainty and confusion in the market,
for the new law-which is superior to the revenue regulation-will
supplant the revenue regulation in a few months.

Charter Change

Another factor that contributes to uncertainty is the determination of
the majority of Congress, with the endorsement of GMA, to pursue
Charter change. The debate is no longer about whether Charter change at
this time is meritorious. The terms of the debate have been confined to
the mode of Charter change – through a Constitutional Convention
wherein the delegates are elected or through a Constituent Assembly
made up of the members of Congress.

What is most disturbing about changing or amending the Constitution is
the underlying motivation of the proponents who belong to the party in
power. This is the fear of an opposition victory in the forthcoming
presidential elections and thus the resort to a shift to a
parliamentary system to prevent others from capturing Malacanang. Here
is a case of institutions being deliberately undermined in a subtle,
legalistic way to preserve the power of the ruling party.

Admittedly, what has been presented is a harsh picture of the economic
prospects. It all boils down to the national and global uncertainties
and the attendant lack of investor confidence. Nevertheless, the
uncertainty is abetted by the weak leadership of the current
administration as it fails to muster the will the carry out firm but
drastic reforms.

But how will this skepticism reconcile with the relatively high growth
rate? Everyone was surprised by the Gross National Product growth rate
of 5.2% in 2002. The fact is, it is not hard for the Philippine economy
to attain a growth rate of five percent or thereabouts for a given year
although the historical average growth rate is lower. The real
challenge begins when the economy reaches its peak at above five
percent. To put it another way, the real test is just beginning, and
the fundamental question is whether the economy can sustain a growth
rate of six percent over a longer period of time.

A cursory look at the national income accounts shows us that the
quality of growth in 2002, while good news indeed, is disturbing.

Investments, very crucial for sustained growth, remain weak. Further,
the structural problems have worsened. The budget deficit resulting
from poor revenue collection is the government’s Achilles heel. The
government is overborrowing, and a debt crisis is not far-fetched, if
the trend of weak revenue collections and further borrowing continues.

In the meantime, Philippine manufacturing is still struggling to be
competitive, and its leaders continue to seek increased protection. The
problem of unemployment, not to mention the quality of jobs, is

It is therefore no surprise that despite a 5.2% GNP growth, low
inflation, and a healthy external account balance, Filipino producers,
consumers, and foreign investors remain skeptical.

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