Sta. Ana coordinates Action for Economic ReformsThis piece was published in the May 3, 2010 edition of the BusinessWorld, pages S1/4 to S1/5.

Noynoy Aquino’s victory is imminent.  What stands in the way of this overwhelming victory is election failure or massive cheating.

Aquino’s victory augurs well for the Philippine economy and politics. We can expect people’s trust in government to be renewed, enabling a favorable environment for reforms to grow. We can expect the economy to pick up, as animal spirits are awakened, thus stimulating investments. The economy will be energized by the legitimacy accorded the new President as well as by the expectation of honest and transparent government.

But it is a mistake especially for Noynoy’s followers to assume a triumphalist air. The electoral contest is the opening salvo, and that particular battle will be won.  But more battles will be fought in the next six years.

As the new administration rebuilds the economic and political institutions and spurs growth in the immediate term, it will face tough obstacles.  Success begets problems and bigger challenges.

Gloria Arroyo and her allies—including those she imposed to occupy sensitive positions in government bodies that are independent of the Executive (e.g., the Supreme Court and the Ombudsman)—will harass the new administration. Those who must account for violations of the law, including high crime, will surely oppose—even destabilize—the new government.  A compounding factor  is the likely wedding of the defeated forces of Manuel Villar and the remnants of Arroyo’s party, which will constitute the new opposition. This will reinforce the “Villarroyo” arrangement.

It goes without saying that the radical Left, which wittingly became Villar’s attack dog against Noynoy Aquino in the campaign, will end up being part of the opposition and thus aligned with the “Villarroyo” constellation.

Countering the “Villarroyo” threat requires political statesmanship and courage. Such qualities are needed to consolidate strategic and tactical alliances; appoint clean, credible, and capable people in the Cabinet and other sensitive positions; and sustain the democratic movement that grew in the wake of  Cory Aquino’s passing and Noynoy’s candidacy.

Undoubtedly, the politicos associated with the ancient regime will align themselves with the party in power.  While they can be accommodated to form a broad tactical united front to thwart the “Villarroyo” forces, care must be exercised to prevent them from worming their way into key positions.  Nevertheless, we should welcome the decent, reformist politicians from the other political parties, including the Nacionalista Party (NP), towards forming a unity government.  Despite being with the NP, Adel Tamano, for example, deserves respect and admiration for condemning those in his party who resorted to black propaganda and other dirty tactics.

Deep vetting of appointive high-level officials must likewise be done, ensuring that those to be selected have integrity and have a consistent record of safeguarding the public interest.  We must protect the new President from infighting, and one way to do it is to resist the lobby that demands political payback and serves particularistic interests.

On the economic front, the Arroyo administration will leave the incoming administration with a big fiscal headache. The Arroyo administration’s failure to increase the tax effort and its propensity to undertake revenue-eroding measures can translate into a fiscal crisis.

Noynoy Aquino has correctly said that the anchor of tax reforms is better administration and improved efficiency, which a credible government has the political capital to do.   Tax policy adjustment is nonetheless unavoidable. People will understandably be allergic to new taxes, given that the revenues from the tax rate increases during Arroyo’s term were dissipated. But Bert Hofman, the World Bank’s country director, clarifies that adjusting existing taxes to inflation—for example, the specific tax on sin products—cannot be considered a new tax.

Another dimension of the fiscal problem brought about by the Arroyo administration is the harsh under-spending for essential services.  Take spending for infrastructure; capital outlays in the past few years have been below five percent of gross domestic product (GDP).  Compare that to the capital outlays of similarly situated neighbors like Indonesia and Vietnam, which are above eight percent of GDP.

Despite the fiscal constraint, the new administration has leeway to increase spending for infrastructure and other essential services. Raul Fabella has written elsewhere that the country has huge savings in terms of foreign exchange reserves, which can be used for funding critical programs. This requires the Bangko Sentral ng Pilipinas to relax its inflation targeting.

Relaxing inflation targeting also serves another important objective—recovering the competitiveness of the Philippine currency.  As said earlier, Aquino’s victory will bring back investors’ confidence, leading to capital inflow that will further strengthen the Philippine peso.  Overvaluation arising from peso appreciation is bad for the real sector of the economy.  But an array of tools can be deployed to fight overvaluation. Even the International Monetary Fund has acknowledged that instruments like capital controls, which were previously eschewed, are now part of the policy menu.

Raising the tax effort, increasing the spending for infrastructure and other essential services, and stemming the currency overvaluation are the necessary steps towards achieving the longer-term goal of sustaining high levels of growth—say an annual growth rate of seven percent—so the country can reach the level of an upper middle-income country within a generation.

But first things first. The immediate task is to defend the Aquino victory.  This will entail people’s vigilance to fight election failure and massive cheating. People’s vigilance will likewise be crucial to secure the reforms under the Aquino presidency towards achieving prosperity in the long run.