Not much change — yet

September 28, 2016 at 12:30

It will shortly be a hundred days since President Duterte has taken office and I’ve been asked by the World Bank, the press, and other institutions about my evaluation of the administration’s economic policy so far.

My reply is that there hasn’t been much change — yet. More importantly, so far, I don’t see the economy moving toward inclusive growth.

This isn’t a condemnation of the administration’s performance, but a recognition of how short a span of one hundred days really is and the many trade-offs a president must make.

My evaluation is based on how the administration is moving on the five binding constraints to inclusive growth, which I have written about extensively on in previous columns.

The first binding constraint is the control by monopolies of strategic industries — telecoms, shipping, ports, etc. The solution to this binding constraint is the removal of the foreign ownership restrictions in the Constitution, liberalizing foreign entry in industries, and promoting a more competitive environment.

During the campaign, President Duterte did say that he’s for liberalizing foreign ownership in public utilities and mass media to allow for a maximum of 70% ownership, but not in lands. His administration is indeed supporting efforts to change the Constitution, but the principal focus has been on a change in the form of government from unitary to federal.

Even assuming that foreign ownership liberalization will be in the new Constitution, that seems still far off. Congress still has to debate these changes and the approved Constitutional changes have to be submitted to the voters for ratification, perhaps during the 2019 midterm elections. If ever, it might take three or more years before we see an impact on the economy.

NO MOVES TO IMPROVE REGULATORY CAPACITY
The administration also doesn’t have other measures to liberalize parts of the economy, as the previous Aquino administration did, with the bank and finance company liberalizations.

Likewise, there have been no significant moves to improve regulatory capacity and will.

The National Telecommunications Commission (NTC) is an example of a weak (and perhaps captured) regulator but the administration hasn’t yet shown that change has come to the NTC. The government has just been a standby spectator as the Philippine Competition Commission does battle with the telecom giants, PLDT-Smart and Globe Telecom, on the purchase of San Miguel’s telecom assets.

The second binding constraint is labor rigidities, specifically the high minimum wages and the strict labor security provisions in the Labor Code. On this issue, the administration, in fact, has been moving in the opposite, counter-productive direction.

For example, the Department of Labor and Employment (DoLE) has declared that it supports a national minimum wage — a backward and jobs-killing policy if ever there was one. A single minimum wage for the entire country irrespective of the cost of living and labor market conditions in the various regions will certainly “kill” (the administration’s favorite word) investments in labor-intensive industries in the countryside.

Even if this policy doesn’t materialize due to opposition from the Department of Trade and Industry, the Department of Labor and Employment is certainly creating an atmosphere of fear among employers, which will have a chilling effect on investments and job creation.

Also, the policy of ending temporary contractual employment or “ENDO,” while well-intentioned, is sure to backfire.

For one thing, employers resort to temporary contractual employment or 5-5-5 (terminating them on the fifth month) because the Labor Code makes it so difficult for employers to fire unproductive employees after they get security of tenure on the sixth month. In other words, the administration is trying to cure the symptom, but is not addressing the real causes of temporary contractual employment.

I don’t believe that there is a so-called win-win solution because forcing the labor contractors instead of the companies to absorb the workers as full employees with security of tenure will just add to the costs of hiring.

The solution to this labor rigidity problem is to amend and liberalize the Labor Code. However, there are no indications that this administration, influenced by leftist and populist thinking, will do that.

At least former Labor Secretary Rosalinda Baldoz in the previous administration recognized the problem and tried to push for an apprenticeship bill that would exempt apprentices from the minimum wage and labor security provisions of the Labor Code during the term of their apprenticeship. The bill would also have extended apprenticeship from the present six months to two years. That bill passed in the House but unfortunately was killed by Senator Frank Drilon, a former Labor Secretary. I don’t see the new administration trying to revive this excellent bill.

PRIVATE INVESTMENTS TO IMPROVE PRODUCTIVITY
The third binding constraint to inclusive growth is the National Food Authority (NFA) monopoly on rice importations and property rights problems in agriculture.

On the NFA monopoly on rice importation, the administration seems to be making a huge change. The reports say that the Cabinet has decided not to ask for an extension of the quantitative restrictions in the importation of rice, meaning the NFA will no longer administer rice import quotas.

It remains to be seen, however, if this will come true. Secretary of Agriculture Manny Piñol is vociferously opposed to the policy. (Fortunately, the NFA is not under him.) He also insists on continuing former Agriculture Secretary Alcala’s failed rice self-sufficiency policy, which will mean wasting more resources at a foolish policy of rice self-sufficiency instead of focusing on promoting higher value-added agricultural products.

In contrast, Vietnam has become the second biggest coffee exporter in the world while our agricultural officials are asleep at the wheel, dreaming of unattainable rice self-sufficiency.

Moreover, Secretary Piñol insists on giving away irrigation for free. If water is given away free, will it be used efficiently? Won’t free water encourage farmers to farm marginally productive lands? It will encourage farmers to plant water-intensive but low-value added rice at the expense of higher value crops. The Agriculture Department should be promoting climate change-resistant crops, but it’s still obsessed with the same rice self-sufficiency policies.

What’s needed in agriculture is increased private investments, which will help improve productivity.

However, the Department of Agrarian Reform’s policies seem to discourage private investments in agriculture. The Department of Agrarian Reform (DAR) has just declared a moratorium in the conversion of agricultural land to industrial uses and to review even previously approved lands.

Productivity in industry is higher than in agriculture.

In industrialization, there’s a natural and logical process of the movement of land, labor, and capital in favor of industry. Banning conversion is a retrogressive policy designed to hamper our industrialization. Moreover, the new policy is already sending alarm bells to the real estate industry because how else will they acquire the huge raw lands to convert to industrial, commercial and residential estates?

DAR Secretary Rafael Mariano is also threatening the passage of a new agrarian reform law and is intent on breaking up agricultural estates into atomized farms. Another agrarian reform law will foster renewed uncertainty over property rights and will deter agricultural investors from investing. For why will investors invest if there’s a possibility that the land will be taken away from them? Or if they have to jump through many hoops just to get clearances from DAR to put up an agribusiness?

The current average size of farms is less than a hectare, too small to increase productivity through capital-intensive farming, especially with lack of government support. The real path to increased agricultural productivity is not to break up large estates but to allow the market to determine the optimal size of farms. Efficient farmers must be allowed to buy out inefficient ones. Presently, DAR wants to maintain the status quo by restricting the agricultural land market.

Worse, DAR Secretary Mariano is revoking DAO 3, issued by former DAR Secretary Gil de los Reyes before he left office. DAO 3 is designed to divide the collective Certificate of Land Ownership Awards into individual CLOAs. Mariano wants to revert to the communist system of collective ownership in a single title, which has constrained farmer beneficiaries and dampened their individual initiative for the past 29 years. Change has just been canceled.

MINING AT RISK
Aside from agriculture, where else will growth in the countryside come from? It should be in mining and forestry. However, billions of mining investments are at risk because of the uncertainty surrounding the policies of the government. It’s not clear that the DENR campaign against mining is directed only at “irresponsible” miners. Moreover, DENR Secretary Gina Lopez says she’s against open-pit mining even if the mining company adheres to international standards of environmental compliance.

It’s also not clear if the new administration, gung-ho on clean energy, will go to war against coal mining. If it does so, the country’s quest for energy stability is at risk. There’s still no substitute for coal, especially to fuel base plants that run continuously. Renewable energy is expensive and intermittent.

A healthy forestry industry can spell employment for the one out of five poor people who live in the uplands.

Unfortunately, the previous Aquino administration’s misguided “total log ban” policy killed the forestry industry. Will the new administration try to revive the forestry industry by giving secure property rights to those who plant and harvest trees through a Sustainable Forest Management Act? Given the rigid environmental posturing of the new administration, that’s highly unlikely.

The fourth binding constraint is an uncompetitive exchange rate. Well, the peso has fallen, helped along by the fall in our exports for 15 consecutive months. However, the peso has to go down further if we want to protect the economy from cheap imports (including drugs), increase the purchasing power of our OFWs, boost tourism, and promote exports.

Well, at least, Finance Secretary Carlos Dominguez III sits in the Monetary Board. A former Agriculture Secretary, he understands that an overvalued peso hurts agriculture.

The fifth binding constraint is our weak institutions. So weak are our institutions that even President Duterte has admitted that the government is close to being a narco-state.

President Duterte’s answer to the problem of a weak state is to overhaul the 1987 Constitution and replace the present system with a federalist one. Again, it remains to be seen whether the proposed federalist system will strengthen the Philippine state because a poorly designed federalist system could end up with the state more easily penetrated and used by political dynasties, drug lords, and gambling lords.

In fact, all these stories about a senator raising campaign money through the drug trade points to an urgent need for a campaign finance law, wherein the state will finance political parties and campaigns. Here again, there is yet no initiative from the new government.

What about the tax reform bills?

The tax reform bill proposed by the Department of Finance under Secretary Dominguez III is excellent. It properly combines tax reduction on income taxes with revenue-enhancing measures from fuel and soft drinks.

HIGH GROWTH TO CONTINUE UNDER DUTERTE
However, in my view, fiscal constraints aren’t first order problems. Government money can be wasted through the wrong policies. An example of this is that the previous agriculture department under Proceso Alcala had three times the budget of the Arroyo administration but had achieved half of the growth rate (an average of 2.9% vs 1.5% pa).

Despite all these, the new administration has to be commended for some measures: a bias for action, cutting down red tape, issuing an FoI by executive order, and commitment to higher infrastructure spending. Most importantly, if rice liberalization pushes through, it would indicate strong political will to push through with an overdue reform.

To sum up: High growth (from 5 to 7 % per annum) will continue under the present administration, helped along by robust consumer spending powered by OFW remittances, BPO growth, and low oil prices. There will also be increased investment spending by government and some sectors like construction.

However, based on policies so far, particularly on labor, agriculture, mining, forestry, and agrarian reform, the economy won’t be moving toward inclusive growth.

It’s an irony, really, because of all administrations, this administration has its heart in the right place. Sadly, its head is not yet there.

Source: www.bworldonline.com