Thursday, April 02, 2009
“Get In To the PSE Now Part 2”
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
On May 6, 2008, the Philippine Composite Index closed at 2,727 and the title of this column was “Get Out of the PSE Now”. Seven months earlier, on October 8 2007, the index hit its high of 3,573.
Two to three weeks ago, there was a strong probability that we would see prices fall to the 1500 or even the 1300 level. Now that negative scenario has turned into having only a slight possibility, perhaps a 20 percent chance. The greater probability is that the market, with some occasional pullbacks, is headed towards the 2200-2400 area.
On Tuesday, I spoke of some of the technical analysis considerations of the Philippine Composite Index (PSEi) that forecast that we have reached the bottom and are beginning a new upward phase. But the PSEi is not the only indicator of the market’s performance. The All-Share index, measuring the movement of all stocks on the PSE, is stronger than the PSEi. Further, the Industrial Index, made up of issues like Manila Water, San Miguel, Energy Devt Corp, URC, and First Phil Holdings Corp, is even stronger, moving way ahead of the PSEi.
There is of course a downside risk with the possibility of the PSEi moving to the 1,900. Any pullback that does not breach below the 1,900-1,880 area is a buying opportunity.
However, no one believes technical analysis anyway because few understand how it works and why it serves as a predictor of the future. That is why you read comments like “No one can predict a market bottom”. Predicting the bottom is not the point. Stockmarket forecasting is not like weather forecasting as some people would hope. What this type of analysis does is accurately identify price tops and bottom, turning points, after they have happened, not as they are happening.
The charts say that the PSE reached its bottom in January and turned higher in February and March. The technical indicators say that an upward trend has been created and until the price action says otherwise, that trend is in effect.
But for those that would like an analysis that is more comfortable, more easily understood, then we turn to fundamental corporate and macro-economic analysis.
Philippines listed companies for the most part are making healthy profits. Earnings are one part of the company quality picture but equally if not more important, is the sharing of those profits with shareholders through the distribution of dividends. Money generated by a company after expenses can be used three ways; spent for expansion and growth, kept in reserve, or released as dividends. Companies do not declare dividends just to be nice. Paying dividends is a serious matter as this takes funds away from the company. If a firm believes that it will need this money for capital expenses or fears that it needs a sizable reserve to shield against future problems, dividends are not paid. Local companies are paying substantial amounts of their profits in dividends because they have all the funds they need to grow and are not fearful about revenues and profits in the future. This is a very positive sign.
The macro-economic picture is becoming more favorable every day. The potential fall in OFW remittances is being lowered constantly. And this will more than be compensated by the massive increase in outsourcing investments in the Philippines that is growing day by day. It is almost a daily occurrence of a report of another call center operation coming to the Philippines which will employ thousands.
Do not worry about the value of the peso. One of two things will happen. Either Obama is the economic genius of all time that his supporters want to believe and his programs will recover the US economy like never before in history. Or, those policies will be a disaster and drive to the US dollar to lows that have never been seen in history. There is far too much non-productive cash in the US economic system. The hundreds of billions pumped into the economy is not going for any sort of wealth creation. Where it is going temporally is into the US stock market. And in the long term, it will move to better stockmarkets and better economies around the world.
Either way we win. Further, although you will never read it in the local newspapers, the really smart money is scrambling to get long term funds out of the US to safe havens like Panama, Uruguay, Colombia, Chile, Slovakia, Albania, Poland, New Zealand, and the Philippines. Why? Sound banks, stable currencies, and good economies.
Forget about oil prices, our inflation monster, skyrocketing also. There is still an oversupply despite OPEC production deceases. Oil traders are hoping and praying that Obama is a genius. But demand is remaining constant at the 2008 levels. Gasoline around P35 a liter is just fine economically.
It is not too early to start purchasing local shares. At this stage, it is important to be selective and prudent, watching closely for any reversals that would signal a change in direction. However the odds are weighted firmly on the side of the buyers, not the sellers as it has been over the last year.
This is going to be a good year for the market. A PSE index level of 2,800 is attainable and not unrealistic by year end.
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
“Get In To the PSE Now”
Date March 30, 2009
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
On May 6, 2008, the Philippine Composite Index closed at 2,727 and the title of this column was “Get Out of the PSE Now”. Seven months earlier, on October 8 2007, the index hit its high of 3,573.
From that October 2007 high, the index lost almost 2000 points, reaching a closing low of 1,700 almost exactly one year after the historic high. Since the 1700 level, prices have recovered about 300 points.
Beginning November 2008 until now, the market endured one of its longest congestion periods in recent memory. The last time we saw this occur was in 2005, from June to December of that year. Interestingly enough, the congestion in 2005 occurred at exactly the same price levels as our 2008-2009 congestion. From a very long-term perspective, this would seem to indicate that our decline since the 2007 high has been a correction in a long term bull market that began in 2003.
These periods of range-bound trading have much to tell about the psychology of stockmarket investors, as well perhaps, about the psychology of the nation. Neither fear nor greed, the prime motivators of buying and selling, seem to get an upper hand. There is a balance between buy and sell orders. When prices move up, sellers liquidate positions. When stocks move down, buyers suddenly appear to take advantage of cheaper prices.
However, out of these periods of indecision, there emerges substantial and sustained price movement. From the 2005 period, the market rose nearly 1500 points. Two to three weeks ago, there was a strong probability that we would see prices fall to the 1500 or even the 1300 level. Now that negative scenario has turned into having only a slight possibility, perhaps a 20 percent chance. The greater probability is that the market, with some occasional pullbacks, is headed towards the 2200-2400 area.
First the technical analysis. Over the last months, prices have formed a long term chart pattern known as a rounding bottom with a very unique formation called a reverse “cup with handle”. Do not let all this technical analysis jargon put you off. It is only a way to describe the situation in an abbreviated form, which is common to many games. If you're chess player you know exactly what a "Queens Gambit” or a “King's Indian Defense” is. It is not some sort of secret language; it is merely an explanatory shortcut.
Three weeks ago, the chart pattern was signaling the probability of another 10 to 15 percent fall. The market did not fall. A basic truth of physics as well as of the stock market is that prices have to stop going down before they can start going up. That is what we have seen. During the last two months, the technical indicators, the long-term technical indicators, have been giving us a buy signal. But prices have not cooperated with that buy signal until now.
Forecasting stock market prices using technical analysis is as much an art as it is a science. Moreover, a competent technician realizes that the best that can be hoped for is to understand the risk-reward ratio as it relates to prices.
I am as confident today about the probability of stock prices going higher as I was one year ago about stock prices going lower.
If this analysis is correct, then what we have witnessed durng the last 18 months is a correction in a long term bull market that began in 2003. For the stockmarket ‘techies’, I would suggest looking at the Fibonacci retracement numbers.
I would view any momentary pullbacks as a buying opportunity. I would look for those issues, those blue-chip issues, which are showing leadership and outperforming or pre-performing the broad index. I would keep a very close eye on issues that suddenly have increased volume and where those volume increases are sustained for several days with or without upward price movement.
The risk area lies in the 1,900 area. Prices could potentially, although I would place a small percentage probability on this, fall 100 points lower and still keep the bullish scenario in tact.
Predicting stock market movement is probably easier than predicting the fundamentals of an economy. Perhaps the best we can say is that the stock market might be the best forecaster of the economic future. This pretty much widely knowledge by those in the economic community that the recession in the United States actually started in the last quarter of 2007. Interestingly, our stock market peaked six months earlier in July 2007. Maybe if the experts had listened to the Philippine Stock Exchange, they would have more accurately predicted the future of the US and global economies.
If this rally is sustained, the market is telling us that the worst of the effects of the global crisis is over for the Philippines. I know the ‘experts’ are saying otherwise. But stockmarket investors, both local and foreign, and putting their money on a favorable outlook for the future. If the first quarter economic numbers are a favorable surprise, then remember that stock prices have been telling us that for two weeks.
Start building up your positions in stocks now. Be selective, very selective. Understand clearly the reasons for buying a particular issue. Have well defined cut-loss points. If am correct in my long term view of the PSE, then 2009 may at least partially mimic the price action of 2006 when the index rose from 2,100 to 3,000. and that would be very rewarding.
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
Sunday, October 19, 2008
“The Stock Market Panic”
Date October 15, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “The Stock Market Panic”
To quote a good friend of mine, “Anyone who thinks the stock market crisis is over has rocks in their head”.
The collapse in stock prices particularly in
The stock trader who bought when the Dow Jones Average was up 100 points, made a killing when the market ended 900 points higher. The ones who bought when the market was up 900 points only got killed.
Conventional stock market wisdom encourages investors to take advantage of lower prices by buying more to average the cost over the longer term. This can make sense in most instances. But how can you average your cost when the stock you bought at $20 two months ago is now trading at $5.00?
Last week was also described as a time of “irrational fear”. Stock market wisdom says that the time to buy is when there is blood in the streets. The question then becomes, how much blood does it take to signal a buying opportunity? Fear is only irrational if it is unjustified and not a single expert can make an accurate prediction of what the future may hold.
The global economic rescue package is only an attempt to stabilize the situation, not a cure for systemic flaws and failures. No one has a clue as to the next year of economic activity in the
Perhaps the best stock market truth is that you should sell until you can sleep comfortably.
Based on country stability, corporate growth, and economic soundness, there are only three stock markets I can see that make investment sense;
So why is our market down? Because foreigners are bailing out to get their money back home and local investors rarely have a clue why they bought in the first place so therefore do not have a clue why they are selling.
To sell local stocks because
I have yet to hear a rational justification that shows the correlation between the corporate value of PLDT, Megaworld, Meralco, or any other issue to the global debt crisis. I know what investors in
Show me that Megaworld’s profits will be down 75 percent over the next 12 months to rationalize the stock falling 75 percent. If so, then MEG will be a great buy at 50 centavos. If not, it is a great stock bargain right now.
The market will probably fall further to the 1,950 area in order to get as much of the foreign money as possible out of the PSE. And if you are a short term player, you should also sell. If you are a longer-term investor, accumulate on the way down or wait for the decline to stop and then jump in with both hands.
On a personal note, I answer all your emails, if I get them. Your email might still be floating around the internet trying to get to me. Therefore, if you do not receive a reply within 24 hours, please email me again.
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
The Death of Debt-Based Wealth
Date October 13, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “The Death of Debt-Based Wealth”
The price of oil plummeted from a 2008 high of $147 to below $80 a barrel and is trading at the September 2007 price. Commodity prices have collapsed. The leading indicator, the Reuters/Commodity Research Bureau index, is not only down 30 percent from its June 2008 high; it is down over 10 percent from October 2007 levels. Global stock markets are in free fall. European markets are off 45 percent in the last 12 months. Asia’s markets dropped nearly 50 percent in a year, as has the
I have called the recent events financial AIDS, Asset/Investment Deflation Syndrome, and the roots causes are not unlike the basis for medical AIDS. No matter what the propaganda about medical AIDS, by far the highest risk groups for contracting AIDS are those engaged in promiscuous behavior and intravenous illegal drug use. Promiscuous sexual behavior comes from a desire for instant gratification and pleasure regardless of the consequences and intravenous hard drug use is a trap and addiction that is impossibly difficult to break.
For some thirty years, the developed so-called
Corporate executives falsify company books in order to fund their luxurious lifestyles. A woman in the
And if you cannot afford to buy the pleasure you want, borrow the money. Just like the drug user, one time will not hurt. That wasn’t so bad was it? So do it again and again and again until you are hooked and financially destroyed. The total debt obligation of the
What is the human cost? In 1987, the number of shopping malls surpassed the number of US high schools. For US parents: average time spent shopping per week: 6 hours; time spent with children per week: 40 minutes. The percentage of college freshmen who reported thinking it is essential to be well off financially was 44 percent in 1967 and 83 percent in 2007.
Is there any wonder why the Holy Father, Pope Benedict, would say last week that the current global banking crisis indicates that the modern world economic order is "built on sand", and only the "word of God" can offer a solid foundation for life.
This is not simply religious talk. A building erected on a foundation of sand and not bedrock only has an illusion of strength. Wealth created by debt and borrowing is only an illusion of wealth.
All of these recent efforts by western governments do nothing to create a financial bedrock and only serve to reinforce the foundation of sand. The idea that the world can somehow continue to build wealth through borrowing and debt is a fantasy. When you hear the experts debate about when the financial markets will recover, know that the answer is Never.
Many nations have fed their economies off the illusion of western wealth including Japan, South Korea, India, Russia, and most prominently, China, through inflated Foreign Direct Investment (FDI) and exports to the US and Europe.
The
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
Saturday, October 11, 2008
Are Filipino Banks in Trouble?
Date October 8, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
The wildfire that is burning out of control through the
All monetary and financial transactions are based on trust. The only way that a person can maintain trust is with full and complete information. A major problem for the West right now is that depositors do not trust the banks or their governments and banks do not trust other banks. In that climate, people start withdrawing their funds, banks raise interest rates for their lending to other banks as evidenced by the spike in London Interbank Offered Rate (LIBOR) rates, and credit and money stops flowing.
The recent disclosure by Banco de Oro (BDO) of its exposure to Lehman Brothers is a case in point. Because of the proper, both ethically and financially, handling of that situation, BDO held the trust of its customers.
This is not the time to be optimistic nor is it the time to be pessimistic. This is the time to realistic and that requires sound and factual information.
Everyone has a critical stake in the local banking system and that requires looking far beyond the headlines and the comments to the numbers. It is interesting and favorable to note that during these times of the more ‘developed’ countries experiencing panic in the streets, the
From BusinessMirror: “Bad loans held by universal and commercial banks were down to 3.98 percent in July as measured by the non-performing loans (NPL) ratio. The NPL ratio dropped from 5.18 percent a year earlier. Total bad loans shrank 1.54 percent from June and were down 9.60 percent from a year earlier. [The end-July] NPL ratio is the lowest recorded since the onset of the 1997 Asian financial crisis”.
Not every financial institution such as Lehman and other companies is run by stupid incompetents. As the West’s financial system began showing problems as early as 2007, our banks were firming up their balance sheets with careful lending and continued disposal of non-performing assets.
Further in favor of our banks and another critical point, our banks are preparing themselves even more in the very unlikely event of future loan problems, by more fully protecting their financial position against defaults. “While bad loans continued to shrink, the BSP said the big banks’ NPL coverage ratio—or provisions for bad loans—strengthened to 97.86 percent from 96.60 percent in June and from 85.29 percent in July last year”. What that means is that our big banks put into reserve another 12 percent of the amount of these bad loans just in case the value of the NPLs falls and cannot be turned into cash. At a 97.86 percent coverage, these loans have been almost totally written off, so that any money that might still be recovered is a bonus.
Are we facing a credit crunch where there just is not any loan money available, an event that would slow the economy? Not happening and not likely. “Bank lending also shrank from June, with total loans down 1.2 percent in July. On yearly basis, however, total loans grew 17.9 percent as of July 2007”. Yes, the banks have become more cautious in the last months but overall, 2008 has seen more lending than 2007, despite the economic slowdown.
Not everything is perfect but never as bad as the ill-informed headlines might lead you to believe. One daily newspaper said that residential property loan problems were rising, mis-leading you into believing that maybe the
It is true that the banks are experiencing a slight increase in problems with their real estate lending portfolio. Problematic residential loans rose to 7 percent of total lending to individual home borrowers, from 5.6 percent at the end of June 2007 and 6.3 percent from the end of the first quarter 2008. Two factors are important in order interpret the significance and to see if there is any potential problem for the future.
What is the loan-loss provision carried on the books of the individual banks for any doubtful loans? Since 1997, the banks have been very conservative and prudent in setting aside money to cover potential losses. BDO is a good illustration as they carry excess reserves that are more than adequate to handle the approximate 4 billion peso exposure with Lehman.
Is the value of the underlying collateral, the real estate, valuable enough to cover the loan? Please remember that these Western banks would still be in fair financial shape if the value of the housing assets were not, in many cases, smaller than the face value of the loan. Never will you see a bank in the
We need to know the financial facts of our banks and based on those facts, we need to maintain our trust.
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
“$700 Billion: What It Does and Does Not Do”
http://businessmirror.com.ph
Date October 6, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “$700 Billion: What It Does and Does Not Do”
After the United States Congress passed the law last week creating the $700 billion economic package, the
Note, it is not a ‘bailout’. The anti-business liberal press and media in the West (and the
It is an economic rescue attempt in the same way that throwing a life preserver to a drowning man is only the first step. You have to stop the situation from getting any worse before you can save anyone. The
Remember what this is all about. The
The lending worked this way. In 1998, you buy a $100,000 house and put up $20,000 cash, borrowing the rest. Three years later, someone wants to buy your house for $150,000. The new buyer puts up $10,000 and borrows $140,000. The following year another buyer comes in to pay $200,000, puts a down payment of $10,000, and borrows $190,000. The final buyer pays $300,000 with $10,000 cash and takes out a loan of $290,000. However, as I related in prior columns, general economic conditions created a surplus of houses and a lack of buyers caused housing prices to fall.
The house now has a market value of only $250,000 and a loan of $290,000. If you had a piece of real estate that you owed a loan of $290,000 and the property was worth $250,000 or less, would you continue to pay the loan or let it go to foreclosure? Welcome to the
So now, you have major banks that, for example, show $50 billion of assets but only $10 billion is liquid (30 % in cash) and $40 billion in bad non-performing loans backed by assets (houses) that no one wants to buy and no one knows what they are worth.
The
What the rescue package will do is clean up the balance sheets of many banks, not unlike the Philippine model of a rescue package (the Special Purpose Vehicle) did after 1997. The banks will have an infusion of cash to carry on their business as best they can. In 1997, Filipino banks were much stronger financially than now in the
This $700 billion rescue package will not bail out the banks. It might have a short-term positive impact to keep the credit and housing market from sinking any more. It will put a short term $250 billion into the banking sector for them to be able to continue to stay in business. There are no miracle economic cures in this legislation.
Highway Robbery?
On another topic, the Land Transportation Office might want to consider stopping its outsourcing of traffic enforcement by ‘deputizing’ private security personnel to issue traffic violations. Unfortunately, some of these deputies may consider their LTO authority a license for something else or they are not being properly trained.
I received an email from someone who was stopped and ticketed on the Subic-Clark-Tarlac Expressway (SCTEx) on September 21, 2008 for taking too long to pass another vehicle. According to his legal ‘Affidavit of Protest and Complaint for Harassment’, “They (the deputies in the Tollway Management Corporation (TMC) patrol car) told me that I stayed too long on the left lane”.
The problem is that there is nothing in the law, Republic Act No. 4136 (Article II, Sections 39-41), that says anything about how long it should take a person to legally and safely pass another slower moving vehicle. Even the traffic citation had no checklist for this supposed violation. The writer of the email says that he felt these private sector employees under the authority of the LTO were either completely ignorant of the law or had another motive (financial?) for stopping him. The Lopez group-controlled TMC and the LTO should look into these practices. Incidents like this are not good for anyone’s business, private or public sector.
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
“Forget the Crisis”
Date October 1, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “Forget the Crisis”
Prices on the Philippine Stock Exchange just staged the greatest single day reversal of direction in its history.
Tuesday, the Philippine Stock Exchange Index (PSEi) immediately opened 147 points lower and soon fell to a low of 2447 for a loss of 160 points. Over the course of the next two hours, prices went up 122 points to close down 38 points for the day at 2569.
The trading of PLDT even more dramatically proved the strength of our stock market. PLDT opened down P145 at P2,576, hit a low of P2,520 (-P165) and then clawed back those P165 to close unchanged at P2,685. Looking at the other ‘down’ issues, it is likely that had the market traded for another 30 minuets or so, our market could have actually been higher for the day.
Comments in the daily newspapers yesterday attributed the rebound primarily to ‘bargain hunting’. This gives a completely false impression and does not do justice either to the traders who invested in stocks and made money or to the PSE. It is a blatantly unfair analysis.
First, ALL buying of stocks is ‘bargain hunting’. Look, it is just common sense, a trait that is often missing in the pundits. You buy an issue at a particular price because you believe that price is a ‘bargain’ compared to what the price will be in the future. Who in their right mind would say, “I will buy PLDT today at P2,520, but I really don’t believe it is a ‘bargain’ and it won’t go higher”. Who ever says, “I am buying today but I really think that in a couple of days the price will go down”. We always buy because we believe that the price is a bargain and will never be any lower than the price we pay for it. The idea of ‘bargain hunting’ is foolish thinking and silly analysis. And investors who purchased PLDT at the end of the trading session at the day’s high price of P2,685 also put their money on what they thought was a ‘bargain’, even if the price had been 6 percent lower earlier in the day.
The day started with a group of panicking investors that obviously spend too much time listening to the international and US financial networks. I wrote in this column a couple of weeks ago that what we needed to do now was to “think locally and act locally” and that also applies to the stock market.
Smart local and foreign investors set on the sidelines while the hysterical investors took big losses falling over each other to get out of stocks. Once the vast majority of the terrified sellers had jumped from the roof, sensible and clam investors started slowly buying at significantly lower prices. As prices started back up, a few still unbelieving sellers that might have overslept and missed the opening, liquidated a few shares into the buying.
At the end of the day, on heavy volume, the market recovered nicely.
The early sellers on Tuesday were played like a little school girl who is teased with a big, ugly plastic spider. The smart money anticipated the reaction of the frightened and foolish and let them run screaming down the road yelling, “The sky is falling, the sky is falling”. The buyers wisely waited until sellers ran out of shares and then came in and made a financial killing. Imagine making a 5 percent in one day buying PLDT. Now that is a juicy and satisfying windfall profit while taking advantage of other people’s fear.
DTI Secretary Peter Favila is right (Of course; he agrees with me) that the
Let me say this again. We have a well-balanced economic relationship with the world, not being overly dependant on any one factor such as exports, remittances, foreign investment, or tourism for foreign currency inflow. We have over the last decade, more adequately balanced our domestic economy with most all sectors contributing fairly well and balanced to the Gross Domestic Product.
But we do need to cut our imports. We need to “Buy Filipino” in all ways including personal tourism, personal investment, and personal consumption. That is critical and we all need to do our part. We need local businesses to invest more here through expansion and increased efficiency.
Ninety percent of all PSE issues are now ‘bargains’. The other ten percent never trade. If the PSEi goes above 2650, we have ended the correction and are headed much higher. If we fall below 2350, all bets are off.
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
“The Crisis: The Future”
Date September 29, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
From this column last Thursday: “By mid-2008, the Western financial system was in deep trouble. The incredible corporate failures you have read about are because these companies do not have enough cash to fund their operations or to pay back their clients’ investments and deposits. These firms are holding their share of the hundreds of billions of dollars of non-performing loans, near worthless loans, backed by near-worthless collateral (houses) that have lost a large portion of value, and worse, cannot be sold for cash”.
Unfortunately, the American public and their politicians took that campaign promise literally, that government could provide people with chickens and cars. Eighty years later, we see the fruits of their actions in the “Financial Crisis”.
In the 20th century, the political/economic/social philosophy was created that the government had the ability to give wealth to its citizens. Individuals no longer had to rely solely on their own efforts but could come to the government for at least a portion of their prosperity. It is a childish belief not unlike my five-year old son asking me to buy him a new toy. However, I have the wealth creation ability to do that; government cannot create wealth. It takes a portion of its citizens’ wealth through taxation.
In order to provide the “chickens”, government attempted to earn an income on its own by owning and operating businesses. The best example is post-war
The only alternative to get the money was for government to borrow the funds. And this has created a 50 year philosophy that, if government could do it, then every person could borrow their way to personal prosperity.
Wealth as a result of personal productivity and innovation has been replaced by wealth through creative financing.
Now because of this major global financial predicament, the West has learned that you cannot borrow your way to economic growth and prosperity. What will the future bring?
The
The
The economic bubbles of the 20th century have been caused by excessive borrowing that inflated assets to unrealistic price levels followed by a collapse of the value of those assets. This current bubble is simply the largest and most pervasive. The Great Depression would have been contained were it not for the long drought that nearly destroyed the
Over the next three years, major global economies (especially
However, the net result will be a stronger and sounder Western economic base and that is good for everyone.
The global debt party is over and now we have to live through the morning-after hangover. Nevertheless, with the severity of this debt hangover, we will see fundamental changes in the way the West does business as happened in
This crisis had to happen not only because it is a result of the debt excesses but also because it was the only way to get the West off the drug of false wealth created by borrowed money.
Asia and the
PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.
Saturday, September 27, 2008
The Financial Crisis: The Collapse
Date September 22, 2008
Author: John Mangun
BUSINESS MIRROR
http://businessmirror.com.ph/09252008/opinion02.html
“Outside The Box”
“The Financial Crisis: The Collapse”
From this column last Tuesday: “By mid-2004, the picture could not have been any better. The
That is the backdrop of the near collapse of the
From 2001 to 2005, buying a house was a guaranteed profitable investment. Hundreds of billions of dollars of lending nearly doubled the price of a house during those years. The lenders made huge profits fueling the housing boom.
The now infamous Lehman Brothers, one of the Financial Services Companies (FSC), saw corporate profits soar by 74% (2003), 39% (2004), 38% (2005), and 23% (2006). In 2007, profits rose 4.8% and now, less than a year later, Lehman Brothers is dead.
How could that happen?
The boom was built on a vicious circle, a complex series of events that reinforces itself through a feedback loop toward greater instability. Higher home prices means more loans which creates higher home prices that fuels more loans.
That economic model is simply a pyramid scheme.
Housing prices continuing to go higher was dependant on lending. The loans used the houses as collateral and the loans being solvent were dependant on home prices going up. As long as new buyers were able to get new loans, the boom would continue. By early 2005, the conditions that boosted the property sector (and the FSCs) from 2001 to 2004 were about to end.
In order to keep home buyers coming in, new loans had to be generated and this was accomplished by lower lending standards. Furthermore, more money was needed to fund the lending so bigger and more complicated loan ‘packages’ were created to attract global institutional money. Continued lending and the boom times depended on three critical factors.
The first was that home loan interest rates stay very low so that almost anyone could afford the monthly amortization. In order to make that amortization as low as possible, a large percentage of the loans, nearly all the ‘sub-prime’ loans, were ‘variable rate mortgages’ (VRM). The interest rates on VRMs are based on prevailing rates that change and perhaps go higher if general interest rates increase. ‘Fixed rate loans’ are higher than prevailing rates but the rates never change. From 2001 to 2204, interest rates were at historic lows.
From August 2004 to July 2006, interest rates increased every month going from 1% to 5.25%. Over this period, the cost of monthly amortization increased and thousands of these new homeowners could no longer afford to pay their loans and the FSCs found themselves with millions of dollars of loan defaults, with the amount growing rapidly. As buyers defaulted, the banks now had thousands of houses in foreclosure that suddenly flooded the market, stopping the rise of home prices. Housing prices peaked in January 2005.
The second factor was home loan borrowers be able to keep paying their amortization. But over a short time, oil prices doubled and people did not have the money to pay their loans. In January 2004, a barrel of crude was selling at $30. By mid-2006, consumers were paying $70. By mid-2007, prices took off, reaching $147 in 2008. Too many of the housing loans made from 2004 to 2006 were made to people that did not have the extra income to be able to fund their loans and also buy high-priced gasoline. More foreclosures hit the market.
The third critical factor was that the Dollar remain strong. In order to find the enormous amounts of fresh loan money needed, the FSCs looked overseas for new investors and sold Dollar-denominated loan packages. In January 2004, the Dollar Index, which is the value of the dollar against a basket of major foreign currencies, traded at 88. By May 2004, the index was at 90 and the foreign investors were making a killing on both the loans and the foreign currency rate. The interest rate they were receiving on their investment was good and the dollar was strong. From 92 in late 2005, the dollar bottomed out in April 2008 at 71. The lenders, which included great numbers of foreign banks, pension funds, and other financial institutions, were not only experiencing large payment defaults from their ‘investment packages’, but they were also losing money on foreign exchange rates.
The start of 2006 was the beginning of the end for everyone. Interest rates skyrocketed, high oil prices damaged borrowers’ finances, and the falling dollar affected foreign funds for lending. Home sales and housing prices had topped out. Housing loan defaults were accelerating. The housing/credit bubble was bursting because the pyramid scheme could not bring in new players.
The last loan packages created in late 2007 were filled with loans that eventually defaulted causing huge financial losses to financial institutions all over the world. By mid-2008, the Western financial system was in deep trouble. The incredible corporate failures you have read about are because these companies do not have enough cash to fund their operations or to pay back their clients’ investments and deposits. These firms are holding their share of the hundreds of billions of dollars of non-performing loans, near worthless loans, backed by near-worthless collateral (houses) that have lost a large portion of value, and worse, cannot be sold for cash.
The Financial Crisis: The Explaination
Date September 22, 2008
Author: John Mangun
BUSINESS MIRROR
http://businessmirror.com.ph/09232008/opinion02.html
“Outside The Box”
“The Financial Crisis: The Explanation”
It is as complicated as trying to trace one noodle in a plate of spaghetti. I was asked during a recent television interview, “Who is to blame?”. That is like asking who is to blame for a bowl of tangled pasta. The guy who invented spaghetti, the cook, the sauce, and the one who is eating. No one is to blame; everyone is to blame for “The Crisis”.
What is the root causes for this global financial crisis? There isn’t any. This crisis is the result of a progression of events. US government policies created a legal framework that the financial institutions maximized for their business interests and consumers participated so they could get wealthier, all for the purpose of a long term housing boom.
Home ownership is a critical part of Western economies. This is why government policies are geared to keeping a continuous boom in the housing industry.
In the
Housing contributes about 14 percent of US GDP.
Home equity is the largest share of household wealth.
Residential assets are worth nearly $10 trillion, equal to one year of US GDP.
About 40 percent of monthly consumer spending is housing related.
Annually, more than $1 trillion exchanges hands from home sales.
However, in the West, no one ‘buys’ a house. They borrow the money.
During the Bill Clinton administration, lending institutions were strongly encouraged to broaden the base of homeowner borrowing. The power of government-backed financial institutions Fannie Mae and Freddie Mac to guarantee these loans was greatly expanded so that much lower-income people could buy a house. With more people being able to borrow-to-buy, the housing sector boomed as housing prices increased continuously over a decade and individual wealth grew fantastically as the value of their homes increased.
During the
Commercial banks borrow money from depositors and loan money to businesses and consumers. Investment banks and stockbrokers use client funds for speculative investments like the stock market. GS prevented the banks from acting like stockbrokers and the reverse.
Since the 1970’s, banks and investment brokers often crossed line of their respective businesses. Brokers were paying interest on uninvested funds (money market funds). Banks were offering brokerage services through affiliates and subsidiaries. However, with FSMA, the line between banks and brokers was officially and legally eliminated. Investment companies such as Merrill Lynch and Lehman Brothers could now act as a bank would, offering depositor services, but using those funds for investments way outside of simple business and consumer loans. Banks bought out and took over investment companies, as Smith Barney (broker) becoming part of the Citigroup (bank/insurance). Banks were brokers and brokers were banks. Now they were called “Financial Services Companies” (FSC). And they were incredibly successful.
Although accounting for less than 3 percent of the total US GDP, FSCs eventually booked 30 percent of all
Government policy was to increase home ownership and the lenders were making a fortune cooperating. One way to get more borrowers was to lower the credit standards to receive loans. These were called ‘sub-prime’ loans meaning the borrowers had less than a ‘prime’ credit rating. Government ignored these bad lending practices as they achieved the goal of more homeowners. The private sector did not care because it was making lots of money. Existing homeowners were happy because home values were always rising and with more credit available, they could buy home number two or three as an investment.
As lending criteria loosened significantly, the natural progression was the kind of loans finally made in the last two to three years; “NINJA” loans. “No Income No Job or Assets” loans. Home lending became almost like a pyramid scheme, with a constant demand for new participants to keep the pyramid of rising home prices going, and these new ‘investors’ were brought into the pyramid through borrowed money.
When the line between banking and investing disappeared, the banking side of the FSCs that loaned the money, put many of these loans in investment packages, and ‘sold’ them to investors on their brokerage side. This increased the amount of money available for lending. Institutions around the globe bought these packages as a good, safe investment vehicle. After all, Fannie Mae and Freddie Mac guaranteed almost half of all
By mid-2004, the picture could not have been any better. The
Friday, April 04, 2008
“The West is Controlling Your Rice Price”
Date :April 2, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “The West is Controlling Your Rice Price”
Go to the Internet and “Google” the phrase ‘world rice shortage’. Most of the websites carrying information about a shortage of rice is from our own local newspapers. However, a potential shortage of reasonably priced price is affecting communities from ‘
Quoting from Asia News Network, the website independent-bangladesh.com perhaps summarized the cause of the problem the best. “Worldwide, economists are worried that the diversion of agricultural land and certain crops to biofuel production is cutting into grain and cereal production for human consumption. The prices of rice and wheat are linked”. That last sentence is the key to the issue, something our local politicians have failed to understand.
Wheat prices are going to historic highs and will continue to climb. The best barometer of future commodity prices is the futures exchanges in the
And if wheat prices are going to continue up, then you can be sure that rice prices will track the wheat price trend.
I wrote in this column that one of the reasons that we are not able to produce enough rice in the Philippines is because of government interference in the free market system that would have allowed farmers to sell rice at a high enough price to invest in agricultural infrastructure.
While there is still a large group of people that believe that government is the answer to all problems, in fact, government usually creates the problems that private enterprise must solve. Thirty years of government intervention in rice production has not solved the production problem.
National governments did not build the rail systems of Europe and the
And the
From the Environmental News Service: “The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs. Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at $13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago. In
If you subscribe to all the environmental hysteria, you might think that using bio-fuels is a good thing. But consider the consequences. “Projections by Professors C. Ford Runge and Benjamin Senauer of the
The reason for the dramatic rise is grain prices is because of government intervention. In an attempt to reduce the use of crude oil coming primarily from the
We may think of rice as rice meaning that rice prices live in a world of their own, controlled by the dastardly rice cartels and smugglers. Prices of basic food commodities are all connected. The free market allows adjustment in all countries.
In
Email comments to mangun@email.com.
“Bad Journalism Bashes Philippines Business"
Date :March 30, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “Bad Journalism Bashes
An article about the
The article, which incorrectly puts the
My opinion is that either the author never properly read or perhaps misinterpreted the JETRO survey. I sincerely hope that this was not a deliberate attempt to discredit the
The purpose of the survey is to profile more than 700 Japanese companies as to their business plans with the world. Five hundred of those companies have existing operations overseas, including 15 who have some sort of setup in the
The second paragraph reads, “The survey of international operations of Japanese firms, 66.4 percent of those polled said they have plans to expand offshore operations, but the
The implication is that there was a question that said, “Where do you want to do business?”, and the
There were several questions asked about company expansion. In summary, it went like this: If you are expanding your Sales Operation, or Research and Development, or Distribution, or Regional Headquarters or Production overseas in the next 3 years, where are you going to locate?
Of course, the
No Japanese firm plans on setting up a primary R&D facility in the
Only one percent of surveyed companies intend to set up production plants in the
The article falsely implies the
The language itself is inflammatory and fraudulent. “The poll placed
The survey results when these companies were asked to ‘rate’ each nation according to certain factors was most revealing.
The article says that the
In six of those areas, guess which country was considered the riskiest?
The
Based on all the eight risk factors,
Perhaps to attempt to show journalist balance, the article concludes, “But there was some positive news for the Philippines as the firms gave plus points to the Philippines in the areas of little language barrier, second; fifth in full set of preferential measures and incentives; fifth in low business costs; and fifth in easy to access local information and services”.
It might have been nice if the article had compared this 2007 survey with the 2006 report. In one year, the
The headline for AHN’s article should have read, “Survey: China Viewed By Japanese As The Riskiest Place For Business and They Still Want to Invest”. Or perhaps, “Survey: Japanese Think Philippines is Getting Better for Business”.
Email comments to mangun@email.com.
“Rice and the Free Market”
Date :March 26, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “Rice and the Free Market”
It was with relief that I noticed there is not a shortage of mangos, onions, tilapia, pork, or chicken and many other commodities including tissue paper, pencils, and soap.
Should I point out that these aforementioned items are not subject to an undue amount of government control in terms of production and pricing?
What do you call a person who does the same thing over and over and over again without any success? A) an idiot, B) an economically ‘liberal’ politician or C) all of the above?
Pork prices have recently exploded. From approximately P135 a kilo where I shop, pigue is now selling at P173, an almost overnight increase of more than 30%.
Well, there is obviously only one solution: price controls, right? Or maybe use government funds to subsidize the price back to P132. Both of those ‘solutions’ are being offered by certain politicians regarding the price of gasoline, so why not pork also.
Except, government interference in the free market will only lead to both shortages and higher prices. Unfortunately, the policy experts have not figured that fact out even with a 4,000-year track record of failure.
Required reading for all elected officials should be “Forty Centuries of Wage and Price Controls” by Schuettinger and
From “Four Thousand Years of Price Control” by Thomas J. DiLorenzo of Mises University and Loyola College in Maryland; “In 284 A.D. the Roman emperor Diocletian fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold, and prescribed the penalty of death for anyone who disposed of his wares at a higher figure. The results were that the people brought no provisions to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside.”
I have never understood why government people mistrust if not hate the free market system. With all of its faults, it works. They refuse to accept the fact that price controls always, always, cause shortages. And the free market always provides supply and fair pricing.
Rice prices should probably go up to grow the agricultural sector and rice production. When inter-island shipping was deregulated, transportation prices initially went up. But the industry became more competitive and profitable giving consumers better service and in the end, better pricing.
Farmers would make more money enabling them to modernize and increase production. Everyone might want to, not plant camote, but plant rice. Then, guess what? Supply would increase and prices would go down.
Oh, you say, but then prices will go up without some sort of government control. Yes, and then they go down, equalizing out because of the law of supply and demand.
The National Food Authority controls only five percent of the total rice supply. Yet it costs some 10 billion pesos a year to accomplish very little. The biggest problem facing our rice producing industry is credit facilities for farmers who now suffer at the hands of “five/six” lending practices. The government should fill the gap by using that P10 billion to provide reasonable credit access to enhance the free market system.
But what about all the poor people if prices rise? In every case with our ASEAN neighbors, government control hampers both production and the farmer’s income. And our usually ignored rural poor are these agricultural workers.
If price support and subsidizes are so wonderful particularly for the poor, why after 35 years of NFA existence are our farmers some of the poorest on the planet and our rice production is one of the worst on a per hectare basis?
A great part of the world’s foodstuff price and supply problem is improper government intervention as in the case of corn-based ethanol production in the
Paranaque Congressman Roilo Golez is showing courage and wisdom in my opinion, by asking for a moratorium on the development of biofuels that would compete with food production.
Of course, according to the politicians, the current rice price/supply problem is ‘very complex’ (for them) and is because of climate change, population, and conversion of agricultural lands to name but a few factors.
No way it could possibly be because of decades of government interference here and abroad in the free market? Every government policy to keep prices artificially low fails and worse, is counterproductive to production and economic growth.
But just keep trying, policymakers. Maybe you need only another 4,000 years to prove the free market wrong.
Email comments to mangun@email.com.
“Agricultural Creativity”
Date :March 24, 2008
Author: John Mangun
BUSINESS MIRROR
“Outside The Box”
Title: “Agricultural Creativity”
Of course, you have heard it a thousand times; crisis provides opportunities.
Human thinking, particularly at the government policy-making level, tends to make problems larger by looking at too large a picture. Sort of like the old saying that you cannot see the forest because there are too many trees in the way.
Every day the newspapers are blaring headlines about high prices and potential shortages of oil, pork, pan de sal, rice, power.
And then my email inbox gets filled with various well-meaning politicians offering solutions that usually involve screwing around with the free market system (price controls) which leads to more shortages. Or tinkering with an already flawed taxation scheme that only might provide short-term relief.
The basic defect with government-based thinking is that creativity, ingenuity, and imagination is rare. For example.
Communication was a problem in the
Private enterprise and private capital solved the problem of poor communications first with the pager and then with the cell phone. Now we have wireless ‘landlines’ rolling out.
In fact, it was only in the last few years that the government dropped that fixed landline program for the barangays look after creative thinking taking advantage of new technology as it evolved solved the problem. Had we waited for government to be at the cutting edge of the infrastructure problem, we would still be using two cans and a long string to communicate.
Now the
Once, just once, I would like to receive a proposal from a policy maker that shows any desire, willingness, and ability to break new ground to help mitigate some of the nation’s problems. You know how the government has these contests for the public to submit new ideas and win a prize? Or how companies offer awards and money to students with fresh entrepreneurial concepts. Maybe as the public, we should create to prize fund to give to a politician to win who comes up with a new, original idea how to deal with current problems.
Take the rice price and shortage problem. You would think that this is the first time the
Virtually every government program to increase agri production and efficiency has been a band-aid on a bullet wound. What we need is a Comprehensive Agrarian Reform Program. No not for land redistribution that has been a failure but a CARP to increase production. What we need is investment in agricultural on the same level and with the same type of incentives that has grown the outsourcing business.
And remember this regardless of what you here the government says. Outsourcing was started by small local Philippine businesses who then attracted overseas companies to buy them out and form larger corporations who then advised the government on what to do to bring us to where we are today.
However, some problem must be solved from the top down and that is supposedly what government is there for to do.
I have read some of the government commissioned studies on improving agriculture and good intentions notwithstanding, they border on the useless.
Agricultural production like every other type of ‘production’ is a business. There has been some notable creativity in tackling productivity as for example the contract growing systems for poultry and swine. Frankly, it would probably be better to eliminate and consolidate the 80% of swine production that is characterized as ‘back yard’ with a few dozen pigs.
But that might be too dramatic a change for our social economy. So then government needs to do much more to raise swine production, keep stable prices that allow the consumer to purchase and the farmer and processor to make a profit. The same applies to other crops.
The knee jerk reaction and non-creative idea is to expand government subsidies for rice to keep the leftist “keep-them-poor but fed” proponents.
What if the
Get creative. There is only a limited amount of Filipino soil that can produce crops. If we cannot produce enough rice efficiently, then find something else we can produce to make the money to buy the rice. And try to think outside the box beyond the bio fuel crops like jatropha. Albert Einstein said. “Problems cannot be solved by the same level of thinking that created them.”
Email comments to mangun@email.com.
Sunday, March 23, 2008
US waging economic war against China ?
By JOHN MANGUN
Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The New York stock market rallied some 400 points Tuesday night, prompting an increase in prices across Asia. Even the Philippines participated a little. US stock prices reacted favorably to the news that the Federal Reserve lowered interest rates. Bloomberg: “The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.”
But don’t get too excited because you must look not just at the “big” picture, but the “whole” picture.
Conventional and common wisdom talks about the recession facing the United States and the potential that an economic slowdown is confronting the globe. There is little indication that a “normal” economic slowdown is happening; normal meaning that production is dropping. It is not so much that production is going down but that the end-result of production, buying, is dropping. If you look around the world at virtually every country in every economic and wealth group, people are wealthier today on the average than at any other time in history. But if people are wealthier, why aren’t they purchasing? One word: inflation.
Prices are going through the roof around the world. Well, that is obviously the fault of high oil prices, right? For example, Kuwait reports that inflation is at a 15-year high. China is very worried and the United States is ignoring the issue in favor of trying to keep the financial system sound.
World inflation has been in a downtrend since 1990, but prices are expected to show heavy increases in 2008, potentially reversing a 15-year movement. Traditionally, high interest rates were a strong indication of inflation trends. In the last 20 years, inflation was best illustrated by a weak dollar and strong gold and commodity prices. And we now have the dollar at historic lows and gold at historic highs, with both of these trends showing little likelihood of changing.
Then we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.
China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.
In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.
If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.
China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros.
The current crisis hitting the financial institutions looks to me like a normal business-cycle shakeout not unlike the dot-com IPO fiasco of the 1990s, the savings-and-loan and foreign-country debt crisis of the 1980s and the personal credit crisis of the 1970s.
Back then, the US government bailed out Wall Street, Mexico and the banks, among others, without receiving much in return. This time, the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.”
Wednesday, April 27, 2005
The Philippines and China: A Bad Match
And with China’s President Hu Jintao making a state visit, what more could a girl dream of? But there was more. China has ‘promised’ to invest billions of pesos in the Philippines newly opened, but financially starved mining industry. Malacañang Palace was proud to state that the Philippines established relations with China 30 years ago. The Philippines and China: a match made in heaven.
But is this the right match? Are President Arroyo and the Philippines pursuing the wrong suitor?
The role of those of Chinese ancestry in the Philippines is important and unique. When other countries speak of open and sometimes violent hostility between the “locals” and the Chinese, they need only turn history back a few decades. In the Philippines, it has been centuries since the two societies viciously clashed. Although the taipan groups of “Chinoy” and those of Spanish heritage view each other suspiciously at times, the wheels of commerce and community turn smoothly for the most part.
However, this is not about the local social and economic order. This is about the international economic relations of the nation of which all Filipinos of every different blood and background have vital stakes.
Given a choice between strengthening bonds with China or Japan, the Philippines would be much wiser to choose Japan and not China.
Malacañang refuses to accept and deal with the fact that China invaded, occupied, and stole Philippine territory in the South China Sea. The Spratleys may be worthless outcroppings or the gateway to boundless treasure. It does not matter. Those atolls and islands are Filipino property as much as the ground on which the President walks each day. China’s conduct and treatment of the Philippines shows their inconsistency and lack of honesty in their conduct of foreign relations.
To view China and Japan similarly in our economic relations is a disaster for the nation. Madame President, listen well: China is a business COMPETITOR; Japan is a buying CUSTOMER. Fifteen years ago, ninety percent of all Christmas ornaments and decorations sold in the United States were imported from the Philippines. Now that ninety percent comes from China. The same trend occurred with Philippine garments and shoes.
Major investments in the Philippine mining industry are greatly welcomed. However, the profits from these ventures will go to support the Chinese mining sector back home. The Philippines needs to attract investment from Canada, Australia, and the United States whose mining industries are mature and not in need of capital like China’s. Then the investments will remain in the Philippines to develop new projects, not used to rehabilitate obsolete Chinese mines.
A free trade agreement with China is not in the best interests of the Philippines. Japan unlike the Philippines is a rich nation: China is not. China will not in the near future be a major buyer of Filipino goods and services. A free trade agreement with Japan is an excellent development for the Filipino economy as they need and want Philippine services and manpower.
The continuing and historic breakdown in Sino-Japanese relations might be the best thing that could happen to the Philippines. Arbitrate it? It would be in our best self-interest if the Philippines could aggravate it.
Tensions between these two giants is nothing new; it is centuries old in fact and in the last thirty years, each time relations sour, the situation worsens. Japan has very substantial business interests in China that are now at risk like never before. The Japanese will not jeopardize their investments.
China is quietly encouraging Chinese employees of Japanese companies based in China to cause problems and dispute production. Already, very high-level discussions between the government and Japanese businesses are progressing, talking about moving these factories out of China to the Philippines. Japan will not wait until the next deterioration of relations and see their investments expropriated or harmed in China. They will move out and the Philippines is best on their list for relocation.
A recent Business Sentiment Survey by the Japan External Trade Organization showed Japanese companies’ outlook on the Philippines for investment turned positive while all other countries rated negative in future investment outlook. That is not a coincidence.
The President would serve the nation better by stopping her fawning over China. China does not need the Philippines today or tomorrow. As in personal life, choose partners with whom a long-term relationship is mutually beneficial. You can trust those relationships.
On a personal note, author and former Secretary of Tourism, Gemma Cruz-Araneta and I begin a new project, a daily radio show, “Gemma and John: Home in the Philippines”. Easy and interesting conversation with ideas and features designed for your lifestyle. Every weekday from 5 to 6 p.m. on DZRJ 810 AM. I hope you will join us.
Tuesday, April 26, 2005
The Pre-Need Pyramid Scam
It was amazing to see so many local columnists rush to their defense, taking the position that the pre-need firm was really not in trouble. Or if acknowledging the company had major financial problems with their educational plans, blaming government policy as the culprit.
What a sad, tragic joke.
“Pre-need” is supposed to work this way. You give the company a small amount every month. They invest your money in a way that generates a higher return than you could, primarily because they pool everyone’s funds together. Sometime in the future, you use your accumulated money to pay for your children’s educational needs.
The system was viable, and not in the nature of a pyramid scam, ten to fifteen years ago when tuition increases of schools was regulated by the government. The pre-need company could guarantee to cover the cost of the education because they knew exactly how much they needed to pay when the plan reached maturity. These companies were able to make a fortune in profits because the ten percent yearly cap on tuition could easily be beat with the return on investment in the high interest rate climate of the Philippines.
They key provision in the plan that kept the ‘smart’ people from buying and the lower income groups rushing in, was the word “guarantee”. When educational institutions could join the free market and set the own tuition costs, the ‘guarantee’ provision failed, as the companies could never know exactly how much they would never to cover future costs. They deleted that provision from the new plans sold in lieu of a fixed amount at maturity. Unfortunately, all those ‘guaranteed’ plans started maturing with inadequate funds in the bank.
The pre-need companies continued to pay on those guaranteed plans by using the funds of new policy buyers, purchased under the new ‘no-guarantee’ provision. That is a pyramid scam and illegal. But no one did anything about it. And no columnists seemed to point this fact out as the problem unfolded. Actually, the pyramid fraud could have lasted forever except that now these plans were less attractive to invest in and sales of new plans did not generate enough money to keep the pyramid going.
So many times when we hear about the failure of major company, behind all the nonsense is the fact that somebody used company money as if it was their own funds. A ‘mini-taipan’ uses depositor money in the bank he controls to ‘invest’ in his real estate company. When the property market slumps, the bank fails and the depositors get to hold an empty bag. There is no question that this type of fraud occurred within the pre-need industry. So why don’t any of these big shots go to jail (or worse) for stealing other people’s money so this criminal activity will stop? I know: VSQ. Very Stupid Question. Next point.
“It’s the government’s fault”. “It’s the government’s fault”. “It’s the government’s fault”. How many times do we have to hear that nonsense? Rising oil prices, rising electricity costs, now fraudulent and failing pre-need companies. And the solution from the ‘experts’ is always More Government Control. Wait a minute. Government was such a total failure at generating power through NAPOCOR so it that should be in private ownership, but government should regulate distribution and subsidize electricity rates. Government was a failure at owning Petron, but should control gasoline prices. Government controlled and gave PLDT a monopoly and nobody had a telephone. The pundits are right about one aspect of regulation: even before the control of tuition fees ended, there should have been regulation of pre-need.
Notice how government control is always good for the OTHER person? Government should keep an iron hand on big business but keep hands off big unions. Government should control tuition fees, but teachers and administrators are best to determine the curriculum. Highly regulated large-scale mining is bad; non-regulated, anything goes small miners are good.
In all the wailing and pity for the failed pre-need companies (who are the victims of government deregulation), not one single word is mentioned about those companies that kept paying their obligations to their plan holders, who profitably survived the tuition fee increases, and who astonishingly never used other peoples money to support their other business interests. Why are companies like Eternal Plans (a sister company of the Philippine Graphic) and several others still thriving with satisfied and confident customers? Maybe it has to do with characteristics that were lacking in the corporate plan and business practices of the failed firms: professional ethics and personal integrity.
com.
Monday, April 18, 2005
Third World “Corruption”
PERC’s bases their index ratings on a survey of hundreds of foreigners doing business in Asia who give their perception of the level of corruption in the various nations. The key word is “perception”. These businesspeople need not to have done business in any of the countries they rate for corruption. It does not matter if they have even ever visited any of the countries they rate; this survey measures their perception.
Having actually done business in many of these countries over the last twenty years, I can personally tell you the most corrupt person in the region is a certain moneychanger in the Jurong area of Singapore. The most corrupt public official I encountered was a member of the Thailand Senate, who threatened my partner with prison unless he at least considered marrying the good Senator’s very unattractive daughter…and apply for a U.S. visa for the family. But that is another story.
Corruption is the dishonest use of power or authority for personal gain and immediately implies a moral defectiveness. Maybe that is why the “First World” so enthusiastically applies the expression to governments in the “Third World”. To use that term so readily, echoes sentiments from the colonial past when the “First” ruled the “Third”, in part because the “Third” did not have either the moral or intellectual ability to govern itself. The First World capacity for unbridled and unashamed arrogance is amazing. But that too is another story.
Corruption is not a moral issue; it is an economic issue and the issue is poor and wasteful utilization of capital. However, actual or even perceived corruption does not necessarily preclude economic expansion. China was always on the top of PERC’s list, yet attracted great foreign investment, and achieved sustained economic growth for a decade. Even as the surveyed were decrying China’s crooked politicians, they continued to pour money into the Chinese economy.
Nonetheless, in nations like the Philippines where capital is limited and sometimes scarce, funds flowing into the off-shore bank accounts of dishonorable public servants, minor and high ranking, hinders economic development. When twenty percent of the money allocated for an infrastructure project never goes into the venture, something has to suffer, usually the quality of the project itself.
Corruption and the poor and wasteful utilization of capital, is not the birthright of the ignorant, wicked citizens of the Third World. We are just not as advanced in the techniques and really need to learn from our betters in the West.
Nothing in Southeast Asia has ever or perhaps ever will compare with the corruption of a project currently underway in Boston, Massachusetts, U.S.A.
Know as “The Big Dig”, it is a series of roads, tunnels, and bridges running through the city with the purpose of easing traffic congestion. Originally begun in 1983 at an estimated cost of US$2.2 billion, completion was scheduled for 1995. As of 2005, construction cost is more than US$14.5 billion for the 7.5 mile highway. One commentator estimated that the road could have been made using of bricks made of pure gold for about the same cost. The tunnels leak water so severely that safety is constantly questioned and repairs, if ever possible, will take at least ten years. Now that is corruption!
Still no public officials have been executed for malfeasance as occurs regularly in China. Senator Ted Kennedy, who pushed the funding for the project through the U.S. Congress, is not criminally liable and been incarcerated like former presidents of South Korea and the Philippines. In fact, the other strong proponent of “The Big Dig” just ran for U.S. President, Massachusetts Senator John Kerry. And they call us corrupt.
The corruption of public funds is not limited to a disaster like “The Big Dig”. A major city in the state of Michigan builds a mass transit system that costs so much to operate that the city must subsidize passenger fares or the customers would not be able to afford to ride it. The taxpayer subsidy amounts to over US$10,000 annually for each regular user. For the same amount of the yearly subsidy, not counting the construction cost, the city could have bought each of the passengers their own automobile. And they say we are foolish when we spend public money. And they are right.
The post-World War II economies of the West (and Japan) saw the greatest economic expansion and living standard improvement in the history of the world. It resulted primarily from the wise use of capital. Third World leaders and public officials ought to be forbidden from wearing clothes, eating food, or living in houses different from the poorest member of their societies. Then we might see an end to the economic corruption that plagues our nations.
Wednesday, April 06, 2005
A Third World Pope
They deliberated that a man of color, a man of poverty, a man from a ‘marginalized’ country would bring a new perspective to the Roman Catholic Church. In their enthusiasm for change, these pundits ignored the fact that the chair of the Holy Father has been occupied by a black man, by many poor men who remained poor even through their rise in the Church, and that several Popes came from a country which did not enjoy major economic and political status on the world scene.
Often through the days long coverage of this historical event, repeated comments were made that the Church ought to choose a man who did not whole heartedly embrace a free economic system. If not outright hostile to a free market and capitalistic economy, at least he should be very skeptical and cautious.
It is astonishing to think that anyone who holds the papacy, and who understands the human suffering that poverty brings, would embrace any economic system that does not foster the greatest opportunity for individual wealth building. No one who honestly examines economic history for the last five hundred years could come to any conclusion other than that a free and open economic system creates the highest standard of living for the greatest number of people.
Every nation and its citizens that existed under a closed and controlled economic environment, whether communism, socialism, colonialism, National Socialism, or feudalism lived a more destitute life than those under a free market economy. To be sure, government must maintain and enforce certain regulatory power to curtail economic abuses. However, to support any of these “isms” of failed economic theory is to keep people poor. It is historically ironic to mention that the period of greatest power of the Church occurred during feudal times when the mass of humanity in its areas of dominance experienced the most poverty.
For the Church to hold to any economic philosophy that stifles man’s God given creativity, determination, and entrepreneurship runs even against the teachings of the foundation of Christianity found in the Gospels of the Bible.
In the teaching commonly known as the parable of the talents, Jesus of Nazareth taught that people have the obligation to make the most of the assets they have been entrusted with handling. The person who uses his skills and ability most wisely is supposed to get greater financial rewards according to Christian philosophy. The parable of the vineyard workers teaches Christians that the boss has the authority to determine salaries of the workers and that those salaries are not always and should not be the same. That idea does not sit well with the economic doctrine of socialism, where everyone in the workplace is treated the same regardless of effort or productivity. In the parable of the hidden treasure, a man finds a great wealth buried in a field and then goes and buys the field without telling anyone about his discovery. He keeps all the wealth for himself, a very capitalistic viewpoint.
For practical purposes, you would think that a Pope would look at those nations that have adopted a strong secular view and virtually ignored the Church, as the economic model not to welcome. Socialist, anti-capitalist France was once the “elder sister of the Church”. Now the Catholic Church in France is for old people and other senile fools. The Church is only growing in those nations that are firmly committed to economic individual self-determination. Catholicism is not healthy in those countries where the people expect the state and government to be the engine of wealth creation.
It would be good for the Church and perhaps beneficial for the world if the next spiritual leader of one billion people was a product of the Third World. These countries deserve that recognition not only for their place and importance in the global future but for their faithfulness to the Catholic Church. It was in Manila, not Paris or New York, where John Paul II spoke to four million people at a Mass. We may live in a nation of too much poverty but we are neither helpless nor hopeless, and the Third World has not moved towards the secularism that has drained and depleted the vibrancy from and truly threatens the future of the Church.
Note this also. It is not the economic system of a free market that has kept the Third World from achieving prosperity and general wealth creation. As in the Philippines, most of the third World is poor because of government abuses and the wickedness and immorality of those governments. Perhaps a Third World Pope, who understands for having lived under that kind of government, could provide the leadership necessary to effect changes. Pope John Paul II was an architect of the defeat of Soviet communism because he knew it all too well.
Wednesday, March 23, 2005
Terri Schaivo and Sexual Predators
While a couple of billion people on the planet occupy their waking hours with the routine and monotonous task of seeking food, shelter, clothing, the First World tackles much greater moral and practical problems. I actually found myself feeling sorry for them and a little guilty that we in the Philippines do not have their struggles. It is almost as if we in the Third World are not doing our share in solving the world’s great predicaments and helping to find answers to the major questions and dilemmas humanity must grapple with each day.
Terri Schaivo, the American woman who has been in a “persistent vegetative state” for fifteen years, is the subject of a legal battle for her continuing existence. Crudely put she is brain damaged and incapable of communicating and cannot take care of herself, requiring constant assistance. A feeding tube sustains her life. Her husband wants her to die, ending her abnormal and difficult life. Her parents want her life preserved and are willing to take care of her, doing whatever is necessary to make her comfortable in spite of her condition. They celebrate her birthday and bring her Christmas presents, never knowing if she is cognizant of their attention.
A neighbor in my working class neighborhood of Manila has a fifteen year old son who is brain damaged from birth. He is incapable of communicating and cannot take care of himself, requiring constant assistance. The family celebrates his birthday and brings him Christmas presents, never knowing if he is cognizant of their attention. He sits in his wheelchair outside the house in the morning sun as his grandfather feeds him. His younger sister plays, pretending they are both having a party, with her dolls resting on his lap.
These foolish and ignorant people do not understand the “First World” concept of “quality of life”. They do not comprehend that this boy would obviously prefer to die rather than to live in a “persistent vegetative state”.
All they know is that they love their son no matter what his circumstance is, that God gave this child life, and that they have a responsibility to take care of him. It is probably a good thing that people like this are not in a position to make the important moral decisions for humanity. Much better that the collective wisdom of the U.S. Supreme Court be the final arbitrator of who deserves to be starved to death.
A man in the southern United States kidnaps, sexually abuses, and murders a nine-year-old girl. He has repeatedly sexually abused children in the past, been jailed, and released. He is caught and the discussion immediately turns to what the government and society can do to best rehabilitate these offenders. How can the government insure the criminal’s rights while trying to protect young children? What is a fair punishment and who is at fault for their behavior? These questions certainly require the exhaustive consideration by experts in their field, as there are momentous legal issues and vital social concerns.
A man on my street named Joey lived in a small shed behind a neighbor’s house. He washed cars and took your garbage to the truck to earn his living. He bought your lotto ticket, wishing you the winning numbers and reminding that he should share in your good fortune if you got lucky. For three years, he was a participant at every fiesta and holiday celebration.
One afternoon, a nine-year old neighbor girl came running into her house, crying and screaming that Joey had fondled her and exposed himself in front of her. Her family ran to find Joey, who was already cornered by two others who had seen the incident occur and had intervened before the situation became worse. The little girl’s older brothers began beating the molester when the child dealt with some of her trauma by picking up a nearby stick and pounding her assailant in the face. Quickly the barangay tanods (community security patrol) arrived and took Joey into their custody.
If this had happened in Chicago or Los Angeles, Joey would defiantly have grounds for a major lawsuit against the girl’s family. The tanods took Joey away never reading him his rights. Some neighbors say he was taken to some relatives on the other side of town or maybe put on a bus to the province or maybe not. This event clearly demonstrates that citizens of the “Third World” simply do not understand the rule of law, civil liberties, and judicial procedure. All they were concerned about was protecting the children from a sexual predator.
There is an arrogant and a self-righteous attitude in the “First” towards the “Third” about how we, the underdeveloped and unsophisticated, live our lives. We are severely condemned for allowing children to work, that we do not always treat the environment with “proper respect”, that we do not follow the acceptable standards of “human rights”. The Third World just does not know what is correct like those in the First World know. What would we in the Third World do without them and their principled leadership?
Wednesday, March 16, 2005
Lenten Thoughts On Money
But suddenly a divine voice spoke to him and said, “You fool! This very night your life will be taken from you. Then who will get what you have prepared for yourself?”
We know the answer to that question. Before the wake began, wife Number One had a friendly RTC judge issue a TRO to evict wife Number Two from the Makati condo she was living in. The youngest son had guards placed around the office of his eldest sister and she was barred from the factory. The older brother withdrew the money from all the bank accounts he could find.
But that is not the real message of the story of the “rich fool” that Jesus of Nazareth told to a group he was teaching. The purpose of the story was to enlighten us on how to become wealthy.
There is an old saying that no one ever got rich by working for a living. That is partially true. No one ever became “wealthy” by earning a salary. However, even salary earners can rise to the heights of financial stardom if they know what to do with the money they make. Few people know the secret and Jesus tries to show them the way.
You have seen as well as I a person who enjoys a very large income from his occupation be it professional such as doctor or lawyer, or the owner of even a small business who also lives a ‘large’ lifestyle. The good times roll and the brand new cars and the bigger condominiums seem to flow like water. Every time you see him, he is talking about that fancy, expensive restaurant where he is a favored customer. The wife is constantly showing off the pasalubong from her last trip abroad. But when his business turns, sometimes by even a small amount, to the downside, his financial ‘empire’ collapses and the next time you see him, he is trying to borrow money from you.
Stupid behavior with money is not limited to the elite and the amount of money involved. You see workers who receive their weekly wages Friday or Saturday after work, and that night they live like millionaires. They buy drinks for the house and fill the table over and over again with food. By Monday when they come back to work, there is nothing left of last week’s salary. All they have to show for their week’s work and weekend of ‘wealth’ are empty pockets and a big hangover headache. Then they start the same useless and foolhardy cycle over once more. People that behave this impractical way cannot see any need to use their salary and their harvest as an investment in their future. They just see it as a short-term provision, made to last for the moment until their next harvest. They live from paycheck to paycheck because their thinking is that this week’s paycheck is intended only to last until next week’s paycheck and amazingly, that is all the longer their money lasts.
OCW remittances are a classic example of using income for lifestyle and not the future. The billions and billions of OCW money that has flowed into the Philippines in the last twenty years has done nothing to alleviate poverty for the country. Actually it has done little even for the individual OCWs. Most of their remittances goes for “lifestyle” and not the future. The OCW wife buys the latest, expensive cell phone when it could have been used to start a business. Of course, this is not true in all cases but sadly for far too many.
You cannot consider that your harvest is your provision for your day-to-day lifestyle. Past opportunities should become our war chest to make the most of upcoming bigger opportunities to build more prosperity in our lives. A foolish greedy person spends everything that he has to increase his lifestyle. The vast majority of big winners in all the national lotteries around the world have nothing left 24 months after hitting their jackpot. These fools might even deceive themselves that they are wise by devouring all of the abundance, but doing it more slowly. The fool raises his standard of living with no thought of using the money to invest and prepare for the next planting. A judicious person spends during the lean times and saves during the good times.
Lent is more than eating a fish sandwich instead of spaghetti for lunch. Godly financial management is more than being thankful for what we receive. It is what we do with our blessings.
Monday, March 07, 2005
Iraqis (And Others): Learn From the Philippines!
The change of a nation’s government structure and social/political system to a participatory democracy is never orderly, rarely graceful, and often burdened with bloodshed and chaos. Because forming a democracy entails the transfer of the power of control from the few to the many, the ‘few’ vigorously resist relinquishing that which they believe has become theirs by right and habit. Strangely enough to some of the world’s current crop of dictators, monarchs, and “presidents for life”, the people seem to think that democracy is worth all the trouble and struggle, which must make democracy a very tempting and important concept.
George W. Bush is probably right about the fire of freedom and self-determination residing within all people. However, the chasm is very wide between desire and the actions necessary to fulfill that desire of democratic liberty. Interestingly, the rulers like Egypt’s Mubarak, Zimbabwe’s Mugabe, and the House of Saud understand that once that flame is kindled, it is difficult to quench. Unless a leader is willing to use all means available, like Saddam’s torture chambers, rape rooms, and mass graves, the most practical solution for holding power is to delay the democratization process by giving the people a few political bones to chew on. Mugabe promises to redistribute the land stolen from the white colonizers. Saudi Arabia allows local elections and talks about the vote for women sometime in the future. Mubarak thinks it might be a good idea to have an opposition candidate for president in the next election, if he decides to let any of them out of prison.
However, the people are never satisfied with just the bare essentials of political freedom. For some reason, they seem to want all the benefits of democracy as evidenced by recent events in the Ukraine and Lebanon, where that Filipino notion of “People Power” reared its head and teeth. Twentieth century “People Power” was born almost simultaneously in the Philippines and in Poland. However, the Filipinos were more ambitious; they intended to restore democracy and take over a government, not simply the workplace. Perhaps then, it is beneficial for those with newfound democracy, those trying to preserve their hard won democracy, and those looking to move towards democracy, to learn these lessons from the Philippine’s experience of twenty years of democracy’s freedom.
It is probably wise for those living with democracy for the first time, or the first time in a long while, to forget all that nonsense that you are hearing from the ‘experts’ about democracy being “a process”. Democracy is no more of a process than becoming a parent. Yesterday you did not have a child to care for; today you do. The change is virtually instantaneous and can be irreversible. These pundits would like you to believe that when you walk into the voting booth, that is the conception of democracy. Not true; that is the birth. The conception usually takes place with just a few people behind closed doors, sometimes in deep secret. The “process” of democracy is the caring and feeding just like with a child. If you do not nurture democracy properly, it will die.
Be careful also not to be too caught up in the exuberance you hear about the advantages of democracy from leaders like George Bush. He is correct in principle but not in practice about democracy being the epitome of social equality and wealth creation. Democracy does not provide a magic bullet against all the evils that trouble a society. It is not a medicine, providing a remedy for all the ills that will beset a nation. Think of democracy as more of a vaccine that can help protect a country from dangerous forces, people, and ideas. Justice and prosperity are still your responsibility to develop. A strong democracy can make it easier.
A legitimate and energetic free press and media are crucial to maintaining a democracy. Guard them well with vigor and intensity. In order for the benefit of democracy to thrive, it needs sunlight and a transparent environment that only the freedom of expression can supply. Error on the side of openness; never on the side of repression. Even repugnant and irrational ideas must be allowed to spread through a free press because in time they will disappear on their own, disposed of on the garbage heap of foolishness. Suppressing free speech often gives credibility to thoughts that have no reason for being taken seriously. Distrust and rebuke every politician who tells you limiting discourse is in your best interest. That person is a clear and immediate threat to your democracy.
Finally, be tolerant with your politicians and leaders. Most have no experience having to share power with you as a stakeholder in a democracy. Many of them lost privilege as you gained power. However, never ever give them the benefit of the doubt. That could be fatal for your country. Give them instead much of your collective patience. Eventually, they may learn how the new system works and be productive. And of course, eventually they will die off. Your democracy and freedom will not.
Monday, February 28, 2005
Community Policing and Community Wealth Building
I am a citizen of the Third World. For nearly half my life as its adopted child and as both an observer and active participant, countries like the Bahamas, Fiji, Morocco, the Philippines are my home.
It makes no sense when one views the great disparities of human economic condition. There seems to be no rational reason for the world to be so unevenly divided between rich and poor. A nation with virtually no natural resources like Japan is wealthy, while a nation with the some of the largest proven gold reserves in the world, the Philippines, mires in poverty. Technology and information is freely available worldwide to almost all, particularly in the age of the Internet and the global community.
It is true that most Third World nations are young, with little comparative time to develop strong institutions as in the First. However, there are notable exceptions. Malaysia is not a poor country and yet in its present state, it is a new nation. South Korea faced war’s devastation only a generation past.
The “why” of the great divide between rich and poor is a comparatively new question. For all their errors of reasoning and other basic fallacies, we have Marx and Engels to thank for attempting to describe and seek an answer to this problem. Their idea that the solution could be found in changing the system was correct. However, they viewed wealth as a win/lose situation: a limited amount of wealth could only go to one person or another, not to both. In prosperous and vibrant economies, the system creates a win/win scenario in that all are recipients of the benefits of almost unlimited wealth creation.
A new book published in the Philippines shows the practical application of the social model and governance strategy first formulated by Peruvian economist Hernando de Soto. This book shows how that model was rationally applied to Philippine law enforcement and in effect provides a blueprint for the Third World to solve the specific problems created by poverty, which will in the end reduce that poverty. This book ought to be required reading for Third World officials and leaders.
"Community Policing: Pathway to Good Governance” is written by Ricardo F. de Leon, currently a three-star general and police Deputy Director General of the Philippine National Police. With a doctorate in Peace and Security Administration, General de Leon is not the average cop on the street. But in a larger sense, he is. His father was a police Sergeant of average means who taught his son the values of discipline, honor, and service to country. General de Leon has not made his career pushing pencils at a desk, but has served in far-flung provinces fighting crimes perpetrated by insurgent rebels to petty thieves. The man knows how to be a policeman.
General de Leon, as the leader of a government institution, recognizes that such an organization can never function effectively nor achieve its mandate unless the public considers it trustworthy and unless the public is involved in performing its duties. This is the central theme of “Community Policing” and it is the critical premise to realize good governance.
The crucial problem in the Third World is that the governments do not effectively deliver services to its citizens. These governments cannot be depended upon by the people to do the job. Governments preach poverty alleviation but the people know from experience that it is a farce. The people do not have any trust in the government bureaucracies and their employees, the “public servants” that man those bureaucracies. De Leon gives practical example after example of efforts to upgrade the quality of performance by his police officers. He dismisses “image control” and “praise releases” by saying “Image must be complimented with positive and direct action”.
Once citizens honestly believe that law enforcement is sincerely trying to do their tasks well, then the second step of community involvement can enter the picture. The public will not help and cooperate with a police body they view as pointless and corrupt and without the public’s best interest at heart. However, once the public becomes involved in law enforcement, the job of the police is easier and the results in crime reduction are evident. It is a win/win situation for both the government servants and the served.
Private enterprise in a non-monopolistic environment must cater to the customers or face extinction. However, government services are monopolistic and therefore not subject to market forces.
Discounting the conventional mantra that “Money is the problem”, de Leon’s formula of community involvement based on trust, opens the doors and the wallets of the private sector for resources that government might not be able to provide.
General de Leon is a policeman; hence, the book is about law enforcement. Had he been a doctor, the same ideas would apply to the delivery of health services and can also apply to all aspects of community development, both urban and rural. And when the community is improved, then wealth creation can take root and flourish.
Nonetheless, no plan or program is possible without political will from the top. This is the story of one man’s personal determination to create positive changes: not simply to talk about it. Unfortunately, that is what most Third World leaders are best at: talking.
Thursday, February 24, 2005
The philippines is Coming Back!
As expected and predicted, Moody’s report card of the Arroyo, administration showed less than a passing performance rating. Smokers and drinkers are paying more for their favorite “sin” and it did nothing to offset the dismally poor fiscal ‘accomplishments’ of the government. In fact, the ‘sin’ seems to be the way the administration handles the people’s money and the government’s finances. Oh well, like a lover subject to the flight of Cupid’s arrows, we must live with the results of the downgrade, for better or worse.
Apparently, international finance, like romance, is unfathomable to some of our political leadership as one senator told the president to ignore the reduced credit evaluation. Wrong audience I am afraid. The international lenders use the rating to judge risk, not for the ego of the international borrower i.e. the Philippines. That is like telling a woman that her using make-up does not matter; Daddy thinks you’re beautiful. Unfortunately, as potential suitors think a woman with lipstick looks prettier, so too foreign bankers think fiscally responsible governments are better to loan money to.
Expect another economic ‘bomb’ to fall around April to round out 2005’s First Quarter Storm of poor consequences for several years of bad policymaking from Malacañang. The First quarter GDP/GNP data does not show an accurate picture of the economy. The service sector grew well, but unfortunately, we are not a service-oriented economy. However, the last half of ’05 is going to be good and, could easily usher in a new period of increasing prosperity for the country. I haven’t felt this good since ’95. Here are some reasons for my good mood and my good expectations.
Despite opposition from the foreign funded anti-mining, anti-prosperity NGOs, the economically successful Supreme Court resolution of the Mining Act is already starting to take effect. Now with a firm legal basis and a President who understands the benefits to the nation, the multi-billion dollar minerals industry has the Philippines on their radar screen again. Of course, once they start putting their investments in place, the self-serving will attempt to derail the nation’s march to prosperity. However, some of these companies will persevere with jobs and wealth creation as an outcome
After preaching for years that agriculture, tourism, and mining were the industries that the Philippines should place the emphasis, finally, the long-term advantageous mining sector is coming into the economic game. Each year through the 2010 end of the Arroyo administration will see greater and greater economic gain thanks to her pushing for the legal validation of the Mining Act and her mobilizing various government agencies to help investors. For that, the nation can thank the lady. The picture is not entirely rosy and there will be difficulties. However, I believe that 2005 will mark the year that we finally got smart about mining and began to reap its rich rewards. One hundred thousand new jobs in the next 36 to 48 months will do much to vindicate the President’s mining policies.
The price multiplier affect of high world crude oil prices will lessen its grip on our wallets over the next nine months. It may seem hard to believe that, as of this writing, crude is above fifty dollars barrel again. Bear in mind that demand is very high right now with a colder than expected winter in both North America and Europe. Still holding price only at US$50 is a good sign.
By the time that the winter freeze is over, Iraq will firmly have a new government in place. It will take much more time for stability to fully overtake that nation, but before the end of the year, production will surpass pre-war levels and world prices will drop slightly. By that time also, the United States Congress will have passed legislation allowing for further oil exploration in Alaska that will have a negative influence on rising oil prices.
Another glimpse of a more prosperous future is in the announcement that the Philippines and Japan will sign a free trade agreement before year’s end. At last, we will have unfettered access to a major trading partner. The relationship is not as favorable for the Philippines as a free trade agreement with the United States would be. We buy much more from Japan than we do from the United States. However, it is a start. The key to this agreement is the emphasis on services, particularly contract workers that Japan needs so desperately from the Philippines. Want a tip on starting a new business? A Filipino friendly Japanese language school. Japan will make it easier for caregivers to enter Japan but will require additional language skills to keep the sex workers out.
Remember when the media used the phrases “Tiger Economy” and “Tiger Cub” to describe our neighbors in Asia? We have not heard those since 1997. Maybe soon we will call the Philippines a “Carabao Economy”: sometimes slow, sometimes not too smart, but once it gets going, it is hard to stop.
Thursday, February 17, 2005
Terrorism: The Losing Strategy of the Incompetent
A discussion of terrorism often centers on the method and the brutality of the attack, be it a person strapped with a bomb on a bus or a car exploding in a crowded street. There is something inherently disdainful about individuals, in their pursuit of a goal, deliberately choosing an action that results in their own death. Even on a traditional battlefield, entering into a combat mission with small chance of survival pushes to the extreme the definitions of courage and bravery.
However, “war is war” and “war is hell”, so we expect that combatants will take many sorts of fanatical measures to win the battle. That is to say, there is realistically little difference between filling a truck with plastic explosives or an airplane with steel bombs, and attempting to kill the enemy. Even the certain death of the truck driver is no different from the possible death of the bomber’s pilot; both are merely a cost of battle.
What distinguishes the current situation, and perhaps why we use the word “terrorism” to describe these actions, is the intentional and premeditated targeting and killing of non-combatants. A non-combatant is a person who is not defending themselves or actively attacking during the course of the war.
But is this killing of ‘ordinary citizens’, these ‘innocent bystanders’, actually a new phenomenon? Equally important, is the killing of non-uniformed civilians justified by the tradition of warfare?
Like it or not, the answers are: No, it is not unique to our times, and Yes, civilians can be legitimate and justifiable targets.
From Genghis Kahn piling up mountains of skulls of the ordinary citizens of the villages he conquered to the aerial bombing of Hanoi during the Viet Nam war, civilians are always in the crosshairs of the weapons’ sights. If you kill the peasant farmers growing food to supply the enemy’s troops, your victory might be a little more assured. If you kill as many of the able bodied men before they are armed and reach the battlefield, so much the better for your soldiers. Unarmed civilians can pose just as real and potentially immediate threat to your victory as the well-trained, well-equipped front line warrior.
However, the purpose for the last forty years of civilian slaughter in Northern Ireland, in Israel, in the Philippines, has nothing to do with the material support civilians give to the uniformed combatant. The philosophical and strategic underpinning of this ‘warfare’ loosely comes from the book “On War”, written by Prussian military tactician Carl von Clausewitz in the early 19th century.
One of von Clausewitz’s basic premises in his brilliant treatise (comparable to Sun Tzu’s “Art of War”) is that armed conflict is merely a continuation or extension of a formulated political policy. Crudely put, if you want to achieve a particular objective, anything goes and everything is permissible.
However, if war is a tool to implement a political policy, then perhaps victory could also be gained by changing your opponent’s policy. If an enemy’s political agenda is to take your territory, then get the government NOT to want to grab your land. Von Clausewitz theorized that perhaps if a direct attack were made on “non-combatants”, a government would be persuaded to change its policy by its own citizens. Bomb London to rubble; England will surrender Europe to Hitler because its people will not accept the suffering.
This belief lays the foundation of modern terrorism. Blowing up some buses on the streets of Manila will birth a separate Muslim state in Mindanao. Attack a pub in Belfast and the Brits will go home. The terrorists believe that they will get what they want because the innocent people will force their governments to change their policies.
The problem for the terrorists is that this strategy is a total failure. No long-term government policy has been reversed by acts of terrorism on non-combatants. Even the recent Madrid train station bombing merely reinforced the majority popular opposition to the Iraq war and gave voters an imperative to elect a government reflecting their will.
The world’s current crop of terrorists are incompetent and failures and that is why they have little or no political and policy influence around the world. A truck bomb that kills some 200 U.S. Marines in Beirut, Lebanon in the 1980’s results in the Americans withdrawing from the country and the terrorists’ objective is won. Killing 3000 at the World Trade Center only succeeds in pushing the U.S. to invade two “terrorist friendly” countries. The difference is that the military weighs probability of success against the rewards of victory and the cost of failure. Militarily, it made no sense to remain in Lebanon.
However, when civilians are attacked, there is no military equation to determine and set the parameters of response. It becomes personal. Philippine President Arroyo reversed the prior administration’s open combat policy against the insurgents in favor of negotiation. Kill some of her constituents who were harmlessly looking forward to their Valentine’s Day festivities and the President (and the people) become more resolute to crush the enemy.
Bin Laden and his kind, regardless of the individual horror and tragedy of their actions, have no chance of victory simply because their strategy and tactics are thoroughly defective and even counter-productive. In the end, bin Laden has a greater likelihood of taking over Iraq by running for Parliament.
Friday, February 11, 2005
Third World Libs and Neo-Cons
The political “isms” that blossomed predominately in the 19th and 20th centuries replaced the more simplistic monarchies that dominated the prior millennium. Political thought was certainly simpler back then: nations ruled by a ‘good’ king or ‘bad’ king but the authority rested in the sovereign who was “The State”. The 18th century democracies of America, France, and Great Britain were the aberrations, not the standard by any measure. However, ultimately, the “isms” failed to replace the onward march towards participatory democracy.
For some one hundred years, political theoreticians struggled to find a balance between the power of the government and the power of the people as democracy tried to find its maturity. Too much power on one side headed towards the extreme concentration of the monarchy; too much ‘people power’ could lead towards state collapse and anarchy.
The contrasting political viewpoints we call “Liberal” and “Neo-Conservative” embody this search for a balance of power. It is a question of who has the power, the “people” or the “government”, and that power comes from which side makes the decisions. It may not be intellectually pretty, but it is unmistakably a power struggle over who controls the decision making process.
An inseparable and critically important aspect of decision-making is responsibility. If you are making the decisions, then you are taking the responsibility surrounding those decisions away from someone else. The parent decides what food the child will eat and the child has no responsibility for acquiring, preparing, etc. what is on the table. If a person is responsible for obtaining something to eat, then they can decide what the meal should be.
Our lives can roughly be divided into two broad areas; economic and social. Economic encompasses the methods and processes of wealth creation and subsequently using that wealth. Social covers personal behavior and interaction. Or put another way, Money Values and Moral Values.
It may be intellectually simplistic, however, I believe in the real world the difference between Libs and Neo-Cons comes down to who makes the decisions in the above two areas. Libs want the government to control the economic life and let the individual control the social aspects. Neo-Cons give the individual control over the money and want government to set the moral standards.
Liberals will determine your wages, the hours you work, the money you keep after taxes, and will use those taxes to provide many basic economic needs such as health care and education. The government takes a major responsibility for your personal wealth creation. In the Third World as in the First, politicians are elected on the premise that it is government responsibility to make you financially comfortable. Other issues for example like pollution and the environment need government control, as individuals cannot be trusted with these.
Libs want specific and intense jurisdiction over your economic life while at the same time allowing great individual freedom over social concerns such as abortion, speech, and other life style choices. Government should stay out of the bedroom and limit itself to the bank account. Economically, the responsibility lies with the state because the individual is not as capable and individuals abuse their economic power.
Neo-Cons provide broad economic frameworks in which the individual is responsible to create his own wealth. Less regulation, fewer taxes, less restriction on your money, but moral conduct and standards need to be set and controlled by the government. Individual social behavior must be limited, as moral excesses will occur.
In my corner of the Third World, the Philippine politicians are some of the most “Liberal” on the planet. Poverty is the government’s responsibility and “the reason you are poor is because past administrations have failed you”. Labor laws are designed to be blatantly biased pro-labor. However, starting an individual personal business is simple with few restrictions and as a result, entrepreneurs are common and self-made millionaires are many. Small businesses have an environment where they can thrive with higher profit margins than the First World could imagine. Yet, abortion and divorce will not be legal in the near future.
Unfortunately, the individual does not know who they want to be in charge, be responsible, and make the decisions. People who pay their full legal taxes are rare but they severely criticize and blame government for inadequate education and the poor environment. So we are neither Lib or Neo-Con but maybe the worst of both.
Perhaps the Neo-Cons may be proven right in the U.S. as its national roots are planted in the individual’s right of economic determination. Liberal Europe may flourish, as it has for centuries been looking for a ‘king’ be it Charlemagne, Napoleon, or the EU Parliament. However, my experience in different parts of the Third World shows that there is little political philosophical clarity seen in the First. We call it adaptation and pragmatism but too often, I see that meaning appropriating what is convenient without regard to what is useful.
Third World leaders have failed their nations and their nations have failed because few have made the effort to determine a method of governance suitable for their local circumstances. It is easier to copy the First World and be unsuccessful.
Friday, February 04, 2005
Poland, India, and the Philippines
What common thread of perception could run through these nations that are as dissimilar in culture, history, religion, economy, and global position as possible? On the surface, there does not seem to be anything that could tie these peoples together in forming a common outlook that runs counter to the prevailing world belief.
One might contend that a particular national self-interest, unique to each nation could shape their individual views and that in fact there is no common ground of thought. However, the responders were the average person on the street, not the government, and there could not be any specific or direct benefit in giving President Bush this kind of approval.
To understand this situation, one must understand the change in political philosophy the “Bush Doctrine” presented as an alternative to that which has dominated the world for the past century.
The twentieth century opened with probably the most foolish, unnecessary, and undoubtedly, costliest and bloodiest wars in world history. Austria partially controlled the Balkans, which clamored for total independence. After separatists assassinated Austria’s Archduke, impossible demands were made of the local government, which allowed Austria to increase its military presence and domination, done primarily to impress the Austrian people as to how strong its monarchy could be. This increased occupation could not have been accomplished without the open approval of Germany.
Russia is sworn to defend its ethnic Slavic cousins in Bosnia and declares war on Austria. France had a treaty to defend Russia. Germany moved against France to aid Austria and marched its troops through Belgium to invade France. Treaty obligates Great Britain to defend Belgium, forcing it to wage war against Germany. The Ottoman Turks sided with Austria hoping to take advantage of the situation and reclaim the Balkans.
This disaster prompted the policy and belief that war is to be avoided at all costs. The twentieth century was supposed to have been the century of peace as the nations declared war as an unthinkable alternative to handling disputes. All possible means should be tried and thoroughly exhausted before combat occurred. This idea failed miserably and led to a bloody century of endless war.
The “Bush Doctrine” in its simplest and purest form says that war is a viable and necessary option when one party does not intend to pursue a peaceful alternative and successful conflict resolution. War is a last resort but needs viewing as a realistic option and not simply as the result of failed peaceful negotiation.
Why would the “Bush Doctrine’ make the majority of those polled in Poland, India, and the Philippines feel safe? Are these war-mongering peoples eager for battle, destruction, and death? No, these are nations that have lived and suffered through decades, losing tens of thousands of its citizens through the policy of “peace at all costs” against enemies who did not have any desire for peace.
Poland spent more than a half-century under total military occupation as the world sought a “peaceful” solution first with Hitler’s Germany and then the Soviet Union. War with Germany was avoided in the mid-1930’s as Austria and Czechoslovakia were annexed through the “peace process”. Weeks before German storm troops marched into Warsaw, Great Britain declared its agreement with Hitler would insure “peace in our time”.
Mahatma Gandhi, not a strong advocate of independence for India, tried negotiation with British colonizers for justice and equality, seeing thousands of Indians die as he pursued “peace”. India has fought at least three border wars with China and a fifty-year conflict with Pakistan. It has lived its entire national life at war with neither resolution of the conflict or peace. And now its war pits two nuclear powers facing each other.
Like Gandhi, Dr. Jose Rizal believed that the colonizer, Spain, had leaders with common sense and understanding of right and wrong who would pursue peace. He died for his values and the Philippines gained little except a national hero worthy of emulation.
Other Philippine national heroes tried to make peace and avoid war with an American government not interested in either, and the resulting brutality left a half a million Filipinos dead.
For thirty years, the Philippine government has struggled for peace, trying to avoid war with two enemies of the state who show little willingness for peace. Thousands of Filipinos have died in combat, or as collateral damage, with the NPA and the Moro secessionists, when perhaps a policy of war would have been a better alternative for those who died while the government “fought” for peace.
The pursuit for a peaceful solution as an alternative to war is noble and right, but impossible unless both parties are inclined and eager to avoid fighting. Some of our enemies are only interested in victory and never in peace, regardless of the human cost. American revolutionary patriot Patrick Henry asked “Is peace so sweet and life so dear to be bought at the price of chains and slavery?” Perhaps sometimes with some enemies, peace is simply not possible and that war is inevitable and proper to achieve that which is right and honorable.
Thursday, January 27, 2005
Wandering, Aimless Leadership
When you read the initiatives of the Arroyo administration, you are reading nothing more than a semi-sweet sounding campaign platform that has been used by every socialist/wealth redistributing politician around the world since the 19th century. The word “poverty” is mentioned over and over and the implication is that poverty is like a physical ailment that one only needs to buy the right medicines or get the right treatment and the patient becomes cured.
And of course, the drugs and the doctors are not cheap so the “not-impoverished” must pay the bill.
I would assume that President Arroyo in her own mind believes that she has created a vision, not only for her own presidency, but also for the Philippines as it inevitably marches down the time path into the future.
Unfortunately, she is wrong. That may be the fundamental problem with the Philippines as a nation. The country does not have an ideal. It has never been given a clear and long-term vision by its leaders.
Nation states are not born; they are created. The founders birthed the United States on the ideal that a government could stand through the wishes and by the powers of the people rather than through a monarchy. France’s rebirth differed slightly in that the nation formed on the premise that all classes of people, not just the nobility, should have a say in the state. Singapore, created first as a part of an independent Malaysia and then as a small city-state nation, believed that a contradictory multi-cultural nation with no territory and no resources could thrive if all shared a common discipline. Even the basis of modern China is the complex vision of Mao Tse-Tung of a unified nation without regional factionalism while still dealing with his great distrust of centralization and bureaucracy.
The Philippines was ill-fated to have an aborted first independence and then to have more or less been kicked out of the American house after the ravages of World War II with little more than the proverbial “clothes on its back”. There was no vision other than a desire to be an independent nation. Quezon’s “Rather have a Philippines run like hell by Filipinos than a Philippines run like heaven by the Americans" does not quality as a useful nation building ideal. Nevertheless, that may be all that we have ever had.
Poverty reduction is a government, perhaps even a national aspiration. That is not the founding principle of a nation or the reason for being. In other words, why is the Philippines a sovereign nation other than simply not to be part of another sovereign country? What do we stand for? At some point in our nation life, we need a leader to define this for the country. We need to clarify our identity and goals as a nation. Even out much flaunted “People Power” has become nothing more than an extra-constitutional way of removing (or trying to remove) a government rather than an ideal of participatory democracy under oppressive conditions.
I know that it may seem like an impractical point to worry about our national purpose while fighting the daily grind. However, one of the major problems facing the Philippines is permanent migration. One man I know who is my age remains the only one of his classmates still in the Philippines. Forget the excuses of martial law, bad economy, etc. Hello! Most people stay in their home nation or at least WANT to remain citizens of their own country. Sure, they may feel economic opportunities lie abroad but their heart stays at home. Often, not so the Philippines.
Look at some national mottos. United States; “In God We Trust”-not the King. Panama: “For the Benefit of the World”. “Onward Singapore”. "Only Unity Saves the Serbs". South Africa: "Diverse people unite". Soviet Union: "Workers of the world, unite!". I especially like Luxemburg: "We want to stay what we are". The Philippines: “For God, People, Nature and Nation”.
What a wonderful thought. But what does that have specifically to do with the Philippines, past, present, or future or the place of a Filipino in the nation?
It is easier for a young, idealistic nation to define and establish its identity and goals for itself and as they relate to its position on the world scene. However, even very mature nations know and re-establish their place from time to time. Look at the historic changes in Europe over the last decade.
“It is always the same: once you are liberated, you are forced to ask who you are” and "The value of identity of course is that so often with it comes purpose”.
The Philippines needs leading into the future with a clear purpose in mind. We have no national purpose other than to survive; even the cockroach lives life with that sort of purpose. The nation and the people are starving for national leaders who are competent. No leader is competent who does not know where they are leading to or for what purpose they are leading.
Thursday, January 20, 2005
Save Now: Buy Later
On that subject, the “10-Point Agenda” is a farce in the same way the U.S. Presidential loser John Kerry tried to use four months in Viet Nam combat to convince the voters he was a war hero. Having an “agenda” and constantly reminding the public that you have an agenda does not make you a successful “Economist” President.
As much as I hate his political beliefs, Jose Maria Sison on his website http://www.defendsison.be gives an accurate picture of the likelihood of the “10-Point Agenda” seeing any life. He is right, although saying that about Sison is a very bitter pill for me to swallow.
But enough about the President, who has a 10-point agenda in case you were not aware. On to you and me. The key word for individuals who wish to build wealth is “hoard”. I don’t mean rice or cooking oil; I mean money. Actually, the correct word is “Save” but it seems like most Filipinos detest the idea of “saving” money as much as most Americans do.
Both nations have a very low savings rate and a very high “spending” rate. That is, Americans tend to become buying consumers when they have extra funds (or an unused credit card limit). Filipinos tend to “invest” extra Pesos through all the entrepreneurial choices that come to us. Maybe that is why all these multi-level pyramid schemes work so successfully for the con artists. Given the chance to own our own business, Filipinos will raise the money. But neither nations citizens tend to put cash away in storage.
Right now though is a good time to hoard cash, for soon “Cash will be King”. My advice is don’t buy it if its not broken and that includes refrigerators, cars, and homes. If you can save ten percent of your monthly income for the next six to nine months, you will have stored a next egg that will reap a bounty and create wealth for you many times over.
Even as I say that we are facing higher prices over the next few months, at the same time we will experience a form of price ‘deflation’.
With the Peso stable and the stock market above pre-GMA levels, the President can say with confidence that those of us predicting gloom and doom are very wrong. And we are…for now.
However, soon all of negative pundits will be very right. Note this thought; 80 percent of Manila households surveyed said they would not be making major purchases in 2005. You should join them but be smarter by saving the cash you would have spent on those things.
Total vehicle sales slid 4.6 percent in 2004 mainly due to sluggish demand for commercial vehicles, an industry report showed a couple of weeks ago. Business usually cuts back first followed by the consumer. The results will be lower prices and better terms months from now.
That is why you need to save your cash to take advantage of it. Real estate will probably not fall in price, but there will be substantial discounts in high-ticket consumer goods both locally produced and imported.
The most important reason to save now and reap rewards later will be for budding business owners. Starting a business from the ground is much more costly and difficult that buying an existing operation small or medium sized. There are going to be significant numbers of business failures in the next months that will allow you to takeover and begin a new venture or expand your existing business interest.
There is a downside to saving money and that is that the bank interest rate in the Philippines is so low, that you might do just as well keeping your money in your refrigerator for the interest it is going to earn. Currently the best alternative to a bank deposit is to buy government Treasury Bills. You might as well take some advantage of the fact that the government, which, by the way, has a 10-Point Agenda, is still borrowing, particularly in the domestic market.
The other reason that you need to be accumulating cash reserves is that you may need extra funds if things do not go favorably in the third quarter ’05.
I am not a big proponent of maintaining large cash reserves unless you are preparing for a specific future purchase. However, there is too much medium uncertainty in the air and it is not coming from terrorists or self-proclaimed opposition leaders. My fear is that the President might be reading her own press releases, might believe that the 10-Point Agenda is realistic and attainable, and completely bankrupt the nation as she fails to accomplish it.
Friday, January 14, 2005
2005 and a HAlf: Much Better
From now until then, you may want to be on vacation, mental if not physical, because you will face a constant barrage of unpleasant news and followed by unpleasant experiences. It will be like you wife telling you as you’re trying to enter the front door. “Honey, don’t go in there: the dog crapped on the floor”. Much better to have walked in without the warning since now you have the distasteful anticipation and then the actual bad experience.
Let me prepare you for what I think you will find as you enter the first half of 2005.
The prices you pay for many things will climb like nothing we have experienced in several years. This will not just be the government’s silly “inflation” numbers. I am talking prices that go up from week to week.
Why? High crude oil prices and the president’s new wealth redistribution system that she calls tax reform.
Early in 2004, I wrote that the full impact of $45 a barrel oil would not hit until 2005. Well, now is the time. Combined with the price of oil is the massive “rob the rich; give to the government, I mean the poor” scheme Mrs. Arroyo calls tax enhancement. Remember the movie “The Perfect Storm”? We are heading into “The Perfect Wealth Destroyer”.
All those knowledgeable say that prices will rise more. That is a given. However, the new tax increases is another matter. Do the math. 80 billion in new taxes spread over 80 million men, women, and children of the Philippines. 1,000 pesos per head per year. Tough but not unmanageable. Let’s see: me, the wife, and four sons means my family is burdened with an additional P500 a month expense to support the government. Not bad but not even close to reality.
First, even if I do not drink alcohol, the trickle around effect of the tax hits me. No man is an island in the economy. What is bad for you eventually affects me. If my dentist raises his fees because the cost of his beer and his cigarettes is higher, his customer (me!) helps pay for it.
Secondly, for the most part, all the tax changes are on consumption and focused on urban middle income and above consumption. Those of the 80 million who “grow camote” and live on the mountain will not pay much of the tax and those like you and me will pay much more than our ‘fair share’.
For example, say the thirty percent of the populace in this economic bracket who for example, drive the cars, shop the malls, own (legally) the cell phones will pay about 80% of the tax. That means around 24 million people will shoulder approximately 64 billion pesos in taxes. Now my out of pocket per month is not P500 but P1250.
Of course, this is not a huge sum for an individual upper middle class family. However, it is money that will NOT be used for wealth creation through consumer spending. It is money that came from created wealth that is now being sucked out of the economy. The administration will argue that the tax revenue does go back into the economy. Some of it does but the government can never spend money as effectively, efficiently, or with as great as wealth-creation effects as even the lowest member on the socio-economic ladder can.
Until June, this economy will be stuck in neutral if not reverse.
The my “gets better” scenario kicks in, partly IF President Arroyo starts doing the right things economically speaking and that means to stop spending and borrowing and spending like a drunken sailor on shore leave. I know that is a big IF however I believe it will happen IF she wants to complete her term of office.
If the oil price hike and new taxes is such a big problem now, why will it be less of a problem in six months? That’s easy. By then everyone will have figured out how to evade paying the new taxes. We may be dumb enough to let a government come close to bankrupting the economy, but we are not totally stupid.
Truthfully, I see a drop in oil prices by the third quarter of 2005. The world’s stock markets are signaling better times ahead and this most recent oil price spike up is the dark before the dawn. By June, the Iraqis will be on much firmer ground and oil supplies will stabilize. Further, by then George Bush will have his economic agenda in place, which will include more U.S. domestic oil exploration production.
By the end of June, the Philippines will have digested the Arroyo tax follies, the credit rating downgrades, and will start benefiting from a better global environment. So let be the first to say “Happy New Year 2005 and a Half”
Friday, January 07, 2005
Tsunami Tragedy?
Feeling sadness at the plight and suffering of the people in the affected areas is understandable. However the only significant aspect of this event is that so many are dead in so wide an area in so short amount of time. In fact, it is just the suddenness of it all that makes any difference.
Looking at pictures of hundreds of bodies rolled over by the waves and whose life was sucked out is amazing and perhaps at little shocking. Looking at the reaction and response of the more developed nations is sickening and revolting.
Do not misunderstand me. The outpouring of money, goods, and logistics is certainly needed and welcomed.
It is disgusting though to see United Nations officials, including its incompetent Secretary General scramble to try to get some credit for the relief work. The United Nations has once again shown itself to be nearly useless and almost ineffective under its present leadership and management.
Another thing that I find disgusting is the lack of responsibility that the victims take for their own predicament. I know that it is not proper or maybe even fair to criticize people that have lost so much, including loved ones. However, it usually does take a tragedy to point out and highlight a lack of personal accountability for what happens in life like you never wear a seat belt when you drive and then whine and complain when you are severely injured in a minor traffic accident. That sort of thing.
The likelihood of a major tsunami hitting this area is remote, sort of like the odds of Pinatubo erupting. However, unlike a volcanic eruption, one must always be wary of the ocean as she turns violent quite often.
Look at the pictures of the some of the resorts washed away in rubble and death. The owners fully expected calm seas and quiet times forever. You do not see a seawall; you do see building practically at the water’s edge. I feel no sympathy for someone who builds in the face of harm’s way and then experiences that harm. I remember years ago in Boracay, every time a large storm threatened to strike, barriers of bamboo went up to protect the shoreline from erosion.
Of course, I am not suggesting that a few sticks of bamboo could have prevented this death and destruction. But one video I saw of a three story hotel, not a nipa hut or bungalows, in Thailand was designed and situated near the ocean in such a way that even one of our average typhoons would probably flood it a meter deep.
Putting greedy monetary considerations first has consequences, likewise with greedy political factors.
Notice that two of the areas most affected are two of the most politically instable in the region: Northern Sri Lanka and Aceh province in Indonesian. Insurgency adds instability, instability adds poverty, poverty adds a lack of infrastructure and preparedness, and these compound the problems of nature, weather flood, famine, or fire.
But it does not stop there. Hardest hit Indonesia will probably be the largest recipient of the three billion dollars that will eventually go to the region. Further, Indonesia will most likely receive some relief or at least a wide scale moratorium on its 82 billion dollars of debt. (RP’s is 60).
I know you are thinking how heartless and insensitive I am to want to deny these poor tormented people the economic aid they need. You’re right. I am cruel and cold-blooded. Consider this. Last year Indonesia received foreign charity, I mean economic aid, in the amount of US$183.06 per person. By comparison, we received US$12.99 per person. Since 1997, Indonesia has been the top economic aid recipient in the world! and that was before “The Wave”.
This is just a suggestion but maybe the Indonesians should use some of the aid money or life jackets just in case. Again in Boracay after a strong earth tremor in 1988, locals were scrambling for life vests, preparing ropes to hang on to just in case, and heading for higher ground. Of course, I have always thought Filipinos were smarter than our neighbors to the south were. And something else disgusts me too.
All this talk about how the rich ones can help the poor nations by investing and through tourism not to mention all the private donations sounds like a lot of nonsense coming from collective guilt.
All the problems in these countries of government corruption, separatist movements, poor infrastructure, unfair judicial systems, and on and on and on still exist! The tsunami did not wash them away. Yet now, for the west, they have suddenly somehow become attractive for investment. I wonder how many people are going to be better off because of the tsunami than before.
The President’s conduct at the regional meeting in Jakarta earned my first respect for her in a long time. She did well particularly with comments like sharing the successful Philippine experience in dealing with the violent typhoons that hit the country.
I am not wishing for a Filipino tsunami but it would be nice for us to get some of that free and easy money that the rich countries are talking about so freely throwing around. Then we’ll teach the others how to really handle their natural disasters.
Wednesday, December 22, 2004
2005: Not Good
The official inflation data that the government releases has nothing to do with reality, believe me. The government inflation numbers are a statistician’s invention that bears almost no resemblance to the way you need to spend your money to live and how much the cost of living actually rises.
For example, both toothbrushes and flat irons are included in the inflation numbers as they should be. However, neither toothbrushes nor flat irons are purchased regularly or very often. Your buy either when you need to and can defer purchase if your finances are running short. Electricity is necessary, you use it every moment of the day, and the bill comes monthly.
If toothbrushes are suddenly free and the price of flat irons drops 90%, I cannot save enough on these items to offset the fifteen percent increase in the cost of power in the last three months. The price of toothbrushes as against electricity probably only matters to someone who lives rent free but still must pay to brush their teeth; the residents of Malacañang perhaps. My personal inflation has sharply increased since September.
The same hold true of things like LPG. The recent reduction of one Peso per kilo means nothing to my budget. My household is eight people and we use 15 kilos of LPG per month. That means even a five Peso per kilo drop reduces my costs by 75 bucks a month. Wow! If it happened, that would offset exactly four days of the new toll rate.
But I do not want to argue with NEDA over the fact their numbers are false and misleading. The numbers do not count. What counts is lifestyle and that is where 2005 is not going to be good.
I predict that for the first time in many years, the overall “Quality of Life” will go down. “Quality of Life” to me means those purchases that make things a little easier and a little more enjoyable.
You see Presidents, Senators and other government types rarely have to make a choice between paying for a telephone and having cable TV when their budget cannot afford both. Real people make these choices. Congressman do not know what it means to decide whether to be thrifty and buy ten Pesos or splurge with buying fifteen Pesos pan de sal. Many real people do.
Price increases of basic goods and services will be a great problem in 2005, being detrimental to all but the financially elite.
Rising prices and the subsequent affects are simple to understand. My next concern is more complicated. I see a liquidity problem in the economy during 2005.
Liquidity is amount of money and the way that money moves through an economy. Think of blood in the human body. If for some reason, say an open wound, the amount of blood is lowered, then the vital oxygen cannot be transported to all parts of the body. Likewise, if there is a problem with the blood getting to where it needs to go, such as in the case of a blood clot or other poor circulation, certain body parts can fail.
The same holds true in an economy; there must be enough “physical” money and it must move efficiently through the economic system. If not, certain sectors of the economy are damaged and as in the high body, most damage causes a domino effect on other sectors.
Right now, the government is “using up” most of the economy’s lifeblood because of its large-scale borrowing to finance its larger-scale debt. For 2004, this situation had little impact on the overall “blood” (Money) supply. In 2005, it is bad. Imports for fourth quart '04 are up, but not in a healthy way. A great deal of our blood is being shed paying for high oil and leaving the economic system much like an open wound. That leaves less for healthy endeavors like growth.
Money will not move as freely through the economic blood veins this year and something akin to a ‘stroke’ could happen.
For example, these new ‘sin’ taxes, which according to the administration will save the nation, are potential choke points. Money that would normally move around the economy, hopefully creating wealth, will now move into the government bank account through these taxes. Rule number one: Taxes do not create economic growth anymore than cancers (which also depend on the body’s blood for nutrients) add to human growth.
On a micro scale, the money that could have gone to build the new businesses instead goes to pay the new taxes. Liquidity problem. Government can help solve this by making more physical money available, but then inflation becomes a greater problem than it already is.
My assessment for 2004 was that it was better than it could have been. For 2005, it is going to be worse than we expect it to be.
Wednesday, December 15, 2004
2004: Not Bad
Do not be too shocked by this comment: 2004 was a good year for the Philippines. In spite of week after week of my criticism of President Arroyo, her advisors, and her administration’s policies, the Philippines (which is a thousand times more important than any single government) came through the year 2004 in fairly good shape.
The President is free to take credit for any positive things I might say. However, as in the past administration, for the most part, progress in the Philippines takes place irrespective of what the government does, not because of what the government does.
The following are just a couple of the most positive developments for our country, which with any luck and a Divine blessing will lay a foundation for more future progress.
The 2004 Election: We too often take it for granted. We keep beating ourselves over the head with the false notion that we are not very good at it. We sometimes listen to the fools and morons who tell us we are not ready for it or that it is not suitable for us. I speak of that form of government called Representative Democracy.
Were you happy that GMA won? Did you feel that FPJ should have been President? Congratulations. You live in a free democracy. Do you realize that the MAJORITY of people on this planet do not live in societies as free as the Philippines? Sixty percent of the world’s population lives under a government that oppresses to the extent that they live at best “Partially Free”.
Freedom is not just about being able to cast a vote. It is about speech, press, assembly, women, children, labor, and all the other facets that make up the social, economic, and political structure of a country. However, do not miss this point: freedom only can exist in a political environment where participatory democracy exists. Freedom begins with casting your vote.
Did you publicly complain about the way our election was conducted? Good. That is a sure sign you live free. No doubt, there were flaws. But in the end, it worked to the extent that the people accepted the results. It was not perfect by any means but it was good enough. Ask the citizens of the fascist Hugo Chavez government of Venezuela about Filipino elections and democracy. We should whine and complain when we face the unrest and chaos and potential civil war that people in the Ukraine are struggling with, on their path of democracy.
Not perfect, but once again our little third world country, stuck in the geo-political middle of the nowhere, successfully held a free election.
The Supreme Court and the Mining Act: The Supreme Court, finally after almost a decade of leaving the nation in limbo, ruled on the constitutionality of the Mining Act of 1995. I will not make a comment on the merits of their decision. You already know that I think the minerals industry is absolutely vital to the future health of the Philippines. It is crucial for three reasons. We have hundreds of billions of dollars of untapped natural resources, one large mining operation would invest more money than all the call centers that could be built in a decade, and this industry NEVER invests with anything less than a ten-year commitment.
But mining is not the issue here. In the corporate boardrooms of the companies that can invest in the Philippines and help this nation rise, we have the well deserved reputation of not honoring our contracts, making and changing the laws as we go along and as it suits certain special interests, and a legal system as unpredictable as a teenage girl’s emotions. That is not the way to do business.
I will say now, I believe that this was the last chance for the Philippines to set the groundwork to attract substantial and lasting foreign money. After AMARI, Naia Terminal 3, and all the other debacle and failures to attract big foreign money, no one has any faith left in us.
The Supreme Court has affirmed a foreign investment law that balanced the needs of both sides, foreigners and the Philippines. Finally, and this is very important, the ruling appears to come from a valid interpretation of law, not a politically tainted decision that favors one side or the other.
2004 was not a bad year for the nation. God bless the Philippines. Let’s hope we treat you better in 2005 than we did in 2004.
Friday, December 10, 2004
Feeling Good About the Philippines
“Malacañang expressed relief yesterday over the decision of London-based credit ratings agency Fitch Ratings not to downgrade the country’s main credit rating. "The decision by Fitch to maintain our rating is a recognition that we are moving forward with important economic reforms," Presidential spokesman Ignacio Bunye said yesterday.” (PDI 12-09-04)
As my Christmas gift to the President and her administration, I will make no comment about the previous statements.
At the December 8th Nick Joaquin Literary Awards held by Graphic Magazine and superbly hosted by owner Ambassador Antonio Cabangon-Chua, I listened to comments from a man with whom I have forcefully and publicly disagreed in the past, but who reaffirmed the pride I have for my adopted country.
Former President Fidel V. Ramos gave brief remarks to the gathering that will not be broadcast on any news program and the specific words of which are probably not preserved for posterity. In fact, there was little memorable or remarkable about this address except his attitude as he spoke and the simple, but certain thoughts he laid out.
It was the first time that I had seen the former president in an informal and somewhat casual setting. The man’s demeanor surprised me as he spoke about the Philippines. It seems that every time I hear a public figure talk about the country, the message can be summed up as 1: a complaint about the state of affairs (with some judicious finger pointing) or 2: a sugar coated assessment about how everything is great or how things could be a lot worse.
As President Ramos talked, he only very briefly touched on how the economy had been better in the past (once a politician, always a politician maybe) but this was not ambition talking or even someone wanting you to remember his successes. This was a person who genuinely felt the pain as though he was looking at a loved one who is ill or even dying.
When he spoke of the current efforts to lead this nation, I sensed a flicker of aggravation, even exasperation as one who looks at another’s self-destructive behavior, but can do little to help.
The former president told about his current project, the Ramos Peace and Development Foundation, Inc. (RPDEV). He did not enumerate this endeavor or that scheme while looking for accolades, but instead spoke his mission. He said simply, almost with a child-like innocence and intellectual purity, that he wanted the Philippines to have the world’s respect again.
I told you it was not so much the words he used but the attitude of this former President of the Republic, which was like that of a young man on a quest, rather than a man soon to be near the twilight of his career. When he spoke of the Philippines being respected and again being even a small influence on the international scene, I was taken back to my own youth.
I remembered a high school friend who bought an old car that was frankly a piece of junk. It was wrecked, damaged, neglected, abused, and discarded. But to my friend, all he could see and wanted you to see was what it could be with a lot of work and what it should be, given its former splendor when it had been properly loved and therefore properly maintained.
The attitude from this man I was listening to, was not the attitude of the complacent or defeated, a tired old warhorse, the old carabao knowing his heavy yoke will never be lifted. This was the attitude of a fresh faced and overly enthusiastic First Lieutenant, as President Ramos once was, who had worlds to conquer and knew they would be.
In a little over a fifty year period, the Filipino stood alone against the might and arms of the Spanish, the Americans, and the Japanese. A decade ago the second largest volcanic eruption of the twentieth century covered central Luzon with ash. Every year dozens of typhoons whip through the country often with results that we just witnessed. Daily, families endure the great hardship of separation to insure a brighter future. Need I go on to make the point that that the average Pinoy and Pinay on an average day can persist and overcome obstacles that would wither and wilt lesser mortals.
Nonetheless, instead of instilling the Filipino with pride of being, optimism in the future, and resolve to succeed, we have national leaders that express relief that things are no worse than they are. The people are never pushed or encouraged to greater heights but simply told to endure the failing status quo for a little longer.
When was the last time one of our leaders made you feel good about the Philippines and the Filipino just by expressing their own confidence?
Thank you Mr. President. It was a pleasure to have my spirits about the Philippines uplifted for once in a long time.
Wednesday, December 01, 2004
My Mercy and Their Hypocrisy
Regarding my comments over the last weeks about the President and the administration, in her letter Gemma called me “merciless”. Me??!!? MERCILESS??!!? Ok, Gemma is right; I do not tolerate foolishness well.
President Arroyo moved heaven, earth, the Philippine Constitution, Bill Clinton and virtually every personal and political favor she ever garnered in order to become President of the Republic. No one ever wanted this position of power and the favored chair in Malacanañg as much as she does. Twice, not once but twice, the Filipino people allowed her to fulfill her fondest ambition and deepest dream. Consequently I do not think it is too much to ask the lady to do the best possible job she can, be honest and truthful with the people, and work for the nation and not for her own historical stardom. Anything less is hypocrisy and intellectual deception.
Listening to the radio the other night while the President was traveling after the APEC meeting, I heard her comments about the benefit that the OCWs could make to the nation by simply remitting an extra US$20 or some 1000 Pesos a month home to their families. The President mentioned an extra billion Pesos or so that could be generated and used by this economy through this small increase in remittances. She is right. What a great and significant idea to help our nation.
I thought back over the Korean response to the Asian Financial crisis, a crises that they were instrumental in creating. “At the height of the financial turmoil, millions of Koreans sold or donated 222 tons of rings, necklaces and other gold trinkets worth $2.2 billion to aid the bailout. ``I sold two gold rings and one necklace,'' said a housewife. ``It was a small amount, but I take a great pride in taking part in helping the country in time of need.''
I am not as cynical as most people who would say that Filipinos have neither the character nor sense of self-worth to make a sacrifice on this scale for their nation. However, we avoid paying taxes because we feel that government is dishonest with the money and to ask us to be law abiding while government improperly uses the money is hypocritical. Were Filipinos to dig deep to raise money to bail out the public finances, whose is to say the money would be used appropriately?
I think hypocrisy and double standards are greater crimes than theft. Let me give you a blatant example of hypocrisy from both the public and private sector. And we wonder why Filipinos are cynical and distrustful.
About 400 Filipino companies are engaged in the business of sending sex workers, I mean, entertainers to Japan. An estimated 80,000 Filipino of these entertainers are sent every year to the land of the Rising Sun and they are GMA’s heroes remitting back almost US$1 billion annually.
It is common knowledge that most of the Filipinas that are employed in Japan as entertainers are not spending their working hours raising the awareness of Japanese men about the native beauty of the Tinikling.
Several “Pro-Woman” NGOs speak forcefully about the degradation of the Filipina in this type of employment. “
These efforts work and Japan is cracking down by proposing stricter visa requirements on foreign entertainers wishing to enter Japan and limiting the number to 8,000 per year as part of Japan's effort to curb human trafficking. Hooray! Finally justice and respect for the flowers of Filipina womanhood. The government and the NGOs should be proud for a battle won.
Not so fast.
“Migrante International, an organization of overseas Filipino workers, said steep fines and detention for illegal Filipinos in Japan will not solve the human trafficking problem because its roots are not being addressed.” Hmmm. . . root causes…Try this out: No prostitutes=no prostitution. That might work.
“Women's organization Gabriela, which has pushed hard for the Philippines' adoption last year of an anti-human trafficking law, said it hopes authorities will lash out at the traffickers and not the victims.” That is certainly unrestrained support for the new law.
“Silvestre Afable, Jr, Malacanañg presidential palace communications director, said the Philippines is concerned about a sudden reduction of Filipino entertainers in Japan, although the Philippines understands and is committed to fighting human trafficking.” I think what he really meant to say was “Maybe the girls should wear “Look but don’t touch signs”. Maybe we can figure out a way to get the Japanese to pay our girls for NOT having sex.”
When it serves their personal purposes, they are fighting for “The Cause”. When it might damage their bank accounts, it is a different story. Please don’t think me merciless but that is called HYPOCRISY!
Thursday, November 11, 2004
REJOICE! No More Fiscal Crisis!
"From fiscal crisis three months ago — because nobody wanted to face it, so I had to point it out — to a fiscal problem because now we are all facing it, the fiscal turnaround is now in sight” President Macapagal told the Union of Local Authorities of the Philippines. “The President based her remarks on expectations that legislators would soon approve the proposed adjustment in specific taxes on so-called "sin" products like cigarettes and liquor”. "Our strategic measures in putting our fiscal house in order are working and we attribute these positive developments to the swift action," Bunye said.
What a fool I have been. All this time I thought that there would have to be a reduction in the national government budget deficit, perhaps a cut back of spending, raising more money for the national treasury, and maybe even a drop in the national debt for the fiscal crisis to end or to become just a “problem”. I thought that it would also take a little more than three months and maybe I would see something like a reduction in poverty or an increase in the value of the Peso or interest rates going down to levels standard across the region as the proof things were getting better. I was wrong.
All it took to pass through “the most critical stage” was for the President to express her ideas and endorse her tax reforms to Congress to find the "roads out of the (fiscal) crisis”. The amazing part was her tax bills did not even need to be passed into law for the CRISIS to turn into only a problem. Not one extra centavo into the public coffers. Not one Peso of our national debt paid off. Just the pronouncement of the President. Who could have imagined it would be so easy to save the Philippines from “Fiscal Crisis”.
All kidding aside, is there anyone in control down at Malacanañg? I have too much respect for the credentials, albeit that they are all academic, of the President to believe that this highly educated woman truly thinks that the Filipino people are going to buy this latest nonsense. One of two possibilities exists. Either some powerful advisor to the President thinks that the Philippines is inhabited by a bunch of fools or Malacanañg really believes the nonsense it is spouting and now we know where the fools reside.
While the President says the crisis is over, the international financial community says “The continued deterioration. . . places added pressure on the external balance of payments and the ability of authorities to maintain a prudent level of official foreign exchange reserves”. Further, “Moody's also said 11 Philippine banks face possible downgrades of their foreign currency long-term deposit ratings.” In addition, “After putting the Philippines and 11 Philippine banks under review for possible downgrade, Moody’s Investor Services announced yesterday that four other big corporations were facing possible downgrade, including Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom.”
While the President is telling the country that the crisis is over, the financial community is saying exactly the same things they said at the time that the President “declared” that there was a crisis. The same international experts warn again that “Attempts by the government to pass into legislation urgently needed revenue measures are proving to be politically difficult” which translated means that none of the Administration’s tax raising legislation has been passed.
In short, all of our financial problems are solved IF the solutions the President has offered do work and IF the Congress enacts them into law. Well that is certainly a reason for rejoicing and dancing the streets. The Administration is so confident of all of these “Ifs” coming true that the Department of Finance has even called for the financial rating of the Philippine be raised, not lower, because of all the good things that might happen. I wonder if they wrote Santa Claus a Christmas letter too.
“We have to argue our case, and the case is that certainly we don't deserve a downgrade," Finance Undersecretary Eric Recto. “Another finance official said Moody's should consider these "positive" developments. He said finance officials could even propose that Moody's outlook on the Philippines be upgraded from the current "negative" to "stable”. Then the Finance Department people said “Moody's was giving too much importance to immediate passage by Congress of the Arroyo administration's revenue-enhancement measures”, which is in exact CONTRADICTION to what the President said about swift and immediate action.
This is obviously an administration in disarray, talking nonsense out of both sides of its mouth, a fact that will not be missed by the international financial rating services. The President may say the crisis is over. I say the worst is yet to come. In six months we will know which of us was right.
Thursday, November 04, 2004
President Bush and GMA: Second Time Around
The United States has historically concerned itself in the affairs of other nations, often to the point of extreme intrusion and meddling. There is no question that the US did “nudge” elections in a certain direction, with governments overturned, sometimes gently and sometimes not. Armed American troops have landed on other shores, sometimes without first getting the consent of the “host government”. U.S. Presidents have applied economic pressure in order to sway and even to change completely, another nation’s public policy.
However, the purpose of all this intervention over more than a century has been to protect and further what was perceived as American national interests.
In this 21st century, I have a hard time finding American interests in the Philippines that need protecting or furthering. In fact, I find it hard to find ANY American interest in the Philippines.
So many of the people that I associate with, are convinced the U.S. monitors everything that happens here, while at the same time scheming and plotting to have its way in the Philippines. Certainly, the U.S. does keep tabs on developments in this nation just as it does in all the other nations of the world. Of course, there is a dossier of every major and minor public official, potential President like FPJ, big businessman, maybe even a movie star or two, in a file cabinet at the embassy. And the information is probably not much more detailed that you could get from simply doing a search of the Internet.
If the US was at all involved in the AFP graft and corruption exposure of “The Generals”, it was probably the handiwork of a bored, under worked, and overpaid U.S. Embassy official, NOT working under a White House directive.
The thing that most Filipinos do not understand about the RP-US relationship is that it is fairly one-sided. That is Filipinos know much more about and are much more concerned about the USA than Americans, official or average, are about the Philippines. Filipinos think that because they are deeply involved in the RP-US relationship, the opposite is also true. Believe me, it isn’t.
Twenty percent of all Filipinos have a relative in the USA. The Philippines imports American movies and television. Most Filipinos can name the President of the United States. Most Filipinos have at least seen American money.
Very few Americans have traveled to South East Asia, let alone the Philippines. Most Americans, because of the historical framework of the Spanish-American War, assume Filipinos still speak Spanish like the people of Cuba and Puerto Rico. Many Americans can answer a trivia question about Imelda Marcos and her shoes.
It is a greatly uneven relationship in terms of knowledge, interest, and concern. Too often over the years since the US bases left, the Philippines has reacted like a girlfriend to an imagined suitor who doesn’t even know she exists. Remember President Bush’s much-touted state visit that was shorter than the time it takes to drive to Baguio? And why did Bill Clinton supposedly send GMA a personal letter (which was published in the local newspapers) wishing her election success but forgot to send one congratulating her after GMA won?
Certainly, the Bush government acknowledged and perhaps even rewarded Malacanañg for supporting the war on terror and the participation in the Middle East wars. However, that does not mean the US considers Filipino foreign policy of vital concern. Notice the utter lack of interest, except for some brief, stern comments, about the Filipino pullout from Iraq. OCWs, denied job opportunities in Iraq, seemed much more upset about GMA’s actions than the US.
George Bush has just taken a strong political mandate in this last election, particularly in the area of foreign policy. His power base has expanded in the both the Congress and the Senate and he will get almost everything that he wants in terms of funding and legislation.
Regardless of GMA’s last moment and halfhearted endorsement, the Bush administration knows that Fil-Ams and wanna-be Fil-Ams like some of our Senators, strongly supported John Kerry. Filipinos in the US have traditionally not supported Republicans, this trend going back many decades.
However, the Bush administration has shown during these last four years to be quite flexible with ‘people’ while at the same time maintaining a rigid overall policy approach to world affairs. The Bush government would enthusiastically help the Philippines deal with our homegrown but foreign funded troublemakers. And those who firmly believe that the US wants a permanent military presence here are either stuck in the 20th century or have been sitting too close to the microwave oven for too long. This President was roundly attacked for even suggesting the closing of bases in Europe, Japan, and South Korea. His military policy is to shut many overseas US bases and return those forces to the US mainland where the support money can be more wisely spent.
The Philippines is a very minor player on the global stage. George Bush will accept, encourage, and take care of “his friends”. He will do anything possible and necessary to destroy whom he sees as his nation’s enemies. All others are simply not on his world map. Except maybe for Fidel Ramos if he wants to be Secretary General of the United Nations…but that is another story.
Friday, October 29, 2004
Administration Finds AFP Corruption?!?!
Believe me, I am just as shocked, absolutely shocked and bewildered at this revelation as you are. It is almost the same kind of amazement that Magellan probably felt when he suddenly realized King Lapulapu was not going to greet him like some kind of a returning balikbayan. How could this possibly be happening?
And then to top things off, there are allegations that members of the military top brass actually may have protected each other and covered up the misappropriation of public funds. What, pray tell, could possibly be next? Maybe that the world is not really flat or, better yet, the crazy idea that the earth travels around the sun?
Of course, this must come as a real blow and disappointment to Malacanañg. Sure, it is acceptable to welcome if not actually encourage the military to break the chain of command and throw away the Constitutional provision of supreme civilian authority over the military if your assent to power is a stake. But I can still remember the words of the President’s 2001 SONA when she said, "To ensure that our gains are not dissipated through corruption, we must improve [moral standards]”.
I am sure that she assumed the military was also listening to her words and would have done everything possible to be the first to stop corruption. In fact, I think the President thought so too. Her Presidential Anti-Graft Commission was conspicuously focusing a lot more attention on almost all other government agencies rather than the military. When you consider the size of the AFP budget compared the funds controlled by someone like Press Undersecretary Ching Suva, who was given a thorough and public “lifestyle check”, one can only assume that everybody figured the AFP was clean. How sad and distressing to now learn that the last bastion of Filipino leadership and moral authority, as displayed during our EDSA II movement, may need some improvement.
And from the headlines in the last the last two days, the administration and its
Senators like Santiago intend to devote their fullest attention to this newly discovered and previously unthought-of AFP corruption.
It is also nice to see the media and the rest of the Congress dedicate so much blood, sweat, and tears to this scandal. You might even think that the fate of the republic hangs in balance. In fact, I guess if a few of the heads in this affair are chopped off, all our problems will be solved. It must be true since little, very little, attention is being given to our problems and potential solutions.
Like this for example.
Senator Miriam was telling us about generals’ wives wearing ill-gotten diamonds while clinging to ill-gotten dance instructors, looking all made-up with their ill-gotten orange/red hair. Buried near the back of the news was just maybe the more important fact that 1) the Philippines manufacturing sector is dying, 2) the export sector is in ICU, and 3) the garment industry is dead.
Manufacturing output dropped 5% in August. This is maybe the first clear indicator of the doom and gloom I have been writing about for months concerning our potential collapse in 2005. By the middle of 2005, this economy is going to be in a recession. August is when things start gearing up for the holiday season but not this year. Further, output fell in July by a small amount (-.2%) BUT the value of the output was up by almost 8%. What that means is that we produced less but what we produced cost 8% more to make. Can you understand the concept of big time price inflation? Apparently, our Economist president and her advisers do not.
“The Bangko Sentral ng Pilipinas said the country’s exports are likely to grow no more than 10 percent yearly until the country becomes more conducive to new investments”. Grab on to this fact. The Peso is at or near historical lows, the United States economy is growing at a moderate-to-strong pace and our exports are basically flat. And the BSP says this situation will not improve until and unless we get more investments, which is honestly up double from last year. That means the investments we so desperately need are way up and still our export sector is in critical condition.
Finally, one World Trade Organization agreement will take hold at the end of the year eliminating the quota system on garments and textiles. China, India, and others have spent the last five years preparing for this. The Philippine has spent the last five years whining about this. Our garment manufacturing/export sector will begin winding up on January 1, 2005 and by 2006 should be all but gone.
This corruption investigation is important no doubt. However, our economic house is burning to the ground even as we speak. Unless the government (and our press and media) realizes the severity and the critical urgency of the economic disaster we are facing, “The Garcia Affair” will seem like a passenger on the Titanic complaining that the soup needs more salt and that there is not enough ice in the drinks. Just wait-soon there will be more than enough salt and ice.
Wednesday, October 20, 2004
Culture of Poverty
We have a “culture of poverty” in the Philippines that almost guarantees that the cycle of poverty, generation after generation of poor, will never be broken. I believe it is in part due to misunderstanding what poverty is; that it is a transitory state (i.e. a condition, as with regard to circumstance, that something is in at a particular time) and not an inevitable, perpetual existence. Being poor is not like being short or tall or dark or fair. Poverty is like being fat or thin or weak, a condition that a person has the power to change. Poverty may be a condition that you are born into but it is not a circumstance that you are destined to carry to your death. Born poor; die poor is a cruel myth.
Are there people living in poverty in the Philippines? Yes. Is the Philippines a nation of poverty? No.
Fact: the Philippines (2002) is the 23rd largest economy in the world, a larger Gross Domestic Product than Malaysia, Peru, Switzerland, Hong Kong, Austria, Greece. Fact: We are the 9th largest Hog Producer in the world. Fact: The Philippines has a higher "average years of schooling of adults" (#28) than France (#29) or Italy (#35). Fact: We have more multi-national companies doing business with local companies here (#9) than Germany, Brazil, Spain or Thailand.
Then why if we are not at the bottom of the wealth indicators, do we rank the 53rd poorest country in terms of percentage of population below the poverty line?
I firmly believe that this country has no valid reason for having so many poor people….except that too many of our people have come to believe that their poverty is inevitable and irreversible. “Being poor is a frame of mind. Being broke is only a temporary situation” (Mike Todd). Our nation has been leaderless for too long to break the vicious cycle of destitution. A true leader of the people would lead the poor out of poverty rather than simply trying to make their stay in that social and economic hellhole more acceptable.
Too many of our people believe that they are destined to poverty and have no skills or instruction on how to get out of poverty by themselves. Poverty is not a national problem. It is a personal issue that becomes a national problem only when the numbers of poor grow large.
Two great influences on the average person, the church and the government, have done little to alleviate poverty and have in fact through attitude and action, reinforced poverty as a destiny.
Too often, members of the clergy have foisted on the poor the shameful and non –biblical idea that being poor is noble, dignified, or even spiritual. Nothing could be farther from the truth. One of history’s greatest champions of the poor, Mahatma Gandhi said this:” Poverty is the worst form of violence”. Even the Bible says, “The destruction of the poor is their poverty”. Any parent that has put a hungry child to sleep or kept that child from school because of a lack of money knows the truth of poverty. There is not a shred of nobility in forced hunger. There is no dignity in doing without. Spirituality is never found in the heart or eyes of a mother looking at here deprived child. All religious leaders that teach this doctrine are a fraud to their flock and their God.
Too many churches have taught that being poor is an acceptable and unchangeable way of life, and as with grey or falling hair, one should comes to terms with it. Fate, karma, God’s will. Nonsense.
Maybe though, they are well intentioned as they “help” the poor. More nonsense. The focus of all those anti-poverty programs is to make the poor persons life a little easier in poverty and not to raise them out of poverty. Like food coupons.
When was the last time you heard any leader say that a person could get themselves out of poverty?
The alleviation of poverty can only start with the personal belief by a poor person that they do not need to remain poor. There is a hopelessness in poverty that leads to inaction and more poverty. If you really believe that you can rise out of poverty, that being poor is not a permanent condition, and that you have power over your poverty, then you can do something personal about it.
However, the church says in effect be poor, be happy, accept your situation. The government says in effect WE are doing everything WE possibly can so that WE can get you out of poverty. Both only give “alms” to relieve some of the stress of a meager and pitiful life. I wonder why this is the response to poverty from these institutions. Maybe the answer is in the words of Samuel Johnson. “The inevitable consequence of poverty is dependence on others".
Wednesday, October 13, 2004
Downgrade and Down
In fact, unless the President and congress take action quickly, the international financial community is going to take matters into its own hand. Unless the Philippine patient starts showing signs of improvement, they are simply going to put the patient out of its misery by suffocating it with a pillow, the way we might think about doing to an old feeble relative, in this case by cutting off our supply of money rather than air.
A few years ago, people talked about how things could not get any worse; how there was no place to go but up because we were so low. Well, we found out that was not necessarily true. That under the most extraordinary fiscal mismanagement possible, there was farther that the country could fall. Which teaches us the truth of an old lesson: Never underestimate the potential incompetence of a politician. You do so at your own risk.
In the next two months, the Philippines will almost inevitably suffer a downgrade by financial rating agency Moody. We already moved from a “stable” to “negative” outlook in January 2004. That put us on the critical list and into the ICU. Now we might have even a worse rating although I have no idea what could be less than a “negative” outlook for the future. Maybe Moody will simple say that in light of the situation, the Philippine economy has no future, negative or otherwise. That may be closer to the truth.
Unfortunate Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura just suffered his own personal ratings downgrade. For the first time in three years, he drops from “A” (only one of four in the world) to “B”. “Global Finance” had this to say: “Part of the problem is that Buenaventura does not appear to see eye to eye with President Arroyo on key issues”. Well, at least he and I have something in common. However, the analysis that continues is very interesting. “However, while Buenaventura says the sovereign debt load remains serviceable, the President says the government faces a fiscal crisis. While Buenaventura suggests the government tap international capital markets if foreign direct investment continues to drop, the President wants to plug the shortfall by raising taxes.”
The comment above is absolutely amazing for a guy like me that follows the world financial scene like a sports fanatic watches the NBA. What “Global Finance” is saying is that Buenaventura wants to keep borrowing more money to finance our governments addiction to over-spending, while the President wants to raise taxes. If true, I would enjoy hearing the Governor’s reasoning. Perhaps he feels A) the more we borrow the less likely the international banks will pull the plug on us, or B) he knows increasing taxes won’t happen or if so, will not generate enough revenue to do the job.
So Malacanañg is partially pinning the financial hopes of the nation on smokers and drinkers as it pushes for increased taxes on tobacco and alcohol products. Chain smokers and drunks are now faced with a dilemma. Stopping smoking and drinking would be good for one’s personal health but could push the government into bankruptcy from less taxes. And what happens if Mayor Binay’s diligent anti-smoking crusade succeeds in Makati? What happens to the national government then?
Government insiders tell me that administration’s reforms, while well intended and progressing are moving way to slow to have any noticeable impact in the near future. But you can see that yourself. Interest rates are already moving up and the Peso is grasping like a smoker with emphysema as it heads to 60, as I predicted a few months ago.
The administration does not appear to have any reasonable solution to the problems it has gotten us into. It has no energy policy, no monetary policy (and less now with Buenaventura leaving), and an inherently destructive and detrimental fiscal policy. I wrote nine months ago that the president was heading us to financial ruin and she never changed her course. Now she has no choice and no political office to gain by standing on her past foolish policies of profligate and wasteful spending.
President Arroyo’s political philosophy is no different from America’s “Liberal” Democrats: Spend and Tax. Give silly “Food Coupons” to those who do not work paid for by those who do work. Tax those who have worked hard to afford to own and operate a car to subsidize those who have not. Take money away from the people to be spent “wisely” by government. No wonder people cheat on their taxes. Remember the words of an old Beatles song, “Taxman”.
“There's one for you, nineteen for me.
If you drive a car – I’ll tax the street;
If you try to sit – I’ll tax your seat;
If you get too cold- I’ll tax the heat;
If you take a walk- I'll tax your feet.
Don't ask me what I want it for
Yeah, I’m the taxman.
And you're working for no one but me.”
Thursday, October 07, 2004
Looking For An Investment Alternative?
The native people have a reputation for hospitality, competent work skills, and a land filled with natural resources. However, the place is poor and the economy is not in very good condition. After years of political and social unrest, there is now stability but that stability has not brought with it the desired benefits of wealth and abundance.
Their economy is never really going to get booming because there is not enough capital (read money) to start and support the quantity and quality of businesses needed to create an engine of sustainable development. This place cannot prosper and thrive without your investment money. Everyone acknowledges that is a fact.
The government leaders recognize the problem and are honest enough to know their shortcomings and where improvement is needed. “Reform” has become the battle cry for several years and although slow, there are signs of slight improvement. The government has actively pursued outside investment, offering incentives to bring in the needed capital. Actually there has been great interest shown by outsiders to invest here because they know that they can make a profit from their ventures. A quite diversified local economy provides that almost any business that you are now running would probably be acceptable there. The people are open to new business ideas, are easily trained, and adapt well. Small as well as large companies are welcomed and have been successful.
For some reason, outsiders who open businesses there find that their profit margins are higher that that with which they are comfortable having at home. Of course, profit is not the only consideration you make is opening business but the other factors are fairly well balanced against the other places that you might want to locate your company or profession. Some costs are higher; some lower than other places but overall the economic balance tips in favor of this place depending on the type of business or industry you are in.
On the incentive side, you will be paying much less in taxes and fees to run your business than you do now. Tax breaks are substantial. Importing of capital equipment can be done with minimal hassle at a significantly reduced cost. I guarantee you that no matter what your business is, from manufacturing to service, big or little, these people are willing to make a deal to help you relocate there.
I know this place very well. I can personally recommend it as a location to do business and make money. But I must be honest with you. There is one condition that you must be aware of that will have a material effect on your business.
You are most welcome and encouraged to invest in this place (and I can almost guarantee you that you will make a lot more money than you are making now!!) but you are not legally allowed to own the business you invest in and set up there.
I know. I know. That may make you a bit uncomfortable. But their laws say that you must have one of their people or companies as your partner. In fact, in some of the kinds of businesses that you might what to start there with your money, the locals have to be the majority owner of the business. The truth is that you are a foreigner and the locals have the idea that if you bring in your money to invest and make a profit and take some of that profit back home it is a bad thing. Therefore, they want you to invest your money but not to hold total ownership of your investment.
I also have to be fair to you about the courts. If you get into a dispute with your local partner, judges have a tendency to be at least a little biased in favor of the locals. Maybe not in the open but that is the way it usually turns out. Contracts tend to be voided to the advantage of the locals.
I have not been very successful getting people like you to invest in this place primarily because of the ownership rules but I thought I would try one more time. The place is great. The people are great. The business opportunities are great for making a lot of money. Nevertheless, I know the ownership thing might discourage you. I mean who wants to put their money into a business that they cannot legally own completely. I thought that I would tell you about it because so many of you ask me for alternatives for what you are doing now. By the way, the place is called The Philippines.
Thursday, September 23, 2004
The Spirit of the Season
Today “The Philippines risks a "painful economic death" within two years unless Congress and the people agree to raise taxes, President Macapagal-Gloria Arroyo warned Tuesday. In a statement printed in the Philippine Star newspaper, the Filipino leader urged the country to "suffer the pain now and experience the gains two years hence (rather) than postpone the pain and die a painful economic death two years from now."
One of two things is true. Either I have been in a coma since April and something very dramatic has happened since then that I am not aware of, to lead the nation on a path to “economic death”. Or every word this administration said prior to last week was political rhetoric AND its policies have brought the Philippines to the brink of disaster.
I must not have been asleep because I have been telling you since at least April, that the country was facing “economic death”.
President Arroyo is placing the hope of salvation for the gross misjudgment and mismanagement by her administration in handling its economic affairs on the raising of new taxes. She has certified as urgent the passage of bills that will supposedly accomplish that task. In a show of unity with the administration’s belt tightening (and such a fat belt it is), Congress will at least publicly give up its ‘pork’. Further, to encourage acceptance of these new taxes, government ‘fat cats’ will give up lavish lifestyles and high salaries. Even private functions held at public venues like Malacañang will be paid for and not charged to the national treasury.
In return for all the cost cutting, new found efficiency, and selfless sacrifice by the government for the singular benefit of the people, the citizenry will rise up in EDSA People Power unity and cheerfully crush the demon of ‘economic death’. There is a new and glorious spirit in the air.
That is the spirit of Taxpayer Revolt.
In case no one in Malacañang had noticed, let me be the first to point out that Filipinos are not the most enthusiastic tax payers in the world. Low tax compliance in the Philippines however, is not unique. Every country suffers from the problem although here it is nearly the equivalent of buying a lotto ticket: almost everyone does it and it is only a matter of how much and how often.
So before you propose a tax, you ought to know why people do not pay taxes properly and what kind of tax you can pass to collect revenue.
The last recipient of the Jan Francke Tax Research Award (a Professor Bloomquist), which is a big deal and EVERYBODY who is a trained economist knows about it, wrote a paper about tax evasion. The short story is this. People who make a lot of money and people who make only a little money cheat the most on taxes. Also people do not pay taxes 1) if they think the tax is unfair, meaning targeted only at them and 2) if they do not think they are getting anything for their taxes.
Well on number two above, the President’s tax proposals are dead meat. President Gloria has raised the government debt way beyond anything imaginable in the last fifty years and the average person cannot see anything for that money. Even if you go to her website and add up all the money she spent on all her wonderful government programs, the taxpayer did not get value for payment. And as Professor Bloomquist found out, guess what, people are not so stupid to willingly pay taxes and have the money wasted.
The idea of income disparity is a little more interesting when applied to the Philippines. The populace has been so bombarded by the politicians with the idea that we are a “poor” nation that it has become part of the national psyche. Anyone who has traveled around the world knows what real and extreme poverty is and the Philippines does not qualify. When jeepneys carrying vegetables and trucks carrying pigs to market require armed escort, then we qualify. However survey after survey shows that the average tax payer, even the wage earning, car owning, mall shopping person considers themselves, if not poor, at least near the bottom of the economic ladder. And guess what, it is the people near the bottom that do not pay taxes.
Sure, the government can impose taxes in a way to directly target the “middle class” like on gasoline and the like. But then two things happen. It is perceived as ‘unfair’, prompting more evasion somewhere else and when avoidance is impossible, people will demand proof that the money was not wasted.
A taxpayer revolt can be an ugly creature. Its fury can transcend even movements against corruption, abuse, or injustice. And more governments and leaders have been toppled (through constitutional and unconstitutional methods) over taxes than for any other reason.
Wednesday, September 15, 2004
Administration Finally Wakes Up
That was definitely the theme in comments made by administration officials over the last several weeks, particular from Congressman Joey Salceda. My respect level of the good congressmen’s aptitude for his position has never been high. Recently, though, he seems to have taken the responsibilities of his station as economic advisor to the President seriously and is now relaying facts and truth rather than political partisanship. His message was plain, clear, and simple. Too much debt, too much deficit, and too little revenue could cause a disaster within the next twelve months unless drastic measures are taken immediately.
Gee. Some of us have been saying that for a year. But I guess wisdom and insight do not count unless you are on Malacañang’s payroll. . . and the election is over.
I am not going to offer any brilliant suggestions to the administration. However, I will offer my congratulations that after almost three and a half years in office, the President has finally deduced or finally listened to the fact that a financial and economic catastrophe is waiting at the end of her (and then previous administrations) fiscal foolishness. Good luck figuring out how to keep the ship of state from crashing into the iceberg.
I am less optimistic today about the ability of the President and her advisor, including Salceda to avoid disaster than I was months ago. My pessimism has gone up because of a few new developments.
First, oil prices are not weakening even as Iraq goes back to pre-war production levels. Wading through all the anti-US/anti-Iraq bias news reporting, Iraq is now nearly producing what is was before the war and is actually increasing production almost monthly. Prices are not going down. Saudi Arabia and the other Gulf states are producing at almost full output levels and prices are not going down. The ‘official’ OPEC price target is around thirty dollars a barrel and prices are not going down. This is going to slam economic growth in the months to come, decreasing even more the potential for increased revenues to the government.
Second, the spending Filipino consumer, who has been a big part of the economic engine for the country, is having their disposable income taken away daily, as if the people were beset by an angry swarm of money-eating locusts.
Inflation is already and will continue to push prices higher across the spending spectrum. Worse, the full effects of the increases in oil prices for the first half of 2004 will not hit full force until the first half of 2005, even as oil prices stay high. Worse still is the crushing, and I do mean crushing impact the electricity rate increase will have over the next months on consumer spending, and therefore, on government revenue through VAT, etc.
On this point, it must be said that the government will benefit in the short and long term if it does not have to shoulder all the debt burden of Napocor by passing costs to the user. However, on a macro economic level, this benefit will be more than offset by the “trickle-around” effect of an extra one, three, five hundred pesos month going to Meralco and not in the cash registers at Shoemart and Robinson’s and Rustans.
All of these factors and more are going to combine for a very rough trip for the nation, the economy, and the people over the next six to nine months. The extent of very rough ride will depend on the administration doing a good job keeping the government afloat. If the President and her people perform at the level we have been accustomed to seeing in her first term, the Philippines may be a dead man walking. I wish I were exaggerating.
The government and the private sector are going to face higher interest rates, rising as quickly as the bank can recomputed the interest payment. We will see rising interest rates on Treasury Bill as world rates continue to rise. As Boo Chanco in the Star pointed out in one of his column a week ago, we are paying almost four and half percent risk premium while Thailand is paying one percent premium. It will get worse and that means less money in both the public and the private sector to build the nation.
The only thing our government seems able to successfully build is the profitability of the international banks.
Finally attacking a problem after it has gotten out of hand seems to be ‘standard operating procedure’ for the government. Take the Department of Education. Having been told for a decade or more that the grading standard for students was wrong, DepEd finally set new tough and proper rules for grading our pupils. Previously if you could write your name on the top of the test without too many errors, you passed the class. Now you also have to be able to show you (surprise!!) learned some of the material to pass.
The failure rate, if the grades are not doctored, is running at almost forty percent. Well, at least now we know how poorly the students are learning the subjects. For the schools, pupils, and parents the party is over also and now they must start doing a better job.
Wednesday, September 08, 2004
Queen Preserves Sacred Idol
There are several places we would not want to go with this headline, particularly in light of the President’s alleged (according to one newspaper editor) attraction to larger men. I also thought about how anyone not familiar with local politics and nomenclature would not have any idea what this headline was referring. It almost sounds like something out of the 18th or 19th century, where the ruler of a mountainous kingdom wages war to preserve a sacred idol.
Perhaps that description is not so far from the truth.
` Hasn’t anyone figured out that only Kings and Queens are supposed to live in palaces? All right, I know that the definition has changed over the years to include “Heads of State” but the identity and attitude of living in a palace still rests with a kingdom. Maybe that is the problem we have in this country. Our politicians assume that they are all part of a royal monarchy with the Queen in the Malacañang Palace and them in their little Malacañangs.
Living as part of the power in a monarchial structure entitles you to certain privileges and likewise, noble responsibilities. In a representative democracy, the rule of law is supposed to be followed. In a kingdom of lords and ladies, the rules are made up as we go along. Sort of like our People Power ‘revolutions’. The written constitution is laid aside until the nobles finish doing what they like.
We worry so often about a “colonial mentality”. What we probably have is much older; a “feudal mentality”. The people on the top of the food chain get what ever they desire in return for taking care of those on the bottom of the ladder. Even this new idea of the richest of the rich donating to Malacañang to keep the government from bankruptcy lies in the annuals of history. If the King (or Queen) got into trouble, it was expected that all the Nobles and Lords of the manor would lend a financial hand in return for future favors from the crown. Just like in the Philippines.
Of course, the serfs and the peasants are all expected to participate in giving and getting and for the getting, we have Pork. “Pork” comes from the term “pork barrel” which is a “legislative appropriation designed to ingratiate legislators with their constituents”. Of course it started in the U.S. will the local politicians pulling their wagons up to the local drinking establishment with a barrel of smoked or sometimes, pickled pork. The politician passed out free food while reminded voters who too support, while not reminding them that it was the voter’s money that paid for the pork barrel. Just like the Philippines.
Don’t misunderstand me though; I have no problems with the pork barrel allocations of the elected officials. It is about the only way to get money directly back to the people. I know of one Congressman who used some of his pork to build a covered basketball court inside an exclusive village where his family owns property. I still think that is completely proper as the people who live there PAY TAXES and are never the recipients of any of the so-called ‘pro-poor’ pork.
My problem is with a political system that operates as if it was above and beyond the electorate and therefore is not answerable to that electorate.
Someone needs to remind the “Palace” that this is not a monarchy. Someone needs to remind Congress who paid for their pork barrel.
Wednesday, September 01, 2004
Economic Cancer Not Crisis
Talking of a “fiscal crisis” gives the wrong impression unless of course you have another agenda. That is if you represent an administration that has conducted its financial affairs in a manner of fiscal irresponsibility, then you are correct in labeling that behavior a “crisis”. However, that might also be an easy a way to divert attention from incompetence to simply being the victim of circumstances. But we all know there is only one victim here – the Philippines.
There is also the contradiction of announcing good economic growth while touting an economic crisis. No one from the government was silly enough to proclaim an end to the crisis based on the good data. Also even with the positive numbers, there was muted enthusiasm unlike on the past when good news was blasted out as proof of competent governing. The President’s economic advisors all know the truth. The worst is yet to come.
Past of the dampened excitement from NEDA and others was the nature of the GDP figures. Much of the economic growth came from increased consumer spending, particularly spending for transportation. Now remember this about the GDP. It measures the amount of goods produced and the amount of money spent. With the tremendous increase in oil prices, of course there was more spending by the consumer.
Having said that the numbers are a bit bogus because we had to pay more for oil, which inflated the numbers somewhat, this economy is amazingly robust despite of government waste and other fiscal foolishness. It shows us how successful and wealth-building the Philippines could be if we had a less failure prone and poverty promoting government. That is another story.
Agriculture is strong and I will give some credit to the Arroyo government. Manufacturing picked up some but this was probably more to restocking inventory rather than a new and sustainable spurt of activity. OCW remittances grew little as expected, depressing net foreign income and the Gross National Product. Exports move up a decent amount of 15% a result again of overseas inventory building and continuing growth particularly in the U.S.
I am still very worried about the future and fear that our economic problems are more of a “cancer’ than a “crisis”.
The term crisis donates of something like a typhoon that rages, howls, and eventually passes if you have the capacity to weather the storm. A cancer is slow, mostly hidden with slight warning signals, and can softly and surely kill. That is what I fear and this is what I see happening over the next months and years.
Three conditions will play havoc on the economy, the effects of which will break out in the next nine to eighteen months. These are high oil prices, rising world interest rates, and first world economic growth that may not be sustainable and may even be quite fragile.
I will not bore you with a brilliant analysis of why this economy may have cancer based on why the three ideas mentioned above are indisputable. The proof of my concerns will be evident or not if the results show up in the next year or so. If my assessment is correct, then this is what we all and especially you that are in business, will face.
Your customers are buying right now and will continue to buy. No one is foolish enough to extend credit after being caught in the ‘non-performing’ accounts receivable problem of a few years ago so cash flow should remain consistent if you are prudent.
The first direct warning sign will be that customers will increase their demands for a discounted price. The discounts asked for will not be great and may even be quite small. However, they will be quite insistent that more discounts are vital to continuing to do business. You will give in to their demands but profit margins will erode significantly over time and that is bad.
No business in the Philippines exists and flourishes without a component of the profits based on the Peso-dollar exchange rate. Here too we will see a slow trend towards further erosion of value. 60 to the dollar will be the standard by next year at this time. We can all survive at the price but business profits and the consumer’s disposable income will suffer. Not a crisis but a cancer.
A whole column and no moaning and complaining about the high government debt?!? The fact that the government owes its lenders a gazillion pesos does not create a direct problem for the economy. The high government debt is a problem only because it diminishes the country's ability to cope with the cancer. Instead of being a fall back with the ability to help the economy, the government has enough financial problems of its own and can do little to help the economy while the country suffers. It should be there to supply cheap loans, play with tariffs, and provide a safety net if needed. It will not be able to and that is the crisis. This economy has cancer and the “Doctor is Out”.
Wednesday, August 25, 2004
No Debt Default” (Much Worse)
The extent of our financial obligation, mainly to foreigners is somewhat staggering. In fact, the amount is so large that the numbers do not convey the serious of the matter. “The Philippines has the highest debt level among its economic peers, with external (foreign) debts equivalent to 76.1 percent of gross domestic production (GDP) with little support from its international reserves. “ The total debt is equivalent to about 130% of the GDP.
Try to imagine this amount of debt in personal terms. You make an after tax income of P50,000 per month or P600,000 annually. You have virtually no money saved in the bank (your international reserves). Your debt is P780,000. If you had to pay a low government borrowing interest rate of 12% and you allocated ten percent of your income or P5,000 per month to pay your debt, it would take 30 years to be debt free. And that assumes you would never borrow any more money and add to your debt.
That is why a person making 50 grand a month with no assets cannot borrow P750,000 on their credit cards. . . but unfortunately for the nation, our government can.
There is nothing wrong with borrowing money, even borrowing a lot of money. the problem that the Arroyo administration faces and the problem that is putting the country at economic peril and its citizens in financial risk, is that the borrowing never stops and it is only being used that “We (The government) may eat and live”.
The borrowing ‘rule of thumb’ is this: “Do not borrow large amounts of money payable over a long period to finance short term expenses”. Can you imagine ANY large corporation borrowing an amount equal to 130% of its yearly sales, payable over five or six years, to meet this week’s payroll? It is complete and utter nonsense and yet in effect, that is what the Arroyo administration has been doing over the last three years. Virtually all of the new borrowings as well as the budget deficit have paid current bills not been used to build any significant infrastructure that will generate income for the nation. It is like our P50,000 a month person borrowing 780,000, not to buy a house, but to put the same kind of food on the table as when he was earning 100,000 per month.
Now for the good news. The Philippines will not, repeat, NOT default on its foreign debt obligations. . . but that does not bode well for the average citizen. In fact, not defaulting means you will suffer and suffer greatly.
Any comparison or even conversation about Argentina is made to deflect attention to the real issue of government fiscal mismanagement and the consequences thereof. Argentina’s debt, per capita, was four time the sizes of the Philippines. Repeat, default is not the issue. The issue is the hardship the nation will suffer because of our enormous and unnecessary debt.
The Philippines, I mean you, will pay the government’s financial obligations and you will pay dearly and suffer greatly because of it.
The Philippines is heading for a day of reckoning on its debt in the first quarter or so of 2006. The President can speak of ‘belt-tightening’ and stop serving snacks at cabinet meetings, but in truth, who have not see anything yet when it comes to hardship.
No matter what decreases might occur in the world price of crude oil does between now an year-end, the damage has been done. The effects of the last months of high prices will hit in nine to twelve months. The Peso will have reached or breached 60 to the dollar. You figure out what this will do to your disposable income when the price every product that is imported or has a large imported contingent rises by at least ten percent.
The government has no choice but to try to cut expenses after the horrifying excesses of the first three years in office. Because little but some increased computerization has made government more efficient, we will see a decrease in the provisions and effectiveness of the bureaucracy. Unless the local governments can exert extreme pressure on Malacañang, revenue sharing to this units will go done dramatically. Then ‘local’ services like waste disposal, supplemental education funding, and the like will disappear.
The bottom line for you is this. Did you enjoy the last three years of economic prosperity and government success? Then you are going to love the next three because there will be much more ‘prosperity’ and ‘success’.
Thursday, August 19, 2004
What Causes Poverty
But that has been the style of this administration since day one - blame the person and not the policy. In fact that is the mantra of most all of our politicians.
The Philippines continues, on a daily basis, to slip further and further behind in its quest to emerge from being one of the biggest losers on the world’s stage in terms of poverty reduction. Over the last twenty years and five governments, the Philippines cannot get a handle on how to bring the nation from its dubious status as a third world nation that once held the number two position in Asia.
None of our successive governments has been able to come to grips with the poverty problem because, in my opinion, none of them has ever addressed the root causes of poverty. Their agendas (including President Arroyo’s) are about attacking the symptoms of poverty, that is those negative situations that are endemic to poor countries. Peace and order, insurgency, massive public sector graft, smuggling – guess what? You do not have these problems on any great scale in rich nations. Speaking of lawlessness, crime and public corruption reached its zenith in the United States during the worst of economic times of the Great Depression. Poverty breeds these social ills; the social ills do not create poverty.
Being poor is a result of action not accident. A poor person or a poor government is the result of failure of endeavor not a failure of events. A poor nation is the consequence with all the collective problems.
Interestingly the Bible clearly and succinctly states what the causes of poverty are in the book of Nehemiah and then lists some of the societal costs. In Chapter 5, the people of Jerusalem complain to the Governor Nehemiah about their poverty. “Some said, "We have big families, and we need more food just to survive”. Others said, "We're having to mortgage our fields and vineyards and homes to get enough grain to keep from starving”. And there you have it. Too many mouths to feed and too much debt. Sound like the Philippines?
Then some of the consequences of poverty. “Yet here we are having to sell our children off as slaves--some of our daughters have already been sold--and we can't do anything about it because our fields and vineyards are owned by somebody else”. Sounds like our OCWs upon whom the nation depends.
One may argue the philosophical/moral issue all that you want. The facts do not change. Fertility rate, that is the number of children a woman has in her lifetime, correlate with the wealth of a nation. The higher the fertility rate, the lower the wealth. Resources are limited and the number of people living off the resources determines how much each individual gets. There is only a limited amount of food on the table, desks in the classroom, and jobs in the economy. For President Arroyo to almost boast that the Philippines economy is growing faster than the population rate is absurd and guarantees future poverty unless the fertility rate comes down. Population growth is 2.6% however each woman bears an average of 3.5 children during her lifetime. That is what creates the problem not the number of births per thousand of population i.e. the birth rate.
By 2050, with our current birth rate of 2.6% and fertility rate of 3.5%, our population will grow by 75%. Central America has a similar birth rate of 2.6% but a lower fertility rate of 3% and by 2050, their population will only increase by 50%. Government needs to give woman who do not want to have more than two children that opportunity, while at the same time refraining from penalizing or stigmatizing the couple that wants a large family.
The government has too many ‘kids’ also. Our government payroll borders on the obscene and after three years in office, President Arroyo is only beginning to seriously address the problem. Sen. Ralph Recto noted that the government payroll has tripled from P92.5 billion in 1994 to P286.5 billion this year and now accounts for one third of the national budget or 33.1 percent. “In fact, in 2002, while the budget for salaries grew by 3.5 percent, funds for infrastructure plummeted by 24 percent,” Recto said.
How could anyone wonder why the economy and the government are starving? Reason for poverty number two next time.
Friday, August 13, 2004
Philippines in the News
Gulf Daily News, Bahrain carried the following: “Foreign investment in Philippines drops 34%; past six years”. Despite efforts by two administrations (and now-Senator Mar Roxas) foreign direct investment, the type of money that builds factories and creates jobs, has fallen by an ANNUAL rate of 34% per year since 1998. in 1997, foreigners put 262.1 billion pesos ($4.6bn) into the Philippines; they invested only 34 billion pesos last year. And all the experts will soon stop their comparisons with Thailand and how much we have fallen behind. A new player has surpassed the Philippines. Even Vietnam has now over taken the Philippines in attracting FDI. Japanese investment (our biggest) to the Philippines has contracted from $43.9bn in 1998 to just $8.8bn last year, a fall of EIGHTY per cent.
Channel News Asia out of Singapore reported that the government may have found a solution, if not the solution, to its fiscal worries: Philippines offers "vanity plates" to boost state coffers”. Facing a 200 billion Peso budget deficit and unable to actually collect “tax” from citizens, the administration has decided to sell license plates. They estimate that if ALL passenger car owners bought a license plate with their names stamped on it for Php50,000 each, the government could raise 17 billion pesos. And there would be no threat of a “People Power” uprising like with other text, I mean tax, schemes.
Finally, the story about the Philippines that received the widest news coverage was found in newspapers and on television stations from South Africa to Scotland, from Pakistan to Peru. The Chicago Sun Times headlined this newsworthy event with: “Leader says read my lips: no kissing”.
Once again, our beloved President has made the world’s center stage talking about her physical relations with men. Last time it was her marital and sexual life; this time it is her public beso-beso contacts. No disrespect but you would think that there might be something more important than this to discuss about a 57 year old person, male or female, who is leader of a government representing 80 million people. I will refrain from making any judgment as to why President Arroyo has attracted this kind of attention on now two occasions.
Why do I choose these three stories out of the literals dozens that show up every day about the Philippines? Because they do show the current state of affairs in our nation.
Can I make it any clearer than this: our economy is in crisis and on the verge of a meltdown. The IMF says we must change government policy on fiscal management now or we may face defaulting on our international debt. NEDA Chief Neri says that the high price of crude oil may push the economy into a recession next year. The United Nations says that the Philippines is making the least advancement out of poverty than other south East Asian nations.
Not only are we in bad shape, we are losing more ground every single day. Sadly, that problem has plague this country for the last two to three years. It is bad and it is getting worse. No longer to do hear “No place to go but up; we are at bottom”. Sorry the bottom keeps dropping regardless of any optimistic appraisals by government or even the business community. The reality just does not support that kind of belief. No amount of administration friendly words will change the facts such as our continuing fall in FDI.
No amount of silly ideas such as turning on a twenty year old power plant (That is really thirty years old in design) or selling vanity license plates (is this story really worth the big headline in the Inquirer??) going to solve our economic problems. Of course, I do not believe that this government believes it either. These are mature, rational adults looking for solutions to problems. However, the President has not exactly captivated the nation or the world with her knowledge about and solutions to deal with our economic problems.
In true, as much as I hate to say this, President Arroyo is not in control of the situation. Earlier she allowed a reporter to ask a question that same reporter would never have asked of her own boss or supervisor. Now President arroyo allows a comedienne/TV host manipulate her into a situation that makes her and this nation look foolish and preoccupied with foolish things. And very Un-Presidential to say the least.
I know the beso-beso incident is no big deal. But does anyone remember why Gloria was in Laguna for anyway? It was an awarding ceremony for loans granted by the Small Business Guarantee and Finance Corp. (SBGFC). Please enough show business and politicking. The nation is in trouble and needs a leader not a tele-novella actress.
Thursday, August 05, 2004
Is Nero Fiddling Again?
On the night of July 19, 64 AD, a fire broke out among the shops lining the Circus Maximus, Rome's mammoth chariot stadium. In a city of two million, there was nothing unusual about such a fire particularly in the slums that covered much of the city. Knowing this, Nero himself was miles away in the cooler coastal resort of Antium. Yet, this was no ordinary fire. The flames raged for six days before coming under control; then the fire reignited and burned for another three. When the smoke cleared two thirds of Rome had been destroyed.
Much of what is known about the fire comes from historian Tacitus, who claimed that Nero watched Rome burn while merrily playing his fiddle. A reassessment of the historical evidence, including forensic examination of archeological excavations, implies he started the fire so that he could bypass the Senate and rebuild Rome to his liking.”
I relate this story of Nero because much of history viewed him as an incompetent sluggard rather than the shrewd, ruthless, and insatiably ambitious politician he was.
Rumors swirled after the fire, some blaming the ‘government’, others random coincidence, still others blamed the fire on that annoying religious cult called Christians. Regardless of how the fire started, groups of thugs were seen throughout the city stopping the people from putting out the fire and so Rome burned to the ground. And Nero built his Domus Aurea, a majestic series of villas and pavilions constructed on a manmade lake. Either Nero took advantage of a situation to fulfill his desires or he created an adverse situation to further his own purposes.
A parliamentary form of government allows the professional political office holder the one employment benefit missing from the current presidential system; job protection. Those pesky term limits that people living in democracies are demanding just do not apply when a parliament controls the government. So, along with power, fame, and fortune, parliamentarians also get longevity of office.
The most common argument for changing to a parliament from a presidential system is that a new form of government would provide a framework that would be more competent to solve the nation's problems. If true, then a parliament would serve all participants much better than the presidential system the politicians would be happy because they get to keep their jobs. The people would be happy because they get a better government.
The only real loser is the “President” since a president has more power and prestige than a Prime Minister does. However, a Prime Minster has the advantage of being able to shift responsibility and therefore blame to the Parliament because major decisions are subject to a continuing majority vote. Failed policy does not rest solely on one person but on the larger executive/legislative body of the Parliament.
This administration and therefore the country is faced with a basket of problems that are quickly become a basket of crises. In light of the pullout from Iraq, our foreign policy is somewhat in tatters and must be reconfigured as we watch and react to the longer-term effects. Rising world oil prices will seriously damage economic growth. A real and severe power shortage is coming. If the global financial markets even slightly hesitate to refinance our debt, we cannot finance the government expenditures. Efforts to spur foreign investment sputter like a candle in the wind regardless of the spin officials put on every minor project that comes in.
And it just does not seem that the government views these predicaments with the same sense of urgency that the average citizen does. The Philippines is in trouble and the government keeps on acting as if it is business as usual.
Although the government is confident of its position following the elections, only a fool would discount what the people might do if things deteriorated and worst-case scenarios (like P100 per liter gasoline) occurred.
Nevertheless, a continuing tenure of office for the current administration could rise from the ashes by a shift to a parliament to thwart any ‘people power’ movements.
Is it psychotic and paranoid to believe that a government would allow problems to go unsolved in order to stay in power? Is it distrustful and cynical to believe that a government would take advantage of crises to remain in office?
Thursday, July 29, 2004
Us and the U.S.
There is the conventional Filipino wisdom that the close attachment between the two nations is only a result of American colonial rule. I do not think that is true. Other nations, Malaysia and Zimbabwe come to mind first, when released from colonial shackles, felt little fondness for, and more importantly, even less affinity with their former master states. Moreover, Philippine based Filipinos, like their Fil-Am counterparts, are actually interested in the state of affairs of America.
Understanding the reasons behind the strong us/U.S. relationship is not easy. An ignorant American observer might say that the Philippines was lucky to have had such a benevolent conqueror as the U.S.; therefore, the close ties. We know that is absolutely wrong as the U.S. waged a brutal war on the Filipinos and took economic advantage at any opportunity exactly like every other Western power. Yet, there is something different about this kinship.
Perhaps the roots lie in the fact that the nation had been a colony, with a colonial mindset, for so many centuries before the American takeover. One can only hypothesize what the Philippines might be today (besides having another name!) had Magellan steered a several hundred miles south and made his Asian landfall on the Indonesian archipelago. However, he did not and 21st century Philippines is the result.
But there are many social and cultural similarities between the United States and the Philippines that cannot so easily be dismissed and justified by the colonial period.
Both are nations that welcome diversity and actually embrace a heterogeneous society unlike all other Asian nations. As an example, for the most part, Filipinos accept multi-racial marriages unlike countries like Japan and Korea that consider these unions a social abomination. Filipinos, like Americans, are the most religious tolerant people around, accepting if not always liking, a society that frees personal worship across the intellectual spectrum, Catholics, protestants, Muslims, Rizalists, Igelsia ni Cristo, and abides these different views without condemnation. That is not true in most of the world.
At lunch the other day, a friend opined that Americans were very 'provinciano' and she is right, just like many Filipinos. One of the first social questions between two Filipinos meeting for the first time regards the province of their respective families. Growing up in Los Angeles decades ago is similar to living in Manila today. Los Angeles, as Manila, is a city of ‘immigrants”; everyone, if you look to parents or grandparents, came from the province. And even now, as in the Philippines, there is a pride in having roots outside the metropolis.
Although Americans are supposed to be so well educated and therefore sophisticated and liberal thinking, in fact, they are quite ‘traditional’ and conservative by Western standards. Not unlike the Philippines in many ways. In a sense the Philippines in Asia as the U.S. in the West, is regarded as conservative and out of step with the times. America is probably the only Western nation where nudity is not accepted nor allowed on public television as in France. The Philippines remains a social ‘dinosaur’, not allowing divorce. Want to change spouses in Thailand? Turn over your marriage contract and fill out the ‘divorce contract’ printed on the back. Have it notarized and registered; congratulations, you are divorced.
In both countries, the average citizen could make a logical case for more permissiveness in society, sex and divorce perhaps spearheading the discussion. However, in both nations the vast majority of ordinary ‘provincianos’ do not embrace most modern ideas that are the standard elsewhere.
It always surprises me that Fil-Ams as well as local Filipinos strongly lean towards the U.S. Democratic political party. Here, there may be some long-standing resentment of the Republican Presidents that pushed the Philippines foreign policy now as in the past. Further the Democrats have always seemed the party of the ‘oppressed’ and the poor.
However, few of even the most urbane Fils or Fil-Am would endorse the Democrats viewpoint; abortion on demand, legal homosexual marriage, somewhat condescending attitude to those of us whose faith in God is important in our lives. Both peoples are much alike in many ways.
I think the biggest problems in the Philippines relations with the U.S. are: 1. The U.S. too often assumes that the goals of the Philippines are identical to theirs, and 2. The Philippines too often assumes that the goals of the U.S. are not beneficial to theirs.
Neither country is getting the best out of the relationship and it is both governments’ fault. The recent hostage/pull out affair highlights the need for greater communication and a different kind of dialogue to enhance this association.
Thursday, July 22, 2004
Finding 10 Billion Dollars Investment
By the government’s own admission, it will require some ten billion dollars of direct investment to create the number of jobs necessary to get this economy growing out of poverty. That investment must come into an economic sector or sectors that meet these parameters: labor intensive, require a long-term financial commitment, and can operate within the existing Philippine environment, social and political. The ten billion will not be found in call centers or any of the individual priority sectors that the government is promoting. For your information, these are construction materials, electronics, food, giftware and holiday décor, home furnishings, marine products, motor vehicle parts and components, organic and natural products, or wearables.
None of these priority sectors meets the criteria mentioned above and therefore cannot be counted on. We need investment that will last and will create jobs for all the people, not just those who speak good English or live in the urban areas or are dependant on a growing consumer oriented export market. Otherwise, growth is not sustainable and sustainability of investment in the face of whimsical government decisions, fluid international conditions, and other variables is difficult.
However, there is one single industry that can provide what we need and this administration recognizes it privately if not publicly. The minerals industry meets all of our investment needs and President Arroyo and her administration have actually been doing much to attract this type of investment. Unfortunately she has been hampered unmercifully by the loonies of the left and the equally loony pro-poor groups, whose only agenda is creating more poor people in order to keep their foreign NGO funding.
In 1995, the Philippines passed a mining regulatory act that was so beneficial to both the nation and to the industry that other countries copied. After the bill became law, all 25 of the world’s largest mining companies began investing in the Philippines. In 1998 when the law was severely challenged by some groups (who are 'challenged' in other ways) ’, 24 of those investors left.
Why mining? In 1995, we exported almost a billion dollars of our mineral wealth. The industry employed 100,000 people directly and another 600,000 indirectly. These numbers were expected to double yearly for the following five years. It did not and now we suffer.
The minerals industry is both capital and labor intensive. In order to develop mineral wealth, a mining operation will require approximately $500 million dollars or 25 billion pesos of investment. Now let’s see. 25 mining companies investing $500 million each. . . 12.5 billion dollars, which is what we need to create ten million jobs. I wonder how many jobs the anti-Filipino groups who stopped this amount of investment created in the last seven years?
Not all jobs are created equal and the Philippines needs the full gamut of occupational opportunities. The mining industry employs the most highly skilled and highly educated to the most common laborer. and in the scope of the business, both jobs are equally important as the industry cannot function without them. Further, these lower skilled jobs are created in exactly the places that the country needs them; in the rural areas. Not too many mines are slated for development inside Metro Manila leaving plenty of room for those high-tech call centers.
Mining investment is sustainable unlike all the others because it takes five, eight, twelve years to bring a mine into operation, meaning the investor commit the time, and the treasure before the investment starts. Mining costs a fortune and takes a long time to be successful, all the while requiring huge sums of money. We just had that experience with the Malampaya project in oil and now with the Rapu-Rapu poly-mineral project in Leyte.
There is no question that economically the minerals industry could make the difference for the Philippine's future.
Two major issues have held mining back; foreign ownership and environmental concerns, both valid apprehensions, ownership being debated in the Supreme Court now. The Philippines does not have domestic capital to develop her mineral wealth. The choices are two; let the people starve while riches lie under their feet or find a solution. This cannot be an either/or proposition; either Filipino ownership or no development. That would be plain stupid.
Other countries have been able to keep development from causing environmental problems. Why can’t the Philippine do it? All it takes is enforcing the laws and punishing the lawbreakers. Is that too much to ask not only from the government but also from the people? Or is being poor, hungry, sick, uneducated, and future-less a better option simply because it is an easier option?
We are always looking for quick economic fixes. I remember when prawn farms and aquaculture were going to be the saviors of the economy. Then came rubber shoe factories, electronics, call centers, and on and on. These are all sari-sari stores in comparison to mining. Other countries know it. Peru exports $3.2 billion minerals yearly. Mining accounts for five percent of all employment in Kazakhstan. Minerals contribute almost 20% of Papua New Guinea’s GDP. Like it or not, time is running out for the Philippines to think sensibly and realistically about this issue.
Monday, July 19, 2004
Looking for a $10 Billion Industry
The problem of job creation is not simply the huge amount of capital expenditure needed for business to expand to meet that need. Another significant concern is the type of business in which the investment is made, but also the geographical location of the business.
In remarks before the supreme Court by DTI Secretary Purisima that I quoted last time, the Secretary made a valid point that the Philippine government has been stuck between a rock and a hard place between trying to attract capital investment to the non-urban areas while investors still flock to those urban areas. Naturally, if jobs and opportunities were available outside of the metropolis, our over crowding, squatter, and resource problems would diminish. “Despite the efforts of the national government for the past 50 years to disperse economic opportunities to the countryside industrial and economic growth has remained concentrated in urban areas. Domestic and foreign investors are drawn to the cities because of the comparatively high growth potential in urban areas.” Investors need the infrastructure of the city; the government needs to keep people out of the city. Is this a conundrum that cannot be solved?
Again, the Secretary: “The Philippines is operating in a world that is marked by the integration of companies, industries and even economies. Such integration forces companies, industries, and economies to specialize and to consolidate their operations and activities on the most efficient, most competitive sectors.” Which is exactly what I have been preaching for years: the Philippines must first concentrate on those economic areas through which we have a chance to succeed quickly: agricultural, mining, tourism. “Various offices of the executive branch found that we can quickly channel the private sector's energy into industries where we have proven to be highly competitive, where our natural endowments clearly give us an edge. One such industry is mining. Mining is one industry in which we clearly have a competitive advantage. The Philippines has the fifth (5th) most mineralized territory on earth.” Are you listening? The Philippines is the fifth largest holder of mineral wealth in the world! Talk about God's blessing. In addition, the mineral industry is perfectly designed for emerging economies. “One great advantage of the mining sector over other industries is that this sector has an almost 100% value-added which means that almost all of the elements of production are sourced locally. In the electronics sector, value-added is only 30% while for garments, it is at most 50%.” And how much value added is generated by call centers?
So why aren’t we rich? “ In the 1970s, minerals accounted for more than 20% of our export earnings. At its peak, in 1974, mineral exports had a 24% share. The 1980s and the early 90s were critical years for the mining sector as domestic and international factors depressed the industry. In 1995, we exported close to nine hundred million dollars worth of minerals (US$900M). Also at that time, the mining industry employed more than one hundred thousand (100,000) people.”
The Ramos administration recognized that a significant part of our future economic potential lie in the mineral sector, hence the Mining Act of 1995. The Mining Act was one of the major accomplishments of our Congress, so beneficial and intelligent was the law that other nations copied our law on which to pattern their own mineral industry. But the Supreme Court invalidating that law is not the issue for this discussion. The issue here is why we desperately need a viable minerals industry. The Arroyo administration has for a long time recognized that this sector can help save and enhance the Philippine economy. The President has been a strong support of the industry once she learned the facts and overcame the anti-Philippine nonsense that the anti-mining people spew. And what are the facts. Next time.
Thursday, July 08, 2004
10 Million Jobs Will Cost 10 Billion Dollars
You basically have three attitudes displayed when it comes to talking about improving the Philippine economy. The government, as embodied in the inauguration speech of President Arroyo, tells us what needs to be done, that the administration will do it, and offers no plan or direct solution in public. The pro-poor believes that the economic pie will never get any bigger and would prefer everyone be equal…and poor while trying to get a few more crumbs for its constituent base. Their agenda is to raise the “poor” to higher standards; an extra can of sardines each day. They intend to achieve this by forcing those who are wealthier to eat sardines also. The “moneyed elite” (probably you and me) has a different personal solution. They ignore the big picture while concentrating on prospering in and protecting their own small world.
Nevertheless, there is a bigger picture that needs to be examined and solutions developed that fit reality, outside of political considerations.
Department of Trade and Industry Secretary, former SGV Chair Cesar Purisima, gave one of the most comprehensive, enlightening, and realistic appraisals of the Philippine economic situation I have heard in many years. Of course, you will not have read his observations any place else and I take pleasure in liberally quoting from his remarks as delivered before the Supreme Court as Oral Arguments in connection with the Motion for Reconsideration on the Constitutionality of the Mining Act. Bear in mind though that this man has shown he knows his business in other comments made since his appointment.
While the former occupant of the office concentrated on importing “no-value added” call centers, Secretary Purisima said this a few months ago; "If we would be able to help improve (Existing Filipino) SMEs' productivity level, its impact on our country would be tremendous. The country could generate over 800,000 new jobs if each SME would add one employee”. If we had spent as much time helping Filipino business in the last years as we did “attracting foreigners’, we really might have created jobs. While we need foreign call centers, we also need to support Filipinos creating jobs for Filipinos.
Truthfully though, you need to understand the problem before you can attempt to fix it. Purisima does that and the conclusions based on the President’s speech are disturbing.
The President sets as a goal for her administration the creation of “even ten million new jobs” in the next six years. Of course, this is not a perfect world. However, the facts are these: “As of the latest survey by the National Statistics Office, 5 million Filipinos are unemployed (and) an average of 1.8 million Filipinos enter our labor force every year”. According the statements of Sec. Purisima that means the President and her administration needs to create ELEVEN million jobs just to have the same level of unemployment that we have right now. Therefore, what the President should have said is that even if she accomplishes her highest goal, the unemployment picture will actually be worse when she leaves office. Her best will just not be good enough. If she achieves her more conservative goal of creating six million jobs in six years, unemployment will be twice as bad as it is today. Isn’t that encouraging. I guess the election really did come down to a choice between two ‘evils’: twice as bad or ten times as bad an economy.
What the President failed to elaborate on in her speech, and particularly since then, is what resources and effort that it will take to generate that kind of employment for the nation. Here the facts create even more apprehension as to the future. Secretary Purisima: “To create one high-value job, the Philippines needs to attract one million pesos in investments. To create one job which pays the minimum wage in a micro or small sized enterprise, that enterprise needs to allocate around Php 50,000 pesos in capital investments”.
Are you hearing this? If we are to create ten million MINIMUM WAGE jobs, we need to invest 500,000,000,000 (five hundred billion) pesos. That is roughly ten billion dollars are current exchange rates.
Another way of looking at that amount is noting that it is about the same as President Arroyo overspent in the last three years supporting the largest budget deficit in history. While she says she will balance the budget soon, we still need to pay back the 500 billion deficit and spend another 500 billion for all this job creation.
There are solutions though and Secretary Purisima has some excellent thoughts on that next time.
No One Wants To Pay The Check
The ‘first’ administration of President Arroyo was not a responding triumph by most reasonable measures of economic success. And any jumping for joy at the first quarter 2004 economic numbers is both premature and missing the point. With the rising deficit, debt stock, and energy prices, that amount of growth is not going to save the country.
Rather than a honeymoon for the next months, the experience will probably seem more like waking the next morning after the big party with a hangover large enough to be able to drive a truck through. Not only are expectations running high thanks to her campaign promises among those who foolishly expect a free lunch from government but the anti-Poe voters are a little cranky too. There is a edginess among those voters that are suddenly waking up to the fact that an anti-Poe vote also means six more long years of a president that did little in the past three. That is the trouble with “lesser of two evils” thinking. A small bad choice is still a bad choice.
The President though is not going to be making very many friends in the next months and it will not be her fault at all. In fact, being a good and responsible president of the Philippines has got to be the hardest job in the world.
Regardless of any past poor economic decisions that the President might have made, two decades of mostly failed economic leadership, and failed economic policy has left her with little choice but to raises taxes quickly and significantly.
Regrettably, this is a nation of taxpayers where everyone wants to eat the meal but no one wants to pay the check.
And the issue of taxing text messages only proves my point.
Texting is a critical part of both my professional and personal life and I would not want to live without it. However, I strongly support a five percent tax on all text messages.
Texting is one of those rare and wonderful consumer products that cuts across all economic levels. It is a product that we can all live without and is certainly not indispensable to anyone’s life. There is nothing about Texting that is crucial to anyone’s existence and a luxury that the rich and poor use it the same notwithstanding newspaper column titles like “Tax not the poor texters”.
Anyone who can afford two or three pesos per text to hear the latest show biz balita, sports score, or ‘love’ report can afford another 15 centavos in tax. Any one who burns through a P250 pre-paid card each month can easily afford 15 pesos per month in taxes. However, as much as the text tax whiners and complainers whine and complain, this issue is not about money. It is about that universal malady known as NIMBY or Not In My Back Yard. Yes, we need more landfills, but NIMBY. Yes, we need more resources of cheap energy, but NIMBY. Yes, we need more tax revenue, but do not take it from my pocket.
A certain vocal opponent of text taxing strongly supports increasing taxes on ‘sin’ products like beer, gin, and tobacco because perhaps for her, spending a couple hours a day testing is not a sin, while smoking for the same time is. NIMBY. By the same reasoning those of us who rarely ride a jeepney could just as easily advocate a tax on public transportation. But doing that is politically incorrect as another feels that raising taxes on alcohol is anti-poor because apparently cheap, liver killing gin is the ‘poor’s’ only source of entertainment as if one could rarely find a cell phone among those in the C, D, & E social strata.
Then there is by far the most stupid and illogical rationale for the placing of taxes, which is; those who gain from government spending ought to pay the most taxes. Those who own cars should pay for the roads through higher registration fees. In that case, those who use government hospitals and health clinics . . .
Our very serious fiscal crisis (and it is a crisis accept it or not) will reap devastating consequences that will not show mercy to rich or poor, texter or non-texter. This economic typhoon that is coming, might soon knock down all the people’s financial houses.
I have been a staunch and vocal critic of President Arroyo’s economic policies and will probably continue to be so. However, on raising taxes we have no choice for the future of this nation. The government must have more tax revenue in order to survive. We need to save the economy and then fix the problems like corruption and incompetent spending. You have two choices over the coming months. Either support tax increases and pay your proper, if not necessarily ‘fair’, tax for a change or get your ‘green card’ in order. 2005 will be the watershed year that will begin a new period of prosperity or mark the time when the Philippines finally collapsed. Tax revenues will help determine the answer.
Wednesday, July 07, 2004
“Democrazy” In Action
It is easy for both the local and foreign press to take barbs at our political process. The last month of posturing, ranting, and tantrums from our elected officials provided a large reservoir of material for our local pundits to express a wide range of opinion. A single day’s broadsheets gave us Neil Cruz in the Inquirer bemoaning the “Tyranny of the Majority” in not examining individual election returns and Boo Chanco of the Star commenting that perhaps “Could we (The Philippines) be better off broken up?”. Serious stuff.
Meanwhile, the Arroyo administration says that “Ms Macapagal had garnered "massive support" when her candidates cornered majority of the seats in Congress and dominated the gubernatorial and mayoralty races”. And it was strange to hear from an administration brought to power in the streets say “"We will never yield to mob rule," Presidential Spokesman Ignacio Bunye said. The constitutional process will never yield to any form of mob rule." While on the other side of town, the opposition candidate talks repeatedly about Arroyo having the potential of being a “fake President”. Democrazy in action.
The Gulf News writer clearly identified some reforms that the Philippines needs in order to progress. These are “broad and genuine economic reforms that include further liberalization of the banking and telecommunication sectors, improvement of the tax collection system, nurturing small and medium-size enterprises with cheap credit, and integration of small firms into major companies' supply chains.
Those ideas seem reasonable and certainly not new. Let’s see. Open the banking and communication sectors up to outside investment and with more deregulation. Collect more taxes. Reduce interest rates to SME companies. Makes sense. But, “During her three years in power since public protests toppled her predecessor Estrada, Arroyo has been reluctant to launch reforms. The reasons given for this included her fear of upsetting powerful business tycoons, who backed her to replace Estrada in 2001, and her intention to win big in the 2004 elections”.
The implication this writer makes is disturbing. The President knows what needs to be done but does not do it for fear of upsetting the people who put her in power AND that these reforms might upset her 2004 election chances.
We all know that with the one term limit for the presidency, we will not have to face the winner of this year’s election running again in 2010 (unless of course there is a change to a parliamentary system). However getting a Filipino politician to leave office at the prescribed time is about as easy as getting them to concede defeat.
So, what is the solution for our democrazy to be a little more workable and a little more responsive?
With the day of reckoning (June 30) less than two weeks from this writing, we learn that the Constitution has made provision in the event of the Congress being unable or unwilling to proclaim a President. If that happens, a new election would take place and we would start the process again. Another election might not be such a bad idea.
The article in the Gulf News accurately describes the problem with our politics. “Because their electoral campaigns are extremely personalized, rather than being connected to groups like political parties, defeat is unbearable and considered a personal embarrassment and insult”. You see, another election might temper all these personal feelings and let both the candidates and the voters concentrate on important things for a change. Now that each side has had the opportunity to accuse the other of cheating, now that each side has had the chance to get red faced and hurl some insults, we could get to what really counts in our democrazy: the election and not the results.
There has been some talk in the last days that perhaps the system should be changed to force the top two candidates into a ‘run off’. Maybe that does not go far enough. Many people want a change from a strong centralized presidency to a parliament but fear a constitutional convention. What we could do is simply never have a proclamation for the presidency, and keep the President of the Senate as the “Acting President”. It would almost be like a having a parliament and almost like having a presidency.
We just keep having elections. No candidate ever has to admit defeat. We all enjoy the fiesta atmosphere of the election rallies. Besides some politicians would do the nation less damage if they spent more time singing and dancing. Election spending would continuously give the economy a little boost. Government probably would not change too much since most decisions are already based on political expedience and not common sense. Maybe we need more democrazy and not less.
Tuesday, July 06, 2004
Failing Students and Failing Countries
I speak from personal and intimate experience with Philippine the public school system having had two sons attend and graduate from Makati Elementary School. Both are at public high schools, the one boy is now entering his first year at Makati Science High School; the older third year at the same school. Lest you think that perhaps Makati an aberration as I once did, my other school age son just entered his second year at a public elementary school in Muntinlupa located across the road from Laguna Bay, near the power plant. John William was selected as the Outstanding Grade One Student last year at the same school.
Please notice that all the public focus was on the 95+% that failed the test. The litany of excuses was depressingly predictable. Classrooms are too crowded. There are not enough books for every student. Some kids had to sit on the floor. Supplies like notebooks and pencils are too costly for the parents. Teachers are lazy and apathetic.
All of the above comments are true. However, they offer no acceptable excuse for the high failure rate. For we are not speaking of a million children whose knowledge and learning level was below reasonable standards. We are speaking of ONE student who failed and whose situation is multiplied a million times over. Not one commentator that I heard talking of the tests had any brilliant words about why those who passed the test were successful. They only made excuses for the failures, the excuses being conditions beyond the student’s control.
Of course, classrooms are over crowded. What do you expect in a society where our leaders are willing to spend literally billions seeking a job in public office while their constituents are unemployed. But did anybody figure out yet that the classroom is just as overcrowded for the one whose grades put him or her at the top as for the one who is the failure at the bottom? All the winners endured the same conditions as all the losers.
Of course, personal school supplies can be a burden on many in the lower economic brackets. However, I am still waiting for that interview whining about notebook prices where someone also says “And my barkada and I couldn’t even afford a drinking spree on my last birthday because the price of gin is so high”. Speaking of the “poor”, by last count, a child’s school notebook which can last at least a semester, costs about the same as a couple of bingo cards for the daily neighborhood gambling fest.
Of course, there are bad teachers. So what. I can remember my mother telling me what seems like a hundred years ago, “You are there to study and learn and your success better not depend on the teacher”. In my fifteen years of public school ‘experience’, my sons had three teachers who belonged cleaning Chinese toilets in Hong Kong. All the others were as dedicated and as hardworking as you probably are in your profession. Maybe more.
We have made a national pastime of making excuses for failure. Any child who did poorly on that test can ‘proudly’ point out that it is not their fault. IF classes were smaller, IF teachers were better, IF materials were more abundant, THEN passing the test is possible. But then what about the passing students who maybe listened a little closer in class, whose parents were maybe a little more interested in their education, who took a little more personal responsibility.
However, whining and excuse making is not limited to our children.
In 1995, the ‘world’, including the Philippines, agreed to end all quotas on garments and textiles. That agreement is to take place in the next six months. No special favors will be granted to any nation. Garment and textile exports are a US$2.8 billion a year business to the Philippines.
In 1995, China was not a player in the world garment/textile market but in 2004, China accounts for 40% of the market. Now 78 exporter groups from 36 signatory nations to the 1995 agreement are whining and complaining that if enacted, China will capture 65% of the world market, hurting their economies even more. They want the quotas to remain three more years, not “specifically (to aim) at China but more at wanting to create a level playing field”. The reason for the 1995 agreement WAS to make a level playing field as politics too often determined quotas. Besides China, two other countries want to see the quotas dropped: India and Pakistan. They too were not major players in 1995.
These three nations spent the last eight years preparing themselves for the end of quotas while Filipino manufacturers did little and now complain that conditions beyond their control are causing them to fail.
Back to school. I say, instead of making excuses for the failures, we should be lauding the winners. They faced adversity and they overcame it. Let the losers be comfortable with their excuses because in a few years the winners will probably be more comfortable in the big house, big car, and big job. And I hope they remember that success needs no reasoning out. Only failure and failures needs an excuse. That is true for nations as well as individuals.
Friday, May 28, 2004
Countdown to Disaster
Even before any of these elected officials are declared the official winners, fuel prices will increase by almost five percent. In case everyone has been too busy with the silly season to notice, world crude oil prices are at prices not seen in more than twenty years. Let me put it to you another way. Oil is trading at over $40 a barrel. It can't get much more expensive than that, can it? Consider that in 1981, crude used by US refineries was selling at just over $35 per barrel. Adjusted for inflation, that equates to about $72 a barrel in today's dollars. When considered in this light, $40 crude may not be that expensive after all.
The International Energy Agency recently concluded that the Philippines, along with India, are the two nations that will suffer the most from increasing prices. They based their studies on the assumption that world crude would only reach US$35.00 per barrel. According to their calculations, the Philippines Gross Domestic Product will be lower by 1.6% in the year following crude reaching 35 dollars. That means the worst of the current high oil prices will not take effect until 2005. And none of our past administrations and congresses have formulated a coherent long term energy policy and program to save this nation from the worst impact of petro-poltical price rises.
The Philippines bill for crude oil has doubled since 1999 even during the time that the much touted, particularly by President Arroyo’s administration, Malampaya project, came into production. Our Department of Energy boasts that the potential of Malampaya could be as much as supplying thirty percent of the nation’s fuel requirements for the production of electricity. Be that as it may, it will not help the economy much at all, although it is comforting to know that we will have lights on while we ponder a very bleak future.
Fuel for power generation is only a small part of our problem. In a survey of sixteen nations including China, Hong Kong, Thailand, Australia, Taiwan and others, the Philippines is the number two IMPORTER of premium gas and fuel oil and the number one importer of LPG, diesel, and kerosene. Our imports of LPG are frightening: Malaysia (#2) imports 856,000,000 barrels per year; the Philippines imports 15,360,000,000 barrels annually or eighteen times as much.
Now you can understand why the recent and probably continuing increase in world oil prices has such a devastating impact on our national and personal economies. We are at the mercy of and experience the worst possible affects of high prices.
Selling a piece of Petron to Saudi Arabia and the Malampaya natural gas project do not fulfill the requirements of a comprehensive energy policy.
However, let it be said that we do have the Philippines Energy Plan created under President Arroyo to give us a direction for the period 2004-2013. The DOE calls it “ well-crafted wherein the government’s medium term plan is anchored on economic growth with social equity, including bridging the urban/rural divide”. Well, I certainly feel better already. But the specifics are disappointing and border on the energy equivalent of putting a Band-Aid on a bullet wound.
Forget about the part of this plan that calls for “electrification program's objective of attaining a 100 percent electrification level by 2006”. By 2006, everyone can be poor while not sitting in the dark. What we need to be concentrating on is getting new indigenous energy sources as quickly as possible and it is not going to happen under President Arroyo’s energy program.
The most foolish specifics of the plan lie in the most crucial area of developing our own crude oil resources. “In the oil sector, about 50 more wells are expected to be drilled in the next 10 years in Nido, Matinloc, Cadio, San Antonio and Malampaya oil fields”. This is the kind of absolute governmental nonsense that is destroying our country.
Fifty wells in ten years is five wells per year, to find and develop our crude oil needs. Indonesia drills 400 wells PER YEAR. How do you think they became a major producer? Further Malampaya took 12 years from discovery to full production, cost P250 billion pesos, and, in the overall energy picture, replaces less than ten percent of our crude oil requirements. Malampaya is producing approximately 25,000 barrels of crude oil per day while we sit continue to import over 300,000 barrels per day.
The energy plan in energy resource development calls for “the PEP calls for the infusion of about P500 billion to set off programs in the oil, gas, hydropower, geothermal and coal sectors”. Do not hold your breath expecting that kind of money to be spent developing alternative energy resources. The government does not have the money from its bloated budget and the private sector cannot afford as that represents two years worth of current crude oil purchases.
In modern times, two factors have caused the greatest social-economic unrest and disturbances: high food and high energy prices. Governments have been toppled and blood has been spilled over both issues. I wonder how much this government can do in twelve months to avoid disaster.
