Tuesday, February 28, 2006

Economic versus libertarian provisions of the Constitution

I don't read the Daily Tribune. It's a yawning abyss of poison news and views. However it's being published in a country which constitutionally protects freedom of speech. So short of direct incitement to violence, this poison is untouchable. If you hate it, just don't buy it.

In this earlier post I linked to Proclamation 1017 and the Philippine Constitution. The latter clearly vests the right for the government to take over a private business during a period of emergency - precisely the principle invoked in the Proclamation.

What the framers (and the people who voted for it) didn't anticipate is that this power could be used to contravene the free speech provision. And it has been so used, in the case of the Tribune. So now the case is under petition with the Supreme Court.

Thanks to President GMA, the latent contradiction is now exposed.

However legal it may be, suppressing the Tribune was a mistake. In cases of conflicting provisions, the government should have erred on the side of civil liberties. In any case it possesess the vast powers of the police - and the military - to suppress armed revolt. Applying it to the dissemination of ideas and opinions is wrong; it also sends the wrong signal about the fragility of democratic and private property institutions.

After all, it is not only military adventurists and insurgents (whether communist or secessionist) which threaten these institutions; the threat can also come from within.

The Constitutional provision authorizing takeover of private business during periods of emergency is problematic and prone to abuse. It should be stricken off. Let some future legislation - which is easier to discuss, debate, and change - take care of potential emergencies.

What should be non-negotiable is the fact that the Strong Republic must be a Republic of free speech.

Keep the marketplace for ideas free and competitive.

Monday, February 27, 2006

Experimental economics is going commercial

A mainstay empirical method in economics is "econometrics", which has been called a "nonexperimental" method of investigating causal relations. The usual argument is that the economic system is not subject to experimentation; nonexperimental data will have to be subject to different methods of analysis. (The contrast of course is with the natural sciences, where experimentation is standard.)

Increasingly though economics adopting experimental techniques. The latest Scientific American reports on the work of Kay-Yut Chen at Hewlett-Packard. The difference is that direct commercial applications are being explored:

Chen thinks he has solved the sandbagging problem: have each salesperson choose a personal balance of fixed and variable compensation. For example, the salesperson can choose a high commission percentage with no fixed salary or, at the other extreme, a modest fixed salary and no commission--or some combination in between. Each choice implicitly reveals how much the salesperson plans to sell, much as an insurance subscriber's choice of deductible and premium reveals how sick she is. Based on a truth-telling mechanism from game theory, this design works on paper. But as an experimental economist, Chen will keep testing it empirically, comparing the emerging design with other available models, such as the one he is testing today.

Chen has successfully used that approach to help HP managers design good contracts with retailers and resellers, and he is starting to tackle other thorny problems for his employer: figuring out how to protect HP's bottom line against international currency fluctuations and discovering ways for brick-and-mortar retailers and HP's online store to coexist happily.

Econometrics is nowhere near being supplanted by experimental economics, even in the long run. But I'd be glad to see experimentation becoming a fairly common research method in the field in the medium term.

Saturday, February 25, 2006

Solita Monsod gives the other side on the Middle Forces

Economist Winnie Monsod has written a column that is an exact representation of my own analysis and sentiments on the current Philippine turmoil.

Freedom of assembly is indeed a sacred right. However it is the citizenry's responsibility not to abuse that right. I'm not saying that the government ought to enforce that responsibility on them. But one error does not offset another. It's like the Danish newspapers' decision to publish those cartoons - a very bad choice, even if it was one one they had a right to make.

Here, where the atmosphere is heavy with military adventurism and sedition at a hat-drop, a responsible (albeit free) citizenry should think twice about feeding the fire.

Failure of poverty reduction is directly traceable to failure of institutions crucial for a stable and thriving business climate. Institution-builders look ahead. Removal of the President is neither a necessary nor sufficient condition for institution-building. We are now reaping the harvest sown in Edsa 2. Shall we now sow an Edsa 4, some bizarre hybrid of Edsa 2 and 3? God help us.

Calling for Arroyo's "voluntary" resignation is not a membership requirement for the Middle Forces, is it?

Get Real : Keeping the flame of Edsa alive

First posted 01:14am (Mla time) Feb 25, 2006
By Solita Collas-Monsod

Editor's Note: Published on Page A10 of the February 25, 2006 issue of the Philippine Daily Inquirer

COUNT ME OUT of the protest actions at the Edsa Shrine and Makati City disguised as a peaceful celebration of the 20th anniversary of the Edsa People Power Revolt. It is not because I don't want to celebrate it -- that event showed not only us, but an admiring world, the best of the Filipino spirit, and is therefore worthy of recall. But I refuse to celebrate it with people who are cynically using the occasion to further their own political or personal agendas by invoking "the greater good." Truly the last refuge of scoundrels.

By doing so, they are destroying all that the Edsa revolt stands for: the spirit of self-sacrifice for the motherland, with no thought of personal benefit. And what is more, they are encouraging military adventurism that may end up at first with a military/civilian junta, but will, if world experience is any indication, surely metamorphose into a military dictatorship, a la Myanmar with its 44-year-old military rule. That will truly be the height of irony:

They want to change Gloria Macapagal-Arroyo (with assertions of her "illegitimacy" that so far has not been substantiated), and will end up with a regime that they may not be able to change at all. Sow the wind, reap the whirlwind.

Those who are calling loudest for Ms Arroyo to make the "supreme sacrifice" and step down for the "good of the country," what kind of sacrifice are they willing to make, if at all? Take the leftists with the red flags who sat out Edsa People Power I and are trying to exploit the event to set up their own government without benefit of elections (to be held only after 1,000 days, if at all). Like the proposed governing council or junta, were they not expecting to be in that self-same governing council themselves?

Take those who resigned their Cabinet positions. Was that really a sacrifice, considering that they seemed to be maneuvering to be in the incoming government (what was that visit to Hong Kong all about, after all)? Or take those who supported them. Weren't they also expecting, and bargaining for plum positions in the successor government?

Take those supposed military "idealists" who want change. What were they doing playing footsies with the New People's Army, whose sworn objective is the violent overthrow of any government that is not theirs? Or people like Scout Ranger Brig. Gen. Danny Lim, who has been in I don't know how many coup attempts, pretended to have reformed and thus rose through the ranks, and now resurfaces as the head of a breakaway group.

Have these people bothered to ask themselves what benefit, or rather, damage, the country has incurred from their activities to supposedly save it?

What about all the hysterical reactions to the so-called "state of emergency," which does not add any powers to the President that she does not already have? It is like the "state of rebellion" declared during -- was it the Oakwood incident? -- that some people immediately described as undeclared martial law. The fact is that there is an emergency situation because there was an attempt by a faction of the military to withdraw support from the government and to solicit participation through the chain of command.

And it is likely that the attempt was made with the support, tacit or material, of others. And it is likely that a few (certainly not all) elements of those participating in the street celebration may want to exploit the situation for their own ends. Provided that the police act with maximum tolerance, what is wrong with taking the necessary precautions to make sure that the assemblies are indeed only peaceful celebrations of a glorious moment in our history?

After all, the spirit of Edsa People Power is not dead, as some people say, perhaps to excuse their inability to mobilize a critical mass in the streets. It is very much alive -- not in those with self-serving agendas or who think of it in the narrow sense of street protests -- but in the quiet heroes engaged in the noble task of nation-building, especially in their own communities, who exercise people power as an instrument to make a better life for themselves, like the parents who work with local officials to improve the education of their children (i.e., Synergeia, about which I have often written), or who make sure that their local officials are accountable for the internal revenue allotments, or who strive to make the justice system work in their "barangay" [villages or neighborhood districts], or who even resort to the recall of non-performing local officials, or who resist projects that endanger their environment.

There are other manifestations of people power at a broader level. Like the private initiative, Gawad Kalinga, that is so purely unselfish in spirit that it has drawn countless people to help build not only homes but thriving communities for the underprivileged. Like government officials both low and high (Gem Carague at the Commission on Audit, and Karina David at the Civil Service Commission) who are engaged in institution-building despite the distractions and politicking around them.

Take those who are disappointed with the impeachment proceedings but know that the ultimate sanction in the accountability process in a democracy lies in elections. Hence, they object to the "no-el" [no-election] scenario and advocate truly credible elections in 2007. A Congress with a different composition can pursue the "closure" of the issue of national leadership.

There are thousands more like them around the country. This year I am celebrating Edsa People Power with them, because of them, for keeping the flame of Edsa People Power alive for all of us.

Friday, February 24, 2006

"State of emergency" in the Philippines

You can read the state of emergency proclamation (pdf) (hat tip: sassy lawyer). Back in May 2001 the President declared a "state of rebellion" when the pro-Estrada demonstrators got rowdy and marched on the Presidential palace. She got a lot of flak for that one, so this time it's called a "state of emergency."

I'll leave it to the lawyers to sort out the legalities. Two provision of the Constitution have been invoked:

1. Article 18 Section 7 - suppression of rebellion; ("state of rebellion", now studiously avoided);

2. Article 12 Section 17 - from which the term "emergency" actually came.

The latter provision states: "In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest."

What does this have to do with preventing public demonstrations? What privately owned public utility or business could the administration be thinking of taking over? Broadcast media? Sea and air transport? Beats me.

Because of this kind of possible intervention, the atmosphere for business just got hazier. What can blacken it is bloodshed and a persistent clampdown on peaceful assembly.

The pressing need of the country is a return to normalcy. The sooner, the better.

Wednesday, February 22, 2006

Dilbert and Dogbert talk about forecasting and oil

This has been making rounds among econobloggers. Didn't know that Dogbert was the economist in this strip.

But then his parody of making bad business assumptions here, here, and here are hilarious. Terrific reminder for making business plans, and in general any kind of forecasting.

ASIDE on the oil thing, Dilbert could have argued thus with Dogbert -

Dilbert: "But if enough of us buy fuel-efficient cars then that might overall help reduce the price of oil, which could ultimately squeezes oil revenues for whichever states that sponsor terrorism."

Dogbert:"If, might, could, and whichever."

Tuesday, February 21, 2006


Aside from faulty institutions, the country's economic growth continues to suffer from natural disasters. The recent landslide in Leyte - with massive loss of life and property - is the latest tragedy to command national and global attention.

In 2000 the Centre for Research and Epidemiology of Disasters named the Philippines as the world's most disaster prone country. A major contestant for this dubious disinction is Bangladesh, according to the UNDP (PDF).

There are some interesting statistics on economic loss from disasters (PDF file: bottom of page 1). The most destructive in these terms are the hurricanes hitting the US (Katrina and Rita) just last year, valued at 131 billion. Interestingly but unsurprisingly, economic loss is highest for the developed countries. However loss of life is certainly far greater in developing nations, which aside from having higher populations, tend to maintain population centers in disaster-prone areas, for which mitigating measures are scanty at best. When was the last time a typhoon passed in the country, however minor, without at least one death? These are typically households in makeshift shelters along riverbanks or coasts, who are ill-equipped to fend off floodwaters and heavy winds.

So once more poverty rears its ugly head. While economic growth can by no means prevent disasters, in the long run it can shift the cost from human lives to human commodities. However costly in numerical terms, this would be a very welcome development indeed.

Friday, February 17, 2006

Defending the dollar

Some University of Asia and Pacific economists want to boost the value of the US dollar:

UA & P Economist says the government must stop boosting peso

THE Arroyo government should take steps to prevent a bigger trade deficit this year by weakening the local currency through more dollar reserves, according to the economists of the University of Asia and the Pacific (UA&P). "The trade deficit will be much larger this year because of the (strong) peso," said Dr. Victor Abola, strategic economics program director of the University of Asia and the Pacific (UA&P), at Wednesday's press briefing. He described the impact of the Bangko Sentral's move in allowing the peso to gather more strength as a "double whammy." He added: "What the BSP (Bangko Sentral ng Pilipinas) is doing is making the OFWs finance the trade gap and at the same time, make industries uncompetitive," Abola said. "Oil prices are going down. You can't allow the peso to strengthen more." To allow the country to withstand the negative effects of the erratic flow of portfolio investments, Abola said the government should intervene by buying dollars to mop up the excess in the financial market.Dr. Emilio Antonio, Abola's UA&P colleague, said that to erase a substantial portion of the deficit this year, the peso should be allowed to go down to as low as P75 to a dollar. However, if the foreign exchange is maintained on the average at P55 to a dollar, the imbalance is likely to reach $8.5 billion. Abola also dismissed fears of perceived government intervention on the foreign exchange, saying, "There is no such thing as a freely floating exchange rate." ... Both urged the government to increase its GIR equivalent to six to 12 months instead of following the conventional standard of three months, which has become obsolete because of the speed of financial transactions.

Well first of all the title is wrong - the government is not "boosting the peso." It is simply doing nothing - allowing the value of the dollar to slide, in peso terms. (Oh for a more perceptive economics journalism in this country!)

I am entirely sympathetic to Vic Abola's argument. It provides a sobering counterweight to syncophant "analysis" on the government side claiming that a strengthening peso is entirely good news. There is some appeal to targeting a weaker peso.

However in principle I skeptical about any kind of policy towards targeting exchange rates. And the fact that India and China are doing it, does not mean it is the right policy. It is indeed possible to minimize intervention in foreign exchange markets. Just because a landlord must monitor the care of his property, does not entitle him to snoop and sneak at whim into the tenant's residence and forbid all manner of use.

There is some legitimacy to the argument of stockpiling a surplus in order to battle speculation. The problem though is whether anyone really knows what "speculation" is. No, "big" trade deficits are not necessarily a sign of speculation. A trade deficit simply means that foreigners are willing to sell more goods to the Philippines (in peso terms) than they are willing to buy from the Philippines. This is an intertemporal (comparison of time periods) decision. Their excess pesos are kept in some form - perhaps in cash, or peso-denominated assets. Think of it as a household with a credit card. The household sells labor services to the outside world. It purchases goods from the outside world. By means of the credit card, the household can buy more goods than it sells in any given month. The outside world is willing to hold onto the excess in return for an interest charge. Maintaining a zero deficit is something like cleaning up your monthly bill everytime - it sounds responsible, but there is a hidden cost somewhere, say the household may be holding off purchasing a new car or constructing a house.

It may well be that big trade deficits now are needed, say to purchase durable equipment. In that case a strong peso would be quite helpful indeed.

My advice to the BSP would be: stick to the basics, which is a low and stable inflation rate. Anything besides that is a distraction at best and a fount of instability at worst.

Wednesday, February 15, 2006

GDP growth in 2006

The Ateneo Center for Economic Research and Development (ACERD) forecasts a GDP growth for the Philippines of 4.9% for 2006. This is much lower than the government forecast of 5.7% - 6.3%.

A reader has pointed out that my work as forecaster does not seem to square with this earlier post.

Let me qualify: I do not outright proscribe forecasting. I would however treat forecasts with great caution. They are very useful, but they are always accompanied by some range of uncertainty. The forecaster often doesn't even know how much uncertainty is associated with the forecast. The best a forecaster can do is to provide a sound basis for making choices. Sometimes making a choice requires certain scenarios about the future - how much average income will grow in a country, for example. Based on this scenario a choice can be made - to push through with an expansion project; to enact an annual budget. Forecasting can be a great help to making the scenario.

Furthermore, I would hesitate to make a short term forecast about asset or commodity prices. Such forecasts are prone to the arbitrage objection: if based on public information (that is, past trends), then any systematic pattern that could yield a profit opportunity would have already been exploited. This implies that asset prices move in an unsystematic pattern (more precisely, a "martingale" Hat tip: Amadeo). Long term forecasts though, based on fundamentals of supply and demand, are fine. So is a forecast about a vast aggregate that would be useful for planning but of little value to an arbitrageur - for example, GDP growth. But the exchange rate by end of 2006? Forget it!

Personally I feel that 5.0% or so is a safe conservative forecast. It will all depend on how investment improves this 2006 - and investment by far is the most volatile component of GDP, so volatile in fact that Keynes attributes its swings to "animal spirits". If the recent investment downtrend can be reversed (and the reversal can come very sharply), then the economy may conceivably overshoot even the government's sanguine estimate.

Monday, February 13, 2006

Physician, heal thyself

The Asian Development Bank, based in Manila, has had to swallow a dose of its own medicine.

The World Bank has also been overtly active in the fight against internal corruption.

What about the bilaterals - JAICA, USAID, AusAid, DANIDA, DFID...? Clue me in if you know.

Perhaps we also need a survey of development clients and practioners, rating the various bilateral and multi-lateral donors for transparency, accountability, and performance. How about it, Transparency International?

Wednesday, February 08, 2006

Addendum on "rolling stores" as a poverty alleviation tool

Just a brief follow-up on an earlier post I had about those "rolling stores". The Provincial Welfare Officer in Eastern Samar mentioned that such a method fails to reach the poorest of the poor. Why? Because rolling stores will travel only up to villages where roads are passable with their big trailers. But the poorest dwell in remote villages where road access is difficult or absent. Oo nga naman. (Policy and program evaluation is 99.9% common sense, and 0.01% technical analysis.)

But note that even for these areas there are local stores which sell food patronized by the poor. By whatever means they are able to bring their wares (by mule or horse if necessary). A food stamp system would, unlike the rolling store, be able to reach the hinterland villagers through these intrepid entrepreneurs. There is indeed a better way.

Scientific assessment of the mining issue

"WILL those hotshot economists and environmental scientists from the country's top schools please conduct a credible cost-benefit analysis of the mining industry in the Philippines?" asks Business Mirror in an editorial.

Feeling -ehem- alluded to in part (I'm not an environmental scientist by the way), let me dish out a reality check: There is no way you can conduct a benefit-cost analysis on mining per se. It simply does not work that way.

What you do is you point to a specific mining activity, over a particular location and time period, and then you can do retrospective benefit-cost analysis of the net benefits of that activity. Or you can identify a specific planned mining project to do prospective benefit-cost analysis. Then you can make a conclusion of "go" or "no-go" over such projects. Never for an industry as a whole.

Of course if you want to be academic about it then you can do some kind of rough-and-dirty, broad-stroke analysis covering a whole industry. However nothing beats an honest-to-goodness, empirical study. And for that one must go site-specific. And be ready to shoulder the cost of doing such studies. (As a percentage of mining revenues, such studies are not that expensive.)

As I understand it some kind of benefit-cost analysis is already de rigeur in the environmental impact assessment phase of mining project. The quality of this analysis is of course another issue. As with anything else - you need to call a professional.

Monday, February 06, 2006

An Invitation to Eagle Watch

From the Ateneo website - An Invitation to Eagle Watch: An Economic and Political Briefing:

Do the rosy headline statistics that highlight the financial bullishness reflect the true state of the economy? Is there a basis for the much-touted claim of an economic take-off? Do recent political developments arrest questions on the legitimacy of the present leadership?

The strong peso and the surging stock prices are meaningless if they do not positively affect the lives of the majority.Yet, government claims that an economic takeoff is imminent. And that the strong peso and surging stock prices are initial signs that we are headed towards that direction.

On the political front, the political stalemate among the political parties, the continuing question on the legitimacy of the present government, the major recommendations of the Concom are but some of the issues that also need to be understood.

These are the crucial questions and considerations that need answers and ample understanding if we are to make sound decisions economically and politically.

Thus, the Ateneo de Manila University, together with the Ateneo Center for Economic Research and Development (ACERD), Departments of Economics, Political Science, and the School of Government, brings Eagle Watch, an economic and political briefing this time on “The political impasse and the real-financial economy gap: Understanding the disconnect” on 8 February 2006, 8:30 a.m. -12 noon, at the Veritas Hall, 4th Floor Ateneo Professional Schools, Rockwell Center, Makati City.

Among the speakers who will help shed light on the aforementioned issues are Dr. Cielito F. Habito, professor at the Ateneo Economics Department and director of ACERD, who will speak on “Bullish markets, empty pockets: Challenges to the real economy;”

Fr. Jose Cecilio Magadia, S.J., associate professor at the Ateneo Political Science Department, with his talk “Completing the picture of chacha;” and Maritess Vitug, editor in chief of Newsbreak Magazine, who will give the talk “Armed and apolitical? A perspective of the Philippine military”.

The participation fee is PhP 2,500 per person, inclusive of lunch and briefing materials.

To register, please email rneri@ateneo.edu or call Sai Sandoval at 4265661 or Guia Janson at 9297970. Please make checks payable to ATENEO DE MANILA UNIVERSITY (TIN 000-707-229).

Blaming poverty

The recent crowd disaster at the Philsport (aka the ULTRA) in Pasig City, Metro Manila was tragic. My condolences to the families of the victims.

Some of the usual suspects have blamed the disaster on poverty. Given that they were poor, sure, the prizes up for grabs attracted a big crowd of them. In this shallow sense, the attribution is correct. However there were many other necessary conditions for such a disaster to materialize. Remove one, and it all passes by as just another show at the ULTRA.

The most glaring necessary condition was the absence of adequate crowd control measures. Hence, the responsibility falls squarely on the shoulders of those tasked to enforce crowd control, and those who are in the authority over them.

Poverty is an age-old problem in the country and will continue to be so in the foreseeable future. Everybody knows this, for heaven's sake. One cannot eliminate poverty just like that. But one can put adequate crowd control measures, just like that.

The reality folks is that nobody is to blame for "poverty". Yes, someone is to blame for specific acts that abuse the poor. But nobody is responsible for poverty in toto, anymore than anyone is responsible for GDP growth. Blaming poverty is a useless exercise. But focusing on adequate crowd control is useful, meaningful, and necessary, because crowds will emerge under any circumstance, in countries rich, poor, or middling. We should not exploit this disaster to gain publicity, or worse, flaunt our own political agenda.

Saturday, February 04, 2006

Killing to save lives?

Last month Philip Yam of the Scientific American blog also had something on science and the death penalty. Yam estimates that execution error (i.e. executing an innocent person) to lie between 1/30 to 1/12 - and this in the United States! He asks: Would you be in favor of the death penalty if one innocent person were executed for every 10 guilty ones? How about 1 in 100?

Hmmm. One way to answer this is: does the death penalty save lives? (Of course this works through deterring homicide). Gary Becker, guru of the economics of crime and the family, is rather sanguine about the deterrent effects of capital punishment. This is based on a priori analysis (using the common sense observation that the typical individual dislikes death more than life imprisonment), combined with some early empirical studies (e.g. by Isaac Ehrlich).

The empirical evidence is reviewed by a recent NBER paper. (Hat tip: Ben Muse.) According to this paper, the link between capital punishment and deterrence is inconclusive; earlier studies that appear to have established some connection suffer from serious flaws.

So, should we be killing to save lives? Clearly the criterion of deterrence and net reduction of the death rate provides no sound justification (as of yet) for capital punishment. Every polity that does institute capital punishment would have to justify it using other ethical imperatives, rather than a practical, measurable impact on public safety.