Dynamic ambitions

A common criticism of the State of the Nation Address (see previous post) is that there was little detail on how the grand public investment plan was going to be funded. This criticism is ill-founded. It was already a long speech, without all those financing details (which could get bloody).

Furthermore, thinking about financing when formulating a strategy is bad planning. Strategy is all about ambition ("vision" is the MBA-speak these days). While I don't recommend throwing reality entirely out of the window, it's healthy to be optimistic about the possibility of relaxing constraints.

So the first question is: are these projects worthwhile? If the answer is yes, only then does one ask: how am I going to pay for it? Because once you have reasonable expectations of value for money, then you can go and persuade someone to give you the money. In the context of government, that's either borrowing, or exacting tax revenue.

In evaluating a public investment plan, the level of analysis is important. It is easy to get mired in a micro, case-by-case evaluation. It may be that a project in isolation yields smaller benefits than a bunch of projects together making up a coherent development strategy. The reason is that there may be "dynamic externalities"; this is just fancy way of saying that in the long run a critical mass of the right investments could deliver proportionately greater benefits than individual projects.

Rural development is an important example. Perhaps an irrigation project by itself can't hack the required social rate of return (say, 15%). But what if it's part of a grand strategy of agricultural development? Suppose a widespread boost in agricultural incomes dramatically improves human capital formation - which investment did not take place previously because of poverty and various institutional failures. The human capital then becomes the base of a sustained industrialization drive. (If you think I'm dreaming, think "East Asian miracle.")

A similar issue is related to city formation. The interesting thing about a city are the so-called "agglomeration economies" - there must be some value in many producers and consumers all bunched up in a small space. That value seems obvious - proximity makes transactions easier for everyone - but on second thought it's not so obvious: because the "everyone" had to be there in the first place! ( Consider the problem of building a city in the middle of nowhere - there is little value in just one person making the move; some type of coordination is definitely required.) Once the critical mass of producers and consumers are clustered, then dynamic agglomeration economies take over, and we get increasing urbanization (economic growth) over time.

So how do you get that critical mass for a "take-off"? Some private sector developer consortium might do it. So could government. Rather than twiddling thumbs waiting for the market, why not support the ambitious State?

Zona

The State of the Nation (SONA) address of the President of the Philippines yesterday was long on specifics and short on generalities. (Full text of the speech is here, sans the Powerpoint.) What it could have used was a bit more abstraction on this "mega-region" approach to public investment. As it is, it came off more like a sound-bite to organize the existing Medium Term Public Investment Plan (download here, large file).

The mega-regions are: Northern Philippines, Metro-Luzon (that is, Greater Manila), Central Philippines (Visayas), and Southern Philippines (Mindanao). The North and South specialize in agribusiness, Central in tourism, and Metro-Luzon in industry and services. (There is a fifth, the "cyber-corridor" cutting across regions. But that detracts from our story). Regional specialization is not of course exclusive (there is plenty of manufacturing in Central and South Philippines, and tourism in Metro-Luzon), but for planning purposes the designation identifies the geographic targeting of public investment. The idea is that each region has its competitive edge, which requires further strengthening through infrastructure support. The enabling environment for private enterprise would stoke economic growth in the long term.

I would have liked to hear more about agricultural development from that speech, but if everyone's baby was in there she would have talked the whole day. The approach is essentially sound - question is if the President's political base remains sufficiently resilient to push these projects through. Her last budget proposal already tanked in the Senate, without all these mega-projects.

Oh, one more thing: she mentioned some startling tidbits like:

"Even before this, Metro Manila firms paying bribes for public contracts declined from 57% in 2003 to 46% today. Congratulations, Metro Manila."

Also:

"Helping our infrastructure upgrading, is the fall in bribery for public sector contracts in Metro Cebu, from 62% of companies in 2004 to 47 today. Congratulations to Cardinal Vidal for shepherding his flock and to Metro Cebu Mayors Osmena, Ouano and Fernandez, and Metro Cebu representatives del Mar, Cuenco, Gullas and Soon-Ruiz."

So previously nearly 3 of five public contracts required bribery; now it down to a tad less than one out of two.

Speaking about the glass being half-full...

Rice quotas forever

According to this report, the Philippine Department of Agriculture has bucked (again) a recent call for rice import liberalization. The proposal mind you is far from free trade: it simply proposes to convert current import quotas to tariffs from July to September, which is the cropping season (waiting time for the rice harvest). The move will earn government some much-needed revenue. It would also extend practically the same protection to our precious "food security" as the current restrictions.

The DA opposes it ostensibly because it would send a "mixed signal", undermining our WTO negotiating stance. What exactly is the position our negotiators are defending? That of quantitative restriction on rice right up to 2012 (under the Uruguay Round, the right to impose quotas for the basic staple expired in 2005). Of course it begs the question of whether the position is right in the first place - if not, then it is only proper to correct the position as early as possible.

Incredibly, the reporter swallowed the line right up to the sinker: "Volume limits are intended to protect farmers especially during harvest seasons, as imports may result in a glut that would cut selling prices." And I thought that the very rationale of importing was to take advantage of a cheaper foreign price!

Now what's the real reason why the DA is opposed to the innocuous move? Simple - the removal of quotas would transfer the monopoly rents earned by the National Food Authority to the general revenue fund. Now since the NFA is government-owned, one would think this should hardly matter. In fact though the distinction matters the world for the NFA. Incidentally, negotiations towards continued rice quotas are led by - surprise - the NFA chief.

In the Philippines, dogs (and monkeys) have tails - but the body is the one wagging.

Soccernomics

Well, between my Africa trip, beating a couple of deadlines, and watching the World Cup games, I've been passing the days blog-free - both reading and writing. Speaking of the World Cup: that's what got me back. Some news items - like this one - talking about "soccernomics", how the World Cup is supposed to give the economy a boost. What???!!! So I checked out the original report from ABN AMRO here. It doesn't take a lot of subtlety to string these business journalists along. Some soccer fans (who happen to be economists) "have way too much time on their hands". Which is exactly what you need - to watch all those games in the first place!