Wednesday, September 13, 2006

Collapse - of economic logic

There's another collapse going on - in economic policymaking of the Philippine government. Under the watch of a Ph.D. economist, no less.

For decades the Philippines had pursued a regime of "financial repression" involving interest rate ceilings, mandatory lending for private banks, and direct lending by government. In the mid-1980s this regime went on a phase-out. One of the last nails on the coffin was Executive Order 138, which prohibited direct lending by government agencies. The main credit intervention of the government (aside from Central Bank regulation) is now relegated to government financial institutions, such as the Land Bank and the Development Bank of the Philippines.

The advantage of such institutions is that they are specialized financial intermediation companies, whose objective is the bottom line - maximizing net present value. Of course that objective is undermined by the "soft budget constraint" i.e. they have the implicit fallback on government subsidy; moreover they receive preferential treatment (for example, the Land Bank is the official government fund depository). This arrangement though remains vastly superior to having the Department of Agriculture dishing out loans to farmers. For the latter, there is essentially no mechanism for accountability should financial disaster happen. And it has happened, as this columnn discusses.

Now the President has repealed the prohibition, opening the floodgates to direct lending by government agencies. Where is the logic, nay the sanity of this?


Randall Francisco said...

I'm no economist but just a simple business management graduate (which means I might not really understand your point, but if I do get your point then probably a lot more people understands you as well) but by reading your post and that one by Dr. Habito, it left me hanging with a couple of thoughts: If DA doesn't have any mechanism for accountability in providing loans for the farmers, what right does the government have to make other agencies act like lending institutions? I thought we have a lot of brilliant minds in the government (how naive of me!). It is as if the DA is giving away cash to farmers. Hmmm, maybe I can try my hands on farming and get a loan as well. If the government thinks this is a joke, then its a sick one.

Econblogger said...

Hi Randall.

1. The infamous example of lack of accountability is the Masagana 99, a direct credit program of DA. Repayment rate was - if I remember my figures right - 30%. So 70% didn't go back. Who got even just a reprimand for this deplorable financial performance? Nobody. If you read government reports, this was simply blamed on the "doleout mentality" of farmers. If some loan officer in BPI were to pull that trick, he'd be out on his sorry ass faster than Ayala can count cash. So yeah, in effect the 70% non-payers got cash from the government.

2. National government should not make any of its agencies lenders. Perhaps one may argue that government can own a for-profit bank, to push its loans for priority sectors. Important thing is it must be an honest-to-goodness for-profit institution directly doing the lending.

3. Government is full of bright boys and gals. But the mental energy is diverted to playing politics, rather than thinking of real solutions to real problems.

Iloilo City Boy said...

I wrote an entry in my blog discussing this topic. Basically, I postulated that the reason why EO 138 was repealed is because President Arroyo felt that GFIs are causing a "bottleneck" and that not enough development funds are reaching the "non-bankable" poor. Pls see my blog for further details if you are interested.