Business bashing is sexy

It seems the oil "crisis" is a great time to debunk bad economics. I can hardly keep up! Here's another grandstanding politician talking about oil company profits: Two of the country’s oil refiners — Pilipinas Shell Petroleum Corp. and Petron Corp. — raked in P11.6 billion in after-tax profits in the last 18 months, as they enjoyed what a lawmaker described yesterday as "massive pricing power" due to soaring world crude prices.

Citing financial statements filed by the two oil firms with the Securities and Exchange Commission (SEC), lone Catanduanes Rep. Joseph Santiago said Shell and Petron posted P2.87 billion and P2.31 billion in net profits, respectively, from January to June this year alone, or a combined P5.18 billion.

In the 12 months of 2004, he said Shell and Petron posted P2.98 billion and P3.43 billion in net profits, respectively, or an aggregate profit of P6.41 billion.

Let's see - how does higher cost of foreign oil translate to massive pricing power? If there is monopoly power, wasn't it there before the oil price increases? What makes them able to better exploit it now than before? It simply does not compute.

Santiago notes his comment could raise anti-business sentiment, so he adds: We are not out to judge the two oil firms. It is not a crime to make a profit in this country," Santiago said. "We are simply disclosing these figures in the interest of public scrutiny and transparency. We are leaving it to the people — to consumers — to judge for themselves." Yes, his motivation in making this press release is oh so transparent.

It turns out that the explanation is more pedestrian: Petron is making more profit because of its export earnings; Shell is making more profit because of export earnings and sales from related business, such as gas station concession fees and retail goods. (From today's issue of the Philippine Daily Inquirer, "Oil firms earn billions of pesos amid crisis", unfortunately unavailable online.) Gee, I learned something at least - now I know the top oil players are exporters too.

Is there anything substantive about the pricing power accussation foisted against the oil industry? What are the facts? Read the independent review of the Oil Industry Deregulation Act, available here. Why was this report not played up in media? Simple - stating the plain facts about free markets is not sexy. Business bashing is.

Fix it until it gets broke

I am growing alarmed over the latest political rhetoric on the oil "crisis". Here's the adminstration talking emergency powers again: WHEN the energy crisis degenerates into a "worst case scenario" President Gloria Macapagal-Arroyo will be forced to use "coercive powers" to enforce energy conservation, Malacañang said Saturday.However, given the present situation of world oil prices soaring to record highs, Press Secretary Ignacio Bunye said "regular laws will work."

This is practically warning of a regime of price controls and rationing - just wait for the oil price to hit some unknown trigger level.

Or take this clueless commentator: What do you remember about earlier oil crunches? Newsroom colleagues ask those who’re older (the Associated Press prefers the 1978 phrase “near-elderly” for us.)

Which one? The World War II fuel crunch? Or the 1973 artificial shortage, stemming from the Opec embargo?

Fuel dumps were bombed in that now dimly remembered war. Japanese forces controlled gasoline stocks. We read by coconut oil lamps. The horse-drawn carriage reappeared. Our 350-cavan "batel" sailed from Batangas to Cebu in seven days. And we hoofed it. One walked four hours on 20 kilometers of eerily deserted roads to reach the city from our evacuation home.

In 1973, you could only buy five liters at a time. So, people coasted from one gas pump queue to another. You hauled five-gallon containers “just in case” a station allowed an extra sale.

Abroad, 55 miles per hour speed limits were clamped on. President Jimmy Carter called for the “moral equivalent of war” to reduce dependence on foreign oil. That included filling the US strategic petroleum reserve and research for alternative energy. He was not reelected.

Habits die hard. Wasteful use of fuel continued. Few politicians think beyond the next election -- or impeachment -- even in countries that have no oil wells.

Unfortunately, it's apples and oranges, folks. Wartime and price controlled regimes are different from a free market regime, which is closer to reality now after oil industry deregulation (RA 8179 of 1998). We will not see queues and rationing as long as we allow prices to freely balance supply and demand.

Here's more: If use pulls ahead of production by even a fraction, oil prices could soar to triple-digit levels, Maas warns in The New York Times magazine. That’d trigger a global recession and affect almost every product, from cell phones to medicine.

Eh? Use pulls ahead of production due to economic growth, no? And high prices would choke off that growth? Okay let's grant it for the sake of argument. Then what? You guessed it, prices would start to go down - because the reason they went up in the first place is gone! Actually what would mostly likely happen is that economic growth would soften (not halt entirely), which stabilizes demand, under a higher price band than pre-2004.

Here's some more: But today’s record prices are straining producers. Indonesia, for example, is laying the basis to whittle back fuel subsidies. Even Saudi Arabia is feeling the strain as the world burns 84 million barrels daily.

Yup, they're "straining" all right - straining to maximize their already soaring profits! If you're getting this rich you must be stressed out too! And about the Indonesians - I guess somebody told them that the fuel industry didn't subsidies anymore under this high price environment?

Now if gasoline hits say sixty pesos (over US$ 1 per liter), lots of politicians are going to insist on price controls. Why? Same reason Malacanang is mulling emergency powers - to make it appear that they're "proactive". I'll take their apathy anytime!

But wait - even now one Senator has filed this bill. Jamby Madrigal wants to repeal the Oil Industry Deregulation Act of 1998. Go figure. I guess she wants to go back to a regime of price control-cum-subsidy. That after some lip service in Section 2: "It is the State’s policy to uphold a truly competitive economy that releases the creative energy of free enterprise and fair competition." Aaaargh!!!

Let me review some elementary economics again, folks:

1. If we implement a fuel price ceiling without industry subsidy, supply of the fuel will decline, relative to supply at the free market price. And definitely relative to demand at the ceiling price - hence the need for rationing, which is constly to monitor and enforce.



2. If we implement a price ceiling and avoid supply shortfalls by extending industry subsidy, the cost will be great - inevitably, greater than the benefit consumers enjoy under low prices.

Why no. 2? The argument requires one to think "at the margins". Bear with me now: At the free market price, additional consumption (say an extra 1%) no longer provides additional net benefits to consumers; alternatively, the additional benefits to consumers are already below the price of the additional 1%. That's why they no longer add to their consumption! Similarly, from the producer's viewpoint, an additional 1% production costs more than the price. That's why they no longer add to their production! So if government introduces a price ceiling with subsidy, increases consumption by say 10%, they are promoting more consumption and more production - that means the additional cost is above the additional benefit. Society is worse off in this scenario. Now producers need to receive at least the cost of the additional 10%; but the amount they can recover from consumers has even been reduced, due to the price ceiling. This adds to the subsidy burden of the government.

Sure the policy has benefitted consumers. And maybe producers are no better and no worse off, if just the right amount of subsidy is given. But the subsidy itself needs to be paid for; charged to whom? The Filipino taxpayer, i.e. the same gas-guzzling public which received the subsidy in the first place. Now what's bad is that the amount of subsidy exceeds the benefit received by the taxpayers in the first place. So they end up getting shafted - though they don't know it. Nobody wins. Except the trapos who got some public relations mileage. The real crisis happens the minute we pander to their populism.

[Trapo, "Traditional politician"; in Filipino, "a rag"]

Riding the wave

To continue this series on Boom and Bust - let's turn now to fiscal policy. In Leitner's paper fiscal policy is measured by government spending (though personally I find deficit spending to be a better measure). Still I agree that fiscal policy fails to counter the business cycle (which would happen if deficit spending shoots up during periods of unemployment, and eases up during periods of higher employment). The reason is simple: given the burden of the public debt (now standing at 3.4 trillion pesos, or 70% of GDP in 2004), fiscal policy is a balancing act between the country's development needs and what the government can afford. In short, government knows there is a shortfall in spending there, there, and there, but funds are scarce and the ability to borrow is now severely curtailed by a big stock of debt. So - when revenues are flowing in (boom), spend; when revenues are drying up (bust) - do the fiscally responsible thing, and rein in spending.

Government could have a lot more flexibility in attending to development needs and countering the business cycle, if only it could keep revenues flowing in. Unfortunately this is not the case. Tax effort - the ratio of revenues to GDP, has been on virtually an eight year decline since 1996. Last 2004 it was only 14.5% of GDP, from 18.9% in 1996. Because of its dismal performance in collecting taxes, the government is forced to just ride the wave.

It's the stupid, economy!

To continue this piece on Boom and Bust: let me first tackle the second priority I listed earlier, which is stabilization. Mainstream economics agrees that aggregate demand (spending decisions of households, business, goverment, and the foreign sector put together) does play a role in the business cycle. Moreover, policies of the government (including the Central Bank) can influence aggregate demand a lot. Deficit spending by government, and monetary creation by the Central Bank (the equivalent of printing money), can stimulate aggregate demand. (These are referred to respectively as "expansionary fiscal" and "expansionary monetary" policies.) Reduction in deficit spending as well as contraction in money growth do the reverse.

Both tools should be exercised with caution though. Excessive deficit spending creates an unsustainable public debt. (That means, it gets so big nobody wants to lend to the government anymore.) Discretionary money creation makes people doubt about the actual purchasing power of the peso (given the unpredictable inflation it causes). Demand management is therefore a delicate balancing act.

Now stabilization policy should be "countercyclical". However, Leitner's study (cited earlier) provides evidence that fiscal and monetary policy is "procyclical"; expanding and contracting when the Philippine economy does. This suggests that government policies have aggravated the business cycle.

Why? One hypothesis is that economic managers have been incompetent (hence the title of this post.) However to be fair, maybe they weren't aiming at goals other than stabilizing the business cycle. On the monetary side, it turns out that all these years the Central Bank has not been targeting the business cycle at all! Rather, it was an informal policy of theirs to keep the exchange rate stable. Hey I'm not pulling this out of my hat; there's good evidence for this from a peer reviewed article by Bautista and Bautista (2005). How does this work? Well, high interest rates make peso-denominated assets more attractive, which increases demand for pesos from dollar-holders. Credit and money supply go together; keeping money supply tight keeps credit tight, which keps interest rates up. So this was the CB was after all these years.

This is the heritage of Oldthink - for decades the Philippines' foreign exchange market was heavily regulated (older readers in the Philippines can recall the "black market" for dollars and the "Binondo Central Bank.") This was in part to control the exchange rate. After liberalization in the early 1990s, the Central Bank still seemed captivated by Oldthink. And you know what? There are some bank economists who believe that the Central Bank is still in the Oldthink mode. See this article:

But Emma Pante, an economist at Rizal Commercial Banking Corp., said, "It may be difficult for the BSP to hold its key rate steady given the US Fed's continued hike in benchmark interest rate to between 4.0 percent and 4.25 percent by yearend." The BSP is being helped in keeping rates steady by the healthy levels of foreign portfolio investments and income remittances of overseas Filipino workers, "but still the oil price threat remains," Pante said. "As the nation's oil import bill rise, the peso will remain under pressure," she said."

That's Oldthink for you.

But the Central Bank itself professes radical departure with Oldthink. From 2000 onwards, it has adopted the textbook prescription of targeting inflation primarily, and other objectives (such as stabilization) secondarily. My opinion is that it's recent performance renders its goal-setting highly credible. (Let's hope then that they prove the economist quoted above wrong!)

Next: fiscal policy.

Interlude: Economic Policy in India

This was too good to pass up. From the Indian Economy blog: an interview with Indian Prime Minister Manmohan Singh, by McKinsey Quarterly. It's fascinating how Singh sounds apologetic for all the compromises necessary to push through the reform agenda. Economics is the art of optimizing; politics (as somebody said) is the art of the possible.

Boom and bust

Economics is divided into two main branches: macroeconomics, and microeconomics. When you talk about the economy on a sector-specific level, then you are talking micro. For example, explaining the rising trend in oil prices is micro. If you are talking about the economy as an aggregate, then you are talking macro.

Used to be economics was entirely micro. After all if you are talking about the "allocation of scarce resources to alternative uses to satisfy human wants", then your approach is going to be highly sector-specific.

However what if all those sectors seem to move in the same direction? For example, suppose all the prices moved up, rather than just the price of oil? Or, suppose not just one industry contracts, but all industries put together experience a contraction? Something funny is going on that may not be amenable to micro-analysis.

So when you are talking about the business cycle, which is simply the trend in the GDP growth rate, then you are talking macro. Why would all industries put together experience growth or contraction?

Just as in micro, one may divide the causes into supply-side and demand-side. On the supply side, growth in resources (accummulation of capital, growth in the labor force, technological progress) all contribute to aggregate growth. Or some negative "shock" may strike at costs of production, of such magnitude as would appear in the aggregate figures. For example, if an economy is agriculture-dependent, then a prolonged dry spell could very well force an economic contraction.

The demand side is much trickier, and here the economic consensus is far from established. The mainstream view (which has numerous detractors, some of them Nobel prize winners) is that total demand for goods and services may also go up or down, accounting (in part) for swings in the business cycle.

The distinction is very important. In the long run, the growth of GDP depends on supply fundamentals - more resources, and more productive use of available resources (technology). So investments must flow in; the labor force must grow and become more skilled; and production technology should be constantly upgraded.

In the short run however we may experience fluctuations - episodes of boom and bust - which may have to do with short run shocks, whether on the supply side or on the demand side. None of us like instability. It's not nice to think we are soaring high this year, only to crash and burn the next. If government policy can do something about it at all, we would like economic growth to be smooth.

The challenge of economic development is twofold: first is to raise growth rate of GDP to high and sustained levels. This is the main engine for poverty reduction. Second is to avoid excessive oscillations of the business cycle. We need to get the priority straight: Growth must first have a fundamental basis in productivity. If growth is merely a figment of the business cycle, then an episode of boom will turn into a bust eventually.

Unfortunately the track record of the Philippines since the 1980s points to more of a boom-bust rather than sustained growth mode. A recent paper by Sandra Leitner (Discussion Paper 2005-10, Philippine Institute for Development Studies) classifies the cycle as follows: 1983-1989; 1989-1997; and 1997-2000. Each cycle lasts about 7 years. It seems we are still in the middle of the third one (fortunately, on the upside. But then when it's over...)

Does government policy have something to do with this cycle? After all, the "shocks" may be the underlying drivers of the economy, with government policy largely helpless in the face of these shocks. In that case, it is impossible for any administration to get the blame for a downturn; by the same token, it should not claim credit for an upturn.

This should make for leisurely reading tomorrow. See ya.

The imagination experts

Today I want to take on a pet peeve of mine - hindsight wisdom about the swings of stock prices or exchange rates.

Do you wanna sound like a securities dealer being interviewed about stock price movements? First, make sure you watch the evening news. Scan the latest international newsmags too, they contain a lot of business info. Of course, you've known whether the composite index went up or down.

Then let your imagination soar! Just follow a few rules:

1. If the index went down, highlight some bad news from last night. This is a good example: Share prices closed 1.01 percent lower yesterday due to concerns about the impeachment complaint filed against President Arroyo as well as rising oil prices, dealers said. (I used to blow my top, shouting, how the hell do they know that? What if the movement is due to something else? What if that something else happened last week, last month, last year? What if it's just plain damn noise? But now I keep my cool. I breathe. I relax. I'll live longer.)

2. If the market goes down, highlight some positive news. If there are none in the local media, then highlight some good news from abroad. Bullish prospects for economic growth in China and India is a favored one this days.

3. If 2 is sounding too far-fetched, check if the market was on an uptrend on the previous day. Then invoke "profit-taking".

4. If you didn't watch or read news at all you lazy bastard, then just say the movement is a "technical correction."

Now allow me to let my imagination soar. Let me propose a computer program which can pair the previous day's price movement, with either a news item, the phrase "profit-taking", and the phrase "technical correction." The program should be written based on 1 to 4, above. A human can then ghostwrite the interpretation with syntax and grammar. Then feed the write-up to the major dailies under a pseudonym. I predict that nobody, just nobody, from the entire business news readership, will be able to distinguish the human-generated from the computer-generated write-ups.

Especially not the dealers.

Spin

I was playing the "spot-the-fallacy" game with Tiglao's piece.

If he was talking about the sound economic performance, then the use of the following indicators are fallacious:

Jobs generated annually, measured by year-on-year increases in the number of employed persons, have seen the biggest number under Arroyo.

Of course, as the labor force itself has grown continuously since the Aquino administration, nothing of substance can be concluded from this statement.

Similarly his observations about the stock market index and exchange rate trends don't mean much:

Take the case of our stock market's performance, compared to those of others in the region. We're the third best performer this year... During Erap's crisis that started mid-2000, the peso's exchange rate fell from P43 to the dollar to P51, a huge P8-loss in our currency's value, foreboding a chaotic period unless Estrada was ousted. That certainly convinced the elite to junk him ASAP. In contrast, since the current turmoil started in June, the peso's exchange rate has held steady at the P56-level. This, despite the fact that crude oil prices have zoomed up to their highest levels in 20 years, putting tremendous pressure on the peso's value.

The problem is that these indicators carry an inherent volatility; snipping off any particular brief episode (as he does) as an indicator of economic robustness is a futile exercise, at best. (Anyway, if the exchange rate does depreciate starting tomorrow, how much would you bet that he'd be blaming oil prices or speculation?)

Then he talks about the most sensitive issues - economic growth and poverty.


The economy registered its highest growth under Arroyo's presidency compared to the preceding three administrations; inflation, the lowest. There is an unmistakable economic momentum. Growing only 1.3 percent in the first quarter of 2001 when she assumed office, the GDP growth rate has accelerated to 6.4 percent by the first and second quarters of 2004, slowed down this year only by the oil crisis.


And:

The economic growth under Ms Arroyo has helped the poorest. Poverty incidence has gone down, from 27.5 percent in 2000 to 24.7 percent in 2003. This means 1 million Filipinos getting out of the poverty quagmire in just three years. Wealth distribution has also improved, as shown in the percentage changes in the shares of the different economic groups in the national income. Under Arroyo's watch, the percentage share of the richest 10th decile has declined by 1.5 percent, with the nearly corresponding increases in the share of the poorest deciles.


At first I thought he was claiming causation. Then he would be perpetrating the "non sequitur" fallacy - mistaking a correlation for causation. I noted however that he is not claiming causation. In fact looking over the article, he nowhere claims GMA-causation for any of these fine trends. He's too smart a journalist and logician (undergrad major philosophy) for that. (I too will not launch into an analysis of causation either - I'm a bit antsy about perpetrating fallacies myself.)

So if these trends may or may not be attributable to GMA's policies, why cite them? Well, first, his explicit objective is to demonstrate that the economy is doing well, hence the President's position is robust. I think on this part he's right. It's interesting though to note that the fate of presidents hang by the vagaries of the business cycle. Scary.

Second is Tiglao's implicit objective. It's clear that he's grasping for a vindication-by-association. And this implicit fallacy is the foundation of all hype and image management. Like politicians hugging babies and fulminating against corruption. In short, his article is nothing more - and nothing less - than spin.

Hatchet job

A friend of mine sends me the following e-mail:

Hi Roehl,
"It's the economy, stupid" Go figure.
Bobby Tiglao's PDI article today also cited figures
claiming that GMA's admin is by far the "ablest of
them all" when it comes to economic management.
any reaction to that?

unbelievable? perhaps, sec neri deserves more credit,
a non-economist at that...(what???????)

dong

Well, let' see about that. My thoughts on this piece by Bobby Tiglao - tomorrow.

What high prices do

This article nicely summarizes responses to the oil price increases worldwide:

Adam Smith and oil prices. Nod to Cafe Hayek for the reference.

Just to summarize some of these responses:

• In Libya, which has some of the biggest untapped crude reserves in the world, lifted sanctions and the prospect of getting $60 or more for a barrel is helping induce Chevron, Marathon and numerous others to open millions of acres for drilling.



• Exploration is also creating jobs and expanding supply in Russia, Angola, China, Algeria, Britain, India, Canada, Azerbaijan, Nigeria, Poland, Malaysia, New Zealand and Trinidad and Tobago, reports Oil & Gas Investor.



• The profit signal sent by $60 oil is so strong that last month the number of exploratory rigs around the world hit its highest level since 1986, says Baker Hughes, the petro services company.



• Capital projects are booming in the equipment and "downstream" sectors, too. Companies in South Korea, China, Singapore and the United States are addressing a drilling-rig shortage by building new hardware.



• Chevron is expanding its Pascagoula, Miss., refinery by a fourth. Kinder Morgan and Sempra want to spend $3 billion on a pipeline bringing natural gas from the Rockies to the Midwest and East. Texas-based Valero and ConocoPhillips are spending billions to improve their ability to process sour crude, which is cheaper than sweet and will help bring down prices.



• Thai Oil is spending $1 billion on new output capacity. Brazil just announced plans to increase processing capacity by 20 percent. China and India have doubled refining capacity in recent years.

Think about it: high price is an incentive to produce more. Common sense economics is vindicated - again.

On a related note: Senator Mar Roxas has wisely criticized some of the conservation policies of the government. In particular:

Roxas said the recommendations, including shorter mall hours, do not require emergency powers. People's “natural self-interest lead to conservation measures.”

Gas rationing, he said, may be a worse cure to the problem as it might spur a black market for ration cards.

Just one remark on Roxas statement - it's not just the black market which is the bad thing about the rationing. The black market is the response to the bad thing about rationing. And that bad thing is the rationing. You ration becomes supply is low relative to demand, but you restrict price from correcting demand and supply imbalance (i.e. consumers to conserve on energy out of self-interest, suppliers to produce more oil out of self-interest.) Not only have you depressed supplies, you have also spawned a lot of unsatisfied customers. Which customers are willing to begin a bidding game against other customers - hence the black market.

Ibon's flight of fancy

This is so good, it's worth quoting in full:

IMPLEMENT PRICE CONTROLS, IBON URGES
Oil price hikes have increased the cost of producing and distributing basic commodities, triggering price increases and further eroding Filipinos’ already devalued incomes. Market vendors said they have already hiked prices due to the increased cost of transporting goods.

Since 2000, food prices have substantially increased. As of June 2005, the price of NFA rice in the NCR has risen 8% compared to June 2000 levels; pan de sal has risen 29%; Lucky Me noodles, 32%; eggs, 16%; galunggong, 19%; tomatoes, 33%; and bananas, 22 percent.

These price hikes have reduced the buying power of the peso in the country to a mere 77 centavos, IBON adds.

Water and electricity rates have also risen significantly. The National Power Corp.’s monthly effective rate in the Luzon grid for June 2005 reached P4.41 per kilowatt-hour, almost 70% higher than the P2.60 per kilowatt-hour rate for the same period last year. The Maynilad water rate of P30.19 per cubic meter in January 2005 is 52% more than the prevailing tariff last year.

To provide immediate relief for poor Filipinos, government should thus freeze prices of basic commodities. This would include a moratorium on oil price hikes, not only to give relief to consumers but also to halt the further profiteering of the oil firms. There should also be a moratorium on water and power rate increases. Rollbacks on the prices of rice, oil, and water rates should also be studied.

But these moratoriums and rollbacks should be backed by price supports and government subsidies, to protect the livelihoods of the country’s food producers. A substantial increase in minimum wages should also be given to bring the standard of living of workers up to decent levels. The National Wages and Productivity Commission itself admits that the daily living wage in the NCR has already reached P666 as of May 2005. Meanwhile, IBON estimates the daily cost of living in the NCR at P635.81 as of July 2005. (end)

The first part reiterates the fallacy of composition: the fact that some people's purchasing power is squeezed due to inflation, does not mean that every household's purchasing power is squeezed. Think about it: in an inflation, prices go up; but who gets the revenues from the higher prices? Other people! The total amount of income is therefore the same, purchasing power on the aggregate is the same. Of course those on fixed income are on the losing side, compared to those whose incomes adjust with inflation. It is only cost-push inflation which actually reduces purchasing power; however from 2000 onward, I think we can point to the current round of oil price increases as the only serious episode of cost-push inflation.

The second part starts talking about price controls. Ingenious, except for the fact that price controls would lead to undersupply. (If you restrict incentives for producers, don't be surprised if they produce less!) So IBON has a brilliant remedy: subsidies! Which again, has only one problem - who's going to pay for it? Government, of course. How? More borrowing? More tax revenue? Ahh, of course, by not paying those lousy foreign loans. And what if foreign creditors refuse to trust us anymore? No need for those dollars, just produce goods locally in such a way that "from each according to his ability, to each according to his need!"

Assertions don't come more devoid of evidence than this. There is not even an effort to back up the claims with the facts. Just some feeble figure-fumbling for fools.

Physician, heal thyself!

I had an erratum in the previous post. It is now rectified. (Were you able to spot it?) Sorry for the confusion. No excuses. But it teaches me not to post here in a hurry (some carpentry work at home, see). At least I healed it myself...

Bad macroeconomics

Cursory scanning of the Op-Ed page of nearly any daily will typically net you a golden example of bad economics. Here's one:

Belinda Olivares' column

Citing the main howler:

THE ENTIRE citizenry has to cooperate in efforts to save on fuel, as it's a matter of national survival. With the price of oil predicted to shoot up to $70 per barrel from just over $30 a year ago, it's no longer a question of whether we can use up as much fuel as we want, so long as we can pay for it. The nation has to cut down on fuel consumption as it's going to drain our international reserves and could widen our budget deficit.

I won't talk about the price angle - yet. Let's just look at some basic national income accounting, shall we? Olivares claims there's a connection between oil price hikes, draining international reserves and widening the budget deficit. Is there?

At the national level, let Y = income (=spending), S = saving, C = consumption, T = tax revenue, G = government spending, X = imports, M = imports.

Based on total spending, we have:

Y = C + I + G + X - M.

Based on uses of income, we have:

Y = C + S + T

These two are basic accounting identities - they are true by definition. Equating income with spending, we have:

C + S + T = C + I + G + X - M.

Cancelling out C and with a little rearrangement:

S - I = (G - T) + (X -M)

What does this mean? National savings (net of what is lent to investors) is lent either to the government (G - T is simply the fiscal deficit) or to the rest of the world (X - M is borrowing by foreigners). Again, accounting identity - true by definition.

Now it follows that if there is a trade deficit, then net national savings equals what is lent to the government, net of what is borrowed from foreigners. Note that if the trade deficit widens, and net national savings is constant, it must be the case that the fiscal deficit increases. So on the surface, there does appear to be a link.

That's several ifs. On the other hand, if government holds steady on its fiscal policy, then G - T is constant (yes, that is perfectly possible), and therefore an increased trade deficit must drive net private saving down.

What about international reserves? It only enters the picture when we look at how a trade deficit is financed. There is another basic identity here:

M - X = capital inflows + change in international reserves.

(Here I am ignoring international transfers, like foreign grants.) Net borrowing from the rest of the world must be financed either by capital inflows from foreigners (foreign direct investment, and net investments in domestic financial assets), or by drawing down Central Bank reserves (of foreign currency and gold). If the trade deficit widens and capital inflows are constant, then international reserves must fall. Note that drawing down international reserves is independent of the government decisions on its budget deficit.

Where did the confusion come from? I think it is a common layperson's idea that the Central Bank somehow holds foreign reserves, which is used for imports - and that more lending for imports increases the debt of the government. Wrong. In the first place, the Central Bank is not the only (not even the main) source of dollars to finance purchases from foreigners. Second, government debt is not a liability of the Central Bank. If it decides to assume that liability, we are in for a terrific financial disaster!

Paying attention to the standard definitions can clear up a lot of nonsense about basic macroeconomics.

Plus, plus, minus

President GMA holds the fort steady on the EVAT. Plus.

Her spokesman rules out oil subsidies. Plus.

Her cabinet is preparing a request for emergency powers, for fuel conservation and rationing measures - a big fat MINUS. What, this from an economist?

From your basic economics you would learn that if any conservation is to be implemented, the most efficient way to do it is by the price system. So - the price of oil goes up; consumers and businesses economize on it. Period.

Government impositions to conserve fuel for the private sector, are blunt instruments of rationing at best, and impose countless hidden costs (besides being themselves costly to implement and monitor). Rescheduled working hours? Restrictions on power usage? Actual rationing of fuel? I'd rather take the adjustment from the market rather than the clumsy bludgeoning of the government. Even if it is headed by an economist.

No, change that - especially if it is headed by an economist.

Bad economics - confusing growth with levels

Here's a pet peeve of mine, reported in what is supposedly the premier business paper in the country.

Lower GDP due to oil price increases

Read the original article folks. It's GDP growth, not GDP itself, which will be reduced, i.e. growth will slow down - according to Mr. U of UAP. But the reporter keeps writing it as if it is the level of GDP itself that falls.

Mr. U's basis is the IMF rule of thumb. I did a search of this IMF rule of thumb and based on two sources, the actual statement of this is as follows: A US$ 5/barrel increased sustained over a year, will reduce the next year's global GDP growth by 0.3 percent. So Mr. U used a conservative version of the rule of thumb, and applied it to last year's oil price hikes of about 30%.

Rules of thumb are by nature crude approximations - not to be dogmatic about it, but just between you and me, I think its an overestimate. NEDA itself seems to be using the rule of thumb that every US$ 10 hike will shave off a 0.1 percentage point off the GDP growth this year. There, I think that's a bit better.

Thinking straight about EVAT - the inflation angle

When fuel prices go up, sure it hurts our pockets. Car owners immediately feel the pinch; so do commuters, when passenger fares go up; power costs rise; many manufactured products also pass on their higher energy costs in the form of price increases; eventually even agriculture and fisheries products face higher costs (because of rising fertilizer and fuel prices.)

In that sense, rising prices are "bad". However, rising prices do play a role. For example, shouldn't you have to part with some of the commodity when there is an influx of demand from competing users? Or, shouldn't you have to do with less, when there is less of the commodity that is available in the first place?

But we can leave a discussion of the functionality of prices for a later post. For now, let's consider how much prices on the aggregate will rise as a consequence of the world oil price spike - that is, the impact on inflation. How serious is it? Is it a national emergency? (In the following I'm using official statistics available on the internet.)

Let's see: the impact on inflation depends on two things: how much prices will rise; and the consumption share of the commodities for which prices will rise. Now for the first: Dubai crude traded an average of US$ 42 per barrel in 2004, and perhaps $60 or more on average in 2005. Petroleum product prices will have to go up, proportional to the percentage of crude oil costs in their manufacture. Think of gasoline price going up by 10 pesos per liter. Then other goods and services raise prices proportional to their dependence on petroleum products, and so on and so forth.

It's difficult to estimate all this. Let's look at the consumer basket for the average Filipino in 2000 and see which ones are likely to take a hit:

Fuel and light: 6% of total spending (fuel is just 2.4%!)
Transport and communication: 7.5% (alas, no breakdown between the two - given the Filipino penchant for the cellphone, don't think transport is necessarily the bigger chunk!)

What about the rest? Food? Yes, that's 45% - but it's hard to say whether prices will rise significantly for this item, due to the oil price shock. (The El Nino effect of 1997 was probably a much much more serious source of food inflationary pressures.) How about non-food? Ah but that's mostly services and housing. Too much of a stretch to see those prices inflating seriously. So far I am unimpressed about the "crisis" terminology so loosely bandied about.

An alternative way of looking at it is by examining the import bill. Total import of crude oil in 2004 was worth - what? In US$, 2.5 billion. The total import bill was 40 billion. Right folks, that's just about 6.3% of total imports. Now the economy is produces about US$ 86 billion worth of goods and services in GDP (using the market exchange rate). That comes to just 2.9% share. And if you want to look at the impact of that on retail prices, chances are you are using a share that's too big, because GDP takes out intermediate goods (raw materials), while the retail price includes all costs (including raw materials).

Okay all of this is simply guess-timating. A more quantitative way of doing this is to run this in a good macroeconomic forecasting model. Again using the Ateneo Macroeconomic Forecasting Model, we examined the impact of a 20% increase in crude oil prices and found that inflation rises by less than a percentage point. So our crude estimates are consistent with the more systematic ones. I won't pin down the precise figures - but we are talking about numbers much less than the last big inflationary episode, the 1997 El Nino, where year-on-year inflation was 10% (was that too long ago for you?)

Now back to EVAT. Should we use oil-price induced inflation as an excuse to defer implementation? Well given the above analysis on the (un)seriousness of the inflationary threat, we'd better pay attention to the greater threat at hand - an unsustainable trend in our government borrowing. So no, deferment is not an option.

And what can I say about those ranting about threats to national survival?

Go Figure.

Thinking straight about EVAT - the growth angle

Representative Joey Salceda (erstwhile Expanded Value Added Tax, or EVAT advocate) has asked for a EVAT deferment. One of the provisions of EVAT is removal of VAT exemption of oil companies. He warns that with the world oil price spike, imposing EVAT now would slow down growth and end up bloating the deficit.

Come on now. Even without the oil price hikes, we knew that the EVAT will slow down growth. Based on simulations of the Ateneo Macroeconomic Forecasting Model, a two-percentage-point increase in GDP tax effort in 2005 (which the EVAT seeks to accomplish) will shave off a terrifying 0.07 percentage points from the GDP growth rate. Yes folks, 0.07 percentage points. (For example, from 5.3% to 5.23%). However the miniscule slowdown will hardly affect revenue collection, so that the ratio of the government deficit to GDP in 2005 should be 20% lower (for example, from 4% to 3.2%). Deficit reduction confers a long-term benefit which I think outweighs the short-run growth impact.

Now what about under higher oil prices? It doesn't matter. Higher oil prices will slow down growth, with or without the EVAT. The EVAT will slow down growth, with or without higher oil prices. A confluence of the two - EVAT at a higher level of oil prices - will not make a big difference on the impact of the VAT on growth.

If so, then the impact on the deficit will also be largely unaffected. Salceda is wrong in alleging that implementing EVAT under a higher oil price regime will worsen the deficit. His thinking is in fact a version of "supply-side economics" which is the laughingstock of mainstream economics. The usual hypothesis of the supply-siders is that tax reduction would reduce the deficit (indirectly, by increasing production); here Salceda is flipping it - alleging that tax increases will worsen the deficit.

How about the impact on inflation? More on that tomorrow.

Benefits of oil scarcity - the long run

Most observers point to demand as a fundamental factor behind higher oil prices (without ruling out speculative activity as driving current stratospheric level.) So if supply of oil expands to meet demand, then we'd be back to more normal levels.

I wonder if this prospect is really good for the future of this planet. Oil is an important type of fossil fuel (another is coal, as well as natural gas), and carbon dioxide from fossil fuel emissions has been strongly implicated as a factor in global warming. We're looking at a warmer world folks, and more oil ain't gonna cool it off.

Oh, by the time the world gets much warmer we'll be dead. Not your kids though. Does that matter?

For a scientific summary of the evidence for climate change:

Intergovernmental Panel on Climate Change summary of findings

Underground economy in the Philippines

Cielito Habito (whose Inquirer column every civic-minded Filipino should read) has a piece on the underground economy. He describes how official statistics on GDP are capturing the informal sector. Briefly put, the method uses labor productivity figures in the formal sector, and applies it to informal sector employment captured in the labor surveys. Neat. The underground economy accounts for about 43% of GDP, it seems.

I have a couple of issues with this:

1. A "commodity" is something we are willing to pay for. How far are we going to extend the social recognition of a "commodity"? Suppose there is an underground outfit which provides consultancy services (for a fee) on bomb-making and placement. Of course your favorite terrorist organization is on their client list. Should their "service" be something the wider community should recognize as a commodity?

2. More pedestrian, but maybe more important: wouldn't we expect informal sector activities to be biased towards the low and stagnant productivity occupations? Simply because as the productivity climbs, there is a tendency to be organized formally. For example a backyard piggery that becomes a large farm becomes the object of attention of the municipal agriculturist; the fishball hawker who finishes his commerce degree becomes a formal sector sales rep. And so on. So wouldn't this method overestimate the size of the informal sector? (I suspect there may be an adjustment somewhere being made. I just wonder how this adjustment is being estimated officially.)

The market mentality

From the World Bank PSD blog:

Does Niger have a market mentality?

I think the author was being too easy on the original article. Still it was a good observation about the excessive market repression in Niger. I just commented that the rhetorical question is a bit confusing: whose market mentality are we talking about? I certainly hope that the post is not questioning the ability of the Nigerian private sector to respond to market incentives. What I think they mean is that the public sector is distrustful of markets, nor is there a significant public constitutency to support market reform. In the long run this is precisely what condemns countries like Niger to poverty - or in this case, chronic food insecurity.

More work

Still deep in paper writing. I just finalized the page proofs for an an article (of which I am principal author) for an Edward Elgar book (in press). In that paper (see my Home Page to view a copy), I computed the economic welfare impact of a 5% decline in small pelagic fisheries in three Asian countries (Philippines, Thailand, India). Pelagic fish are fish that dwell in the upper part of a sea, ocean, or water body (in contrast to bottom-dwellers called demersal fish). This is what a lot of small-scale fishers catch. What did I find? Well I used supply-demand analysis to show that the welfare impact reverberates throughout the various fish sectors; the Philippines, which has the largest small pelagic sector, has the largest intersectoral effects. What does this show? That comprehensive picture of welfare impact requires analysis of the full range of economic effects. This is a kind of economics version of the so-called "ecosystem approach" to fisheries management, which requires managers to consider all types of ecological interactions (such as predator-prey relationships) when managing the fisheries.

Update on my work

Just submitted my latest MS for Agricultural Systems, on priority setting for research on aquatic resources.

View the paper here .

Comments welcome.

Human capital "externalities"

I mentioned in the last post something about "externalities" associated with human capital. First off, externalities are benefits or costs of actions that are imposed without going through a market transaction. Ordinarily, to enjoy an economic good I would need to buy it; but in the case of an external benefit you just soak it in, as it were. It is alleged that human capital has this effect. If I get educated, it's not only I who benefits, but the rest of the society which interacts with me. They may benefit in a variety of ways - I may develop or sharpen ideas, which end up hastening the rate of innovation; I support and improve basic institutions that keep the economy running smoothly (e.g. I make wiser choices during elections); I influence my society towards greater civility, harmony, participation, etc.

So an OFW (overseas foreign worker) who gets an education here and hies of abroad, may not be able to share the externality with his or her countrymen (except, these days, the voting part). In fact, other societies get to soak up his or her good ideas!

This suggests a good argument against the brain drain. It's not enough that brainier workers go abroad and send home the money; their brains should all come together here and reach a critical mass of ideas that lead to innovation and ignite economic growth.

The idea sounds good, but unfortunately the empirical confirmation about the existence of significant externalities is inconclusive. I for one am not about to bring home the OFWs just because of this alleged externality. However, I do find massive OFW deployment to be symptomatic of weak employment generation in the domestic economy (plus an excess of government subsidy for the footloose.) It is these root causes that need to be addressed, in order to keep the brains from being drained.

Why go to school? There's an obvious answer

Sassy Lawyer in her Manila Times column says:

The intention to cash in on one’s education is not an evil thing; it is a cultural thing. Perhaps, it is an offshoot of the Spanish colonial rule when Filipinos were denied education and doomed to poverty. When the Americans introduced the public school system, people saw it as a way out. In our culture, education is an investment. Many marginal families do not flinch at incurring debts and pawning or even selling their meager properties just to see their children through college. We are taught that having an education assures us of a bright future.

Bright means financially comfortable. And a bright future is something that the college graduate is expected to share with his parents, siblings and other relatives. In short, our educational orientation is focused on the individual and the family rather than on society.

My answer: sorry - it's not evil; it's not cultural; it's economic. Education is an investment. You spend money and time now, to reap higher wages later. It's that simple. It's not wrong, any more than investing in stocks is wrong, any more than investing in a business is wrong. This is simply an act of a rational, sensible human being. And going abroad to realize higher wages is simply an extension of this rational behavior.

This is the lesson of human capital theory (first conceptualized in 1964). After forty years economists have accummulated a large body of evidence on the main predictions of the theory:

a. higher education is correlated with higher future wages;
b. current wages are negatively correlated with wage growth;
c. older people tend to invest less in human capital;

and so on. (I can give you the references - if you're interested.)

However there is another, also economic, reason for wanting to keep all that human capital at home. It's got nothing to do with purity of motives. It's because of alleged "externalities." What's that? Oh, that's not obvious, so I'll save it for another post.

The common good

Last night I said, essentially, that you can do us all a favor by making more money. Eh? Isn't this supposed to help only you? And in fact, most people think, somehow money goes (with a big sucking sound, in fact) to the moneymakers and away from the rest of us breadwinners.

But that's not how the economy works. (Not that I am one of those moneymakers). Once upon a time (in 1776 in fact), a fellow named Adam Smith pointed out that to make money, you have to persuade your fellows to part with theirs; and to persuade them, you've got to offer them something they themselves value, but are less capable of doing themselves. (Otherwise they'd just do it themselves, no?) So you specialize in something. Everybody who participates in this value-for-money system, or market, ends up specializing. And this "division of labor" effectively organizes the economy (spontaneously, without centralized planning) to become a gigantic production machine.

So self-interest creates mutual benefit. Notice that "self-interest" here does not involve deception, or clubbing your neighbor for a piece of meat. It means exchange. Nor does this work out as an endorsement of selfishness and indifference to your fellowman's well-being; one can be a good participant in the market, and devote part of one's money and time to charity and neighborly assistance.

Such counter-intuitive paradoxes are a continual source of wonder. As I said before, great stuff.

Philippines: Next year's borrowing

According to Business World, based on DBCC recommendations, next year's deficit is targeted at 110 billion, down from the projected 180 (or is it 150?) billion this year. Spending is going to slightly shrink in terms of share of GDP; but revenues are projected to rise by 23%. This requires approximately 16.4% tax effort, a dramatic jump from this year's project < 10%, and still much higher than the tax effort of previous years. This is a bit risky, despite the possible implementation of the expanded VAT law, particularly if growth is less than the government expects (our high end forecast for real GDP growth in 2005 is the low end forecast for the government!) But our back is to the wall: there is hardly any scope for cutting spending further, and, while privatizing government corporations now would be nice, realistically these things take time. I know; it sucks. It always sucks for a government whose narrow range of options is getting further squeezed by the day. Two items on my wishlist: tax effort does go up; economic growth jumps to NIC standard (7% and up). So folks, if you've got a chance to make 7% more next year than this year, go do your country a favor.

Econblogger's offer for those who believe in Pascal's wager

Sunday - the day of worship for most Christians. I am of the position that belief in God is a matter of faith, not proof. I think this is the standard Christian position on the matter. That hasn't stopped many Christians from trying to "prove" the existence of God.

One prominent one is Pascal's wager. It says that if you disbelieve God, you may suffer infinite loss. But if you believe in God, you may suffer some finite loss (of deprivation in this life). Even a very tiny probability (but not zero) multiplied by an infinite loss, is still infinite. So the choice is clear: believe in God.

If correct, what does this argument imply? It implies that you will be willing to suffer some finite loss in order to avoid the small probability of infinite loss. So let me recast the argument in a better way:

I have a Book of Life, given to me directly by God. Your name must be written in the Book of Life. God has authorized me to decide whose name to write. Those whose names are not written will suffer infinite loss. To get your name written, you must pay me your gross wealth (plus 10% - take out a loan, I know you're worth it.)

You may say, the probability of me having such a Book is zero. Is it? It possible that God has communicated to someone? Is it possible that God's communications are of this nature? Is it possible that I am that someone? Assign to each a very small probability, and you will still end up with a very small probability. Kind of like the sun not shining tomorrow - vanishingly small, but hey it's not IMPOSSIBLE that the sun turns nova, or the earth itself stop spinning, or go out of its orbit.

So, why suffer an infinite loss when you can just suffer a finite loss? Please write me an e-mail (click on my personal profile) detailing your personal wealth, your complete name, and I'll inform you of the payment details.

Oh, there's a charlatan named Tabarrok who is unfortunately making the same offer. Don't believe this guy; the probability that God talked to him is Zero.

Tabarrok's offer

It's me you should be getting in touch with!

(Don't call me; I'm having trouble getting my tongue out of my cheek.)

Respect for reality

You've heard that all economists do is assume, assume, assume. Well we do a lot of that, sure. It is essential to our work. As long as the set of assumptions "make sense", and generate hypothesis that are consistent with the data, then we stick to our assumptions. For example, rational choice: as long as people respond to incentives the way rational choice models predict, we feel free to maintain the assumption in most of our work.

Which brings us to data. An economist, like any self-respecting scientist, is primarily interested in being confirmed or refuted by data, rather than simply framing hypotheses. Moreover, analysis of data is the only way to quantify the strength or weakness of hypothesized relationships. For example, for a specific product, sold in a specific market, over a specific period, by how much will quantity purchased fall when price increases, all other factors constant (all changes expressed in percentage terms)? Notice how wordy that is - it's part of having to make everything precise, systematic, and credible.

It's not enough claim that national consumption is a function of national income. One must get data on national consumption, national income, and other related variables, and analyze the data to extract the relationship - if any.

For the macroeconomic forecasting model of Ateneo, (see post below) this is what a team of economists have done. The forecasts we generate are based on a model that has a sound basis in data, i.e. observed economic reality. In fact we have done this for thirteen hypothesized relationships. Then we impose other conditions, which consist of either accounting identities, or economic relationships which have a basis in the literature (i.e. on earlier, observation-based studies). Then we put it all together into a model of the Philippine macroeconomy. So it's not like the numbers are plucked from air.

Right now, I'm thinking of how to confirm whether, statistically speaking, the AMFM generates accurate forecasts. Since we regularly come up with forecasts, ex post (after the fact) comparisons are possible. However you need to wait a while, because the sample is still small (we started in 2002). I'd better dig in the literature for other models that have done this type of study (i.e. ex post forecast accuracy). The "systematic" and "precise" part of economics - of any science, for that matter - takes time and painstaking care. Reality deserves no less.

Globalization is good for the poor

When I wrote about the hypocrisy of the G8 regarding globalization, I did not mean that openness to trade is bad for developing countries like Mali, or the Philippines. Quite the contrary - what is harming poor countries is the subsidy policies in developed countries, that restrict trade from developing countries. The evidence is consistent and strong: openess to trade is favorable to economic growth. This is borne out by a number of cross-section studies. In particular, because trade is good for growth, and growth reduces poverty, Dollar and Kraay (2001) show that trade opennes reduces poverty.

What is not so clear is why trade is good for growth. Economic theory is very good at understanding why opening up to trade moves a country from one level to a higher level; however, a move from a lower to a higher growth path is harder to explain. One approach links trade to innovation. First, expanding global competition would require adjustment, adoption of international standards, etc. Second, technological improvements may be embedded in imported inputs (materials and machinery), are necessary for technical progress in domestic industries. (This may explain why apparently imports cause growth, but not exports.)

The research continues. But one thing we are sure of: a developing country that shuts down its borders to international trade commits itself to the steady growth in the number of its poor people. Now that is a bad kind of growth.

What the Eagle Saw

Eagle Watch - if you weren't there, you missed something. Entitled "From Crisis to Crisis", the quarterly briefing ran from 9 am to 1130 am (followed by lunch). The briefing consisted of a presentation by Benjamin Tolosa (Ateneo Political Science Department) on Philippine politics, one by Cielito Habito (Economics Department) on the economy, and one by Diwa Gunigundo (BSP Deputy Governor) on monetary policy during a political crisis.

Benjie's presentation was a polished, organized reflection on our political predicament, with a self-explanatory title: "The crisis as opportunity: from political stalemate to reform." One take-home message: discussions of fundamental policy shift (Charter Change) should not be confused with discussions of the suitability of the President and her accountability for alleged high crimes. No "forecasts" on the political side were given - with which I agree: such will just be exalting someone's (or some group's) "gut feel" on the future of this administration.

Ciel's as usual was an incisive critique and analysis of the state of the economy. Entitled "Are we poised for take-off?", one may guess that the answer is No; and he presented figures to corroborate this. Despite a few positive signs, we see: economic growth slowing down, declining investments, exports and imports also slowing down, inflation up, unemployment and underemployment up. Forecasts for 2005 based on simulations from the Ateneo Macroeconomic Forecasting Model are as follows:

GDP growth : 4.5% to 5.3%
Inflation: 8.0% to 9.0%

Meanwhile the impact of EVAT implementation (conservative scenario) is a merely 0.3% uptick in the inflation rate (coincidentally identical to the forecast of BSP, according to Diwa Gunigundo). Meanwhile expect as much as an 18% decline in the deficit/GDP ratio (i.e. from 4% to 3.2%).

Finally Diwa rounded up the briefing with an excellent presentation of BSP policies with respect to inflation targeting (which it began in 2005). He pointed out that a rigorous, by-the-book methodology has been adopted by the BSP; unfortunately inflation targets are off due to supply driven shocks, particularly on oil prices. Currently the BSP is pre-empting any adjustments on inflation expectations by "mopping up excess liquidity" through mild interest rate increases and moderate hikes in the reserve requirement.

My own take on this? All is not well, but we are not about to fall into the abyss. The outlook could be better, but there are many positive points to build upon. We can choose to be part of the solution; just a very small example - pay your taxes, because tax revenues are the key missing ingredient in our deficit troubles. Or we can spread a message of doom and gloom and contribute to governance paralysis - thus becoming part of the problem. We need stable institutions and a sober citizenry to insulate our economy from the vagaries of politics. I just hope we as a nation have this level of maturity.

Gloom?

According to Business World, executives at the MBC have supposedly turned gloomy after buoyant spirits at the start of the year. But the Business World report is far from illuminating. Consider:

Over 71% of executives now expect economic growth (gross domestic product or GDP growth) for 2005 to be lower than in 2004, a sharp downturn in business optimism compared to January, when 58.6% forecast the economy to grow either the same or at a higher pace.

But wasn't this too optimistic to begin with? Back in February a government think-tank (the Philippine Institute of Development Studies) had already forecasted a growth slowdown (5.6% GDP growth for 2005.) So wasn't this a correction on the executives' part?

Over 86% now also feel that inflation in 2005 will be higher than in 2004, as compared to 73% who forecast higher inflation rates in January.

Given sustained high petroleum prices, this is to be expected. Whether it will turn out to be correct is another story.

Close to 63% of respondents also expect the average 91-day T-bill rate to overtake last year’s 7.34%. The sentiment on the interest rates remains the same as in January, despite a drop in the bellwether rate to 6.64% in the first semester from 6.93% a year ago, on account of a narrower fiscal deficit.
"The mood, however, may have changed following the temporary suspension of the expanded value-added tax following the Supreme Court’s decision of July 1," the club said.

What? Why will the mood change? Shouldn't it worsen? Anyway, banks are awash with cash right now, driving T-Bill rates south. The feared fiscal tailspin is far from imminent, and government remains the most reliable borrower yet.

More than two-thirds of business respondents expect the peso to depreciate against the dollar by about 5% in the next six months, it also said.

I wonder how many of them would put their money where their mouth is. Those who expect the exchange rate to rise in six months, ought to convert their peso holdings to dollars now (in proportion to their degree of confidence, and adjustments for inflation and interest rate costs), and realize a gain later. That is, if they really expect it.

A little over 54% of senior business executives are now expecting investments in 2005 to fall below last year’s P221.8 billion in investment approvals by the Board of Investments, Philippine Economic Zone Authority, Clark Development Corp., and Subic Bay Metropolitan Authority, the club said. In sharp contrast, almost 46% of its members polled last January projected higher levels of investments in 2005.

Beg your pardon? Fifty-four percent now expect investments to fall; that means 46% expect investments to keep steady or rise. But in January, 46% projected higher investments. WHERE IS THE SHARP CONTRAST (pardon my shouting)?????


But fewer companies now plan to make additional investments this year, from over 47% of companies in January to 39.4% in July, the club also said. However, the average amount of investments rose slightly to P300.2 million from P268.7 million.

Hmm. Fewer companies want to invest, but those that do, plan to invest more. Hardly sounds gloomy to me.

In short, I think our industry chiefs are largely going along business-as-usual route. A little disturbed by the political climate, sure, but no sign of impending catastrophe. Hey, there's money to be made in the country after all. Cheers!

Fair globalization

Mali - a country of 12 million people, the fourth poorest in the world, a classic case of the Sub-Saharan Africa problem. Poverty incidence is a staggering 64%. Its main export is cotton; and cotton is one of the most well-subsidized industries per value-added in the US, driving cotton prices down in the world market. And there you have it - Mali is the poster child for unfair globalization.

A starker portrait of G-8 hypocrisy can hardly be painted. While an extra US$ 25 billion has been pledged for Africa aid by 2010, farm subsidies in the industrialized nations continue to hurt the world's poorest cash crop farmers.

Well good news - the WTO has ruled with finality against United States cotton subsidies, following several appeals by Washington. No the case was not brought by Mali - a country too poor to afford extensive legal representation in the WTO, based in Geneva. It was the relatively affluent Brazil which brought the suit. Elimination of cotton subsidies is expected to allow world prices of cotton to rise by an average of 4%. This translates to about US$ 20 million or so gain per year in Mali, not incorporating farmer responses (i.e. plant more cotton once prices go up). However the pathway from the ruling to the final elimination of subsidies is long and convoluted. Only recently has the Bush administration finally requested Congress to repeal the subsidies. A protracted fight remains, as it is possible for these subsidies to be transformed and hidden away, for more suits to expose them.

The battle for fair trade has been joined. For once, these G8 leaders should stop insulting the intelligence of the rest of the world.