Technological change and the Almighty Corporation

John Kenneth Galbraith, recently deceased after a long and full life, was the most potent popularizer of the Almighty Corporation. Galbraith argued that the "new industrial state" is fundamentally a planned economy - driven not by decentralized competition, but consciously directed by a business oligarchy. A linchpin of his thinking was the manipulative power of advertising, which brought consumers in line with the planning objectives of the Almighty Corporations.

Now go sell this theory to Eastman Kodak. How the big bosses there wish this were true. Digital cameras? Make it disappear with a savvy advertising campaign. That will save the company's core business, now 125 years old - the manufacture of films, to catch those "precious moments".

From Galbraith's fantasies, let us look at the facts: Kodak has been in travails over the last five years. Its prospects for 2006 are negative (bad pun intended). Its only hope is that its recent transformation into a digital camera company would succeed - and fast, before skittish stockholders start dumping, big time.

Ahh, suddenly these all-powerful corporations look helpless against technological change. It all started when a couple of Bell Lab scientsts invented the Charge-Coupled Device (CCD), essentially an instrument for converting light into information. The rest is techno-history. Now the camera film industry is in a total meldown. How the Almighty have fallen!

When you walk around malls and supermarkets and convenience stores, take a good look at these camera films. Store your film cameras in a safe place. They'll be memories and museum pieces. Sooner than you think.

Have Koreanovelas washed out Filipino soaps?

Via the PCIJ is the following PIDS study on the Philippine audio-visual industry. The authors argue that foreign-made soaps are popular for the following reasons:

Consequently, there are several factors why Korean dramas are successful in the international market. One is its urban appeal. Most of the dramas are shot in the cities. Beautiful settings and background music also helped the programs penetrate the international market. For instance, Endless Love was commended for the luscious/lavish use of music (including Western classics such as Romance d'amour), which makes the drama even more unforgettable. The more poetic and imaginative ways of expressing love also makes Korean romance dramas outstand other dramas. Almost all Korean dramas circulated around the overseas market are romance dramas. Romance stories have been a universal genre in TV dramas, reflecting the appeal of fantasized love relationship in audience' everyday life, and the relationship between TV dramas and viewers. Many viewers seem to prefer Korean dramas in that they deal with romance in a way that stands them out from other counterparts. The melodramatic effect of the Korean dramas also captured the viewers. Whereas other romance dramas tend to spoil the audience with happy ending, many Korean dramas are infused with unrequited love, rivalries between families, and failed romance. Tragedy seems to be a defining feature especially in Korean dramas, in which the male and female leads often suffer from sickness, and even death.

C'est la vie. So why is local entertainment fare so abysmal? I'm not talking about why we don't crank out the artsy-fartsy stuff. (Not that I don't like 'em - sometimes.) I'm talking about competent entertainment, decent escapist fare for the masses. (That includes me.)

Well don't ask me about cultural reasons. Let me just point out the following:

The industry is also among the heavily taxed entertainment industry in Asia. Among such taxes is the amusement tax which the local government imposed on the theater owners. This tax amounts to 30 percent of the gross receipts from the ticket sales. Aside from the amusement tax, there are also 10 percent VAT on film shares and post-production costs; P0.25 per ticket for cultural tax; P8,000 to 10,000 classification fee per film by the MTRCB, custom duty on imported unexposed films needed for filming and exhibition; and 32 percent corporate tax. In addition, there are also taxes for importing equipment and machineries needed for shooting films and printing the advertisements. On average, importing these machineries is subject to 6 percent tax rate but since these equipments cost thousands of pesos, the import costs sum up to a significant amount.

Meanwhile, what was India doing?

In addition to tax reduction, the government can also provide tax incentives for the investors and theater owners in upgrading their cinemas. The Indian government did these measures precisely to help its domestic industry. With the advent of digital technology and the identification of Bollywood as a priority export sector, the Government reduced the basic import duties on certain digital studio equipment, benefiting the content producers and other media companies in India. The government also initiated various tax incentives to investors investing in multiplexes in the rural areas. Bank and institutional funding was made available to single screen owners to upgrade their existing theatres to multiplexes. Over 100 cinema halls have been converted into digital theatres over the past 2 years.

Yep - whether art, culture, soap operas, economics is everywhere. Question is: is the growth of a quality domestic film industry worth the foregone revenue and cost of providing incentives? Don't know the answer to that one. And watching the wasteland of local shows these days, somehow I really don't give a damn.

The population growth circus

I think it all started with the title of the unfortunate link title of the NSCB press release: "Philippine population growth slows to 1.95 percent by 2010." (This is already incorrect, but the newshounds started tracking.) The content of the press release itself clearly states that the 1.95% figure, covering the period 2005-2010, is a projection.

Somehow reporters got stuck with the link title and dropped the "estimate" part.

Reality check: the only way to check for sure whether population growth really slow down is to conduct a census. The last one was in 2000. The next one is scheduled for 2010. There is no way to check the actual population growth per year in between. (Censuses are expensive.)

The confusion has gone way out of hand, as discussed in the NSCB clarification. Even NEDA chief Romulo Neri got carried away:

Romulo Neri, director general of the National Economic and Development Authority (NEDA), noted that the latest population growth rate was nearing the government’s medium-term target of 1.94 percent. Neri said slowing down population growth to 1.94 percent a year was necessary to enable the Philippine economy to feed and sustain its entire population.

Unless of course he was misquoted, which is perfectly possible.

Solita Monsod finds the projection unbelievable, and so does Dean Jorge Bocobo. Essentially both are arguing that the decline simply does not square with historical data. (I should hat-tip DJB for getting me to post on this topic.)

However, the population projection method is not based on fitting to past data. It uses projections of fertility rate and mortality, using baseline data from the 2000 Census, combined with certain scenarios. For the mortality rate, the projection applies life expectancy, with an assumed upward increment over time (about 2 years for every quinquennium). For the fertility rate, three assumptions are made, regarding the year in which net replacement fertility (approximately zero population growth) is reached: 2030 for the low assumption, 2040 for the medium assumption, and 2050 for the high assumption. The estimates cited by the NSCB pertain to the medium assumption.

I am not a demography expert. However I would agree with DJB and Mareng Winnie that some consistency be observed with experience. To my amateur eyes, I would think that pushing the target dates of net replacement fertility backward would maintain the official method, while satisfying critics. Perhaps by ten years? DJB has a graph showing that using the "high" as the working assumption leads to a better fit with historical data.

Lessons learned from this brouhaha:

1. Journalists are seldom to be trusted for accuracy in reporting crucial technical details. If possible one must always go back to the source document (often a technical report, or a journal article).

2. A fantastic amount of saliva and ink can be spilled, largely on inane discussions by politicians and other "concerned citizens", about population programs, birth control, public investment priorities, the Roman Catholic church, and so forth, on the basis of what is essentially an urban legend.

3. Be careful about naming your hyperlinks!!

The biggest charity of them all

I thought the biggest charity would by far be the Bill and Melinda Gates Foundation. It's certainly the most famous. But The Economist found the biggest of them all - the Stickting Ingka Foundation.

The what? Amazingly, it's the nonprofit foundation that operates all the Ikea stores. Meanwhile the Ikea brand is owned by another company, which is owned by another company, etc. The brand-owner earns money by franchising the trademark to Ingka Holdings. The article reports that in 2004, these complex of entities earned 553 million euros, but paid less than 20 million euros in tax - mainly by exploiting various tax avoidance clauses in different jurisdictions.

Ingenious. As ingenious as the retail innovations that have made Ikea the global giant in home goods and furniture retailing. Among it's many great ideas is flat pack furniture, one of major logistic innovations of the 20th century, along with the shipping container.

Here's how Businessweek describes the Ikea shopping experience:

What enthralls shoppers and scholars alike is the store visit -- a similar experience the world over. The blue-and-yellow buildings average 300,000 square feet in size, about equal to five football fields. The sheer number of items -- 7,000, from kitchen cabinets to candlesticks -- is a decisive advantage. "Others offer affordable furniture," says Bryan Roberts, research manager at Planet Retail, a consultancy in London. "But there's no one else who offers the whole concept in the big shed."

The global middle class that Ikea targets shares buying habits. The $120 Billy bookcase, $13 Lack side table, and $190 Ivar storage system are best-sellers worldwide. (U.S. prices are used throughout this story.) Spending per customer is even similar. According to Ikea, the figure in Russia is $85 per store visit -- exactly the same as in affluent Sweden.

Wherever they are, customers tend to think of the store visit as more of an outing than a chore. That's intentional: As one of the Harvard B-school studies states, Ikea practices a form of "gentle coercion" to keep you as long as possible. Right at the entrance, for example, you can drop off your kids at the playroom, an amenity that encourages more leisurely shopping.

Then, clutching your dog-eared catalog (the print run for the 2006 edition was 160 million -- more than the Bible, Ikea claims), you proceed along a marked path through the warren of showrooms. "Because the store is designed as a circle, I can see everything as long as I keep walking in one direction," says Krystyna Gavora, an architect who frequents Ikea in Schaumburg, Ill. Wide aisles let you inspect merchandise without holding up traffic. The furniture itself is arranged in fully accessorized displays, down to the picture frames on the nightstand, to inspire customers and get them to spend more. The settings are so lifelike that one writer is staging a play at Ikea in Renton, Wash.

Along the way, one touch after another seduces the shopper, from the paper measuring tapes and pencils to strategically placed bins with items like pink plastic watering cans, scented candles, and picture frames. These are things you never knew you needed but at less than $2 each you load up on them anyway. You set out to buy a $40 coffee table but end up dropping $500 on everything from storage units to glassware. "They have this way of making you believe nothing is expensive," says Bertille Faroult, a shopper at Ikea on the outskirts of Paris. The bins and shelves constantly hold surprises: Ikea replaces a third of its product line every year.

Then there's the stop at the restaurant, usually placed at the center of the store, to provide shoppers a breather and encourage them to keep going. You proceed to the warehouse, where the full genius of founder Kamprad is on display. Nearly all the big items are flat-packed, which not only saves Ikea millions in shipping costs from suppliers but also enables shoppers to haul their own stuff home -- another savings. Finally you have the fun (or agony) of assembling at home, equipped with nothing but an Allen wrench and those cryptic instructions.

I can't but agree. My wife and I got a lot of furniture and decor from the Ikea store in KL. The most memorable part was when I got back home, and I spent several days poring over the instructions, hammering, jamming, screwing, swearing, but finally getting it all together. Three beds, two tables, several shelves, a workstation, and a few other items. The stuff may look cheap - and it is cheap - but don't knock it: it has the decent, middle-class, mass-produced look, and after three years everything is fine (except for the parts I warped or scratched.)

No Ikea in Manila yet, nor do I expect one for many years. Even if the retail industry were sufficiently deregulated - which I doubt - sheer market size would probably not be up to snuff for the next couple of decades. Still, I wonder how much I would save - or not! - were one to open in, ah, Fort Bonifacio?

The right way to promote "fair" trade

Here's the right way to promote fair trade: bring your case directly to the consumer. Don't go the state and rely on its powers of coercion to restrain foreign competition. Appeal to consumers exercising their voluntary choices in the market.

That said, I still object to the misleading arguments being made to promote fair trade. The idea is that these cheaper foreign-made goods are a threat to domestic livelihoods. This may be true for some sectors in which the country has no comparative advantage. However this cannot be true for all sectors of the country. There will always be something the Filipino producers can offer foreign buyers - that's why it's called "trade". (One might think even a nitwit would understand this implication.) Otherwise foreigners will be happy to sell us their goods with nothing going back to them except useless Filipino currency. If so then we should shaft them to their limit!

One can however appeal to our sense of loyalty to Filipino-made products. Hey if that's something consumers go for voluntarily, who am I to object? Ultimately though one has to observe a trade-off: there is only so much price difference between domestic and foreign-made goods that one can tolerate out of patriotic loyalty. And if there is a high patriotic value for Filipino-made, it would be a great incentive for Filipino producers to conceal the foreign component of their products. For example, they can limit themselves to the final stages of processing and call the product "Filipino-made" whereas import content is actually quite high. Filipino-made laptops, anyone?

Nevertheless, except for the dissemination of economic illiteracy, this form of product promotion is largely harmless. I say let these fair traders vent their feelings in as many fair trade fairs (they themselves fund) as they please.

Consumers will know what to do.

Price gouging oil companies redux

When will this ever end? From the Business Mirror:

Oil firms’ bottomline unscathed

WHILE consumers grapple with the skyrocketing fuel prices, multinational oil firms have been raking in huge profits as shown by their income statements submitted to the Securities and Exchange Commission (SEC), a senior administration congressman disclosed Tuesday.

Liberal Party Rep. Abraham Mitra of Palawan made public the income documents submitted by Pilipinas Shell and Petron Corporation, two of the country’s biggest oil firms, “not to accuse the oil giants of price gouging or excessive profiteering, but to let the public draw its own conclusion from what the cold numbers present.”

Mitra, vice chairman of the House Committee on Appropriations, said that based on the statements furnished by the SEC, Shell’s net profit jumped by 102 percent in 2005, while Petron’s surged by almost 50 percent in the same period.

Shell reported a net income after tax of P5.672 billion last year, more than double the P2.846-billion profit it pocketed in 2004. As a result, its earnings per share doubled too, from P4.12 to P8.34.

The firm’s net sales jumped 17 percent from P126.7 billion in 2004, to P148.9 billion in 2005.

Petron, which is partly owned by the national government, saw its income after tax surge to P5.765 billion, up from the P3.886 billion profit it reported in 2004. This represents a 48-percent increase in profits.

In its income statement, Petron declared that its gross sales soared to P191.2 billion, up by 29 percent from the P147.5 billion in 2004. With this, Petron’s earning per share improved to 61 centavos from 41 centavos in 2004.

Again some basic economics (this is easier done with graphs, but then I realize some of us may not be that familiar with the use of supply-demand diagrams). A price increase occurs either because either costs go up, or demand goes up. If costs go up, producers pass on the increase in cost to the consumer; however they are not able to do so completely, because consumers cut back on their purchases. In the end their profit falls, even as prices paid by consumers increases. On the other hand, if demand goes up, then consumers are willing to pay more to get extra units of output. The firms are thereby persuaded to increase their production, but of course in the process, the market price goes up. What happens to their profit? Of course, it goes up! The increase in profit is precisely the incentive that is required to increase production and therefore satisfy the extra consumer demand. We should find it a remarkable mystery to observe firms obliging consumers' higher demand, without requiring any extra incentive to do so.

However, it is not a mystery that legislators would want their names in the news by pandering to popular mythology.

Does globalization help the poor?

Angry Bear has an old post summarizing some recent papers linking trade and growth. The author concludes:

So let me amend my summary of the emerging consensus as follows: sometimes trade causes faster growth, and sometimes it doesn't. But protectionism is never good for growth.

Trade is good for growth, and growth is good for the poor, ergo trade is good for the poor. This is a conventional way for arguing the positive effect of trade liberalization on poverty. Globalization though is broader than trade liberalization, and "the poor" are not some homogeneous mass of people whose well-being move in the same way. Pranab Bardhan's article in Scientific American provides good overview of globalization and the poor. A more technical discussion is found in this forthcoming volume on Globalization and Poverty from an NBER Conference.

My answer to the question: yes, on the whole; sub-sectors though will suffer from increased global competition. Globalization is neither the catastrophe that critics decry, nor the panacea that some proponents profess. This may help explain why the Philippines, despite two decades of trade liberalization, has failed to reap the expected reform dividends. (On the other hand, it is almost certain that the economy would be even worse off had the status quo on trade been maintained; moreover in many industries there has been significant flip-flopping on liberalization, especially in agriculture.) To end with a quote from Easterly (from his contribution to the abovementioned volume):

Globalization is less important for the wellbeing
of the poor than the (unfortunately more mysterious) process of productivity growth.

The box that opened world trade

The box that changed the world just celebrated its 50th anniversary. I'm fascinated with these erstwhile nondescript innovations that turn out to have revolutionary impacts on the global economy.

A Wired article discusses how things were, pre-1956:

But look back to the 1954 film On the Waterfront and you'll get a good idea of how things used to be. New York dockworker Terry Malloy (played by Marlon Brando) climbed into the rusting hulls of cargo ships and used brute muscle to move freight using nets and grappling hooks. Loading and unloading was so slow, ships might remain in port for days, even weeks. Only four decades ago, contemporary photos of Singapore's port showed shirtless workers stumbling down wooden gangplanks carrying enormous bundles of bananas on their backs. It was called break-bulk shipping.

This inefficiency irked Malcom McLean, a crusty North Carolina trucker who defied convention to spark a logistics revolution that continues to reverberate today. Dubbed the Father of Containerization, he laid the foundation in the 1950s for what would arguably become the world's first truly packetized transport network.

McLean reckoned there had to be a better way of loading and unloading ships than the clumsy, slow, and theft-prone process of break-bulk. His first brainstorm: stacking sealed truck trailers on flatcars for long train journeys, trucking them only the few final miles to their destination. But the railroads weren't interested, so in 1955 he bought a small tanker company named Pan Atlantic and modified two of its ships to carry 58 detachable trailers. In order to stack the trailers, he removed the wheels and strengthened the sides. In April 1956, the first of these converted ships sailed from New York Harbor to Houston, and containerization became a sunrise industry.

The Wikepedia article describes the advantages of containerization: first, it allows a trucker to load cargo in sealed containers directly onto a ship, and unload cargo directly back onto a waiting truck. No more messy loading and unloading of individual packages or boxes. Second, the use of sealed boxes greatly enhanced cargo security, helping eliminate the "falling off the truck" problem.

So important was this simple innovation that "it is very unlikely that we would all be buying Japanese TVs, Costa Rican bananas, Chinese underwear or New Zealand lamb. In fact, globalisation would probably not exist and the World Trade Organization would have a lot less to talk about," according to this BBC article.

Simple ideas that change the world. Wish I could think of one.

The real pro-labor approach

Today is Labor Day. As the rest of us honor the day of the working man and woman, unions use the opportunity to press for more stringent regulations on the labor market. At least two come to mind: first is the demand for an across the board minimum wage increase. Second is the demand for elimination of the contractual labor category and provision for security of tenure.

Bulatlat.com provides a good summary of these demands from the labor perspective (Bulatlat article):

Citing government data from 1990-94, a research by the Asia-Pacific Research Network (APRN) in 2000 revealed that the combined share of casual, contractual and part-time workers in total enterprise-based employment was between 14-15 percent. It went up to 18.1 percent from 1994 to 1995. By 1997, the figure has reached 21.1 percent, meaning that for every five workers one is a casual, contractual or part-timer worker.

For example:

In the more than 20 branches of Shoe Mart (SM), one of the biggest chain of shopping malls in the country, in 2002, nine out of ten workers are contractuals, hired either through an agency or by a concessionaire, said Maristel Garcia, spokesperson of the Sandigan ng mga Manggagawa sa Shoemart, the union of SM employees.

Contractuals abound in export zones and industrial parks around the country, such as those in Baguio City, Cavite, and Laguna. A survey of APRN covering 14 unions under the Kilusang Mayo Uno (KMU or May 1st Movement) in the National Capital Region revealed that contractual workers comprise 67 percent of the workforce at the time. This is despite KMU’s efforts at protecting job security and benefits.

“It is true that contractual labor is now really extensive. Easily seven in every 10 companies practice contractualization,” Donald Dee, president of the Employers Confederation of the Philippines, told Manila Times in 2003. “We know for a fact that contractualization is meant to avoid regularization,” admitted Dee.

Today the share of contractuals in the total workforce may even be bigger. For example, after SM management practically crushed the union by terminating all striking union workers in 2003, Garcia said, it stopped regularizing workers and was able to employ more contractuals.

In other large firms, threats of retrenchment complemented by early retirement schemes resulted in a stripped-to-the-core number of regular workers. The Philippine Long Distance Company (PLDT), the country’s largest telecom company, was able to reduce its workforce from 14,000 to 10,000. Its rank and file union membership has dwindled from 7,000 to 4,100. It was also able to reduce the 3,000-member supervisory union to just about 2,000. The rest of PLDT’s required manpower comes from contractual workers who are paid piece meal, per phone installation or telecom services sold.

In Japanese-owned Asahi Glass Corporation, the ranks of regular workers have been decimated after a wave of forcible retirements. Retired workers were subsequently rehired as contractuals. At present, there are five contractual employees for every regular worker.

The benefits of higher minimum wages and greater worker security are clear. However, are there any negative consequences we should know about? (That is the problem with such ideologically slanted analysis. We are told of all the benefits of this or that anti-market imposition, but any attempt at analyzing cost is slammed. So much for critical thinking.)

Okay the negative effects are:

1. Higher minimum wage means more expensive workers. More expensive workers means, within a market economy, capitalists will higher fewer workers. (The alternative is to go the planned economy route and eliminate capitalists altogether; all productive capital would be owned by the state. Then the government becomes one big employment agency. It can pay all the higher wages it wants. Heck it can even print money if there's no budget for it. Worker's utopia indeed!)

2. Enforced security of tenure means firms have less flexibility to deal with economic change. If the market for their product sours, they are forced to produce less. In the absence of worker security, they can cut costs, in part by laying off workers. However with worker security this is difficult. Enforced security of tenure also means that removal of individual workers because of poor abilities, mismatched skills, low productivity, and so forth requires a lengthy adjudication process (i.e. the termination "for cause" provision in the Labor Code.) Finally with security of tenure comes a long list of costly but compulsory worker benefits. Because of this, firms either decide to higher fewer workers, or hire workers who can easily be removed - i.e. the casuals.

3. The "casualization of labor" cited in the Bulatlat article is therefore a consequence of regulations enforcing security of tenure, particularly on workers hired for a year (Labor Code provision) or more than six months (a guideline that is being increasingly used as a cut-off to determine which worker is becoming "regularized."). However this is going to create a lot of "churning" in the labor market. Ever wondered why some salespersons in SM are rather inept? It is likely that by the time they became familiarized with their duties their six months is up. To be replaced by someone who has to learn the ropes all over again. This is probably going on also in many factories. Once you learn the skills on the shop floor, you have to be removed. This is not the best way to develop a quality labor force!

Note finally that the benefits of higher minimum wages and enforced worker security are ultimately enjoyed by those who are currently regular workers. No wonder they have a strong interest to fight for them. Even if this would cause misery among the ranks of those who are outside this group - mainly the unemployed, or casual workers.

(More detailed arguments for reforming labor markets are found in this paper by Gerry Sicat. It's a great read.)

That is, the real pro-labor approach would be: fewer regulations, rather than more. Not only that: it would be pro-growth as well.

Seeing those demonstrations and strikes and pro-labor legislators and bureacrats in the Department of Labor and Employment, I wonder: who will protect us workers from our protectors?

The oil price stabilization tax - US version

Amadeo has pointed out in a comment entry in this weblog that some US legislators are also pushing for their version of the oil price stabilization tax. The issue has been picked up by US econobloggers. Manuel Lora of Mises.org is rendered speechless by the plan, which combines a $100 rebate plus stronger anti-price-gouging measures.

James Hamilton has a thoughtful post on the Chief Executive's policies towards the oil price hikes. He says:

There is currently an almost religious conviction by many Americans that the price of oil, rather than being determined by world markets, is controlled by a few big oil companies, as if the 2.5 million barrels of crude oil per day that ExxonMobil produced last year somehow give it the ability to control the price of the other 82 mbd that got sold. The certainty with which people hold this conviction seems directly related to the complete absence of any supportive facts..

Indeed. Even the fact that OPEC countries control 40% of oil exports is no slam dunk case for international "price gouging". OPEC has been around for about thirty years; did they all just get their act together all of a sudden, just when China and US ratcheted up their oil demand? Does not compute.

And:

I think there is an overwhelming political instinct in the current situation to do something huge, drastic, and ultimately quite harmful.

This is exactly how the average grandstanding politician would act. When something this big is going on, one must give the appearance of activity, inasmuch as passivity is the ultimate political crime. Hippocrates was right: a physician confronted with a baffling ailment is tempted to apply all sorts of mysterious nostrums. So he said: First do no harm!

Greg Mankiw also gives advice on how not to deal with higher gas prices. One interesting point: the US deficit is on a unsustainable path, so a tax rebate would be most unhelpful in moving towards fiscal sustainability.

What is a "sustainable deficit", anyway? There are several definitions, but two are most easy to remember: first is the "no Ponzi game" definition. In a Ponzi game, interest payments on debt can only be financed by borrowing. The analogy to pyramid schemes is perfect: in a that scheme/scam, the scammer's promise of high returns can only be met by new investors also chasing high returns. Insidiously, government may be playing a kind of pyramid scam with its deficit management. Second is that the public debt-to-GDP ratio must be constant or decreasing. The idea is that the GDP is the base from which to extract revenue, and therefore service the debt. The debt itself must not grow out of proportion of this tax base. Both these definitions are long run definitions; in the short run some violation of these rules is possible, but these violations cannot be pursued indefinitely. The creditors will eventually wise up, the way scammed pyramid investors do, and the whole thing comes tumbling down. The government becomes insolvent. Or it pays its debt by printing paper - fueling hyperinflation.

This time the message is: between taxes and excessive public borrowing, which one does less harm?

Oil Price Stabilization Tax

What's going on? As oil prices go up, legislators in the Philippines are again calling for suspension of the value added tax on petroleum, which is 12%.

I remember the good old days of the Oil Price Stabilization Fund. (This is what passes for sarcasm among economists.) It worked as a variable subsidy: at a given domestic price, when the foreign price went up, the oil firms would be subsidized by the fund; when the foreign price went down, oil firms would put money back into the fund. Well it might work if the regulated domestic price equalled the long run equilibrium price. It doesn't take an ijit to guess that the regulated price was set way lower than that, so that the "fund" was perpetually in the red, burning holes through government coffers.

What the legislators are proposing is in effect a variable levy. Foreign price up: suspend tax; foreign price down: impose tax. It is more feasible to implement because government doesn't actually have to cough up financing for a subsidy. But the idea is as flawed as the Stabilization Fund, and the effects are more insidious.

First, does anyone really know the long run trend in the world price of oil? Is US$ 65 per barrel it, as Rep. Salceda is guessing? Nobody knows. If anyone did, they would make a killing in the futures market. (If it were different, that is.) Suppose the oil price hold steady at today's high levels. Does anybody seriously think this tax can be reimposed?

Which brings us to the second point: suspension of the tax would forego, by some preliminary estimates, revenue of about 40 billion pesos. Representative Salceda recommends restrictions on spending and the scrapping of the rationalization program. But these are truly lousy ways of meeting government borrowing targets.

How about the "hardship to the people"? Well excessive government borrowing, or restrictions on public spending, are themselves sources of "hardship to the people." I am pleasantly surprised with Senator Recto, who shows lots of good sense, by claiming that the suspension would hurt people more.

Another way to approach the problem is this: suppose you are foregoing 40 billion in tax revenue anyway. Compared to repealing the VAT on oil, is there a better way to structure the tax system? My (very preliminary) simulations with the updated PhilCGE suggest there is. For example, halving the sales tax rate on petroleum products has about the same revenue loss as removing 5% off the sales tax rate across-the-board. However the latter involves a welfare improvement of about 30% more. This confirms that a more uniform tax structure tends to be less distortionary on the economy. Unfortunately the suspension of the EVAT moves towards a less uniform (and more distortionary) tax regime.

The de facto oil price stabilization tax is only good for one thing: political mileage. Yep, I can hear 'em downshifting to high gear all over.

Blame-thy-neighbor policy

One of the charges levelled against China is a "beggar-thy-neighbor" policy: keeping its currency artificially cheap, effectively subsidizing its exporters (while penalizing importers). Last week's meeting between Presidents Hu Jintao and Bush provoked a comment from the latter: "There has been some appreciation in the currency. We would hope there would be more appreciation in the currency."

Some review: a currency peg is when one country fixes the conversion between its own and a foreign currency at a given value. It is said to be following a fixed exchange rate policy in contrast to a flexible or floating exchange rate policy. A domestic currency appreciates when the rate at which one unit converts to a foreign currency goes up (conversely, when it takes fewer units of a domestic currency to buy one unit of a foreign currency). A depreciation is the reverse. The real exchange rate, is the market value adjusted by relative inflation (the difference between domestic inflation and inflation in the country holding the foreign reference currency). The idea is that domestic inflation at given market exchange rate is equivalent to an appreciation of the domestic currency. Depreciation accompanied by the same rate of inflation yields an unchanged real exchange rate.

So now we are ready to consider the question: is the yuan undervalued? Most economists would agree: yes, but not by a lot. Certainly not by magnitudes of 27.5% called for by some US Congressmen. (Though revaluation of yuan by that magnitude would do wonders for the Philippines' trade surplus with that country. Whether that's economically desirable is doubtful.)

Since the mid-1990s China has been on a currency peg; based on ADB data, the yuan/dollar exchange rate has fluctuated within a narrow band of 8.3 to 8.28. Using inflation rates in China and the US from 1996-2005, the yuan has only depreciated in real terms by less than one percent. Finally, overall trade surplus of China is only 2.6% of GDP, around the same level as in 2000.

More arguments against the undervalued-yuan claim here. Brad Setser also has plenty of discussion on the China-US imbalance.

It seems that some elements of the US Congress have become very adept at the "blame-thy-neighbor" policy. China-bashing bandwagon, anyone?

The China chance

China has received blame all around. For rising oil prices. For vaccuming up all the foreign investments. For grabbing markets for consumer manufactures, such as apparel, footwear, textiles, toys...

China - a country of 1.2 billion, where per capita GDP (PPP-adjusted) has risen over tenfold from 1980 to 2002 (reference). Now the second biggest economy in the world, thanks to decades of rapid economic growth.

What's not to fear from China? Lots. (See this link.) It's showing the early stages of the classic Lorenz-curve pattern - with inequality rising initially during growth. Back in 1980, the Gini ratio was 0.2 (quite equal), but now it is 0.45 (about the same as the Philippines.) Not good for social stability. The type of growth that has been pursued showns signs of unsustainability, in the environmental sense:

Rapid industrialization is producing massive environmental devastation. China is the world’s second largest greenhouse gas emitter (the U.S. is first). About 60 percent of China’s major rivers are classified as being unsuitable for human contact. Seven of the ten most polluted cities in the world are located in China. Air pollution alone claims 300,000 lives prematurely per year. Acid rain falls on 1/3 of the territory. More than 1/3 of industrial wastewater and 2/3 of municipal wastewater is released into waterways without any treatment. Over the last few decades, increased industrial agriculture and commercial grazing has resulted in creating over 2.67 million square kilometers of desert land—around 27.9 percent of China’s total territory. Many claim that foreign investment and the introduction of “green” technology will help clean up the environment in China; however, this has not been the case to date. One of the reasons for this is because China’s State Environmental Protection Agency (SEPA) has little authority. SEPA estimates that although water treatment facilities are installed in most major industrial plants under government mandate, round one-third are not operated at all and another one-third operate occasionally. Often the fines it levies are less than the expenses of using the “green” technology. (Business Week, August 22, 2005)

Well I for one am hoping that it's rapid export-oriented growth is sustained. A competitive Chinese export sector means cheaper products which we can import. And a big Chinese economy means a big market to send our goods. In 2000 the export share of China was only 1.74%; in 2005 it was 9.86% and growing. In terms of value, exports to China in 2000 were only US$ 663 million; in 2005 it was over 4 billion, more than a sixfold increase. You may not realize this, but our imports from China in 2005 was only US$ 256 billion. (So what's all that "made in China" stuff? Well it turns out that China exports to other countries, which export back to us the made in China stuff.)

The global economy is not a zero sum game where one country becomes better off only if others become worse off. Simultaneous growth is a very real, in fact very realistic, prospect.

Energy prices up again

Much has happened while I was missing in action beating a couple of deadlines: the Thaksin problem in Thailand has been resolved; in the Philippines, local governments are pushing for Constitutional reforms, while the President suspends all executions; but the global development I'd like to flag for now is the recent uptick in oil prices. In the past month, prices have gone up by 16%, with Brent crude exceeding US$ 71 per barrel.

While many analysts (cited in the article) point to uncertainties with respect to Iran as a proximate cause, James Hamilton thinks it's still a prosaic supply-demand story: oil production in the US is down, as well as in Nigeria (due to their political problems). "And demand remains strong, with U.S. economic growth resuming at a faster pace than some of us had anticipated, and Chinese use of petroleum continuing to climb. If demand is up and supply is stagnant, small wonder if we see the price continue to rise."

For the Philippines, what is the impact of this? Suppose a high crude price is sustained yearlong, leading to an increase in prices of petroleum products, within the range of say 20%. In 2005 the country's total imports was US$ 44.9 billion, of which about US$ 6.1 billion was in the form of mineral fuels, lubricants, and related products (except coke and coal). This accounts for about 13.6%. Hence the average import price (assuming constant shares) would rise by about 13.5% x 0.2 = 2.72%. For good measure I raised this to a worse scenario of 5%, and ran this average price increase scenario into a macroeconomic forecasting model I am currently working on. Voila, what did I get? The price increase shaves off a little over a percentge point off our GDP growth in 2006. So if the forecast is 5.2% growth for the year, then with the shock, growth is only around 4.2% or so. Interestingly, even if the average import cost was permanently higher, growth would recover to its unshocked trend already by 2007!

So the bad news: higher energy costs are a serious drag on growth. Good news: the economy is not going into a tailspin.

More good news: notice that demand remains a key reason for fuel prices rising, and China and the US remain a major source of this demand boost. And how is that good news? But that's for another post.

Termites in the woodwork

Interesting that the heads of government in both the Philippines and Thailand are both grappling with credibility crises. Under a Parliamentary system as in Thailand, elections can be called to test the mandate of a sitting government. Under the Presidential system of the Philippines, a President serves a fixed term and can only be removed by impeachment. Both solutions have been tried in each country. In the Philippines the impeachment bid failed in a Congress whose Lower House (where impeachment must be initiated) is dominated by the President's allies.

In Thailand meanwhile the crisis has probably gotten deeper, mainly because of the opposition boycott. This boycott has often puzzled me, given the relatively credible electoral system in Thailand. Why would the opposition intentionally attempt to undermine institutions that have served Thailand well, so far?

Well, as explained in the CNN report, a large bulk of the population remains rural (70%). Apparently agriculture-led development has worked in Thailand, preventing the massive rural-urban migration observed in other Asian countries, such as the Philippines. I hypothesize that the rural population tends to be more conservative in their voting strategy, as long as the sitting government is delivering basic services. Abstract values of governance tend to be dismissed as petty bickerings of a distant urban center. Knowing of their impending defeat at the polls, the opposition organized a boycott among urbanites - deepening the crisis of institutions in that country.

The case of the Philippines is different. In Thailand, there appears to be a strong urban-based constituency towards actively replacing the administration. In the Philippines, a loose oppositionist alliance with vague middle and lower class support has repeatedly called for the President to resign. However these calls have not provoked mass demonstrations. Ironically, an unpopular President continues to rule because extra-constitutional measures are themselves highly unpopular.

As an economist my biggest worry is that political paralysis and pessimissm would extend to economic decision-making, particularly in the area of fixed and financial investment. In the Philippines the "firewall" appears to be holding, but things seem more tenuous in the case of Thailand. Would an economic crisis the magnitude of the 1997 exchange rate debacle hit Thailand, again? Maybe not soon. But in both cases these credibility problems are simply burrowing deep in the woodwork - like termites.

Immigration supply

A Reuter's story (through Yahoo) relates a discussion on the supply side of immigration. The context of course is the raging debate on the US on immigration - though Mexican immigrants are the biggest group affected, lots of Filipinos illegals stand to benefit as well.

Per capita income is a good indicator of local wage rates. The disparities are indeed enormous. The case of Spain and Portugal are held up as examples of how tackling the supply side - evening out the income disparities - will do much to ease immigration pressures.

What happened to Spain? Well way back in mid-1980s its US$ per capita income (PPP-adjusted) was 10,435; today it stands at 25,100. That is per capita income rose by a factor of nearly 2.5. That can be done by plodding along at a decent growth rate of about 4.5% per year (in per capita terms). Once your economy is that size, you don't need Tiger economy growth rates (in the rate of 7% and above) to double hit developed country levels in a short time. All Mexico needs to do is to trundle along at about that pace; in fact its per capita growth has been in the range of 1%-2% in the last couple of decades. So the US can expect a lot more migration from the South in the medium term - that how that entry is managed is their call.

What about the Philippines? At about US$ 1,000 per capita, even doubling income will still keep us at a poor country level. If we can make our per capita income grow by 3% per year (around the growth rate last year) then in 20 years we can hit US$ 2,500. Pretty impressive, no? That's about Thai standards now. What we need is really fast growth (Tiger - standard). At 7% per capita growth (9.5% in GDP terms), we quadruple income in 20 years. But that's only about Malaysia standard (these days). In fact, the past couple of decades our per capita growth has been lower than Mexican standard!

So we can expect lots of migration from the Philippines over the next several decades. Slow growth and employment generation at home has been a major "push" factor behind all that worker migration. If we can rack up decent growth rates, there will eventually be a slowdown in the rate of growth of overseas remittance - and even a reversal. I do not believe that overseas remittance growth has contributed in a significant way to slowing down our growth rate - my gut feel is that the effect has been positive.

Experimenting with corruption

The Economist points to this great study, in terms of scientific approach and relevance to development. The paper (PDF) is mostly nontechnical (and is completely accessible to an economics major.) The study looks at road projects in Indonesia and compares actual expenditure with measured expenditure, working backward from the observed quality of the road. The difference between the two is the effect of corruption (pocketing project money that should have gone to purchasing materials and labor.) The experiment is made by introducing community-based monitoring and central government audit at random across the sample of projects, prior to the conduct of the projects.

It shows that - surprise! - officials respond to announcement of audit. This is observed within a corruption-prone society. More "modern" approaches, which relies on community-based monitoring, is found to be less effective, or effective only for controlling corruption with respect to labor purchases (which are observed by the community). Since only one-fourth of the road project is composed of labor, this is not very effective on controlling overall corruption.

Here's what you take home (from the author's conclusion):

By contrast, increasing grass-roots participation in monitoring the project affected only missing labor expenditures, with no impact on materials and, as a consequence, little impact overall. These results suggest that grass-roots monitoring may be more effective for government programs that provide private goods, such as subsidized food, education or medical care, where individual citizens have a personal stake in ensuring that the goods are delivered and that theft is minimized. For public goods where incentives to monitor are much weaker, such as the infrastructure projects studied here, the results suggest that using professional auditors may be much more effective. This does not mean that empowering community members to discipline service providers has no role in an anti-corruption approach. In fact, the results suggests that the audits were most effective when the village head was up for re-election, which suggests that local level accountability may be an important mechanism for disciplining public officials. However, the results suggest that grass-roots monitoring alone may not be sufficient, and that for detecting corruption professional monitors may also important. The results in this paper present the results from a short-run intervention. If auditors are bribable, over time villages may develop repeat relationships with auditors which may make bribing auditors easier than in the one-shot case examined here. This might suggest, for example, that frequent rotation of auditors – or lower probabilities of audits combined with higher punishments – may be optimal.

One good deed leads to Dutch disease

Dutch disease manifests in many forms. Here is the latest incarnation from Zambia (via Mahalanobis).

In short: the debt write-off (under the rubric of the MDG) effectively transfers foreign exchange to Zambia, causing a currency appreciation and hurting exporters.

Earlier I had written about a similar Dutch disease in the Philippines. Now I realize that the latter form is less of a problem than that experienced by Zambia, or other countries afflicted by the "natural resource curse".

The reason is simple: remittances wind up in the hands of private individuals (families back home), who allocate the funds based on market incentives. However in Zambia, the transfers are disposed of by the government; similarly in resouce-driven appreciations, state-owned companies typically get the bulk of the bonanza.

I am very suspicious of government acting as if it were a market entity, when it is actually shielded from market incentives. There is no guarantee that the foreign exchange earnings will be used for the right purpose, whether investing in human development directly (welfare programs and safety nets) or indirectly (investing in profit-making enterprises). So the Zambian government (and other recipients of the MDG debt write-off) better be careful that the long-term gains from their investment more than offset the short-term repercussions of the Dutch Disease.

Inane proposals on migrant labor

Why restrict the overseas Filipino professional? So asks this Inquirer columnist, who talks about a full page ad put out by Fair Trade Alliance. I didn't read the ad myself, but I have a pretty good idea what it would say ... and Mr. Pagalangan relates the gist of it: keep them home.

What the %^&*@#$$?!!!

The skilled Filipino worker gets paid higher wages outside. His or her well-being goes up; as a fellow Filipino this should count for something, no? Even if he or she happens to be living abroad? What is more, he or she remits income back to the Philippines, increasing the well-being of the family. So far so good.

The cost? We back home get deprived of some cheap skilled workers. Well, time to get real folks - other people overseas are willing to pay for our workers. And we pretty well have to learn to match these wages if we want to keep them here.

What about our health care, and all those "critical professions"? Same thing. It's the price system at work. You get what you pay for - whether it's food, drugs, or people. Any suppression of the price system (say, by inane regulations on overseas work), is going to backfire. Probably the regulation won't work as workers, placement agencies, and public officials themselves circumvent its obvious stupidity. Worse still, it may work - and in the medium to long term you will see fewer people investing in quality education and training. (Those prospective high wages abroad have got everything to do with all that studying!)

How about "return service"? I've got a better idea. Why subsidize all that higher education anyway? Do away with tertiary education subsidies entirely. All that money is better spent on providing quality education at the primary and secondary level. Then let the professional - who has invested in their own human capital - make their free choice about where to work.

Disclaimer: I had a brief stint abroad (in Malaysia, 2 years) doing research in an agricultural research center. I probably have a vested interest in this issue. So? The idea is still $%%^&$#!! stupid. And I'm still right.

Fish - one of the most active sectors in agriculture today

Fish is an important source of food and livelihoods in Southeast Asia. Fish provides a large share of animal protein intake, from 40% in the Philippines and Thailand to 57% in Indonesia and Cambodia. Low value fish in particular is a major component of the diets of the poor. Fisheries are also a significant source of livelihoods for communities on coasts, riverbanks, and floodplains, which cover a large bulk of the populations of Southeast Asia.

Recently the fisheries sector has been undergoing unprecedented changes: production in the region has grown rapidly, averaging 4.2% average annual growth from 1980-2003, compared to a 2.7% average annual growth over the same period for all other agricultural products. Fish has spearheaded the globalization of agriculture, following the reduction in import barriers and duties and the harmonization of food safety standards under the World Trade Organization (WTO) Agreements. The share of fish all agricultural exports reached 20% in 2003, compared to only 6% in 1980. The value of fish exports in 2003 (US$ 8.6 billion) is far in excess of exports of fruits and vegetables (US$3.5 billion), cereals (US$ 2.7 billion), coffee, tea, and cocoa (US$ 2.3 billion), and poultry (US$ 1.2 billion). For example, Vietnam is well-known as a coffee and rice exporter: however the export value of these two crops combined was less than US$ 1 billion in 2003, compared to fish exports of US$ 2.4 billion in the same year.

However rising global demand for fish has placed tremendous pressures on aquatic ecosystems and wild stocks. The "live reef food fish trade" is a case in point: consisting mostly of groupers, snappers, and wrasses, this trade involves exports of reef fish mostly to Hong Kong - China to meet a nearly insatiable demand for live fish. Unfortunately extraction of reef fish is both too heavy, and often done in an unsustainable manner (e.g. reliance on cyanide fishing).

What is the future of global fish trade, given rising demand and dwindling stocks? Not so bright - higher prices are in the offing, including for fish consumed heavily by the poor. (And there are ways to project the magnitude of these price increases, and even the impact of these future trends on economic well-being). But while gloomy, the situation is not hopeless. Yet. (I think.)

Unintended consequences

A common prescription to save fish stocks is to "throw it back", pertaining to immature fish that have been caught by fishers. Interesting point I didn't think about: well that strategy may have its drawbacks, according to a Scientific American article cited by Mark Thoma (posting in the Environmental Economics blog). The unintended consequence is that fishing selects in favor of small fish - leading to a gradual evolution of populations with smaller individuals. And these individuals seemed to be duller and weaker than those that end up on our dinner table.

The answer? Not throw back any fish at all! Well in tropical Asian fisheries, the entire "trash fish" industry is built on the idea of landing and selling everything. Unfit for human consumption? There's a great big aquaculture industry (shrimp, grouper, milkfish) waiting to gobble it all up.

Of course this is an ecological no-no, so the article suggests throwing back some big ones too. I can imagine environmentally-conscious fishers doing that. Especially those using hook and line, or longliners.

Kidding aside, I think nothing beats cutting down on fishing effort, period, by whatever means - state command-and-control; individual transferrable quotas; community-based controls; whatever it takes. Otherwise we would be looking to a future of - not just smaller and dumber fish - but none at all.

Singapore - after decades of liberal trade and investment

Okay so I'm stuck here in Singapore on an eight-hour wait for my connecting flight. An airport display informs you of the following factoids:

Did you know that Singapore makes:
1/3 of all hard disks?
1/3 of all hearing aids?
20% of all photoflash lamps?
Oil and gas equipment?

About 26% of GDP is accounted for by manufacturing, of which nearly 40% is in electronics, 26.4% is in chemicals, 17% in mechanical engineering, and 7.6% in biomedical products.

Of course we all know that Singapore is a global transport hub. One-third of the world's oil passes through Singapore; it has the 3rd largest oil refinery hub; it has 50% of the world market for fast ferries. It is the world's number 1 in shipbuilding repair, cornering 20% of the world market. Changi airport exemplifies this excellence: all cargo is cleared within 13 minutes; the airport has been voted best airport by "Business Traveller" for the last 17 years.

Was this achieved because the government closed off the economy to foreign investment and trade? You gotta be kidding. It's one of the freest economies in the world, next to Hong Kong. One of the beauties of the market is how it identifies export winners in such detailed niches that no planner or economic model could possibly foresee. Well okay, a world transport hub, maybe; but friggin' hearing aids? Photo flash lamps?

Okay lots of people are complaining about the repressive political environment. However what is important is total freedom - economic and political. Some countries have lots of political freedom but place plenty of economic restrictions. Time to realize that these restrictions fall within a continuum of repression. So before we say in the Philippines fault Singapore for this and that, tell me, how long does it take for you to register your real property in the Philippines, grease-free, in the Philippines?

Cultural attitudes towards science and pseudo-science

Answer first:

1. Which nationality is more likely to believe that astrology or fortune-telling is scientific? Chinese, South Koreans, Europeans, or Americans?

2. Which nationality is more likely to support public funding for science? Chinese, South Koreans, Europeans, or Americans?

3. Which nationality is more likely to say that science does more good than harm? Chinese, Europeans, or Americans?

Now peak at the answers here. And read the whole thing while you're at it.

Those silly Confucianists. (Crash!)

Game theory satire

Whenever I read an article or book on technical economic theory, I often get the impression that I am in a fantasy world no less imaginative than Middle Earth or Narnia. By a long chain of assumptions, we are assured that this is an "approximation" of the real world.

Often this kind of imagineering (to borrow a phrase from Disneyites) is essential. One wonders though whether sometimes economists have gone overboard with it.

Check out this satirical piece on the toilet seat problem. Are some articles in Econometrica or Journal of Economic Theory no less absurd than this piece of toilet humor (bad pun, sorry!)?

BTW, am headed off for a workshop in Malaysia next week (on the live reef food fish trade) and (you guessed it) I am ducking my blogging duties. Expect light posting over the next couple of weeks. (I'll explain what "live reef food fish" is - that's good for at least one post already!)

Economic growth - forever

Many environmentally-minded people have the impression that fixed natural resources, in principle, makes perpetual economic growth impossible. This seems to make sense from an input-output perspective: growing output requires growing input (true); however some of the required inputs are fixed (true); hence output must stop growing eventually.

However the mistake is this: growing output requires at least one growing input. If the growing input can substitute for the non-growing inputs, then it is mathematically possible for the limiting point (zero natural resources) to be reached at time infinity - with economic growth happening all along the way.

What can be this perpetually growing input? In human history, economic growth has typically been driven by technology. Technology ultimately is based on human intelligence, or information processing.

It seems that the ability to discover new stuff is limitless. That is, it seems that humans will also be able to discover new things that the market values. This is the crucial point: economic growth is not just a matter of piling up new stuff by weight. Then certainly economic growth is limited. Economic growth is a matter of piling up new stuff by market value, based on subjective assessment of individuals, collectively summed up in the market price. This process holds the key to perpetual economic growth.

Scattalaxis has another way of putting it. In addition to the economic sphere and the biosphere is the "noosphere" (was this originated by de Chardin?) The products of the noosphere appear to be limitless, as valued by the noosphere itself.

Now all of these are possibilities are based on theory. On the other hand perhaps humans will run out of innovations, or perhaps inventions are not as substitutable with natural resources as we think. For example, perhaps it is not possible to find a cheap substitute for oil-powered transportation.

In the long run, my money is on the human mind.

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.

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.

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
Inquirer



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.

"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.

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."

Disasters

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.

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.

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.

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?

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.

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.

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.