Thursday, December 23, 2004

Prudent Investor Debates: Philippines in a State of Anarchy?

From this week's newsletter: Prudent Investor Debates

Philippines in a State of Anarchy?

Early last week I read an article by a local political analyst Mr. William Esposo of the Inquirer-GMA 7 website and found it initially repugnant. Since your prudent investor analyst do not want to succumb to confirmation biases, with an opened mind I digested the thesis that the Philippines is in an advance state of anarchy let me quote some important quips of Mr. Esposo’s arguments:

“The lethal combination of the most extreme poverty and runaway consumer prices, graft and corruption, public disillusionment over the political system coupled with the total absence of an inspiring leader-model and topped with an all-encompassing fiscal crisis lead to only one conclusion: we are headed for a period of anarchy…

“I’ve said in previous columns that this nation is already in revolt, in the psychological sense. In contrast to our previous political crises, people have become too disenchanted to even see hope in the changing of the guard. The people want a system overhaul. The yearning to change the system becomes even more intense as the pressures mount….

“More and more people I talk to have told me that they find an authoritarian regime an acceptable alternative to the present system. In his column several weeks back, my friend and Inquirer columnist Randy David wrote about Washington Sycip and F. Sionil Jose expressing support for an authoritarian regime and a revolution, respectively. Five years ago these mild-mannered gentlemen would have found these radical views unthinkable.

Writing as an investor, for a state that is on an initial phase of ‘revolt’, as Mr. Esposo suggests definitely is unworthy of investments. But is the country truly in a state of anarchy? Or is anarchy simply confined to the mindsets of political analysts with blinders and experts banking on controversial hugging headlines? While it is true that problems such as extreme poverty graft and corruption, public enchantment does exist, does this suggests that the Philippines must undergo a violent cleansing process to uplift its economy and its people? Will a change of political system guarantee the amelioration of the economic health of the country?

Well for Mr. Esposo arguably it is, hence their radical call for an authoritarian regime. This is sharp contrast to what foreign analysts think of our economic health as I have shown you lately. Warts and all analysts from Credit Lyonnais, Morgan Stanley, Goldman Sachs, the Economist and independent market maven the preeminent contrarian and my personal favorite thinker Dr. Doom or Marc Faber are economically bullish on the Philippines. So why these extreme nuances?

“Wealth distribution in Asia has been heavily skewed and has benefited relatively few. Second, poor governance suggests the danger of the collective wealth being squandered by rent-seeking and systemic financial risks. In addition, it is possible that inflation will be raised in the US to ease the debt burden of future generations, which could impair Asia’s inheritance.” notes Daniel Lian Southeast Asian Economist for Morgan Stanley. Wealth distribution (poverty levels), inflation (high prices) and rent seeking (patronage ‘palakasan’ culture, cronyism) and systemic financial risk (fiscal crisis) are well identified and similar to the observation of Mr. Esposo. In other words, these foreign analysts are fully aware of the disequilibrium in the economic and political structure. However unlike Mr. Esposo he identifies the risks of US inflationary policies from which Mr. Lian posits “may impair Asia’s inheritance”.

On the plus side Mr. Lian cites of a possible domestic investment boom which is of course is virtually impossible to the likes of Mr. Esposo. Mr Lian says, “Both Malaysia and the Philippines also have considerable scope for lifting investment. Malaysia has consistently generated very high savings (44% of GDP) and the Philippines has plenty of room to raise its savings rate to at least the low 20%s, if the present round of revenue-enhancement efforts, coupled with structural fiscal reform, result in a significant reversal in the government’s deficit trend. Raising the investment rate to the low-20% area COULD TRIGGER A SIGNIFICANT RISE IN INVESTMENT IN THE REPUBLIC. However, in the case of Malaysia, there is some uncertainty about the investment outlook due to the government’s attempt to reduce its investment role. In the Philippines, the battle in the current round of revenue enhancement moves and structural fiscal reform is far from over.”

Morgan Stanley is bullish on Asia and the Philippines not only in its outlook but it puts its money where its mouth is according to Bloomberg’s Hui-yong Yu “Morgan Stanley, raising $3 billion for its fifth global real estate fund, got a commitment of as much as $440 million from Washington state’s pension fund to invest in Asia and Europe… Morgan Stanley…is betting on economic recoveries in Asia and Europe to lift property values.”

In addition the latest news is the mining front is that Dr Marc Faber who sits in the board of Canadian Mining Ivanhoe Mines is in talks with local mining heavyweight and Philippines’ largest gold producer Lepanto Mining. According to the Philippine Daily Inquirer, “CANADIAN mining firm Ivanhoe Mines Ltd. is considering investing in mining projects of the Lepanto group Lepanto group chairman Felipe Yap said Thursday…Yap said he met with Ivanhoe Mines founder and chairman Robert Friedland to discuss the potential investment of the Canadian firm. “I am excited to look at investment opportunities here in the Philippines,” a Yap associate quoted Friedland as saying.” Money invested represents votes of confidence.

Now if the Philippines simmer into a revolutionary phase obviously this would be felt by these investor/analysts. Either these investors stall their investments or sell out. Apparently based on market data, manifestations of these conditions have not yet emerged. But Should it?

To suggest the likelihood of the return of authoritarianism is equally revolting. Name me a Latin American country (which has patently a similar culture to the Philippines than that of the rest of Asia) that has prospered economically out of dictatorship? Not Brazil, Argentina, Chile, Ecuador, Peru, Bolivia and Nicaragua. Some of our Asian neighbors had their encounters with Dictatorship and/or statism but has returned to the fold of democracy. You’ve got the likes of India, Indonesia, Thailand, South Korea and Malaysia. Myanmar (Burma) nor North Korea are no Thailand and is hardly your economic paragon. In fact both China and Vietnam are now gradually phasing in market based economies that are unlikely to prosper under a dictatorship, I believe that the Political transition would follow soon.

The usual argument for a return to authoritarianism is predicated on virtuous of discipline and central control. And this is premised largely on model leaders that would be ideal or in Mr. Esposo’s words ‘inspiring leader model’. And in most occasions, the premier model would be Mr. Lee Kwan Yu of Singapore. Singapore’s 8 million people is largely a homogenous society and could be easily controlled. The Philippines is a technically heterogeneous considering that it has more than 172 dialects, 7,100 islands, and 15 regions including National Capital Region (NCR), Autonomous Region of Muslim Mindanao (ARMM)and Cordillera Autonomous Region (CAR). Hence even amongst ourselves unity can hardly be attained, simply observe the Philippine organizations abroad, as much as the local political butterflies, Filipinos abroad could hardly foster unity.

The best parallels could be seen with Indonesia which also underwent a plentiful horrid years of Dictatorship (1967-1998), yet if one notices in economic terms according to World Bank 2002 the Philippines ranked 133rd against Indonesia’s 145th based on GNI Atlas methodology per capita income, as measured in Purchasing Power parity the Philippines ranked 126th against Indonesia’s 140th.

In terms of corruption according to Transparency International the Philippines ranked 77th in 2002 against Indonesia’s 96th place. Moreover according to the same corruption watchdog, President Mohamed Suharto ranks as the most corrupt leader with an ill-gotten wealth estimates of around $15-35 billion, our own Ferdinand Marcos was ranked second with an estimated stash of about $5-$10 billion. Of course there would be an update on these as Iraq’s deposed despot Saddam Hussein and his cronies were reportedly able to skim over $21 billion out of the UN Oil for Food scandal which were originally intended for food and medicine provisions for the Iraqi people.

The additional list of most corrupt leaders includes Mobutu Sese Seko of Zaire, Sani Abacha of Nigeria, Slobodan Milosevic of Serbia/Yugoslavia, Jean Claude Duvalier of Haiti, Alberto Fujimori of Peru, Paulo Lazarenko of Ukraine and Arrnoldo Aleman of Nicaragua. Now note, most of these most corrupt leaders were tyrants. In other words, authoritarianism breeds corruption rather than slays them. Corruption under an authoritarian regime is and has been the rule and their much touted Singapore’s Mr. Lee Kwan Yu is an exception to the rule which means that in context of probabilities, under an Authoritarian regime the likely outcome would be a more corrupt government. So be careful of what these analysts wish for.

In terms of Business conduciveness, World Bank’s Doing Business shows that the Philippines has a more attractive business environment COMPARED to Indonesia it takes 25 procedures 380 days and costs about 50.7% as percentage to debt to set up a business in the Philippines compared to the Indonesia’s 34 procedures 570 days and 126.5% of costs. So if there was any country that needed a revolution it would have been Indonesia.

And for one to believe that a country can emerge as immaculate is delusional according to Director of Global Governance at the World Bank Institute, Daniel Kaufmann, “there is no such thing as zero corruption, even in countries that rate at the highest levels in terms of ethics and the control of corruption.” This not to mean that your analyst would be tolerant of these malfeasance this is to say that reforms are required and not some iconoclastic actions that would exacerbate rather than alleviate our present predicament.

But of course, these local revolution inciting analysts have their self-serving agenda, either they bear an irresolvable personal difference with the present administration or they seek other agendas such as outmoded left leaning political paragons or have personal interests on an alternative government or are simply dolts engaged in oodles of tarradiddles.

Finally I would like quote Mr. Lew Rockwell of the Ludwig Von Mises Institute about the corruptions of governments, “In a free market, big isn't the same as corrupt or inefficient. Bigness is the reward of market success. If you give the consumers a good product or service at a price better than the competition, your business tends to grow. No matter how large the firm, its managers are always accountable to the public. Moreover, no market position, however exalted, is permanent. Private business must earn its keep every day, or suffer losses and even bankruptcy. This is what makes market institutions accountable; the watchdogs of the system are investors and consumers with their own property at stake.

“In government, the opposite is true. Big and corrupt go hand in hand. The worse the government is, the more it grows at public expense. So long as the coerced revenue pours in, government can disregard the public interest, and go about its usual business of rewarding its friends and punishing its enemies. Rules, regs, and whistle-blowing that attempt to keep conflicts of interest at bay work about as well as prison bars of thread. For mankind has never discovered a method for keeping the robber state from acting according to its nature.”

To diminish corruption we need less government not more.

For a sample of the horrors of Authoritanism read the Economist article about Myanmar "Forced and other customs"

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