Tuesday, July 26, 2005

DrKW Global Equity Strategist James Montier: Doing the right thing or the psychology of ethics

This insightful excerpt taken from fullermoney.com by DrKW’s (Dresdner Kleinwort Wasserstein) Global Equity Strategist James Montier: “Doing the right thing or the psychology of ethics” tackles on our thought process and how we usually pass on ‘Moral' or 'Ethical' Judgments to ‘everyday’ issues be it finance, investing, politics or to any our precious life’s little daily encounters...

We all believe we behave in an ethical fashion. Unfortunately the evidence suggests this is just another in the long list of positive illusions we lumber under. Our moral judgements are often not the result of reflective logical thinking, instead they are driven by unconscious emotions. Being aware of our own implicit biases is an important step along the road to learning to be mindful about ethics.

We all tend to suffer from an ethical blindspot. We have a good idea about how others will act in moral situations, but we are hopelessly optimistic about our own behaviour. We tend to think we will behave much better than we actually do. We also think we will be uninfluenced by biases or conflicts of interest - the illusion of objectivity. Sadly the reality of our behaviour is very different.

Historically, moral judgement has been held to be the result of logic. Ethical dilemmas are meant to be resolved by a process of reflective logic. However, recent evidence suggests that more often than not our moral judgements are made on the spur of the moment by emotion. Moral reasoning is often a post hoc justification for the decision we made, rather than a balanced review of the relevant information before we reach a conclusion.

Bazerman et al have referred to our behaviour as bounded ethicality (as a parallel to the bounded rationality of judgement and decision-making). Just as bounded rationality consists of a well-defined group of common biases and errors in thinking, so bounded ethicality covers some generalised traits of unethical behaviour.

Four key ethical biases have been identified.

Firstly, we have a tendency towards implicit attitudes or unconscious prejudices. We tend to think of ourselves as free from biases such as racism or sexism. However, implicit attitude tests reveal that whilst we think we are unbiased, many of us actually display stereotypical thinking.

Secondly, we tend to display in-group bias - a tendency to favour those who are like us. For instance Van Knippenberg et al created a mock crime, giving jurors information about the crime and witness statements. When they were placed under high cognitive strain, they fell back on stereotypes. When told the suspect was a banker only 44% of jurors said he was guilty, when told the suspect was a drug addict 80% of jurors said he was guilty.

Thirdly, we all tend to over-claim credit. If you ask spouses to estimate their contribution to household chores, the sum is almost certainly greater than 100%. Similar findings hold for most groups.

Finally, we underestimate the impact that conflicts of interest will have upon us. Experiments reveal that we fail to correct for the degree of influence that conflicts will have on our decisions. For instance, Professional auditors were 31% more likely to accept dubious accounting if they worked for the company rather than an outside investor! Becoming mindful of our proneness to ethical failure is perhaps the only way of dealing with insidious bias. Legislation and disclosure simply won't work.

Sunday, July 24, 2005

Yuan’s Dollar Unpegging Opens Portals for Philippine Economic Advancement

Yuan’s Dollar Unpegging Opens Portals for Philippine Economic Advancement

A kaleidoscope of earthshaking global events has failed to take away the limelight from the unwarranted fixation of Filipinos on domestic politics. The terror bombings in Egypt, whose causalities have climbed to 88 fatalities as of this writing and the second series of bombings in London and most importantly, the seismic ‘Yuan revaluation’ or the depegging of the Chinese currency from the US dollar for the first time in more than a decade which is now the du jour topic of the global financial markets.

While the Yuan’s peg has been adjusted by only 2.1% from 8.3 to 8.11 to a US dollar, the move towards a “managed exchange rate regime” alters the framework of its peg from the US dollar to a “basket of currencies” which almost similar to the Singapore dollar model. Second, the currency is now allowed to float within a trading band of +/- .3 percent, with the closing prices determined at the end of the trading day.

What is so significant about the Yuan? According to Morgan Stanley Chief Economist Stephen Roach ``China’s fate is tied far too closely to that of the US. Its export-led growth is dependent on the American consumer; at least a third of all Chinese exports go to the US. Moreover, China’s currency, the renminbi, has been pegged to the US dollar for over a decade. This means the monetary policies of the People’s Bank of China and the Federal Reserve are joined at the hip.” Moreover, according to Andy Xie Asian analyst also for Morgan Stanley ``China has become the biggest trading partner for most East Asian economies, and it has substantially increased its influence in the region.”

In other words, in the context of global trade dynamics, the symbiotic relationship of China, as the world’s principal supply chain, and the United States, as the world’s premier consumer, has been implicitly shaped by an interlocked monetary policy as evidenced by the Yuan/Remimbi peg to the US Dollar. This implies that with the current move to wean away from its interdependence to the US dollar, China is finally adopting an independent monetary policy! In this instance, the central banking skills of the People’s Bank of China (PBOC), China’s central bank, will finally be tested and most importantly, we could probably be at the cusp of a major global structural trade, financial and economic adjustment that essentially would be deal with the extant imbalances that threatens the global economy.

It is true that while the revaluation is miniscule relative to the expected adjustments (anywhere from 15 to 30%), the PBOC is anticipated to adopt ‘baby steps’ in its transition to the new exchange regime, possibly to avoid the risks of having massive disruptions or dislocations in the financial markets that may ripple to the global economy. Further, it is my view that the gradual steps are part of the Chinese central bankers’ learning or experience curve as quasi-independent policy makers.

It is also possible that the recent moves to adjust its currency could be a political statement in response to the souring relationship with Washington as threats of legislated protectionism, particularly the Schumer-Graham China Currency Act (S. 295) which would slap 27.5% tariffs on Chinese imports, are poised to undermine global trade flows. China needs those jobs badly as rising unemployment or displaced workers from former state owned enterprises could stir political instability that may overwhelm the Communist ruling party’s survival (Sounds familiar?).

What’s in it for the financial markets? For one, the diversification away from the US dollar and the pegging to a basket of currencies are definitely bearish indicators for the US dollar and US treasuries.



in $ Million


United States






Hong Kong



South Korea




















Table courtesy of USChina.org

If there would be any clue to the inscrutable ‘basket of currencies’ peg recently adopted by the PBOC, the above table shows of China’s top 10 largest trade partners, which posits that the US $ and Japan ¥ would get a bigger share of the basket pie while Asian Currencies may dominate the basket.

As the Yuan appreciates the cost of imports from China are likely to expand thereby increasing headline inflation pressures in the US. Further, the new Yuan peg construct essentially diminishes China’s need to recycle its trade surpluses to US treasuries, and as well, may raise the odds for a shift out of the US dollar. This in effect removes the artificial bid to the US dollar denominated assets which has, thus far, provided subsidy to the low interest regime in the US today. The lifting of the subsidy would translate to probable cutbacks on US treasury purchases that may lead to falling bond prices or higher yields suggestive of higher interest rate environment which may test the resiliency of the asset-dependent heavily indebted US consumers. Malaysia’s lifting of its ringgit-US dollar peg, just hours after China’s promulgation, may yet underscore this.

For China, the 2.1% revaluation is less likely to affect their economy, since the wage and cost differentials are only a fraction relative to US standards.

Second, after applying administration policies to unsuccessfully slowdown growth to lower the risks of overheating, the revaluation could have been also used as an instrument to temper the fast clip growth momentum as well as to reduce inflation. China’s GDP accelerated to 9.5% in the second quarter, ``spurred by a $39.6 billion trade surplus, rising consumer spending and investment in power plants, mines and factories. The faster-than- expected growth suggests Asia's second-largest economy can withstand a stronger currency, which will make the nation's exports more expensive overseas.” observes Bloomberg’s James Regan.

Further, the tensions arising from its inability to sterilize excess money in buying US dollars in its monetary system may have the heightened risks of excess credit creation as manifested by the emergence of ‘assets bubbles’ and mounting inflation. The revaluation basically gives China an ample room to exercise monetary tools for flexibility purposes.

Third, China’s government has taken steps to increase outflow of capitals prior to the recent revaluation. This is clearly visible with China’s encouragement of its endogenous companies to invest overseas such as Lenovo’s latest acquisition of an IBM division, Haier’s (China’s largest home manufacturer) bid for Maytag (the struggling maker of Hoover vacuums), and the controversial China’s CNOOC (China National Offshore Oil Corp.) tender for Unocal.

The other related notable capital outflow policies are the raising of the limits on the amount of money that students and tourists can bring abroad, as well as the current process of loosening restrictions and repatriation of money for foreign owned companies in China. This implies that China intends to use much of its foreign currency reserves to support its financial sector, secure energy and raw materials, and to expand overseas through acquisitions for brand expansion, distribution channels or showcase their management skills.

Lastly, given the present economic realities such as the surplus capacities brought about by excess business and government investments, rising costs in the coastal areas, transportation bottlenecks, shortage of oil and electricity, China’s present thrusts, according to Simon Hunt of Simon Hunt Strategic Services as excerpted by John Maudlin seems to revolve around ‘focusing on business profitability’, ‘return on capital investment’, ‘value added’ ventures (new technology, more expenditures on R&D and etc.), and expanding inland or rural sectors ``where transport systems have improved, where land costs are a fraction of that in the coastal cities and where wages are one-third or less.” These disadvantages open the doors for opportunities among the region’s low cost producers and other emerging market economies.

Naturally, an appreciating Yuan would translate to more expensive exports for China while reducing import costs that may yet stimulate its domestic demand.

For manufacturing companies in South Korea, Japan and Taiwan, capital investments may shift to lower cost production countries such as Vietnam, India or other emerging economies. Yet if domestic consumption will be augmented by the China’s currency appreciation then regional trading opportunities will undoubtedly accelerate. Further, the trend suggests (as can be seen by China’s table of top trading partners above) that inter-regional ties would likely deepen as trade and investments expand.

For a region that holds about 60% of the world’s population supported by 70% of the global currency reserves, it is of no doubt why our paragon benevolent dictator Mr. Lee Kuan Yew, Singapore’s former Prime Minister in his latest article ‘Rising Asia’ in Forbes forecasts that ``The inevitable surprises will occur, but both China and India are on course for a revival of their glorious civilizations. By 2050 the world's economic center of gravity will move from the Atlantic to the Pacific and Indian oceans.”

Meanwhile, the US is unlikely to recover the hollowed out manufacturing capacities it has lost to the outsourcing/offshoring phenomenon given that its relative price structure is still way above China and the emerging market economies even considering a 30% revaluation of the Chinese currency.

Japan Yen Spot Rates 1989-2004

If history could be a gauge then Japan’s remarkable appreciation from about 150 yen (USD/JPY) in 1998 until 110 today for a 26% rise has not stanched the tide of surpluses in favor of Japan, as shown in the chart above, courtesy of Gavekal Notebooks, “Japanese equities will do a lot better than the economy”. Japan’s foreign currency reserves is the world’s largest for the 67th straight month for June, according to Forbes at US$843 billion and is the largest US Treasury holder at $687.5 billion (May 2005) according US Treasury Department!

To aptly quote Dr. Faber, ``Quite frankly I do not understand the thinking of central bankers. Either they think that a strong currency is a problem or they think that weak currency is a problem. The world would be better off if central bankers collectively resigned and let the market fix exchange rates. Then there would never be a problem, in my opinion. In addition, a strong currency has never been a problem in the long run. It forces corporations to become extremely efficient, to innovate and to invent new methods of production. Weak currencies on the other hand are an incentive to compete based on short term favourable exchange rate movements – in nature very much alike protectionist economic policies. I think the Yen could appreciate to one US$ equal 1 Yen and the Japanese would still have a trade surplus with the US.”

Finally, the Yuan revaluation essentially opens the economic opportunity portals for emerging market economies as the Philippines to take advantage of. While most of us Filipinos are still trapped in the arguments of personality based politics and instant gratification solutions to our economic and financial problems, here we are faced with opportunities to recover our senses, wits and dignity. Simply put, here is the opportunity, what do you do?

``Count your blessings. Once you realize how valuable you are and how much you have going for you, the smiles will return, the sun will break out, the music will play, and you will finally be able to move forward the life that God intended for you with grace, strength, courage, and confidence." Og Mandino, American Essayist and Phychologist, 1923-1996

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Friday, July 22, 2005

Llewellyn H. Rockwell, Jr.:What We Mean by Decentralization

Decentralization is an important step to where Philippine democracy can be strengthened given its intrinsic diversity. This insightful article by Mr. Lew Rockwell, of the Ludwig Von Mises Institute enunciates why it has worked even on the private organizational level. Quoting the entire article…

What We Mean by Decentralization

by Llewellyn H. Rockwell, Jr.

The Kelo decision, in which the Supreme Court refused to intervene in the case of a local government taking of private property, touched off a huge debate among libertarians on the question of decentralization. The most common perspective was that the decision was a disaster because it gave permission to local governments to steal land. Libertarians are against stealing land, and so therefore must oppose the court decision.

And yet stealing isn't the only thing libertarians are against. We are also opposed to top-down political control over wide geographic regions, even when they are instituted in the name of liberty.

Hence it would be no victory for your liberty if, for example, the Chinese government assumed jurisdiction over your downtown streets in order to liberate them from zoning ordinances. Zoning violates property rights, but imperialism violates the right of a people to govern themselves. These Chinese government lacks both jurisdiction and moral standing to intervene. What goes for the Chinese government goes for any distant government that presumes control over government closer to home.

How is the libertarian to choose when there is a conflict between the demands of liberty and strictures against empire? The answer is not always easy, but experience and the whole intellectual history of liberalism suggest that decentralized government is most compatible with long-run concerns for liberty. This is why all the founders were attached to the idea of federalism: that the states within the union were the primary governing units, and the Bill of Rights was to protect both individuals and the states from impositions by the central government—even when liberty is invoked as a justification.

Just so that we are clear on this last point: the purpose of the Bill of Rights was to state very clearly and plainly what the Federal Government may not do. That's why they were attached to the Constitution. The states, under the influence of skeptics of the Constitution's limits on the central power, insisted that the restrictions on the government be spelled out. The Bill of Rights did not provide a mandate for what the Federal Government may do. You can argue all you want about the 14th amendment and its equal protection clause by a reading that says it magically transforms the whole Bill of Rights to mean the exact opposite of its original intent is pure fantasy.

Back to the libertarian presumption in favor of decentralization. There are several reasons for it.

First, under decentralization, jurisdictions must compete for residents and capital, which provides some incentive for greater degrees of freedom, if only because local despotism is neither popular nor productive. If despots insist on ruling anyway, people and capital will find a way to leave. If there is only one will and one actor, you cannot escape.

Second, localism internalizes corruption so that it can be more easily spotted and uprooted. Along the same lines, local government corruption can be rather benign by comparison; it is easier, on a middle-class budget, to pay off the zoning board than to bribe the State Department.

Third, tyranny on the local level minimizes damage to the same extent that macro-tyranny maximizes it. If Hitler had ruled only Berlin, Stalin only Moscow, and FDR only Washington, the effects of their demented policies might have been contained. This is not only a utilitarian consideration. It means that evil people are prevented from violating the rights of people outside their jurisdiction.

Fourth, no government can be trusted to use the power to intervene wisely. With such power, central governments will always invoke good motives even when they are a mere mask for power grabs (as when the US invaded Iraq, for example). The typical path goes this way. An intervention takes place that might be celebrated by good liberals, such as the Lochner decision (1905) by the Supreme Court that invalidated New York's labor regulations. But once that power is gained, it is used to put a legal imprimatur on central planning and prevent local governments from finding an escape (the central planning of World War I was Lochner's daughter).

Fifth, a plurality of governmental forms—a "vertical separation of powers," to use Stephan Kinsella's phraseprevents the central government from accumulating power. Lower governments are rightly jealous of their jurisdiction, and resist. This is to the good. In fact, the whole history of liberty is bound up with the glorious results of competing institutional structures, no one of which can be trusted with complete control.

To be sure, this does not mean that libertarians must be agnostic on the question of what government should look like. Law should protect person and property against invasive force. This principle applies in all times and in all places. But that does not mean that there must be a single law giver and enforcer. To maximize the chance that good law will prevail over bad, over the long haul, and prevent power grabs from the top, we need a multiplicity of legal forms.

Murray N. Rothbard had a nice phrase that he used to summarize this position: universal rights, locally enforced. Those two principles are frequently in tension. But if you give up one of the these two principles you risk giving up liberty. Both are important. Neither should prevail over the other. A local government that violates rights is intolerable. A central government that rules in the name of universal rights is similarly intolerable. Heaven on earth is universal rights, locally enforced. No, it's not here yet. That's why libertarians exist, to work for the ideal.

Now, there is another form of decentralization you often hear about. It comes from those who regret globalization in all forms, including multinational corporations and the like. They complain about the centralization of life in the modern age and long for simpler times. Here's the problem: the kind of centralization they regret is a result of voluntary decision-making in the marketplace. It is freely chosen centralization. Their plans for scaling back would requires massive coercion and bring about an economic calamity.

In matters of private association and market economics, libertarians can make no a priori decision concerning the best means to organize. Rothbard was a defender of multinational corporations and global trade, but he also saw that too much integration in the production structure is bad for business. Firms loose the ability to calculate their profits and losses when they are responsible for too great a degree of internal production for their own capital goods.

How does this impact the organization of other institutions in society, like church, extended family, civic associations, and ideological movements? Is centralization best or is decentralization best? The answer must be left to experience. The Catholic Church is centralized doctrinally but decentralized managerially. The family in the American context is not centralized between generations. Grandparents are there to dote, not rule. Civic associations take many forms, from national organizations to local ones.

Rothbard himself, in the course of experience, changed his view on the best method for organizing ideological movements. Early on, he was attracted to the idea of top-down management, with cadres and followers and cells of every sort. He saw that this worked for the Communists, so why not for the libertarians? He was right to say that nothing in libertarian theory prohibits top-down management insofar as it is voluntary and rooted in private property.

But later on in life, he changed his mind and wrote that he found serious problems with this model, and they are related to the same problems that appear with political centralization. In the Libertarian Forum, August 1981, he writes:

"I would like to take this opportunity to admit my previous error in calling for an ultra-centralist model for the [Libertarian Party]. Several years in the [LP] have soured me on centralism permanently. Putting the rule of the Party, or of the movement as a whole, into the hands of one man or of one tight group is a recipe for disaster. First, it means that if a few people sell out to opportunism, the rest of the movement is dragged along with it. But second, and more generally, even if the Machiners were a bunch of wonderful people, since they are not omniscient they are bound, as are all of us to make mistakes. And just as the mistakes of a government controlled economy can ruin a nation, so the inevitable mistakes of a tight ruling clique can ruin a party or a movement. I still think it absurd to think of decentralism as 'the libertarian' form of organization. How we organize is not a matter of libertarian principle, so long as we do not violate the non-aggression axiom. But it appears that neither radical decentralism nor ultra-centralism will work in any organization…. [M]oderation and balance should be our organizational mode."

How right he is! Imagine if the only forms of ideology available to us were those offered by Washington, D.C. organizations, with their hyper-policy focus and tendency to kowtow to the state. In intellectual life, we need a vast multiplicity of forms in order to check corruption and compromise. Even in the libertarian movement, we need diversity and experimentation, not centralization, command, and control.

In the organization of business, ideas, and life itself, Rothbard recommends balance and moderation. So we might articulate two Rothbardian principles. In public affairs, we need universal rights, locally enforced. In private and economic affairs, we need neither centralization nor decentralization, but moderation and balance, trial and error. To me, these formulations represent the height of good thinking, good law, and the good society.

Llewellyn H. Rockwell, Jr. (Rockwell@mises.org) is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com. See his Mises.org archive. Purchase his book, Speaking of Liberty. Post comments on the blog.

Wednesday, July 20, 2005

July 20, 2005 A Renewal of Confidence on the Phisix?

July 20, 2005 A Renewal of Confidence on the Phisix?

Today’s market activities was a pleasant surprise, the Phisix zoomed by 55.16 points or 2.92% powered by foreign capital accumulation on key heavyweight issues to lead Asia’s mostly buoyant bourses.

Foreign money accounted for nearly 70% of today’s turnover with net accumulation of P 105.331 million representing about 8.7% of total trades. Major heavyweights recorded significant gains led by San Miguel B shares up 7.44%, Ayala Corp higher by 6.77%, SM Primeholdings 4.28%, Ayala Land 2.59%, Globe Telecoms 2.4%, Bank of the Philippine Islands 2.04%, PLDT 1.96% and San Miguel A 1.02%. Only Metrobank among the 8 major issues recorded a decline, down 1.81% to 27.

Among the 8 major issues, foreign flows was evenly divided, nevertheless there were more inflows seen on a net basis to companies that accounted for inflows while the broad market benefited from the spillover. Second tier issues which benefited from the spillover buying included Jollibee Foods Corp. up 6.55%, First Philippine Holdings up 3.57%, Meralco B 2.08%, Petron Corp 1.66%, Aboitiz Equity Ventures 1.02% and Manila Water Corp. 1.53%, notably most of the operations of these issues were on either power or infrastructure.

Another noteworthy factor is that while advancers led decliners by more than 3 to 1, the broad market activities showed up with less interest from local investors as number of issues traded remained below the active levels. So far, it appears that the most of the buying activities had been directed towards the heavyweights and its peripheries. The ‘speculative’ issues are expected to benefit from a sectoral rotation if these perky activities persist.

Except for the Mining industry which was the only sector that recorded a slight decline, all other sectors were in the green led by the property sector up by 3.38% and closely followed by the Commercial Industrial Index higher 3.12%.

Renewal of confidence on the Phisix?

The chart above of the Phisix exhibiting today’s vibrant performance almost parallel to its early June outperformance. The current gains brings the Phisix back the key levels it previously lost which implies that the Philippine benchmark may be back on its secular upside trend.

Again in my view, today’s action emanates from the sanguine sentiment of global bourses (discussed in my weekly newsletter) which practically upstaged the antsy developments in the domestic political arena.


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Monday, July 18, 2005

Japan Times Editorial: On the verge of decline

In the polemics of the migration economy, I’ve argued that industrialized nations have been experiencing declining fertility ratios that would pressure on such states to lift immigration barriers and thus encourage more migration flows. An example would be Japan, the article below is an editorial commentary from the Japan Times. While the article is reticent about immigration policies, it acknowledges the dire conditions of a shrinking population and pins their hopes on policy incentives for baby making. Because Japan is reluctant to open to immigrations out of cultural concerns it hoping that such policies would work. Good luck to them. My take is that they would be compelled to open their doors to immigrants sooner rather than later.

Japan Times Editorial: On the verge of decline

The countdown has begun ahead of Japan's plunge into a period of shrinking population that will have a serious impact on the nation's economy and society, especially the labor force and social welfare, including the pension system.

According to the Health, Welfare and Labor Ministry's statistics on population dynamics for 2004, about 1,111,000 babies were born in the nation that year, a record low since statistics were first compiled in 1899.

The number of births-minus-deaths also marked an all-time low at about 82,000. For the first time, the natural increase in the population came in below 100,000 (declining from 108,659 in 2003). Conspicuously, 25 of the nation's 47 prefectures saw a natural decrease in their population.

The fertility rate -- the number of children on average that a woman is expected to give birth to during her lifetime -- has recorded an all-time low for four consecutive years, with the rate for 2004 hitting a low of 1.2888, down from 1.2905 for 2003. The number of births in 2004 represented a decrease of about 13,000 from the previous year. These figures translate into a prediction that Japan's population will start shrinking in 2007 and decline to about 100 million in 2050.

The increase in the proportion of Japan's elderly people is reflected by the fact that the number of deaths has topped 1 million for two straight years, with the year 2004 registering 1,028,708 deaths, the second highest total following the all-time high in 1947, immediately after World War II. There were 30,227 suicides in Japan in 2004. Although the figure is about 2,000 fewer than in 2003, all members of Japanese society should be aware that this is an abnormal situation.

It is said that the fertility rate must be at least 2.08 for the population to level off or grow. In 1974, Japan's fertility rate fell short of 2.08 for the first time and has been on the decline ever since. The fact that the nation's fertility rate has continued to fall in the past decade indicates that various measures the government has taken since 1990 to give people the incentive to have babies have not born fruit.

For example, even as the number of nurseries has increased, they have not been of much help for many mothers who, due to the demands of shift work or long working hours in general, have difficulty finding nurseries that operate until the time they can come and pick up their children.

Statistics for 1990 came as a shock to the government as the fertility rate, at 1.57, fell short of the 1.58 registered in 1966, the year of the Fiery Horse in the Chinese zodiac. In such a year, many people try to avoid having babies due to the belief that girls born in that year will bring destruction to their husbands.

The trend of getting married at an older age continues. This means that, because most women in Japan have babies in marriage, more women are giving birth to their first babies at an older age, which naturally leads to a decrease in the birthrate. In 2004, the average age at which men married for the first time was 29.6; the corresponding figure for women was 27.8. For both sexes, the ages were 0.2 year older than in 2003. The average age at which women give birth to their first babies has gradually risen over four decades -- from 25.7 in 1965 to 26.7 in 1985, 27.5 in 1995 and 28.9 in 2004.

An official of the Health, Welfare and Labor Ministry says there is a good sign. While women aged 25 to 29 gave birth to 25,730 fewer babies in 2004 than in 2003 (for a total of 370,245), women aged 30 to 39 gave birth to more babies in 2004 than in 2003 -- 7,363 more for women 30 to 34 (for a total of 415,948) and 10,753 more for women 35 to 39 (for a total of 150,242).

These figures should be interpreted to mean that a generation of women that had postponed marriage and childbirth have started having babies. But this is unlikely to stop or reverse the downtrend in the total fertility rate.

Amid signs pointing to the start of population shrinkage, the government plans to set up a blue-ribbon committee to discuss measures to stop the downward trend. It will naturally come with financial incentives for married couples to have more children, such as fatter child allowances and tax breaks for families with children. But the committee should pay more attention to creating an environment conducive to the husband and the wife's jointly rearing their children.

In other words, both men and women should be assisted so that they can work and still have a family life. To achieve this, it may be necessary for the government to work out measures to encourage businesses to shorten working hours for both men and women.

The Japan Times: July 17, 2005
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The Maid Exports; Misguided Perceptions About The Migration Economy

The Maid Exports; Misguided Perceptions About The Migration Economy

I recently received a forwarded email depicting the country as such in a miserable gloom and doom state and that we are surviving on ‘exporting maids’. The sophistry of the epistle is largely a political propaganda aimed at personality based politics rather than an objective view of economic impact of migration.

According to the Philippine Daily Inquirer ``Remittances from Filipinos working abroad in the five months to May rose 19.2 percent year-on-year to 4.0 billion dollars, the central bank said…Around 8 million Filipinos are working abroad, and the central bank expects them to send home as much as 9.4 billion dollars of their earnings this year, up 10 percent from last year.” Further it is also reported that some 500,000 workers left the country for higher paying jobs abroad.

Remittances today account for nearly 10% of the country’s GDP and has kept the economy afloat. These are usually spent by families and or dependents on food, clothing, basic utilities, shelter, education, health and other services. While it is true, that this is PARTIALLY an offshoot to the lack of jobs at home, I think the whole episode of migration is a GLOBAL PHENOMENON ARISING FROM THE GLOBAL DEMOGRAPHIC TRENDS rather than a simplistic ‘blame your government thing’.

Top 5 Remittances from Migrants

The table above courtesy of BBC, shows of the top 5 states with the remittance from migrants where even the emerging market growth ‘poster child’ India is shown as one of the major beneficiaries.

Migration is largely a function of division of labor, where declining fertility ratios in industrialized nations have brought about labor shortages thereby the attendant requirements to absorb emigrants despite some political and cultural resistance as seen by the recent France vote against the EU constitution.

Further, it is also a story of welfare states. With the aging population growing more than the working force, welfare benefit payouts are expected to exceed premium inputs leading to government budgetary imbalances or fiscal strains. This means that either the government increases its taxes, or cut benefits or provides incentives to its citizens to have more babies (e.g. Singapore) or allow for immigrants to fill the gap or a combination of the above.

This need for foreign workers could be exemplified by the direct hiring of nurses by United Kingdom http://www.nursinguk.nhs.uk/, where Filipina or Indian or Spanish nurses can apply online.

Demand will simply find its own supply. This is clearly evidenced by the mushrooming nursing and caretaker schools all over the country to meet the rising labor export demand. With the country’s surplus labor, the unemployed can all retool or reinvest in themselves to get a ticket out of the politically crazed country.

Put differently, even if the Philippines would have a ZERO unemployment rate, the migration flows to industrialized countries will CONTINUE depending on the opportunities presented by global demographic trends, the fiscal concerns of welfare states and most importantly the PRICE FUNCTION OF LABOR or the real wage differential considerations among the concerned nations.

Globalization supported by technological breakthroughs in information and communications has highlighted on the cost or price variable hence the emergence of the offshoring/outsourcing phenomenon and the growth story of emerging market economies. Labor therefore is not exempt.

Finally, the personality based government blame game is totally misguided simplistically believing that a change of administration will solve all the problems thereat.

Most citizens expect that government should provide for food, job, shelter, welfare, other social benefits and everything else under the sun. However, by doing so they fail to comprehend that HAND OUTS, DOLE OUTS AND OTHER SOCIAL BENEFITS DON’T COME FOR FREE. There is NO such thing as a free lunch! Either the government PRINTS more PESO or BORROW more DOLLARS or PESO to fill such requirements. The ramifications of such actions are higher consumer prices and or the debasement of the local currency which would effectively lead towards efforts to legally EXTORT more money from its tax paying citizens by the government and or benefit cuts. Such is the vicious cycle of continued dependence on government sponsored boondoggles.

In short, no matter WHO sits as the head of the country, more government presence to please short-term demands of voters who largely refuses to pay taxes equates to a lower standard of living.

Understanding and capitalizing on global dynamics is a far better approach than the fallacious and myopic moralizing on ‘Maid Exports’.

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Sunday, July 10, 2005

Denouement of the Political Tele-Novela? (Updated)

Denouement of the Political Tele-Novela? (Updated)

Such an incredible drama unfolds in the Philippines today, where its citizens, glued to the TV and radio, are practically mesmerized and awestruck by the rapidly evolving chain of events, mostly centering on who or what party calling for either the resignation or support of the embattled Philippine President GM Arroyo. The political imbroglio takes an episode out of a box office hit Telenovela where the audiences appear to come to believe on what they need to believe just when they need to believe it. The public, as some survey shows, believes that the incumbent president cheated her way to victory and the wiretapped conversations simply reinforces these beliefs. The effect is an erosion confidence to the leadership thereby creating the demand for her to be replaced. Beliefs, justified or not, are what determines or shapes today’s box-office hit, a sordid spectacle which is actually an embodiment of the Filipino culture whose proclivities are mainly on perpetuating intrigues, controversies and self-righteousness. A manifestation of James Fallows ‘damaged culture’? Looks likely enough.

Yet adding to the woes of the already poisoned politics we have several regional leaders from Bicol to Mindanao threatening to breakaway from the Philippines by establishing their own ‘republics’ if the PGMA is ‘forcibly ousted’, claiming that the Metro Manila based turmoil “are affecting the rest of the country”. The regional leaders argue that Metro Manila have unjustly usurped the power to remove the leaders when they were also part of the electoral exercise in the selection of the national leaders. These pronouncements simply highlights on the country’s divisiveness, something which may lead to unnecessary violence.

This is precisely why I am in favor of the voluntary resignation of the President, again NOT on legitimacy or moral ascendancy issues but on the heightened RISKS of the escalating political tumult turning violent or a possible plunge into chaos or a civil war, on the RISKS that adventurous and misguided elements may intervene to wrest the country’s leadership through unconstitutional means, on governance concerns which seems to leave the President ineffectual as constant bickering and assaults to the presidency would result to self-preservation moves instead of a salutary functional leadership, the continued demoralization of key government institutions as seen by the resignation of 10 cabinet members, RISKS of a lame duck presidency, political compromises in return for support that may erode judicious decision making and the continued fragmentation of the society.

The manifestations of all these tensions have been reflected in the financial markets which likewise could translate to future economic paralysis and a possible financial crisis, until a resolution to the country’s leadership could be arrived at. However, I also do understand the administration’s defense, the constitution’s basic rights of presumption of innocence until proven guilty or proof beyond reasonable doubt. This is what makes things entirely difficult. Perception versus legality, yet perception appear to have the upper hand on this case. Perception has in fact become reality.

The Public’s choice of governance is set on very high ideals yet bereft of reality. Corruption has always been a key issue. While I have noted in the past that the corruption and inefficiency seen in the present government is largely systemic in nature and less on personality traits, the “revolutionary government” paradigm as espoused by the leftist ideologues are outmoded and failed experiment (just look at the China, the defunct Soviet Union, Yugoslavia and East Germany) alternatives. Likewise, the ‘transitional government’ version proposed by the rabid ex President Joseph Estrada’s supporters is an utter charade, as it primarily aims to reinstate the disgraced leader or its protégés, more than the upliftment of the people.

It also seems that alot of experts fail to address the issues of corruption and inefficiency to MORE government. In fact, ironically most of the proposed solutions are geared towards the issue of MORE government. They mistakenly believe that efficient and corruption free leadership is merely due to personal credibility, integrity and competence. In a system where MORE government thrives, particularly, excessive legislation and regulation, superfluous bureaucratic layers, red tape and interventions, is a system that breeds the patron-client relationship, nepotism, rent seeking complex, cronyism and administrative bribery, or in short, the fundamental causalities of corruption. To aptly quote a local congressman, ``You can put the Pope in Malacañang, and he will still fail because the system will make him fail.”

What could probably be done is to improve on our democracy, to paraphrase Moeletsi Mbeki, deputy chairman of the South African Institute of International Affairs and the brother of South Africa's president, Thabo Mbeki, on his views of how to improve Africa, through a model that could empower “not just the political elite but private-sector producers as well”. Maybe just maybe, a shift to the Parliamentary form of government could be a step towards the much needed reformation.

With a cornucopia of resources and talents the country is blessed with, the public continues to deny its existence and rather focus on instant gratification, dramas and controversies. Until we know how to count our blessings, we are preordained to damnation.

Morgan Stanley's Daniel Lian: Philippines: Political Uncertainty Stirs Fiscal & Economic Reforms

Previously Morgan Stanley economist for Southeast Asia Daniel Lian saw bullish prospects in the country, today with a brewing political storm, Mr Lian, does a turnaround to cite a ‘decisively bearish political economy’ and sees significant headwinds for the country, quoting Mr. Lian’s entire article…

Philippines: Political Uncertainty Stirs Fiscal & Economic Reforms

Daniel Lian (Singapore)

Growth Expected to Retard

Several macro economic indicators point to a slowdown in economic growth in 2005, following robust momentum of 6.1% YoY last year. Government spending remains low, in line with the fiscal consolidation strategy. Meanwhile, consumption growth hinges on household spending (80% of GDP), supported by soaring remittances from overseas Filipino workers (the second-largest source of foreign currency following export earnings). Given the weak macro fundamentals of towering prices, high unemployment (11.9%) and reduced government spending on social development projects, the shield provided by these remittances is likely merely to delay the coming economic slowdown, in our view.

Another strong indicator of slowing growth is the decline in export growth. Exports are a key driver of GDP growth (50% of GDP). A slump in the global electronics cycle and falling demand from key export destinations – also adversely affecting other export-led Asian economies – are likely to lower both export earnings and allied private consumption significantly, in our view.

No Structural Change in the Deficit

We believe the recent improvements in the budget deficit are due largely to the continued squeeze in government expenditure. As a percentage of GDP, government spending has fallen from 19.6% to 18.7% in the period 2002 to 2004 accounting for 68% of the improvement in fiscal balances, as revenue collection has expanded by a mere 0.4% of GDP. In addition, what increase there has been in tax revenue has resulted from culmination of the cyclical upturn, whereby increased income levels have generated higher tax. However, the 1Q05 GDP slowdown to 4.6% YoY vs 6.1% in 2004 marked the end of this cyclical upturn, in our view, and we expect 2005 growth to shrink to 4% YoY.

The lack of structural improvement in the country’s fiscal accounts is reflected in the low tax effort ratio. Improving GNP in 2004, due to 6.1% growth in GDP and increased remittances from overseas workers, hasn’t improved tax revenue and the tax effort ratio remains low. Any positive impact from structural reforms to the tax structure would have been reflected in a rising tax effort ratio.

Heavy Debt Burden Raises Concerns

Another serious concern as regards the deficit is its unproductive use to finance consumption rather than investment. Government borrowing reached PHP 242.5 billion in 2004 to meet its financial requirements (27.5% of total expenditure). Thus additional tax revenue is required to cut the country’s dependence on borrowing and reduce the debt stock.

Persistent budget deficits since 1998 have resulted in the accumulation of both domestic and external debt (PHP2.0 trillion and PHP1.8 trillion, respectively, in 2004). The pinch has been the sudden surge in public-sector debt service payments. Interest and principal payments on the public-sector debt stock have doubled from 32.1% of total national government expenditure in 1998 to 67.8% in 2004.

Moreover, the Philippinesability to repay debt is considered low, because of its moderate growth path, high inflation and low saving rate. Poor tax collection is exaggerated by tax evasion, with corporates alone evading around 45% of taxes due (see our report Pulling Up Its Fiscal Socks at Last?, April 1, 2005). This makes it tougher to reduce the foreign debt burden. Consequently, government debt as a percentage of revenue exceeds 500%, substantially more than the country’s indebted Asian counterparts.

Fiscal Constraints Hamper Development Plans

We believe declining public expenditure could cause infrastructure investment bottlenecks, jeopardizing the Philippines investment appeal. Poor infrastructure increases the cost of doing business and reduces the country’s attractiveness to investors. Hence we think an increase in productive expenditure is required.

However, limitations such as high interest payments and the need to lower the budget deficit, are keeping productive expenditure low. The country’s soaring outstanding debt has raised its interest payment liability to 29.4% in 2004 and consequently lowered the share of other expenditure. The increase in the cost of servicing public debt has sharply reduced national government expenditure, particularly on social services (social service expenditure is reported to have fallen from 35% of total national government expenditure in 2000 to 23% in 2004).

Education, health and poverty and unemployment eradication programmes are among the public disbursements that are contracting to meet the government’s conservative expenditure targets. This has led to sluggish growth in the skilled labour pool and widespread unemployment (as high as 11.9%), forcing Filipino workers to seek jobs overseas. Moreover, high levels of corruption further increase the cost of doing business in the country.

Political Economy Is Decisively Bearish

Following Ms. Arroyo’s decisive electoral victory (she won by 1 million votes) last year and the commencement of her reform programme (which centred on raising sin taxes and VAT, as well privatizating the key state energy producer), the market turned decisively bullish on the Philippines. The economy’s relative outperformance since the beginning of 2Q04 and a small rebound in investment inflows have strengthened the bulls’ resolve that this story is finally turning around.

However, we remain cautious on the structural outlook (see Upgrading Growth and Upping the Ante on Reform, September 3, 2004). We were not surprised that President Gloria Arroyo upped the ante on reform or that she chose to focus on the fiscal sector – we view this as the primary structural economic malaise of the republic and a worthy priority for the government. Nevertheless, the financially strapped government has caused a significant drag on the country’s saving rate, and in turn slowed capital formation and economic growth.

We would note that, while fiscal reform is a critical first step, the structural impediments confronting the republic stretch beyond mere government finances. In our view, Ms. Arroyo must strengthen the rural development platform and engineer a new economic strategy that places emphasis on the long-term development needs of the urban poor, resources, SMEs, and the government and corporate sectors. We believe that Thailand’s dual track strategy, for example, has a lot of relevance for the Philippines. Concomitantly, Ms. Arroyo needs to overcome the institutionalized rent-seeking complex that permeates Philippine society. We also see a danger that the country’s powerful oligarchic interests could derail the President’s efforts.

The political events of the past three weeks strengthen our belief that the country’s structural impediments stretch far beyond mere economics. The oligarchs remain extremely powerful, and the market has begun to speculate over the political future of the President. Whether or not Ms. Arroyo survives this latest challenge, the country’s economic outperformance may already be coming to an end as exports across Asia are rapidly slowing down and the recent political uncertainty may once again hamper remittances and domestic investment. In a nutshell, we think the republic continues to face significant economic and political challenges.

Bottom Line: Political Uncertainty Stirs Fiscal and Economic Reforms

The Philippinestwo strong pillars of economic growth stand on unstable fundamentals, pointing towards an economic retardation this year, in our view. The Asia-wide export slowdown is likely to cause a drop in export earnings and allied private spending. Private consumption is being supported largely by overseas Filipino workers’ income, deferring an economic slowdown.

The low tax effort ratio implies that improving tax revenue has been due not to structural factors, but to the culmination of the cyclical upturn, with increased income levels generating higher tax and curbing the deficit. We expect this to fade with the slowdown in economic growth.

Successive deficits have led to the accumulation of a large debt stock and doubled the country’s debt service payments over the last six years. Besides a moderate growth path, high inflation and a low saving rate limits the Philippines’ ability to repay debt. Additional tax revenue is required to cut the dependence on borrowing and lower debt.

Interest payments on debt have lowered the share of productive expenditure on infrastructure and social development projects. A lack of such development programmes has led to sluggish growth in the skilled labour pool and higher unemployment. Moreover, rising business costs due to the lack of infrastructure facilities and widespread corruption make the investment climate less favourable.

While fiscal reform remains the critical first step, political events unfolding over the past three weeks strengthen our belief that the structural impediments stretch far beyond mere economics. Looking ahead, we perceive political uncertainties as well as significant economic challenges for the republic.