Philippine Economy: Airline Liberalization Yields Greatest Number of Cheap Travel

Well this development is certainly a refreshing plus for the Philippine economy. 

The domestic airline industry’s liberalization has led to a boom in domestic tourism and has earned the Philippines plaudit as having the greatest number of cheapest air fare in the world.

From the Economist, (bold mine)

LOW-COST airlines like Ryanair and Southwest Airlines have swollen to formidable size in recent years by offering a very different approach to that of more traditional full-service airlines. With their single-class seating, range of ancillary charges and pared-down approach to all things aviation-related, these budget carriers have become a familiar, often bemoaned, feature of holidays and business trips around the globe. In British airports, for example, more than 50% of all passengers last year squeezed into seats on low-cost carriers. But Britain only comes seventh on a list ranking countries on that criterion. Figures released by Amadeus, a global travel distribution system, show that the Philippine aviation market has the greatest proportion of low-cost flyers. In that country of over 7,000 islands, 65% of all passengers used budget carriers last year. Cebu Pacific, the nation’s biggest low-cost operator, boasted over 46% of the domestic market. Among the smallest low-cost markets are Russia, Japan and China, where budget carriers accounted for just 5%, 4% and 1% of departures respectively. In China, the government keeps strict control of the airline industry and shields the three main state-controlled carriers (Air China, China Southern and China Eastern) from low-priced competition. Shanghai-based Spring Airlines, which launched in 2005, is the country's only low-cost carrier of any size.

Since the Philippine government has liberalized the airline industry in 1995, the entry of new players has prompted competition to drastically lower airfares which translated to a natural boom in the domestic tourism industry. Lowering the cost of airfare has allowed a greater number of people, across income and wealth strata, to enjoy the benefits of traveling.

Here is the current list of domestic commercial airlines from Wikipedia.org

Domestic tourism plays a big role in the tourism industry where spending share of local tourists accounts for 59.1% of the industry in 2011 as I earlier pointed out here.

Rather than blowing bubbles, real structural reforms on the local economy should be modeled after the Philippine airline industry.

As post-war free market reformist, former Chancellor of Germany Ludwig Erhard, popularly known to have ushered in "Wirtschaftswunder" or German for "economic miracle", wrote in his classic book Prosperity through Competition, page 1

Competition is the most promising means to achieve and to secure prosperity. It alone enables people in their role of consumer to gain from economic progress. It ensures that all advantages which result from higher productivity would eventually be enjoyed.

Indeed.

Chart of the Day: Stereotyping in Europe

From a poll conducted by Pew Research.

I don’t believe in stereotyping, but it must be emphasized that social policies (such as the welfare state or various forms of government interventionism) plays a significant influence on people’s value scales and preferences which consequently shapes work habits.

As former chancellor of West Germany known for his leading role in the "German Miracle" or West Germany's postwar economic recovery, Ludwig Wilhelm Erhard (1897–1977), once wrote,

Social policy must not damage national economic productivity even indirectly, and must not run counter to the basic principles of the market economic order.

If we desire to guarantee a permanent free economic and social order, then it becomes essential to achieve freedom with an equally freedom-loving social policy. That is why, for example, it is contradictory to exclude from the market economic order private initiative, foresight, and responsibility, even when the individual is not in a material position to exercise such virtues. Economic freedom and compulsory insurance are not compatible.

Chart of the Day: America’s Fast Expanding Welfare State

From the Wall Street Journal Blog,

Families were more dependent on government programs than ever last year.

Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data. Those numbers have risen since the middle of the recession when 44.4% lived households receiving benefits in the third quarter of 2008.

The share of people relying on government benefits has reached a historic high, in large part from the deep recession and meager recovery, but also because of the expansion of government programs over the years. (See a timeline on the history of government benefits programs here.)

Means-tested programs, designed to help the needy, accounted for the largest share of recipients last year. Some 34.2% of Americans lived in a household that received benefits such as food stamps, subsidized housing, cash welfare or Medicaid (the federal-state health care program for the poor).

Another 14.5% lived in homes where someone was on Medicare (the health care program for the elderly). Nearly 16% lived in households receiving Social Security.

Aside from the bailout policies, this serves as one significant reason why prospective US economic growth, as manifested by the current elevated rate of unemployment and low output, will progressively become lethargic as scarce resources are diverted towards more non-productive, capital consuming activities.

Importantly, US politics will increasingly be sensitive to the maintenance and the advancement of the unsustainable system of the welfare state.

To wean away dependants from this system, which has become more entrenched, will be considerably difficult and destabilizing.

Perhaps it may come to a point where the markets will force a tragic resolution, partly similar to what’s been happening to Greece.

Moreover, the US political spectrum will likely be dominated by class divisions, where welfare beneficiaries and their political patrons will call for more taxation in support of the pocket picking welfare policies.

The result of a recent poll exudes this political climate

From another Wall Street Blog,

Poll after poll shows that a majority of Americans support higher taxes on the wealthy, even when “wealthy” is defined as those making more than $250,000 a year.

Presumably, most of those polled don’t make the income cut-off, so it’s easy for them to demand that someone else pay for the nation’s debt.

Political divisions, from such class warfare, would only encourage instability and abet on violence.

In addition, the welfare state will continually be funded by debt that will ultimately lead to an outright default or will be inflated upon.

Ludwig Wilhelm Erhard, former economic minister and Chancellor, architect of Germany’s postwar economic reform and economic recovery popularly known as "Wirtschaftswunder" or "economic miracle", in his book Prosperity through Competition wrote a very apropos admonition on the dangers of the welfare state (p.187) [emphasis added]

if this mania increases we shall slide into a social order under which everyone has one hand in the pocket of another. The principle would then be: I provide for someone else and someone else provides for me.

The blindness and the intellectual inertia which are pushing us towards a Welfare State can only bring disaster. This, more than any other tendency, will serve slowly but surely to kill the real human virtues—joy in assuming responsibility, love for one’s fellow being, an urge to prove oneself, a readiness for oneself—and in the end there will probably ensue not a classless but a soulless mechanical society.

A Nation Of Takers Is A Path Towards Poverty

Wall Street Journal’s Stephen Moore in an Op-Ed suggests that the US is becoming more of a nation of takers than a nation of makers or producers.

Mr. Moore writes (bold emphasis mine)

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida's ratio is more than 3 to 1. So is New York's.

Policy induced bubble cycles, bailouts, subsidies, welfarism, government fostered cartels (banking, military complex, green energy) and the palpable redistribution of power from the markets to the political sphere signifies as a mission creep towards a more socialized society in the US.

For the many statists who sees every imbalances as the fault of China, this clearly is an internally induced economic distortion. In short, the Chinese have little to do with the mistakes of American policymaking.

Chart from Heritage Foundation

And over the years, US politicians have used each crisis as an opportunity to expand government intervention in the name of security. Remember this quote popularized by Rahm Emanuel, "You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think could not do before."

The obvious outcome from the continued pursuit of such policies is likely a transition towards the Philippinization or emerging marketization or simply a material reduction of America’s living standards.

That’s because the welfare state represents an unsustainable model of governance—picking on someone’s pocket is a zero sum game that rewards non-productive agents at the expense of productive agents. Thus the welfare state breeds and nurtures political parasitism.

Ludwig Erhard, Vice-Chancellor and Minister for Economic Affairs of the German, who presided over the post war West German recovery known as the ‘German Miracle’ (Wirtschaftswunder) has this to say of the welfare state (Mises.org) [bold emphasis mine]

In recent times I have frequently been alarmed by the powerful call for collective security in the social sphere. Where shall we get to and how are we to maintain progress if we increasingly adopt a way of life in which no one wants any longer to assume responsibility for himself and everyone seeks security in collectivism? I have drastically described this flight from responsibility when I said that if this mania increases we shall slide into a social order under which everyone has one hand in the pocket of another. The principle would then be this: I provide for someone else and someone else provides for me.

The blindness and the intellectual inertia that are pushing us toward a welfare state can only bring disaster. This, more than any other tendency, will serve slowly but surely to kill the real human virtues — joy in assuming responsibility, love for one's fellow being, an urge to prove oneself, and a readiness to provide for oneself — and in the end there will probably ensue not a classless but a soulless mechanical society.

This process is particularly incomprehensible because, with the spread of prosperity and the growth of economic security, our economic basis becomes increasingly solid; the need to safeguard the achievements from all future dangers overshadows all other considerations. Here there exists a truly tragic mistake, for one meets with an apparent refusal to recognize that economic progress and prosperity based on effort cannot be combined with a system of collective security.

This call for security, which naturally must permit more state intervention, shows up the contradictions contained in this dishonest policy. If the words of these demands are reduced to a simple formula then what is being demanded is no more and no less than a lowering of taxation simultaneously with a greater demand on the public purse.

Politicians can fool MOST people for MOST of the time, but politicians CANNOT fool ALL the people ALL of the time. That’s because the laws of economics ensures that such deception or dishonest policies will be exposed for what they truly are.

Imbalances from unsustainable policies eventually implodes--the MENA political crisis should serve as a concrete example.

At the end of the day, redistributive policies camouflaged by noble intentions delivers the opposite outcome. A nation of takers will eventually drudgingly scuttle under the weight of debt, fiscal deficits and or inflationism.