Philippine Economy: The Unseen Factors behind the “Doing Business” improvements

Domestic media and the mainstream cheers on reports of the vast improvements by the Philippines in the Doing Business rankings by the IFC-World Bank. 

The Philippines joins other outperformers led by Ukraine, Rwanda, the Russian Federation, Kosovo, Djibouti, Côte d’Ivoire, Burundi, the former Yugoslav Republic of Macedonia, and Guatemala 

This article from Rappler gives a good account where the gist of the so-called positive developments has been allegedly made.

Regulatory reforms that helped improve the Philippines' ranking were evident in the following 3 criteria:

One, the introduction of a fully operational online filing and payment system that made tax compliance easier for companies.

The government has aimed to reduce the number of steps to pay taxes to 14 from the previous 47. The survey showed it still takes 36 steps.

Two, the simplified occupancy clearances that eased construction permitting:

The government wanted to cut the steps to obtaining construction permits to just 12 from 29. The survey results showed it currently takes 25.

Three, the new regulations guaranteeing borrowers’ right to access their data in the country’s largest credit bureau.

These were some of the areas the government has created specialized teams for to address each of the 10 indicators on the difficulty or ease of doing business in the country that IFC is tracking.

The teams' priorities were on indicators that have to do with starting a business, getting credit, protecting investors and resolving insolvency.

Here I will offer a contrarian analysis (using the great Bastiat's Seen and Unseen analytical framework) of the so-called outperformance in Doing Business rankings based on the areas which posted the biggest advancement.

1. Paying Taxes. 

It is natural for the Philippine government to prioritize in the enhancements of tax collections.

That’s because the government has been spending far more than the revenues the government has generated. Data from NSCB and Bureau of Treasury

Yet the increase in the growth rate of government spending has been accelerating to the upside. On the other hand, revenues while also increasing has failed to keep up with the pace of spending growth. 

Moreover, while the rate of government spending appears “linear”, revenues has been subject to fluctuations in the economy

The current “boom” has hardly cut back on the budget deficits that had been accrued during the global 2008 crisis.

In 2010, deficits swelled in the aftermath of a sharp decline in tax revenue collections relative to what seems as steady or constant increase in the trend of government spending. The current deterioration of deficits erased the earlier efforts by the past administration to balance the budget.

In addition, according to the Department of Finance, through July year on year growth of revenues was at 17.3% relative to spending at 21.7%. So nominal deficits (-4.4%) at the current rate will likely even deteriorate more if such a trend persists.

Of course deficit spending unfilled by taxes has been and will be covered by debts. So underneath the surface of a supposed boom has been the swelling of the debt levels. 

The government has already been spending a lot more than they can earn, even at pre-Doing Business improvement levels. This means that in contrast to the optimistic perspective, more efficient tax collection will motivate politicians to spend even more.  And with bigger government spending, efficient tax collections will extrapolate to higher taxes. 

Moreover, money spent for public consumption will mean less money spent for productive activities. Government spending will only add temporarily to statistical growth. In reality, via crowding out of the private sector, government spending diminishes real economic growth. That's because government has no resources to fund any of their spending programs such that the government principally relies on the forcible extraction of savings, output or wealth from the productive agents by taxation. And because government spending cannot be measured by market metrics as they are a monopoly, such spending represent consumption.

So this hardly signifies a positive news over the long term.

2. Construction Permits

In the consensus perspective, ballooning budget deficit and public debt figures when compared to the statistical growth (debt/gdp, deficit/gdp) has been seen as 'stable' or barely viewed as a source of concern.

This is largely because the 'strong' denominator or statistical growth figure (gdp) have “muted” the numerators (debt and deficit).

Such underappreciation of risks has been due to the skewed computation of statistical growth. Yet debts and deficits has largely been driven by the very factors (government spending), aside from the bubbles in the formal economy (nominal private sector debt), constituting statistical growth.

This leads us to the next "big" advance in Doing Business.

The 2nd quarter 2013 Philippine statistical growth clock came at 7.8%. But when one scrutinizes on the National Statistical Coordination Board data, economic growth emanated from mostly construction and government spending (based on expenditures).

And the construction share of growth includes government spending, where the share of public construction has increasingly added to statistical growth data based on World Bank data

In short, measures to improve regulations in the construction and real estate industry seem as deliberately designed to accommodate a real estate-construction boom in order to boost the statistical economy.

Yet how has the boom in these sectors been funded? Well by credit expansion.

BSP data shows how bank lending to the real estate has exploded since 2010 until 2012

Despite some moderation in the current pace of bank lending, construction and real estate loans remains vastly above “statistical growth”. Of course there has also been the Philippine version of the shadow banking industry.

3. Getting Credit.

The third room for the Doing Business upgrade has been in the partial easing of credit regulations, particularly “guaranteeing borrowers’ right to access their data” 

As noted above, the booming areas, specifically real estate and construction and allied industries have mainly been funded by a credit boom

On the consumer side, given that 8 in every 10 households are estimated as unbanked according to the BSP’s annual report…

…and that only 4% of the households have credit cards…

…and where 6.8% of households borrowed money for housing

The above data suggests that “Guaranteeing borrowers’ right to access their data” will hardly be a factor in enticing the informal economy to access the formal banking sector. The average borrower will hardly be concerned about right to access data but rather over access to funds.

True, consumer credit has grown in 2010-2012

…and also through 2013, but they have largely remained below the pace of the supply side growth rate.

Again the so-called “guaranteeing borrowers’ right to access their data” will unlikely boost the overall credit market for the simple reason it does not address the disease: rigid regulations (e.g. AMLA) and taxes that inhibit access to the formal banking system.

Instead “getting credit” will likely buttress the asset speculators, whom have been driving an asset mania, the same entities who have access to the formal banking sector and to the capital markets, as well as, the financiers of these speculative boom.

In short, the credit financed boom has been concentrated to a small sector of the Philippine economy who will benefit from "doing business" upgrade. 

Yet in order to maintain current statistical growth levels largely dependent on debt, this means inflating bigger asset bubbles financed by even more ballooning of debt levels. The so-called Doing Business reforms has just facilitated this.

Bottom line: The biggest improvements in the Philippine IFC’s "Doing Business" has hardly been about promoting small and medium scale businesses and or the informal economy

Induced by zero bound rates, the selective easing of regulations essentially compounds on the accommodation by the government of the debt financed speculative binge on asset markets, as well as, debt financed government consumption. 

Instead, ease of paying taxes, construction permits and getting credit only reinforces the transfer of resources (via inflationism, deficit spending and asset inflation) from society to the political class and their favored allies and constituents

This has been hailed by the short term looking consensus as an ideal growth paradigm. 

But as the great Austrian economist Ludwig von Mises warned,

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.

Yet the soundness of such paradigm may soon be tested by the global bond vigilantes

US Informal Economy estimated to have DOUBLED to $2 Trillion since 2009

All the financial repression via bailouts, rescues, inflationism, new taxes and regulations from the US mortgage-banking crisis of 2008 have driven many of the average Americans to the informal economy.

From the CNBC:

The growing underground economy may be helping to prevent the real economy from sinking further, according to analysts.

The shadow economy is a system composed of those who can't find a full-time or regular job. Workers turn to anything that pays them under the table, with no income reported and no taxes paid — especially with an uneven job picture.

"I think the underground economy is quite big in the U.S.," said Alexandre Padilla, associate professor of economics at Metropolitan State University of Denver. "Whether it's using undocumented workers or those here legally, it's pretty large."

"You normally see underground economies in places like Brazil or in southern Europe," said Laura Gonzalez, professor of personal finance at Fordham University. "But with the job situation and the uncertainty in the economy, it's not all that surprising to have it growing here in the United States."

Estimates are that underground activity last year totaled as much as $2 trillion, according to a study by Edgar Feige, an economist at the University of Wisconsin-Madison.

That's double the amount in 2009, according to a study by Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria. The study said the shadow economy amounts to nearly 8 percent of U.S. gross domestic product.

Whether in politics (Boston’s martial law) or in economics (informal economy) the US appears to be sliding down the path towards a banana republic.

Why?

The informal, underground or shadow economy have always been a product or outcome of the politicization of the marketplace.

Proof?

Regulations have been skyrocketing in the US. A big segment of growth comes from the post-crisis years. The number of pages of regulations from the Federal Register has ballooned almost sevenfold since 1940s. Chart from Political Calculations Blog.

Additional regulations means more taxes too.

Number of pages of Federal Tax Rules has swelled by about eight times since the 1940s, where the bulk of the recent expansion of tax rules also occurred during the years of post-US mortgage banking crisis . (Chart from Cato’s Chris Edwards)

Regulations signify as hidden taxes too. 

Estimated compliance costs is at $236 billion in 2012. This would account for 1.5% of the US GDP. By the way, $2 trillion informal economy is about 12.7% of the $15.7 trillion US GDP in 2012. 

Yet there are indirect regulatory costs too.

Overall, the total estimated regulatory costs have been at $1.752 trillion in 2011 according to Competitive Enterprise Institute.  That’s more than 10% of the US economy. Such costs must be a lot more today.

Statistics would not really capture the lost business opportunities from the burdens of additional taxes, regulations and other politics based programs because they are largely invisible or unseen by the public. For instance, I recently pointed out how state authorities shut down a child’s lemonade stand for the lack of license. So one has to be leery of any supposed analytical insights entirely focused on the shouting of statistics or on the dependence on empirical methodology.

We will have to add the burdens of tax and regulatory costs  from Obamacare and Dodd Frank.

That’s not all. There is also the enormous onus from entitlement spending. (chart from Heritage Foundation)…

…and the diminishing purchasing power of the US dollar from the printing presses of the US Federal Reserve since 1913 (chart from visual.ly), whose boom bust cycles have led to the justification of more interventions or “never let a crisis go to waste” dogma. 

So such vicious cycles of government expansion leads to a debt trap.

To cap it, increasing politicization of the marketplace means higher costs of doing business which entails more limitations or restrictions on economic opportunities and diminishing productivity and capital accumulation, which extrapolates to stagnation or a decline in living standards.

Thus when people’s survival is at stake, and where costs of doing formal business is high and increasingly a hindrance, they resort to the informal, underground or the shadow economy.

The digital age via the web has also substantially contributed to the expansion of the informal economy, where the former provides the platform to conduct businesses outside the prying eyes of the government. The emergence of the Bitcoin is a wonderful example.

The growth in the informal economy will also likely be manifested in the evolution of politics. This should translate to a growing divide or the deepening polarization between the productive class and political parasites (political class, cronies, welfare-warfare beneficiaries and the bureaucracy).

Although while informal economies represent as good sign of people’s attempt to generate productivity outside the political realm, they represent as an implied or passive revolt against politics. Alternatively, this also could mean social unrest ahead.

Updated to add: Informal economies will be smeared by the mainstream as illegal and immoral operations (such as drugs, money laundering and etc...). While there could be some, most of them aren't. This would represent as propaganda to cover up the failure of governments or to shift the burden of blame on the public rather than they owning up to their failures.

Chart of the Day: More Economic Freedom, Lesser Corruption

This striking chart from the Economist exhibits a tight correlation between economic freedom and corruption perceptions which illustrates a very important message: MORE economic freedom translates to LESSER Corruption.

The trend of  democratization of economic opportunities through lesser interventionism or reduced politicization of the markets has been mostly influenced by the snowballing forces of decentralization through globalization and information and technology driven information-digital age than through an implied dynamic of having more socially and economically “conscientious” autocracies.  

A large number of the “Most improved” in Doing Business rankings according to the World Bank (also from the same Economist article) have also been the most dynamic countries in terms of information and technology  development based on the data from the International Telecommunications Union.

ADB’s Imprudent Investments in the Philippines

From the ADB

The Asian Development Bank’s (ADB) Board of Directors today approved a $350-million Increasing Competitiveness for Inclusive Growth Program loan to help the Philippines improve its business climate through a mix of policy reforms and programs to promote competitiveness and develop labor skills among out-of-school youth.

“There has been marked improvement in the Philippines’ global competitiveness, but regulation, lack of domestic competition in key sectors, underinvestment in infrastructure and a mismatch of skills in the labor market are keeping the country from realizing its full potential,” said Kunio Senga, Director General of Southeast Asia Department.

To help young people better integrate into the labor market and develop workplace skills, ADB is working closely with the Department of Labor and Employment to design a youth job search program, called MyFirstJob, which will be piloted in 2013. The initial pilot will provide up to 1,600 youth with career counseling services, grants for vocational training, and internships with employers.

MyFirstJob is one of several initiatives that will be used to make the labor market more inclusive. Others include the tourism industry-led skills development program and a new tourism quality assurance and accreditation system that will improve skills and competitiveness in the tourism industry.

(bold highlights mine)

Well ADB seems to be throwing away taxpayers money on some wishful thinking measures that, in reality, treats the symptoms than the disease. These will represent taxpayers (ADB’s contributors) money down the drain, as well as more burden to Philippine taxpayers because of the spendthrift loan program.

First of all, the ADB admits that the problem has been one of "regulation and lack of domestic competition in key sectors". So the answer here is to substantially reduce regulatory and legal impediments as well as taxes and all of other barriers and costs to businesses. But ADB has been silent on the details of their proposed reforms.

Second, ADB sees another problem of “a mismatch of skills” in the domestic labor market.

Plagued by a poor investing climate, this only means that domestic markets has been heavily distorted by political interventions.

This is why many Filipinos would rather seek employment overseas and why commerce have largely been done underground or through the informal or shadow economy.

So how on earth does ADB know of a “skills mismatch”? By mere comparison with other economies?

In a free market environment or in market economies, economic systems emerge out of specialization (law of comparative advantage), so what may be advantageous for country X may not be advantageous for country Y. But specialization through the markets has not been sufficiently addressed, again out of political obstacles.

In essence, matching of skills and jobs is hardly the cause the problem but rather a symptom. Yet without a salutary marketplace, there hardly seems a way establish the domestic comparative advantage from which local labor market should cater to. ADB then seems to be presuming the possession of the right knowledge which it doesn't have.

ADB should instead address reforms based on the liberalization not only of labor markets but of the entire economy.

So what good does the MyFirstJob project do?

With the lack of investments, job searches won’t have any material impact. The answer, instead, is to CREATE JOBS through a business friendly environment. Job searches will become a natural dynamic once the business environment expands. Also, job searches can be accomplished by many private sector internet based platforms.

To add, tourism industry-led skills development program can also be handled by the private sector. Tourist enterprises would want to have employees with the right skills to meet the demand of their consumers for them to profit from.

So the demand of the industry will be reflected on supply as local citizens will conform with changes in the industry and of the economy. If the tourism industry continues to boom, so will the number of people who would want to join the sector by acquiring the skills required. And this will be most likely provided by schools or by enterprises themselves through in housing training or education outsourcing. This does NOT need the government.

However “new tourism quality assurance and accreditation system” only means more bureaucracy, red tape and regulations which ADB sees as a problem. So the ADB the loan proposes to do more of the same thing and expecting different results. Hasn't this been called insanity?

At the end of the day, the money that ADB lends money to the Philippine government accounts for as nothing more than political symbolism, wasted taxpayer resources (which means more tax burden for us) and a wonderful ($350 million) business opportunities for domestic cronies and for the pockets of political officials.

A side comment: Could this be the money used to recently pump up the local stock market?

The Message Behind the Phisix Record High

The theory of reflexivity developed by billionaire (and crony) George Soros underscores the dynamics of bubble psychology, as expressed through a feedback loop mechanism between people’s expectations and their attendant actions in response to the changes in the prices.

Mr. Soros wrote[1]

The underlying trend influences the participants' perceptions through the cognitive function; the resulting change in perceptions affects the situation through the participating function. In the case of the stock market, the primary impact is on stock prices. The change in stock prices may, in turn, affect both the participants' bias and the underlying trend.

Reflexive Theory Applied to the Phisix

The foundation of this theory seems to be anchored on the confirmation bias, where changes in prices that reinforces the underlying trend, gives confidence or strengthens the convictions of people to undertake action in the direction of the same trend. Such action feeds into the price mechanism and thus the feedback loop.

Applied to the Philippine equity market, many people will interpret the current state of the Phisix, which is at fresh record levels, as positive changes in the real economy. Believers would see this as having raised confidence levels, which that merits further actions through additional investments. Again this eventually feeds into higher prices.

An article at the Financial Times sings hallelujah to the Philippines[2],

Whisper it if you will, but the Philippines may at last be getting its act together. These are early days. But there are definite signs that the country – with its young population of nearly 100m people, the world’s 12th largest – has turned a corner…

The Philippines may still be the llama of south-east Asia. But, for the moment at least, the llama has broken into a trot.

President Noynoy Aquino has also used this opportunity to grab credit

From the Inquirer.net[3]

“Investors and Filipinos alike see what is happening: Here is a country determined to turn the corner by instituting genuine, wide-ranging, meaningful reform, and acting on its belief that good governance is the bedrock of equitable progress,” the President said.

We have had six positive ratings actions since we took over government a little less than two years ago—a stark contrast to the single upgrade and six downgrades in the nine years of the previous administration,” he added.

He said the country’s stock market also experienced 27 all-time highs in his 22 months in office.

Let’s put this into perspective.

While the Philippine equity bellwether has indeed been at record levels, such gains have not been unique or limited to the Philippines. In reality, major ASEAN bellwethers have ALL been on a bullish rampage. In other words, what has been portrayed as a special case is, in fact, a regional phenomenon.

Three of the ASEAN-4 majors are in ALL time record highs, particularly Indonesia [JCI:IND, dark orange], the Philippines [PCOMP:IND, green] and the seemingly underperforming Malaysia [FBMKLCI:IND, light orange] whom has marginally encroached the 2007 highs.

Meanwhile, Thailand [SET:IND, yellow] treads at a milestone 14-year high, but has yet to breach the 1993 record.

Yet these can hardly be construed as coincidental, as the undulations of the ASEAN-4 stock markets have eerily been similar for the last 5 years.

The other way to say this is that there has been a seemingly tight correlation between the Phisix and ASEAN markets. While correlation is not causation, there has been linking factor to their parallel performances.

So if there should be any special developments this must be attributable to the region and not to specific nations.

On a year-to-date basis, the Philippine Phisix, posted a 21.17% gain as of Friday’s close, ranked third only in the Asian region.

The top spot has been Vietnam with 35% returns, while Pakistan has is in second with 28.77% gains.

Notice that except for India, equity benchmarks of Asian majors Japan, Singapore and Hong Kong have yielded over 10%.

In short, Asia in general has posted substantial gains, but emerging Asia has outperformed.

Nonetheless while it may be true that the Philippines has exhibited material improvements on the dimensions of fiscal balances and debt[4], the bulk of the improvements came prior to the incumbent Aquino administration.

In relative dimensions, the degree of progress of the Philippines has been subordinate to the ASEAN peers.

Importantly, ASEAN in general has shown similar path of improvements in both aspects.

Real Reforms? Informal Economy Says No

So admittedly while there have been noteworthy advances in the management of government finances, the question is, has the Philippines been adapting reforms to encourage investments through a business friendly environment?

Well, the World Bank figures suggest otherwise.

Out of 183 countries, the Philippine scorecard[5] for Ease of Doing Business for 2012 has seen marginal improvements in 3 aspects (getting electricity, trading across borders, and enforcing contracts) while 7 areas posted declines in 2012.

Overall, the Philippines fell from 134^th ranking in 2011 to 136^th in 2012, where 1 accounts for the easiest place to do business while the last rank represents the most difficult place for business.

The above diagram from Doing Business report on the Philippines for 2012[6] gives as a better view of the domestic business climate.

Fundamentally, the Philippines have long lagged the region and the world because of the manifold political hurdles that has undermined relative competitiveness and has raised the bars (or hurdle rate) for attracting investments.

More, while the mainstream meme has touted remittances, which signifies about 8.9% of the economy (Wikipedia.org[7]), as powering the Philippine economy, what they don’t tell you is that there has been a far far far larger of the share of the domestic economy that has a more significant influence: the informal or shadow economy.

The Philippines has one of the largest informal sectors in the world[8], which accounts for nearly half of the economy. They are the balut (fertilized duck egg), peanut and cigarette vendors, carinderias, family drivers, household helps, and etc…

People tend to ignore the obvious.

As Black Swan author Nassim Taleb posted on his facebook account[9]

We are all, in a way, handicapped in a similar way, unable to recognize ideas when presented in a different contexts. It is as if we were doomed to be fooled by the most possibly superficial part of things, the packaging, the gift-wrapping paper around the object. This is why we don’t see antifragility in places that are obvious, too obvious.

For instance, the mainstream overemphasizes on the much heralded 10% (remittances) while ignoring the 45% (informal economy). In behavioral finance, the fixation on the visible while overlooking the others is a logical error that is called the survivorship bias[10]

About a year ago, I interviewed a balut and a peanut vendor from our neighborhood. The peanut vendor told me that he earns about 400-500 pesos a day. But because he can’t read and write, he has been reluctant to open a bank account and instead keeps his money in some physical storage (I think in a can). Yet over the years, his savings has enabled him to buy 2 tricycles which he lent out to 2 relatives for business.

The balut vendor on the other hand told me that his eldest son has been self financing his college engineering education. The son rides the bike which he uses to sell balut at night, and goes to school in the late mornings until the afternoon. The balut vendor father is even in a better position than I am. He owns his house.

Even if people from the informal sectors have been beyond the radar screens of the government and of the institutions of the establishment, the money they save (capital accumulation) helps increase the standard of living of Filipinos. And amazingly these are stuffs which statistics has not been able capture and has left mainstream experts lost at explaining the consumption economy which they mistakenly attribute to “multiplier” from remittances.

And this is why I have long believed that the statistics has understated the real savings rate of Philippines. And it is from such unseen sources of savings that has enabled the Philippines to have 3 out of the 10 largest shopping malls in the world (as of 2008)[11].

Yet the informal sector is an offshoot to economies that has been unduly burdened by a labyrinth of regulations, stifling taxes, onerous social security payments, restrictions in the official labor market, mandated wage rates and other labor restrictions, maze of bureaucratic red tape, politicization of economic opportunities and the many other various forms of interventions[12].

The peanut vendor told me that because he has been a mainstay in the area where he operates, local officials have not been a menace to him, because he got acquainted with them. But other vendors have not been as fortunate, many has to shell out “under-the-table” money for them to operate even during night time, while the others operate on a dictum of “when the cat’s away the mouse will play”.

That’s precisely why informal economies have been associated with greater incidence of corruption.

A weak rule of law, which emanates from unilateral, arbitrary, partisan, repressive and selectively enforceable laws, edicts, regulations, ordinances, impels people to circumvent them, much of it through bribery. And this has been further exacerbated by weak institutions.

As Ms. Ana Eiras at the Heritage Foundation writes[13],

Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Also, informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.

And as the great Austrian economist Professor Ludwig von Mises reminds us[14],

Corruption is a regular effect of interventionism.

So talks about abolishing corruption have simply been misleading. That’s because informal economies, again, exist as consequences of repressive and abusive laws which fosters corruption and are symptoms of economically unfree nations.

Yet if we should give credit where credit is due, then it is the informal economy through the various domestic entrepreneurs and the silent labor force, whom has been defying all these regulatory and political obstacles, that has mostly breathed life to the Philippine economy. Otherwise, chaos would rule.

Until the government meaningfully dismantles the obstacles that inhibit commercial activities, then the “good governance is the bedrock of equitable progress” represents nothing more than a flimflam.

Remittances are Partly Symptoms of Unfree Economies

Politics has always been about distortion of the truth.

The mainstream savors the romanticized notion that OFWs are the “modern day heroes”. In a way they are. Yet hardly any of these experts deal with why OFWs thrives and why they are heroes, outside of the context of $ remittances.

People seem to have mental blackout if we point out that today’s modern day heroes, the OFWs, like their shadow economy counterparts, have been products of unfree economies.

The inadequacy or insufficiency of economic opportunities (particularly for investments which has been diffused into jobs, yes about 4 out of 10 college graduates have been unemployed), have been prompting Filipinos to seek livelihood or greener pastures abroad (13% of graduates go abroad[15]).

Emerging economies whom have been highly dependent on remittance contributions have mostly been unfree economies.

Of the 30 countries on the table, 20 are mostly unfree if not repressed economies. While others like Lebanon, Samoa, El Salvador, Kyrgyz Republic, Jamaica, Albania, Guatemala, Cape Verde, Armenia and the Domincan Republic are moderately free according to the rankings based from Heritage Foundation[16]. Yet many of these “moderately free” nations are on the “borderline”.

The remittance phenomenon serves as an incredible paradox: The lack of economic opportunities as manifested by high unemployment which has been the outcome of the towering walls of arbitrary regulations and the politicization of markets, has been offset through migration and overseas employment. Yet politicians and media glorify what in reality has been exposing on their flagrant mistakes of collectivization.

Yet the heroic part of the OFW is this; oppressive laws have not prevented them from finding ways and means to survive. So they go abroad and elude domestic government. This has been the part not seen by the mainstream. What has been mostly seen has been the dollars sent and social costs of parting ways with the family, a theme that has been assimilated in media (tv series or movies).

To wit, individuals work to find ways to survive and thrive through circumventing laws by either going to the informal sectors, by corruption (bribery) or by voting with their feet through working abroad as OFW or emigration.

This is the real world and not a figment of someone’s political alter ego (in psychology these are dissociative identity disorders[17] where people live in their dreams and to have a life of what they had always wanted.[18]). Yet it has been inherent for politicians to engage in semantical abstractions to hoodwink the gullible public.

Bottom line: For Filipino politicians to deservingly claim credit for their deeds, we need to see three outcomes from the thrust to promote a business friendly environment or economic freedom: an explosion of legitimate small medium scale businesses, a natural decline in the informal economy out of the reduction of politicization of commerce and a voluntary repatriation of OFWs as a result of the increased economic opportunities at home.

The Disconnect: Stock Market and the Economy

This brings us back to the reflexivity theory.

Whatever “progress” that is largely being interpreted from buoyant financial markets has not yet been representative of the actual performance of the real economy.

If we go by the simple theory where corporate earnings growth has been a part of GDP[19] the implication is that stock prices should be somehow reflect on the expected GDP growth trend.

But the volatility of prices of the Phisix simply does not match with such measures. [As a side note, aside from earnings, a portion of GDP growth[20] also comes from capital increases such as new share issuances, rights issues, or IPOs].

Take note that the Phisix fell by over 50% in 2007-2008 yet the GDP growth hardly turned negative.

Also, note that in the same context GDP growth fell from 8% in 2010 to a little less than 4% yet in late 2011 yet the Phisix continued to set record after record.

In other words, such disconnect simply means either one of the two measures (the Phisix or the GDP) has been emitting false signals or that reality simply defies conventional wisdom.

And where “a flaw in the participants’ perception of the fundamentals” becomes recognized and escalates, this “sets the stage for a reversal of the prevailing bias”[21].

In short, the artificially embellished boom transforms into an ugly bust.

---

[1] Soros George The Alchemy of Finance p.53 John Wiley & Sons

[2] Pilling David South-east Asia’s llama breaks into a trot, April 25, 2012 Financial Times

[3] Inquirer.net Aquino tells ADB: Corruption over, May 5, 2012

[4] HSBC Global Research Step by step October 11, 2011

[5] Doingbusiness.org Ease of Doing Business in Philippines

[6] Doingbusiness.org Economy Profile: Philippines 2010

[7] Wikipedia.org Philippines Remittance

[8] Pyramid Research Emerging Market Operators Go Underground, January 29, 201

[9] Taleb Nassim Nicholas Facebook

[10] Wikipedia.org Survivorship bias

[11] See A Nation Of Shoppers??!!, April 9, 2008

[12] See Does The Government Deserve Credit Over Philippine Economic Growth? May 31, 2010

[13] Eiras Ana, Ethics, Corruption, and Economic Freedom December 9, 2003 Heritage Foundation

[14] Mises, Ludwig von 6. Direct Government Interference with Consumption XXVII. THE GOVERNMENT AND THE MARKET

[15] See College Isn’t For Everybody, February 3, 2011

[16] World Bank Migration and Remittances: Top Countries Migration and Remittances Factbook

[17] Wikipedia.org Alter ego

[18] Healthguidance.org Alter Ego Definition

[19] Wikipedia.org Relationship with GDP growth Earnings growth

[20] MSCI Barra Is There a Link Between GDP Growth and Equity Returns?, May 2010

[21] Soros, op. cit. p.57

European Debt Crisis: Taxing the Economy to Prosperity

The Wall Street Journal editorial has a nice and trenchant discourse on Europe’s chosen course of action in working to resolve on their debt and financial crisis. (bold emphasis mine)

European leaders are meeting in Brussels today to craft their third attempt—or is it the sixth?—to end the Continent's debt crisis and avert a deep recession. So it seems an apt moment to review the economic policy record of the leaders seeking to set Europe back on course. It isn't pretty.

A large part of the problem is the state of Europe's intellectual debate, which pits government spending against "austerity" as the only two economic policy choices. The Keynesians are blaming Europe's looming slowdown on belt-tightening governments, as if public spending is the only way to spur economic growth. But the problem across most of Europe isn't a lack of government spending that typically represents about half of GDP. It's the failure to create the conditions for private investment and growth.

When the financial panic hit in 2008, the EU and International Monetary Fund urged governments across the Continent to spend like crazy to avoid recession. So they spent, only to discover that such spending is unsustainable. Now the same wise men are urging governments to raise taxes to offset all that spending and even to spend more "in the short term." The one policy none of these leaders has tried is the Reagan-Thatcher model of cutting taxes to spur growth.

Read the list of tax measures being imposed and or the rest of the article here (subscription required)

The mainstream, as rightly pointed out by the WSJ, offers a false choice where government spending has been portrayed as the elixir or magic wand that would bring about prosperity. So aside from the additional burden of taxation, the alternative option to finance government spending or private sector rescues has been the shrill clamor for the ECB to inflate the system or for peripheral states to leave the core to be able to inflate (allegedly to regain competitiveness, which has hardly been the reality).

There has been little regards towards incentivizing those who generate wealth—the entrepreneurs and the capitalists—or as per the WSJ “conditions for private investment and growth”.

Yet to the contrary, taxation and inflation demotivates or discourages investments.

So far, the direction of policies has been geared towards the preservation of the status quo or the political architecture of the welfare state—central banking—banking cartel at the expense of the wealth creators.

This political preference to redistribute rather than create wealth means that any ‘fiscal union’ risks not only the failure to attain the objective of saving ‘peripheral states’ so as to preserve the EU, but also risks undermining the credit standings of stronger or creditor nations. In other words, every nation that joins in the bailout bandwagon will likely get dragged into economic morass, where eventually there won't be enough resources from which to redistribute and the whole structure falls apart.

Politicians and the bureaucrats, desperately looking for short term nostrums, looks like they are digging themselves deeper into the hole.

And given such conditions, the crisis should be expected to linger on and that sharp volatilities will continue to be the common feature of the marketplace.