War on Outsourcing: The Specter of US Economic Nationalism (Protectionism)

The Malaya reports

President Aquino appears unfazed by US President Barack Obama’s endorsement of House Bill No. 3596 or "Call Center and Consumers Protection Bill" pending in the US Congress saying it may be an election-related statement.

"We have to take into account that this is an election year but at the end of the day, like any other country, the US would want to make their companies more effective, more competitive, etc. and outsourcing is one of the keys towards that," Aquino said in an ambush interview at the EXL Service Philippines Site at the Mall of Asia in Pasay City.

"At this present time, I was made to understand, that this was an issue that was brought up during the last elections in America and from that time which was four years ago and now, the situation has not changed. Perhaps there isn’t that much of a danger," Aquino said.

"I will assume that it (BPO) will continue, hopefully it will not change because that is one of our sunrise industries," he said.

Aquino said there are no plans at the moment to lobby against the passage of the bill and that he prefers to "cross the bridge" only when the bill is passed.

It’s good to know that Philippine President Noynoy Aquino recognizes what looks like an election ploy. It really takes one to know one.

But it’s unfortunate that President Aquino, beneficiary of the outsourcing boom, would remain passive on this issue. Never mind if America’s turn to protectionism might indeed harm the industry. It would seem better to be bullied into submission. Yet fawn over with plans by the US to expand military presence here.

President Aquino doesn’t seem to realize that the divide-and-conquer and class warfare strategies have been the hallmark of the Obama administration.

As Mike Brownfield of the conservative Heritage Foundation writes,

Obama enacted a purely progressive agenda with his expansion of the state under Obamacare, his trillion-dollar stimulus bill, the government takeover of the auto industry, the proliferation of regulations under the Dodd-Frank regulatory reform bill, the crony capitalism of the Solyndra scandal, and the illegal appointments to the unrestrained Consumer Financial Protection Agency and the National Labor Relations Board. The result: Some 13.1 million Americans remain unemployed, job creation has been abysmal for much of the past three years, and the President’s promise to turn around the U.S. economy has gone unfulfilled.

The difference is that Mr. Obama’s progressive agenda, during this election season, seems to have transitioned from a moderate to hard line stance.

Maybe’s this also part of the desperation to get re-elected considering the Mr. Obama’s near record low approval rating. (chart from Gallup)

Yet here is more proof of President Obama's protectionist urge.

From the Wall Street Journal,

China was dragged into the 2010 U.S. midterm elections, and President Obama is busy ensuring that it will be an even bigger political target during the 2012 campaign. In Tuesday night's State of the Union address, the President joined Republican candidate Mitt Romney in singling out China as a special trade violator.

In announcing that he will set up a new Trade Enforcement Unit to investigate "unfair trade practices in countries like China," Mr. Obama is promising to increase investigations against Chinese exporters. His Administration has so far brought five cases against China in the World Trade Organization (WTO). Late last year it began targeting China's solar industry, while last week it said it would investigate Chinese makers of wind energy towers.

By the way one looks at it, protectionism has been rearing its ugly head as politicians like President Obama and the mainstream Republican candidates appeal to the emotions of the uninformed via nationalism/patriotism to solicit for their votes.

Many are unaware that economic nationalism (or protectionism) fundamentally underpins the philosophy of war or of military conflicts. World War II, for instance has mainly been caused by rabid nationalism.

Again current events have been affirming the admonitions of the great Ludwig von Mises,

Economic nationalism is incompatible with durable peace. Yet economic nationalism is unavoidable where there is government interference with business. Protectionism is indispensable where there is no domestic free trade. Where there is government interference with business, free trade even in the short run would frustrate the aims sought by the various interventionist measures…

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war.

In short the President Obama’s war on outsourcing constitutes part of what seems to be an overall protectionist agenda, which translates to a war on trade against every nationality (including the Philippines).

President Aquino should negotiate to retain and expand free markets and abide by such principles. Otherwise, perhaps Marc Faber’s prediction may come true.

Typhoon Sendong Exposes the Myth of Good Government

From the MSN.com

President Benigno Aquino on Monday fought off accusations that he was partying with starlets as the Philippines was mourning hundreds of people killed by a storm.

The presidential palace said Aquino briefly stopped by the traditional Christmas party of his elite security group at their compound on Sunday to show gratitude for their services.

"The president stayed for a little over 30 minutes. But he did not go up on stage, he did not sing, he did not dance. There was no partying," the head of the presidential security group, Colonel Ramon Dizon, said in a statement.

Tropical storm Washi hit the southern island of Mindanao at the weekend, spawning swollen rivers, flash floods and landslides which left 652 dead with hundreds other missing, according to Philippine Red Cross figures.

Reports of Aquino's alleged partying spread after a local TV actress and show host, Valerie Concepcion, said in her Twitter account that she met Aquino at the party, where she performed for the troops and their families.

Concepcion said Aquino laughed at her jokes and enjoyed her performance, triggering a wave of criticism directed at both.

The 51-year-old bachelor president, who comes from one of the country's richest landowning clans, had previously been linked to female celebrities and was once criticised for buying a Porsche sports car, which he has since sold.

My comments:

1. I told you so.

2. While I am very sympathetic to the unfortunate victims of the disaster, mainstream media foolishly makes it appear that events like this function as the only political priority. They make the public expect of excessive maudlinness or overreaction from officials. Policymaking for them, thus, has mechanically been demonstrated as perpetually attempting to please public sentiment reactively.

That’s why many Filipinos end up chasing their own tail—many, if not most, don’t really know what to expect from politicians except for political melodramatics which ultimately ends up frustrating them.

Understand that politicians will HARDLY deliver us from the terrible toll of natural calamities; to the contrary more interventionism, which have been the key cause, will likely worsen such conditions.

Notes the Inquirer,

The absence of a flood warning, high tide, darkness and a false sense of security proved disastrous for people of northern Mindanao when Tropical Storm “Sendong” came over the weekend.

Add illegal logging, rapid urbanization and mining, and the result was deadly for residents of Cagayan de Oro and Iligan cities, government and Red Cross officials said.

This represents as very naïve ex-post account of what has happened.

This assumes that had been none of the above activities occurred, the current fatalities and damages wouldn’t have happened. This is simplistic and sloppy thinking. In reality, this simply isn’t so.

Unknown to the author is that illegal logging activities globally, for instance, have been mainly caused by poverty and by the tragedy of the commons where effected arbitrary laws in response to such problems, has exacerbated the incidences of these activities and engendered other untoward consequences such as more corruption, organized crimes, human rights abuses and etc….

The application of conventional prohibition laws, which tramples on property rights, represents as typical example of applying a cure which is worst than the disease.

In other words, poverty brought about by excessive regulations, the lack of trade opportunities, and or the politicization of local economics has spawned these “illegal” activities and thereby the ensuing environmental degradation.

Poor people care about their day to day survival and not the environment.

Thus the said effects has flagrantly been misread by media as the cause, and thus dumbing down their gullible audiences.

So if the political reactive response will be to curb on these activities, we eventually end up with more of what we least desire. This would represent as the law of unintended consequences.

Instead, as seen in other countries, economic freedom has vastly mitigated the destructive effects of natural calamities. Wealthier people are likely to undertake protective measures for themselves, their families and the community regardless of government actions.

Bottom line: Keeping people poor and politically dependent is a guaranteed recipe for prospective victims of natural catastrophes.

Next as I have argued before, ALL public officials are HUMAN BEINGS. This means that as humans (and not a quasi-deity whose popular delusions has been promoted by media), their actions will be dictated by personal values and preferences.

Alternatively this exposes the myth about good government. There is no such thing as good government whose employment of organized violence will always be politically motivated benefiting a few at the expense of the rest. Despite all the idealistic blarney by media, politics has not been about serving the public (hahaha!) but of the self-interest of the political leaders and their allies, followers and cronies (insider-outsider dynamics).

Lastly, more “compassionate” overreactions actions by political authorities will extrapolate to more corruption and inefficient use of resources which leads to massive wastage and higher taxes and or inflation in the future.

This subsequently translates to more poverty and the same set of troubles in the future.

Does the politically connected mainstream media ever account for why, after all these years and all the changes in political stewardship, we get the same set of problems?

Good government? Duh!

P-Noy’s Entourage is a Showcase of the Philippine Political Economy

“As a society, culturally we get what we celebrate”, that’s how prolific Forbes nanotech analyst-writer Josh Wolfe describes the importance of role models in shaping society.

Who we celebrate essentially reflects on our actions. For instance, if we worship politicians and celebrities, we tend to follow their actions. Our time orientation would narrow to match with theirs.

And having a short term time preference means we value today more than the future, thus we would be predisposed to indulge in gambling, hedonistic (high risk but self gratifying) activities and political actions that would dovetail with such values.

However, if we see entrepreneurs or scientists as our role models then we are likely to value the future more than today. We would learn of the essence of savings, capital accumulation and trade.

What has this got to do with P-Noy’s trip to China? A lot.

President Aquino’s entourage simply is a showcase of how the Philippine political economy works.

From today’s Inquirer

Underlining the trade and investment slant of his state visit to China, President Benigno Aquino III arrived here with a 270-strong business delegation, including the Philippines’ top industry leaders.

It is the biggest business contingent of Mr. Aquino’s foreign trips.

And for what stated reason? Newswires say this is meant to secure $60 billion worth of investments.

According to Bloomberg,

The Philippines may secure as much as $60 billion in Chinese investments under a five-year plan to be signed during Aquino’s stay, Christine Ortega, assistant secretary for foreign affairs, told reporters in Manila on Aug. 24. This trip alone may bring $7 billion in commitments, Trade Undersecretary Cristino Panlilio told reporters in Beijing yesterday…

Aquino is counting on investments to boost economic growth that slowed for a fourth straight quarter. Gross domestic product increased 3.4 percent in the three months through June from a year earlier, from a revised 4.6 percent in the first quarter, the National Statistical Coordination Board said today.

Lagging Investments

Net foreign direct investment in the Philippines fell 13 percent to $1.7 billion in 2010 from a year earlier, the central bank said in March. Between 1970 to 2009, the country lured $32.3 billion in FDI, compared with $104.1 billion for Thailand, according to United Nations data.

Higher returns on investments will come from resources “that have been untapped for such a long time,” Aquino said in an Aug. 18 interview, citing plans to explore for energy in the South China Sea. Two of 15 blocks put out for tender in June are in waters China claims.

The Philippines plans to boost hydrocarbon reserves by 40 percent in the next two decades. Mineral fuels accounted for 17 percent of total monthly imports on average last year, from 11 percent in 2000, data compiled by Bloomberg show.

“We want to resolve the conflicting claims so that we can have our own gas,” Aquino said Aug. 29. “Once we have our own, we will not be affected by events in other parts of the world.”

First of all it isn’t true that the Philippines have little access to $60 billion worth of funds for investment.

In fact, the Philippines has a disproportion of savings to investment as shown below.

National savings alone is almost enough to bankroll these required investments (charts above and below from ADB)

Yet this doesn’t even count other domestic assets which can be used as collateral or as alternative sources for funding.

The Philippine Equity markets had a market cap of $202 billion as of the last trading day of 2010.

Foreigners hold around 20% of the market cap; even assuming 50% foreign ownership that’s still $100 billion worth of potential collateral.

And we also have the corporate bond markets (4.1% of GDP) and vast property assets which because of the lack of secured property rights, around 67% of rural residents in the Philippines live in housing that is considered as ‘dead capital’ which is worth about $133 billion Peruvian economist Hernando de Soto estimated in 2001 in his book, the Mystery of Capital

In other words, many of the big shot investors who went with P-Noy do not see sufficient returns on their investments, hence have been reluctant to deploy their savings on local investments.

They instead went with the President to supposedly seek out “partners” to 'spread the risks'.

On the other hand, these business honchos will likely use this opportunity to invest overseas!

Why then the lack of domestic investments?

Aside from the lack or insufficient protection of property rights, a very important hurdle to investments is simply the inhospitable environment for investors.

As the table above shows, the Philippine economy has been strangled or choked by politics.

So bringing in a high powered presidential entourage won’t help unless there would be dramatic structural reforms on our political institutions that would encourage profitable investments.

Most of the deals that would be obtained from this trip will likely be political privileges or concessions (most possibly backed by implicit guarantees from the Philippine government).

This brings us to the significance of role models.

Essentially, P-Noy sees big business as the main way to entice investments or reinvigorate the economy, hence this star-studded retinue (could this be a junket??)

Why leave out the public, when I would presuppose that much of the investable savings are held by them? Is it because that, as his political supporters, this would serve as the ripe opportunity to be rewarded (with state induced deals)?

Or is this authorative show of force simply been about showmanship? (Public choice theory is right again showing how politicians are attracted to symbolisms to promote their self interests)

Bottom line: P-Noy’s China trip reveals of the essence of the Philippine political economy; economic opportunities allocated or provided for by the state.

In short, state or crony capitalism.

The Truth About Malacanang's Sin Taxes: Insatiable Government Spending

Sin Taxes needs to be raised for the purpose of imposing discipline on the Filipino citizenry. So says the Philippine President.

From the Inquirer.net

We proposed all of these measures because we really believe that they are needed to run this country better. I’m sure that in the conscientious fulfillment of their duties and obligations, they will expedite the passage of measures that they already agree with,” President Aquino said. “With the sin taxes, there’s no question about our ultimate aim, to decrease the consumption of sin products.”

Such moral statements are wonderful to hear. It seems to have a cathartic effect, especially to the gullible.

But in reality, prohibitions whether direct or indirect hardly ever achieves its declared goals. Simply look at the local war on drugs, where the Philippines despite the numerous drug laws have acquired the ranking of the 4th largest supplier in Asia. So we seem to be seeing a reverse phenomenon where more regulations have equaled greater drug problems. (I can't link to my old posts because my dsl is down and I'm operating from an internet cafe).

The same should apply to smoking bans or sin taxes. Economics always trumps politics.

However the real goal of Sin Taxes can be gleaned from the same article.

The government aims to generate P60 billion from a proposed bill restructuring the excise tax on alcohol and tobacco products.

President Aquino said the revenues from the modified excise tax would be earmarked for universal healthcare.

So like all paternalistic- nanny states, who pretend to know best for the society, the means will always be used to justify a questionable unattainable moral end.

Equivocation aside, the real intent, like all governments, is to raise money for political ends.

And governments operating on the welfare platform eventually end up bankrupt, as the problems of Greece and even the US has been revealing.

Apparently, politicians love to spend while ignoring long term consequences of their current actions, and at worst, never ever seem to learn from lessons of the past or of the present.

President Aquino’s First Term Speech: Everything to get Applause

President Aquino's speech on his first year in office, as excerpted by the Inquirer,

“Before, there was resignation, dejection and apathy,” the President told reporters.

“If you remember at the time, you were writing about the people’s apathy and numbness, as if they did not expect anything from their government. They were blasé to scandals that were being unearthed,” he said.

“Now, more people are expectant that their lives are changing for the better,” Mr. Aquino said.

He said growing demands for change from the people were a good thing.

And these are the cited accomplishments of the administration

Again from the same article,

These include the 21,800 families of policemen and soldiers who will have decent homes before the year ends, the 2 million poor families set to benefit from the conditional cash transfer program and the 240,000 farmers who will benefit from 2,000-kilometer farm-to-market roads finished in just one year, Mr. Aquino said.

“Isn’t it clear that there is change?” he said.

He said that because of reforms in the government financial system, the government was able to save funds more than the amounts allocated by the General Appropriations Act to implement programs, the President said.

These include providing P12 billion for the “Pantawid Pasada” for transport workers affected by high oil prices, he said.

“Housing, rice, security, salaries, roads, Pantawid Pasada and other lifeguards for the people drowning from poverty. These are the changes that we are reaping now,” he said.

It’s another vindication for me as economic reality has been unmasking all the illusions of deliverance from our over dependency on political distribution as a way to success.

Also, this justifies why I have not and will not exercise the so-called the rights to suffrage which only buttresses this perpetual charade.

People hardly realize that there are only TWO ways to attain people’s needs: this is by production (economic means) or by plunder (political means--forcibly taking other’s resources through political mandates) [Franz Oppenheimer].

The political route is a non-market process of distributing resources ‘legally’ expropriated from society. The choices made by political leaders are premised according to their biases, ambitions, interests, value preferences, ideology, networks, comfort zones, cultural, educational or religious orientation and other personal attributes.

Remember, political leaders are not gods but humans. So they suffer from the same frailties as anyone else. Most importantly they suffer from the knowledge problem.

The only difference is that they are backed by the power of organized violence through the state.

And since all economies are highly complex and dynamic, political distributions means taking or assuming choices for the benefit of a few groups from among the widely diversified and competing sectors.

Because various interests groups will jockey for such privilege, the societal interactions by these competing groups would translate to the employment of patronage, horse trading, shady deals, bribery and many other morally unscrupulous actions.

Politics is a zero sum game. Thus, the actions of these competing groups along with the respective political entities involved will be predicated on or revolve around attaining political goals by guiltism, covetism, envyism angerism and villainism (to borrow from libertarian Robert Ringer) which always leads to “resignation, dejection and apathy” and most importantly to perennial conflict.

So it never changes.

Yet it is naive, seemingly insensitive and supercilious to suggest that there has been "growing demands for change", as if Filipinos have been chronic dolts and have been blindly satisfied with the status quo despite their dire condtions.

The reason people act is to fulfill their uneasiness, thus, always strive for change.

The apparent passivity of the Philippine populace to political misconducts is NOT because of the lack of desire for change, but because most appear to have succumbed to the frustrations of the failed glamorized heroism of the state. Repeated government failures have jaded the Filipino’s vim.

And it is because of too much expectations founded from the grave misunderstanding on the role and limits of the state that has signified as the country’s main blight or the nation's Achilles Heels'.

Importantly, such delusions extends to the elitist academia (which serves as the recruitment pool for bureaucrats and private sector patrons of political actions) and well into the business sector, whom all look for patronage, anti-competition, and doleout as virtuous and a necessary condition for economic development.

If there have been any changes during the first year of President Aquino’s term these accounts for changes on the beneficiaries of redistribution.

Essentially, President Aquino has been no different from the actions of the predecessors, which is what I have been saying even prior to the last elections.

Yet most of the incumbent’s reported accomplishments have been designed as “feel good” noble intended redistribution programs (“Pantawid Pasada” or cash transfers to farmers) and to cosset groups that assures their hold on to power (policemen and soldiers).

This reminds me of the great H.L. Mencken’s description of former US President T.R. Roosevelt, whom Professor Don Boudreaux quotes from A Mencken Chrestomathy

What ailed him was the fact that his lust for glory, when it came to a struggle, was always vastly more powerful than his lust for the eternal verities. Tempted sufficiently, he would sacrifice anything and everything to get applause.

As a general rule, political self-interests signify as the most important priority for political actors. Apparently, President Aquino has not been an exception.

The Aquino Government’s View of Free Trade

Is the incumbent Philippine political regime pro-growth via free trade?

Clues to this answer from the Japan Times, (bold emphasis mine)

A senior Philippine trade official said Wednesday his government has to study the U.S.-backed trans-Pacific free-trade initiative carefully before joining it because his country, like Japan, has sensitive sectors like agriculture to protect.

"We are also just exploring the TPP (Trans-Pacific Partnership Agreement) and studying it, because the TPP agreement is quite an ambitious agreement," Undersecretary for Trade Adrian Cristobal said in an interview on the sidelines of the Asia-Pacific Economic Cooperation forum meeting in Yokohama…

"So these are some of the real constraints that the Philippines has, and other countries have similar constraints," Cristobal said. "We have to look at our own legal and regulatory structure, even our own constitution . . . as part of our own evaluation. From there we need to do some stocktaking also of our own sensitive products, our own industries. Of course we have to consult our own people, business sectors and economic sectors of what their views are."

Blunt interpretation or euphemism from the political lingo: We have to look at the interests of our cronies first.

Is it a wonder why the Philippine economy continues to lag?

Global Policy Divergences Favors A Rising Peso

``Governments remain today, as much as when Hayek spoke these words, under the sway of political ideologies that insist it is the duty of the state to regulate the market in the service of powerful special-interest groups, to redistribute wealth, and to secure “safety nets” under most aspects of everyday life. The budgets and deficits of many EU countries, and the fiscal crisis they have now gotten themselves into demonstrate this beyond any doubt.” Richard M. Ebeling

I’d like to bring about a small point on the Peso and the Phisix.

In contrast anew to domestic mainstream analysis, the Peso has been proceeding in accordance to our projection. The Peso should continue to appreciate (anywhere in the range of 43 to 44+ to a US dollar by the yearend) as the Phisix surges.

The Peso’s rise will reflect on many factors, but mostly on excess US dollar liquidity and divergences of monetary policies.

Not only has the Peso risen despite the recent lagging actions[1] relative to our neighbors, which I had suspected had been part of the political efforts to embellish of the image the new President during his first State of the Nation Address (SONA). As a political group the Peso has now become sensitive to the demands of OFWs. Hence, I suspect the constant involvement by the Bangko Sentral ng Pilipinas (BSP) or the Philippine central bank to stem any meaningful appreciation.

Notice too that the Peso immediately rallied fervently just right after the SONA. This only furthers my impression that our new President has been soooo obsessed with image preservation or maintaining high popularity ratings, therefore would resort to populist measures at the expense of the public. Sorry to say, but a majority of the people are economically unlearned to absorb such truths.

But unless the BSP would take the risk of severely undermining the Peso in order to match the inflationary policies implemented by the US authorities, efforts to keep the Peso from rising will only serve as temporary patches. But again unknown to the public, all interventions has attendant costs, and will be paid for by the public either through a lowered purchasing power (higher consumer prices) or higher taxes in the future.

Nevertheless as the US continues to manipulate her bond markets for the purpose of allegedly staving off deflation, such actions accentuate the increasingly gaping policy divergences between Asia and the US.

And foreign currency reserve rich China, perhaps anticipating such predicament, appears to join us in becoming more bullish with the austerity conscious Euro[2], and likewise parts of Asia, such as Japan and South Korea[3] where she had embarked on selling US dollar ‘bonds’ for Euro and the Asian ‘bond’ assets.

And the greater the policy divergences, the higher the allure to arbitrage against the US dollar for higher yielding assets (a.k.a. carry trade) like the Peso.

And as we have previously argued[4], the influx of foreign money will not only intensify the price actions in the Phisix (see Figure 6), it will also be reflected on other domestic assets as real estate, bonds (already happening) and hopefully into more investments.

Nevertheless all these will be vented on the price of the Philippine Peso.

Figure 6: Peso and Net Foreign Trade in the Phisix

We have previously pointed out (left window-Peso at the upper pane and foreign trade at the lower pane) that surging foreign interest in the Phisix coincided with a higher Peso.

By way of the recent market actions, this phenomenon seems to be taking place again and seems to build up pressures incrementally prior to a massive move (right window).

Of course, the caveat will be expectations of a reduction in liquidity (risk aversion) in the marketplace.

But given the prospects of a slowdown which has given rise to mainstream’s heightened need for more political actions, we can expect policymakers to go about unleashing a new wave of liquidity as had been in the Lehman episode of 2008 or during the Greece spurred Euro crisis of 2010.

At the end of the day, for policymakers it’s all about economic ideology, path dependency and adherence to superstitions cloaked with mathematical formalism.

But of course, all these won’t repeal the natural laws of economics.

---

[1] See The Philippine Peso’s Lagging Performance July 18, 2010

[2] Bloomberg.com China Favors Euro to Dollar as Bernanke Shifts Course, August 16, 2010

[3] Bloomberg.com China Doubles Korea Bond Holdings as U.S. Debt Sold, August 18, 2010

[4] See Buy The Peso And The Phisix On Prospects Of A Euro Rally, June 14, 2010

Revocation Of Midnight Appointments: It’s About Who YOU know

Perhaps you’ve heard the axiom “It’s not about what you know but WHO you know.”

In a market economy, this would be less relevant because consumers are reckoned as the empowered political-economic force.

But in a statist economy, where economic opportunities are mostly distributed according to whims or priorities of politicians then this becomes a very influential factor.

And it appears that the second executive order issued by the President Aquino is emblematic of the latter.

This from the Inquirer.net,

President Benigno Aquino III has issued Executive Order No. 2, revoking the “midnight appointments” former President Gloria Macapagal-Arroyo made on or after March 10, Malacañang has announced...

De Mesa said Malacañang found 977 instances wherein the previous administration violated the constitutional ban on appointments two months before the presidential elections and 90 days before the end of Mrs. Arroyo’s term last June 30.

My comment:

1. After the Wang Wang, now political retribution. President Aquino’s thrust seems very much directed at populist politics, obviously aimed at sustaining his high popularity ratings.

Since former President GMA has been intensely unpopular, then piggybacking on vindictive sentiments seems the most apparent way to meet his personal goals (popularity ratings).

However, as we earlier wrote, ``Political gimmickry can only have a short term impact, thus he would need a bagful of other tricks to keep people entertained.”

2. Like any other politician, the President’s action reveals that political loyalty and affiliation have been the primary mechanism to effect ‘changes’.

This implies that preservation of power translates to rewarding supporters and will use such occasion (PGMAs unpopularity) to his advantage.

Hence, the vacated posts will most likely be used for election payback.

Yet, if President Aquino truly desires to seek the betterment of the Philippine society, then he should use this opportunity to trim the bureaucracy. But the latter option is wishful thinking on our part and isn’t likely the course of action.

3. While one may argue that midnight appointments are illegal, they could, technically speaking.

But these types of laws can be arbitrarily interpreted to the convenience of the powers-that-be.

Laws can be perverted to unjustly impose powers over certain groups or to the society for the attainment self-interested political agenda by political leaders.

As Frederic Bastiat wrote in the Law, “they turn to the law for this despotism, this absolutism, this omnipotence.”

And as we’ve been saying all along, we are seeing more and more proof of “the more things change the more they stay the same”.

Elusive dreams will remain ever elusive.

On President Aquino’s SONA: The More Things Change....

I have not heard or read the entire transcript of the First State of the Nation (SONA) address by President Noynoy Aquino yesterday. Thus I’ll be basing my comments on the content or quotes of the President Aquino by mainstream media.

Fundamentally the Inquirer ‘We can dream again’ article seems to give alot of weight on Mr. Aquino’s penchant for public-private partnerships arrangement.

So what is a public private partnership? It is basically government project/s outsourced to the private sector.

This from Wikipedia.org, ``PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period.” (bold emphasis mine)

In other words, PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

Hence, PPPs are no less than emblematic of the status quo, which I had been predicting, that highlights on the legacy of crony capitalism, which seemingly, the new administration is headed for.

Of course one may argue that these projects will be transparently offered to the public. But that would be a non-sequitur. As we should know, there are many stealthy ways to maneuver the process or to ‘skin the cat’.

Going back to the SONA it is further a wishful thinking for President Aquino to assume government knows best in allocating resources,

From the same article,

``To put a stop to the wasteful use of funds, the government would eradicate “wrong projects” and adopt a “zero-based” approach to crafting the national budget, the President said.

“What used to be the norm was every year, the budget merely gets reenacted without plugging the holes,” he said. “Next month we will be submitting a budget that accurately identifies the problem and gives much attention on the right solution.”

When resources are allocated politically, they become impervious to market pricing thus, are always subjected to waste.

Even to the most well-meaning politician, it is hardly the interest of the public that comes into play, but the interest of the public as perceived by the political leaders.

Yet these perceptions can be skewed by biases, familiarity, networks, vested interest groups, and many other influences.

Lastly, not everything is bad news though, we hope that the new president will indeed not only streamline processes “to make them predictable, reliable and efficient for those who want to invest” on the PPPs, but we hope that this will be applied to the broader businesses environment.

So there you have it, more proof that the more things change, the more they stay the same.

How Philippine Capital Markets Will Benefit From Free Trade

In this issue:

How Philippine Capital Markets Will Benefit From Free Trade

-Will Lady Luck Probably Smile On The Aquino Regime?

-Explaining Free Trade

-Anti-Free Trade: Political Dynasties and The Maguindanao Massacre

-The Invisible Hand

-How Free Trade Should Benefit The Philippine Capital Markets

At a recent speaking engagement, I was asked of what I thought of the new Aquino administration and his economic policies. My reply, first that I was apolitical, and second, that there are major forces such as globalization, regionalization and the technological revolution that has been and will be driving global policymaking and this includes the Philippines.

Obviously far from being a populist answer, such reply would seem stoic since it didn’t whet the sensationalist craving of the audience.

Will Lady Luck Probably Smile On The Aquino Regime?

As any regular reader would know, in my opinion, the new administration is NO more than representative of the status quo[1], which for me would seem better, compared to activist ‘messianic’ left-leaning leaders, such as Venezuela’s Chavez or even the US president Obama.

And yes, most signs have been validating my perspective, be it on the pronounced policies on jueteng[2], cabinet appointments[3] packed with representatives from big business and even to populist sound bite (or what Mark Twain would refer to as "a minimum of sound to a maximum of sense" or simply “attention generating”) policies such as the “Wang Wang”[4] or the recent administrative action: the censure of PAG-ASA[5] (government weather forecasting) personnel in the wake of the recent widespread brownouts caused by typhoon Basyang.

And based on my analysis I predict that the administration’s performance (success or failure) will likely be aligned with the patterns of “global” if not regional political economic trends.

As previously stated[6], ``the direction of political winds in the Philippines is likely to get influenced more by our deepening interactions with external forces-particularly, the new free trade zone (with ASEAN and China), China's growing role as a major political force as regionalism deepens, a deeper impact from globalization buttressed by technology and OFWs (or migration flows) and deepening financial globalization which includes transmission effects of inflationism, steep yield curves, bubble policies and etc.”

In short, luck or the lack of it, will dominate the Aquino regime.

Well it didn’t take long for more signs to surface which would seem to validate my prognosis.

This from yesterday’s article from the Inquirer.net[7], (all bold emphasis mine)

``In a speech before members of the Philippine Chamber of Commerce and Industry Wednesday evening, Trade Secretary Gregory Domingo said it was now common practice among economies to participate in multilateral trade pacts.

“You have to be part of every trade agreement because to be excluded is a disadvantage for you. We’re not yet part of [the TPP], but at some point, I think it is our desire to join as well,” he said.”

It is unfortunate enough for the Aquino administration’s trade secretary to seem to have little appreciation of the essence of free trade agreements. For Mr. Domingo, and if this should represent the insights of the administration, free trade agreements are simply a fad, take note of “common practice”.

So while I applaud the Aquino administration for supposedly espousing free trade, the essence of the administration’s policymaking, as stated before, is because “everybody else is doing it”. It’s definitely not out of principle, but out of the socio-economic signalling known as “Keeping up with the Joneses”.

This again lends credence to our projection of: one—popularity based policies (in this case globalization) and two—the deepening influence of global political trends which has been influencing local policymaking.

Let me add that while the practice of free trade seem to get more ingrained globally, this remains a virtually unpopular or severely misunderstood concept in the eyes of the domestic populace.

Take for example, this free trade agreement definition from the media; from the same article

``The aim of the free trade agreement is to bring all tariffs down to zero by 2015. The coverage of the deal spans trade in goods and services, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers, intellectual property, government procurement and competition policy.”

True, these are mostly technically “legal” definitions, but this hardly dwells on the kernel or the cost-benefits tradeoffs from the said policy.

And in evincing more proof of miscomprehension of free trade, but this time from the officialdom; the same article quotes the incumbent trade secretary anew, (bold highlights mine)

“We will be very vigilant in joining various trade agreements. We’ll try to join as many trade agreements as possible, but still keeping in mind that our interest is really to protect the interest of Philippine businesses and Philippine consumers,” Domingo said.”

But free trade is of the interest of the Filipino consumers and businesses!

Free trade is VOLUNTARY exchange! It allows people to conduct exchanges to satisfy personal and commercial needs.

When we go to a store to ‘freely’ purchase things or services which we deem to need, don’t we achieve immediate satisfaction from the activity?

If people, on their unfettered disposition, buy from me, do I not use the proceeds from the exchange to subsequently also buy from the marketplace, either to fulfil my consumption goals or expand or replenish my business needs or even make contribution to social projects for the betterment of our community/society? Because producers are themselves consumers, then trade is a benefit to all parties involved.

Hence, the fundamental role of the marketplace is to satisfy our sundry needs by means of voluntary, and NOT coercive, exchange. So why does Mr. Domingo express scepticism with “protect the interest of Philippine businesses and Philippine consumers”?

Explaining Free Trade

There are two way to acquire wealth. German sociologist Franz Oppenheimer[8] once said that there is the ‘economic means’ via work and exchange and there is the ‘political means’ by forcible exploitative means either by plunder or by redistribution.

Acquiring wealth through work and exchange is NET beneficial to the society since it fosters the creation of value added products or services.

Figure 1: World Bank[9]: Explosion In Global Mobile Subscribers (left window) and Internet Use (right window)

Think the internet and the mobile phones. Twenty years ago these were non-existent. Yet competition in the marketplace cultivated a sweeping technological innovation, which the introduction of these highly efficient revolutionary tools exponentially expanded access to communication and greatly reduced transaction costs.

Today, I can talk with my mom in Hong Kong everyday at the minimal cost of the bandwith, compared with costly occasional long distance phone calls 20 years back.

Of course there will always be losers anywhere. Creative destruction from free market innovation led to the phasing out or the obsolescence of the pager and the telegraph, the reduced usage of the fax machine, postal mail and even a decline in the newspaper industry[10]. However the gains from innovation have virtually eclipsed the selective losers. In short, by large, society benefited from the new technology.

Moreover, because of the immensely lowered transaction cost, global trade blossomed.

Meanwhile, the obverse side of acquiring wealth from economic means is the political means.

‘Political means’ essentially is parasitic which lives off the work of others. This involves taxation and forcible redistribution, war and corruption. The benefits only accrue to the parties involved in conducting such affairs, primarily government. And such actions signify a ZERO SUM game- where one benefits, as the others losses, which in general do NOT add wealth to the society—since resources is just taken away from someone else.

Furthermore, by allowing people to exchange voluntarily, this furthers the division of labor that creates jobs, and importantly, accumulates capital or wealth.

And increased global trade or globalization, as noted above, has definitely been the prime engine of wealth accumulation (see figure 2).

Figure 2: Google: Deepening Free Trade And Exploding Global Wealth

The correlation of the growth of global merchandise trade relative to the explosion of global per capita income may not be perfect, but it has been strong and rigorously supported by theory and empirical micro evidences as the rapid diffusion of the mobile phone and the web around the world.

Anti-Free Trade: Political Dynasties and The Maguindanao Massacre

In addition, free trade greatly reduces pressures from political redistribution which frequently leads to internecine political conflicts.

Take for instance the Maguindanao massacre[11]. The fundamental reason why such atrocious and barbaric act had been committed was allegedly due to the political insecurity by the incumbent local leadership over the preservation of his regime.

The horrid Maguindanao incident appears to be symptomatic of the latent inherent defects of the Philippine political ‘democratic’ framework, which has cultivated a brood of political dynasties (estimated at about 250) that has used politics to arrogate upon themselves economic opportunities and thus the imperative to remain in power at nearly all cost.

Even this New York Times article of 2007[12] presciently noted of the violent nature from this political arrangement, ``For generations, political dynasties have dominated elections and governments in the Philippines...As these clans protect their reign, they often resort to violence to frustrate any attempt by rivals to unseat them.”

And how do you sustain political dynasties? By systematic redistribution. The above board taxes generated from the local economy are used to pay off voters indirectly by virtue of massive welfare programs [e.g. free movies, free health care, senior citizens discount and etc...] or directly (vote buying) during elections. For instance, local authorities discreetly allow people to squat on empty government and private lands and are given protection from doing so in exchange for votes.

Yet this form of squatting has been provided with a legal cover in the face of the Lina Law (RA 7279)[13], where relocation is required for squatters evicted from their domicile. In short, the law rewards the violation of property rights.

Of course there is also the issue of the undeclared tax payments, which usually ends up in the pockets of the politicians.

Hence, the violence in Maguindanao has been representative of the state of economic deprivation from the operative highly skewed political-legal environment.

According to the Focus on the Global South, Maguindanao remains as one of the poorest provinces in the country. With a population of more than 1 million in 2006, six out of ten people are considered poor in the province, which is almost three times higher than the national average. Maguindanao is also a “mainstay” in the list of ten provinces with the biggest income gap, poverty gap, and severity of poverty[14]

In other words, where politics has been substituted for trade, we get violence as a result of the exploitative grab for resources by the use of political means, as Franz Oppenheimer has postulated.

And this also validates the great Frédéric Bastiat who once said that, “When goods do not cross borders, soldiers will.”

Apparently, in Maguindanao, the order of private armies determined past economic fortunes which had largely been held and distributed by the entrenched political class and which appears as modern day vestiges of a medieval age political structure known as feudalism.

Likewise, history has revealed that the same political means to attain wealth in favour of vested interest groups had been responsible for the mass slaughter of humanity seen in the two horrendous world wars of the 20^th century, where the casualties as estimated by the Wikipedia.org[15] for World War I is anywhere in the range of 10-64 million people while World War II at 40-72 million people.

As historian Michael A. Heilperin poignantly observed[16], Economic nationalism was the real victor of World War I, just as collectivism was to be the real victor of World War II.

So why does the new trade secretary remain fearful of free trade?

The answer is simply because the entrenched political and economic class are concerned and apprehensive that their current economic privileges, which on the other hand signify as economic inefficiencies, brought about by protective walls of legal and political barriers, might not cope with the onslaught of market based competition.

In short, free trade means putting to risks inefficient and uncompetitive firms which has operated on the premises of political concessions such as monopolies, cartels, subsidies, liberal access to state financing, tax shields, various licensing or other state based privileges which has been an enduring trait for Southeast Asian economies, as journalist and author Joe Studwell rightly notes[17], “The lesson of the past decade has been that the relationship between political and economic elites in Southeast Asia is more enduring than almost anyone imagined.”

Thus, by reading in between the lines, the trade secretary appear to signal the administration’s possible intent to enforce gradual change on a regime that thrives on the status quo.

The Invisible Hand

It is likewise foolhardy and mendacious to assert that free trade works to harm consumers as free trade primarily benefits consumers through manifold choices.

Free trade allows consumers to benefit from the various offerings from the producers or service providers, all in competition to satisfy their needs. And the thrust to market products to satisfy consumers comes in many facets such as pricing, quality, utility, aesthetics, self-esteem and etc...

In short, for the consumers, the essence of free trade is choice, the more the array of choices, the greater the value of the exchange.

On the other hand, for the producers, the essence of trade is profits,

As Ludwig von Mises wrote[18],

Profits are the driving force of the market economy. The greater the profits, the better the needs of the consumers are supplied. For profits can only be reaped by removing discrepancies between the demands of the consumers and the previous state of production activities. He who serves the public best, makes the highest profits. In fighting profits governments deliberately sabotage the operation of the market economy.

Thus in connecting the two, free trade gives the consumers the best possible alternative while for producers, the profit incentive from doing so. In short, free trade signifies as the best possible arrangement for achieving satisfaction and profits.

Yet sometimes media gives the illusion that consumers are too dumb that they can’t distinguish between what’s good enough for them and what’s not, and thus require the nanny state via various regulatory interdictions.

Ironically, the same media would pontificate on the virtues of democracy where people get to vote on political leaders, as if people have been bequeathed with intelligence only when they vote for leaders and the lack of it when they spend their own money.

In reality, it works the opposite way.

When people spend for goods and services they expect to get direct benefits from an exchange and thus always exercise the option to choose based on perceived order of needs and of the accompanying value from the available choices.

Isn’t it commonsensical for consumers not to further patronize on what they feel as inferior, inadequate, substandard, or a product or service that is perceived as worth less than the price which they had earlier paid for?

By the pattern of spending, consumers, thus, impose market discipline on producers without the need for state intervention.

The father of modern economics, Adam Smith called this as the Invisible Hand.

In contrast, in elections when people vote for political leaders, what you vote for isn’t what you exactly get. Whether it is Philippine President Joseph Estrada of 1998, Japanese PM Yukio Hatoyama[19] or US President Obama, the point is—populist politics usually ends up with the opposite expectations from which they had been ushered into office.

Of course in any field, one can’t discount that there will always be unscrupulous agents. But such devious entities are likely to fool people ONCE and will be refused further patronage. Thus, any gains will be temporary and by deceiving consumers, they will be penalized by the virtue of monetary and reputational losses, if not lawsuits.

Yet, in the case where physical harm that should emanate from the use of their products or services, then this should also be subjected to legal remediation.

How Free Trade Should Benefit The Philippine Capital Markets

So if the Aquino regime will truly usher the Philippines more as an active participant in free trade engagements this should augur very well for the Philippine economy.

Of course, the Philippines has been a signatory of many free trade[20] accord, even prior to the Aquino regime, which includes including the Asean Trade in Goods Agreement, Asean-Australia-New Zealand Free Trade Agreement, and the Japan Philippines Economic Partnership Agreement, but sustaining and more importantly (and hopefully) expanding the ‘gradualist’ momentum will be a very crucial dynamic.

However, given the administration’s faddish perception of globalization, the consistency of this policy is yet unclear.

Theoretically, increased free trade and/or economic freedom should bode well for the local capital markets, since more investments should translate to the increased access to domestic and global savings which should get intermediated via the banking system or through the capital markets.

Figure 3: McKinsey Global Institute[21]: Share of Financial Assets By Region 2008

In developed economies, except for Japan, bank deposits make up a smaller share of the capital markets as shown by figure 3. The greater part of the distribution of financial assets has been into the private sector debt securities and in the equity markets.

Thus while there are cultural and domestic regulatory dynamics that could also shape the divergences in the distribution of financial assets, we should expect a larger share of private bond and equity markets for mature market economies. This implies Emerging Asia could likely be headed on that path.

Considering that the Philippines, whose primary line of financing has been channelled through the banking sector, where banking penetration level is only 35% of the population, according to McKinsey Quarterly[22] estimates, this means there is a huge amount of unaccounted capital afloat in the system.

And this squares with the estimated 40% share of the informal economy[23] and with 4 of the top 11 largest malls[24] in the world, according to the Forbes Magazine, housed in the Philippines.

In other words, free trade and or economic freedom will compel enterprises and institutions to deal with this enormous untapped savings which should translate to a huge boom for the domestic capital markets.

Part of the early move on this has been the advent of mobile banking.

In terms of bond markets the Philippines accounts for one of the smallest in Asia (see figure 4)

Figure 4: IMF[25]-Size of Corporate Bond Market, ADB[26]-Local Currency Bonds Outstanding

Aside from the untapped savings, which is most likely sourced from the informal economy, the existing bank deposit base is likely to tap into both the bonds and the equity markets.

The factors that are likely to drive these would be amplified relative returns, reforms that would enable the lowering of transaction costs, introduction of derivatives and other more sophisticated financial instruments that allows the public to hedge. Incidentally, if I’m not mistaken only the Philippines among the ASEAN-4 have yet to introduce derivatives in the stock exchanges.

Figure 5: Reuters[27]: Market Capitalization of Emerging Asia

I’d also like to further point out that the Philippine Phisix accounts for as one of the smallest bourse in Asia (not included in Figure 5).

As of Thursday’s close the Phisix free float market cap is estimated at US $66.5 billion (exchange rate of Php 46.5 to a US dollar) compared to $188 billion of Thailand last January 12^th or possibly at $212 billion today adjusted for the 12.7% advance from the aforementioned period.

And it is of no surprise to us that the ASEAN-4, which comprises as the smallest bourses of the region, has accounted for the biggest gains.

The trend of the ASEAN-4 towards freer markets, aided by technological revolution, is just one of the major positive structural long-term factors at play.

Nevertheless, the other major and more influential medium term dynamic is the risks of blowing asset bubbles originating from the current concerted global central banks’ bubble policies, which is likely responsible for today’s buoyant asset markets.

Since the risk for Asia and the ASEAN seem to be a brewing boom-bust cycle, where a boom is a positive and bust is a negative, the larger net effect of a bust which constitutes as capital consumption signifies as a NET NEGATIVE. So we have major two forces counteracting on each other.

But this is a story we have long been talking about.

Anyway, in closing, speaking of bubbles, this news report is just too compelling for me to exclude from this week’s report.

From Bloomberg[28],

``South Korea will ‘soon’ announce plans to stimulate the nation’s property market, Yonhap News reported… The nation’s land ministry is drawing up measures to boost real-estate prices, and the ruling Grand National Party may begin discussions on easing debt-to-income restrictions on homeowners…”

People never seem to learn.

---

[1] See Philippine Election Aftermath: Goodbye Illusion, Welcome Reality!

[2] See Plus Ca Change: President Aquino's Policy On Jueteng

[3] See President Aquino’s Cabinet Appointments: The More Things Change, The More They Remain The Same

[4] See Why The Sell-Offs In Global Markets Are Unlikely Signs Of A Double Dip Recession

[5] See Privatize Pag-Asa or Open Weather Forecasting To Competition

[6] See Philippine Election Myth: New President Will Determine Direction of Economy And Markets

[7] Inquirer.net, RP eyes participation in free trade deal, July 23, 2010

[8] Oppenheimer Franz, The State

[9] World Bank, States and Markets, World Development Index 2009

[10] See Is The Newspaper Industry Dead? Probably Not If It Is For Free

[11] Wikipedia.org, Maguindanao massacre

[12] SFGate.com, Philippine political dynasties stifle democracy, nurture violence / Powerful clans have a stranglehold on system, experts say, New York Times, March 13, 2007

[13] Answers.com, What is the Lina Law?

[14] Manahan, Mary Ann Maguindanao in Focus Focusweb.org

[15] Wikipedia.org, List of wars and disasters by death toll

[16] Heilperin, Michael A. Heilperin Economic Nationalism: From Mercantilism to World War II

[17] Studwell, Joe, Ties That Bind, July 22, 2007

[18] Mises, Ludwig von Confiscatory Taxation, Chapter 32, Section 3

[19] See How Populist Leadership Goes Kaput: Japan Edition

[20] Inquirer.net, loc. cit.

[21] McKinsey Global Institute Global capital markets: Entering a new era, September 2009

[22] See How Free Markets In The Telecom Industry Aids Economic Development

[23] See Does The Government Deserve Credit Over Philippine Economic Growth?

[24] See A Nation Of Shoppers??!!

[25] IMF Regional Economic Outlook Leading the Global Recovery Rebalancing for the Medium Term

[26] Asian Bond Monitor, Asian Development Bank, March 2010

[27] Reuters ANALYSIS-For Singapore bourse, IPOs remain the Achilles heel, January 13, 2010

[28] Prudentbear.com, Trichet Challenges Inflationism, Bloomberg July 19, 2010