President Obama Hearts Indonesia: US to Boost Investments and Trade

The US has reportedly pledged to bolster investment and trade with Indonesia.

From Jakarta Globe

Francisco Sanchez, the undersecretary of commerce for international trade at the US Department of Commerce, has visited Indonesia three times in the past 18 months. Each time he comes, he is impressed by Indonesia’s robust economy and the opportunities available.

On his current trip, he brought a high-powered business delegation to show them first hand what Indonesia offers. He told the Jakarta Globe he is hopeful that these companies will enter into business deals.

American companies have a long history of investing in Indonesia, but in recent years they have been overtaken by other players, notably the South Koreans, Chinese and Singaporeans. According to Sanchez, US companies cannot wait any longer or they might miss the boat.

President Obama’s seems to be reaching out to the nation where he became a resident of during his pre-teen days.

And so how does the US intend to expand trade with Indonesia?

First through investments in infrastructure projects coordinated by a supposedly “independent” government development agency, (from the same article)

According to Sanchez, US companies have a lot to offer in sectors such as engineering, construction management, waste-water treatment and smart grid technology.

To express its intent to participate in infrastructure development in Indonesia, the US-based Overseas Private Investment Corporation on Tuesday signed a memorandum of understanding with the Indonesia Infrastructure Guarantee Fund to support the development of infrastructure projects…

And next is through Obama’s pet project; renewable energy… (bold mine)

One development that could help boost trade is for the Environmental Protection Agency in the US to classify Indonesian crude palm oil as renewable fuel. The EPA visited palm oil estates in Indonesia two weeks ago and is now reviewing its decision.

To qualify for as renewable fuel, CPO must reduce greenhouse emissions by 20 percent. Discussions are currently underway between the EPA and the palm oil industry.

Instead of free trade, the Obama regime will mainly promote investment and trade through political patronage, where economic or financial contracts (concessions) will likely be awarded to favored networks, friends and allies of the Obama regime in the US and in Indonesia. 

Obama’s global trade policy seems geared towards exporting cronyism.

On India’s Lost Government Revenues From ‘Corruption’

Columnist Megha Bahree of Forbes reports that a huge amount ($213 billion) of tax revenues had been lost to bribes, tax evasion and mispricing in India during 1948-2008.

These estimates were supposedly conservative because it may have excluded different forms of smuggling and missing data, aside from foregone interest charges.

Ms. Bahree writes, (bold highlights mine)

The flight of capital from the legal system accelerated once the Indian government eased its tight control with economic reforms that started in 1991, the report says. Part of the problem was that Indian’s economic liberalization wasn’t accompanied by better governance or more accountability in the system. So while this period started liberalization of trade, lowering of trade barriers, less control and less oversight, it also led to an increase in bribes (to get your goods out of customs more quickly, for instance) and higher tax evasion.

India’s underground economy has been estimated at 50% of the GDP, making it about $650 billion at the end of 2008. Of this, 72% is held abroad, estimates Dev Kar, the author of the report and a former senior economist at the International Monetary Fund.

My comments:

1. Bribes occur only when there are legal proscriptions.

Bribes are symptoms or representative of societal response to the existing maze of arbitrary regulations.

Absent these restrictions or obstacles, then there won’t be any incentive to bribe, or much less, commit to an act that would circumvent any laws.

In short, the economic liberalization isn’t to blame for the institutional inefficiencies but on the partiality or the tepidness of liberalization reforms.

The strength of any social institutions emanate from the respect for the rule of law.

2. Tax evasions, like bribes, are symptoms of circumvention to onerous statutes.

They represent as cost saving measures resorted to by many enterprises in the face of the high costs of doing business largely due to obstructive taxes and the cumbersome compliance costs from the incumbent regulatory regime.

In other words, in most instances, a regime of high taxes is likely to incentivize tax evasion. Thus, it would be inaccurate to link economic liberalization with tax evasion because the cause and effect does not square. Economic liberalization should translate to lower taxes predicated on less dependence on the government.

3. The 50% share of India’s underground economy is emblematic, not of economic liberalization, but of the bureaucratic morass and the oppressive regulatory structures that discourages half of the economy to participate in the legal framework.

Again they are symptoms of people shunning government regulations, which is tantamount to government failure.

Like any process there always will be a transition. This means that the current reforms made by India hasn’t been enough (but should be on path), and that people and the existing institutions, coming from a long rule of statism, has yet to fully assimilate on the benefits of economic freedom premised on the respect for private property and the adherence to the rule of law.

4. Lost government revenues can be seen both ways.

If it is pocketed by government officials then it is likely to be devoted to consumption activities thereby would be considered unproductive and thus have negative implications.

Whereas if lost government revenues gives private enterprises room to expand production or services then it could be seen as having positive effects. Yes, this is the positive aspect of corruption.

Of course one could argue that lost revenues deprives the government to spend for social projects.

But most of social spending itself is questionable.

Aside from the issues of wastage and corruption, most of these so called public goods can be handled better and more efficiently by the private sector.

More importantly, high dependence on social spending is likely to foster a culture of entitlement or parasitism that is unlikely to prompt people to engage in productive activities but in acrimonious partisan politics between political insiders and the outsiders, promote patron-client relations (or crony capitalism) and even nurture criminal or underground activities.

India’s corruption problems isn’t one that hails from economic liberalization but from the vestiges of statism.

President Aquino’s Cabinet Appointments: The More Things Change, The More They Remain The Same

As the Aquino Administration matures, current developments seem to be confirming my predictions that there will hardly be any change in the administration’s political direction.

This from the Philippine Inquirer, (bold emphasis mine)

“President Benigno Aquino lll’s decision to pick executives from big business for key Cabinet posts has placed his administration in potential conflict-of-interest situations, particularly in state-regulated enterprises, such as power, water, telecommunications and toll roads, lawmakers noted Tuesday.

They said the big business appointments were a growing public concern because they were identified with four of the most influential business conglomerates in the country – the Ayala, Lopez, Aboitiz and Metro Pacific groups – to positions with powers to make or unmake business empires.”

Some thoughts

1. It’s payback time. Election campaign bills come due.

2. Conflicts of interests depend on the definition. Every person sitting on a regulatory agency or bureaucracy has an interest which will always come in conflict of the interest of the regulated. (Yes, I mean personal interest. Political leaders and bureaucrats are not gods nor are they supposed to embody our perception of interest)

In the above, what is clearly being defined as conflict of interests is regulatory capture or as defined by Wikipedia.org as “when a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.”

In other words, regulatory agencies function to advance the interest of select or favoured groups at the expense of the rest of society.

By the use of the regulatory body as legal barrier, competition is therefore restrained, and thus, economic opportunities are allotted based on political concessions via the arbitrary application of regulations or what is known as economic rent.

3. Insider versus outsider game. Insiders are those who comprise the economic-political elite class. Outsiders are those in the periphery who are made to believe that genuine change is in the offing. And outsiders are the majority and wielded by the insiders for election purposes.

The Aquino appointments clearly demonstrate this deeply rooted Insider based relationship in the context of the Philippine political economy.

Hence, the only thing that has changed are the personalities involved in manning the bureaucracy, and not the anti market political patronage system. The net effect is a status quo.

And as we previously predicted, ``The rule of the entrenched political class means 'the more things change the more they remain the same'.”

We also anticipated the kingmaker role of the personalities involved in the Meralco takeover in the recently concluded elections, which apparently has emerged in the appointments.

Elections are, therefore, a vehicle which grants a mantle of legitimacy to the immoral alliances of vested interest group and the political class.

As H.L. Mencken rightly labeled, “[Democracy] has become simply a battle of charlatans for the votes of idiots."

Distinguishing Political Indentity From Ideology

This is excellent stuff from Brink Lindsey on Partisanship published at the Cato Unbound. (Pointer to Bryan Caplan of Econlog).

Here, Mr. Lindsey observes that partisanship is much about identity more than ideology.

Here is an excerpt: (bold highlights mine)

``It’s not just that partisans are vulnerable to believing fatuous nonsense. It’s that their beliefs, whether sensible or otherwise, about a whole range of empirical questions are determined by their political identity. There’s no epistemologically sound reason why one’s opinion about, say, the effects of gun control should predict one’s opinion about whether humans have contributed to climate change or how well Mexican immigrants are assimilating — these things have absolutely nothing to do with each other. Yet the fact is that views on these and a host of other matters are indeed highly correlated with each other. And the reason is that people start with political identities and then move to opinions about how the world works, not vice versa."

``So yes, most partisans are “better informed” than most independents, because they have a political identity that motivates them to have opinions and then tells them which ones to have as well as the reasons for having them. Consequently, partisans may have more information in their heads, but their partisanship ensures that this information is riddled with biases and errors and then shields those biases and errors from scrutiny. This is not a state of affairs worth defending.

``Virtue as well as truth is a casualty of partisan zeal. Even when partisans know what the score is, they’re constantly tempted to shade the truth, or at least keep silent, in order to be a good team player. Recall, for example, the fury unleashed this past fall on the handful of conservative commentators who were willing to admit the obvious: Sarah Palin was obviously, embarrassingly unprepared for the office she was seeking. In coalitional psychology, the only thing worse than an infidel is a heretic, and that fact ensures that most partisans keep their heterodox opinions to themselves. Good for the team, perhaps, but bad for the soul — and the republic."

My comment:

Mr. Lindsey' observation, in my opinion is spot on.

In the Philippines, the partisan crowd think that they argue about issues, but all the while their arguments revolve around identity or personality. Definitely not ideology. That's why I call this Personality Based politics, where leadership preferences are based mainly on popularity, symbolism or connections.

For example, the public's impression of corruption appears mainly a moral issue. Lost in the argument is the interrelationship between regulatory structure and how these affects behavior of affected agents, the bloated bureaucracy, the quality and web of laws, the incentives governing the officials and the bureaucracy, patronage system, election spending, restrictions, and many more.

And it's why the elixir of "clean" government won't happen. Not when the critical decisions affecting the economy are determined politically.

It's just that democracy allows people to vent changes in terms of hope-even when they are false hopes.

In addition, it is also true that highly partisan people engage in analysis that are highly biased and full of logical errors. Although this would seem like economic creed, perhaps identity indeed is more the culprit for such incoherence. The confusion perhaps stems from forcing to fit data mined facts to the belief adhered to by the leaders.

Mr. Lindsey sees a change in the shape of politics as a sign of hope,

``In America until relatively recently, and in less developed democracies today, the predominant form of partisanship has been a concrete, personal loyalty to specific leaders and comrades. This is the partisanship of patronage and clientelism — of the Jacksonian spoils system, Tammany Hall, and the Chicago machine. In the twilight of this phase of American democracy, 64-year-old Illinois state legislator John G. Fary won a seat to Congress and made this statement of his plans: “I will go to Washington to help represent Mayor Daley. For twenty-one years, I represented the mayor in the legislature, and he was always right.”

``In the newer style of partisanship, which has emerged with a richer and better educated electorate, loyalty has grown more abstract. Now shared allegiance to broad principles of public policy is the defining element of party ID. Parties have grown more ideological, and so have partisans. Polarization is the name we’ve given to this development.

``I regard the shift toward a more ideological politics as progress. Broadly speaking, we have been moving away from politics as an amoral struggle between rival gangs and in the direction of politics as a contest of competing values. Because people have differing values, and assign different weights to the values they share, there can never be an end to politics. Accordingly, even in an ideal world where all citizens are completely rational and equally public-spirited, a politics and thus a partisanship of values would still be necessary. Here, then, in the realm of values, is the purest and most durable source of political identity."

My comment: Somehow, the web should be able to amplify on such shift as people learn more about ideals and form groups 'tribes' that eventually command the public's attention, draw a larger following and eventually acquire political heft.

Albeit perhaps, this would take longer to happen in the Philippines. Nevertheless, as a Confucian saying goes, a journey of a thousand miles begin with a single step.

The Tragedy of Political Mascotism

``It is our moral and rationally selfish obligation to help others understand that freedom is not free.  And one of the biggest costs of freedom is an end to government handouts.”-Robert Ringer

 

Political mascotism is when incumbent political leaders use the underprivileged to dramatize or “put a face” on the predicaments of the society and to represent the “deprived” sectors supposedly meant to benefit from their proposed political programs.  This showcase of symbolism has been a conventional feature for almost every incumbent President of the Philippines during their SONA (State of the Nation Address).

 

Unfortunately for Mang Pandoy (Felipe Natanio), who served as the model of “courage and dedication to improve life” for the 1992 SONA of former President Fidel V. Ramos, passed away last week in the same destitute and disadvantaged conditions prior to his ascension as a political icon. RIP Mr. “Mang Pandoy” Natanio.

 

While media seemed quick to pounce on the opportunity to imply of the personality based “failure of leadership” attributes, what appeared to have been lost in the tragic Mang Pandoy experience is the most important lesson of all: the failure of government intervention through the patron-client based political economy.

 

We learned that following FVR’s SONA in 1992, Mang Pandoy was accorded with a television show “Ang Pandayan ni Mang Pandoy” (inquirer.net)which he co-hosted in a government owned TV station. Unfortunately, because of the lack of continued appreciation from the public, the show lasted for only 3 years. Although at the same time he was also appointed with a short-lived job at the House of Congress which likewise came to a close as his “popularity” faded.

 

But there had been other opportunities which he reportedly have also wasted; he was said to have been given livelihood projects which included a hog raising package, aside from scholarship grants for his children-from which none of his children availed to its fullest because of “lack of allowance and daily fare.”

 

UP professor Randy David quoted by the Inquirer.net poignantly encapsulates Mang Pandoy’s hapless living conditions (highlight mine), ``He had ended up expecting the government to help him all the time. But help was not always there.”

 

So instead of a role model for social and economic upliftment as the former President had envisioned for Mang Pandoy, he turned out to be a paradigm of unintended consequences for government welfare programs.

 

Apparently Mang Pandoy and his family’s utter reliance on government support have cost them numerous opportunities to progress. Applied on a multiplier scale, this is what I decry as the “dependency culture”, where absolute dependence on welfare programs or from gratuity of politicos translates to bigger government spending which takes a toll on the productivity aspects of the society. 

 

And lost productivity means higher costs of doing business which extrapolates to higher hurdle rates or lesser investment opportunities needed to boost the capital stock of the economy. Yet, without investments we can’t get the Mang Pandoys of the society out of poverty.

 

Remember, governments are essentially consumers of capital.  That’s the reason why they tax and use the coercive arm of its institutions to enforce collections. And when governments spend more via intervention in order to provide the Mang Pandoys their share of the economic pie, it also means that someone else would have to fund these activities. Funds, which should have been efficiently allocated to productive sectors and thus expand the labor pool and incomes, ends up subsidizing non-productive jobs or activities.

 

As the illustrious Ludwig von Mises of the Austrian School of Economics wrote in Socialism, ``All almsgiving inevitably tends to pauperize the recipient” aptly describes on the conditions of the Mang Pandoys of our society.

 

Yet lamentably our Mang Pandoys elect for the illusion of perpetual government sustenance instead of living on the ideals of having “courage and dedication to improve life”-the slogan ironically contrived by the former President Fidel Ramos for our Mang Pandoys. Noble sounding political slogans almost always end up as empty rhetoric.

 

Paradoxically too, the Mang Pandoys are the very constituents from where most of our politicians derive their innate strength for expanded political power. By pandering on the masses and to media by catering to the abstractionisms of “guiltism, envyism, villainism, covetism, and angerism” to quote self development author Robert Ringer, by encouraging more economic and financial dependence and by peddling the charade of simplified cure all solutions or elixirs to the society’s complex problems so they can arrogate for themselves more control over our lives and expand access to financing to whimsically bankroll programs for political or personal reasons.

 

In the words of conservative economist Thomas Sowell, ``Politics is largely the process of taking credit and putting the blame on others-- regardless of what the facts may be. Politicians get away with this to the extent that we gullibly accept their words and look to them as political messiahs.”

 

And while corruption has been a popular political issue, it has hardly been dealt by the media and our experts as a symptom to a systemic disease but one of personality based disorders which seem to always recur, if not deeply rooted in the bureaucratic culture. Hardly anyone tells you that the systemic corruption is an offshoot to BIG government. You reduce chances of corruption by minimizing their political power and by slashing wasteful and nonproductive discretionary spending.

Yet day in and day out we hear politicians offer themselves as the solutions to our problems. At the end of the day, we all end up as losers with the Mang Pandoy’s enduring most of the brunt. Headline stuff indeed. Unfortunately we never seem to learn.

Diesel Roll Back For PGMA’s Sona, MV Princess of the Stars Tragedy, Economic Realities of Cagayan’s Used Car Trade

``Beliefs have a social as well as an inferential function: they reflect commitments of loyalty and solidarity to ones coalition. People are embraced or condemned according to their beliefs, so one function of the mind may be to hold beliefs that bring the belief-holder the greatest number of allies, protectors, or disciples, rather than beliefs that are most likely to be true. Ideological beliefs are obvious examples.”- Steven Pinker, Department of Psychology of Harvard University

Some political economy notes and observations.

1. Diesel Roll Back For PGMA’s Sona.

Political accommodation feeds on the dangerous impression that oil companies have been “obscenely” profiting at the expense of the people.

Since almost all of the oil requirements of the Philippines are imported, this means that domestic oil companies essentially import all crude oil for domestic refining taking with it the risk of inventory storage, currency, political pricing aside from other risks relevant to the industry. Thus, profits are realized because of successful risk taking endeavors and not from price gouging as peddled by some politicians.

Refining companies earn from crack spreads (wikipedia.org)-“differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products)”, which means profit can only materialize if they are able to passthrough their products to the consumers tacked with some margins. If oil companies are not able to do so they will incur losses. Vested interests see only the profits (survivorship bias) and not the risks or the potential losses.

The basic reason why oil companies can afford to roll back prices is mainly due to the significant fall in world crude oil prices. This essentially allows oil companies larger margins if sales are to be maintained based on present retail prices. Present retail prices covers inventory accumulated from recent crude purchases. However, a sustained decline in world oil prices should also translate to more rollbacks in the future.

Those arguing that the country’s oil deregulation as the main culprit to high oil prices should look at the Vietnam and China experience.

Both countries whose oil companies are state owned increased prices significantly (Vietnam 30% and China 18%) primarily not because of fiscal problems (although it has an influence) but mainly because losses in state owned firms have reduced or lessened supply output which has led to rampant smuggling, vast shortages and rationing.

Given the precarious state of the Philippine fiscal position, the idea of nationalized oil companies will only placate near term desires but at the expense of greatly higher prices in the future. The fundamental problem of oil prices comes from sustained government intervention around the world.

Oil companies ought to be more transparent with the public by communicating on the risk-reward aspects than simply accommodating politicians.

2. The MV Princess of the Stars Tragedy

It is a peculiar development why despite the repeated accidents by the same shipping company, consumers continue to patronize such private entity. The answer is the lack of choice.

None in the media has brought out the fact that the domestic shipping industry is a very tightly regulated industry.

Imagine, aside from 5 agencies that directly supervise the industry; namely, Maritime Industry Authority, Philippine Ports Authority, Bureau of Customs Bangko Sentral ng Pilipinas and the Philippine Shippers Bureau, there are another twenty six (26) other agencies directly or indirectly regulate the inter-island freight shipping industry (NEDA’s Philippine Institute for Development Studies). Incredible red tape!

With all these bureaucracy given the prevailing idea that government knows best, it is an oddity why the seemingly regular recurrence of the undeserving life losing tragedy.

Yet, media and the political circus continue to feed on the masses for more government intervention. Are 31 agencies not enough? Maybe Pagcor should be included as a regulating agency to allow bets on the next mishap? Why not nationalize? Hahaha.

It is quite evident that such choking bureaucratic entanglements represents by itself a significant barrier to entry which would naturally discourage potential rivals and limits challengers to the stalwarts, thus, the oligopoly or economic rents concentrated to a few inefficient sellers or providers.

Myrna S. Austria’s observation in her paper “Liberalization and Deregulation in the Domestic Shipping Industry: Effects on Competition and Market Structure captures the essence of the inefficiencies in the sector, ``Nonetheless, substantial competition exists in only a small percentage of the routes. A greater majority of the routes are still effectively monopolized, or experienced only mild competition. The top three or five companies in the industry effectively dominate the different routes. What is more striking is the large increase in cargo and passenger rates after the implementation of the reforms. The cartel-like arrangement that is observed to exist in the industry may have contributed to this.”

As we discussed in It’s Less About Oligarchy and More About Bureaucratic Crony Capitalism or in Philippine Politics: Systemic Defects of the Pork Barrel Political Economy, the major defects of the present economic system lies in the web of laws that shields competition on the turfs of the oligarchs. These oligarchic structure breeds inefficiency and continues to add up statistical fatalities in the domestic shipping industry, yet we never seem to learn.

3. Economic Realities over the Controversial Cagayan’s Used Car Trade

The recent ruckus over the used car imports gives some important economic realities.

One, imported used car has a thriving market, probably due to lower costs (reduced taxes due to export zone privilege?).

Two, laws meant to protect certain industries or interests have unduly created market inefficiencies resulting to higher domestic car prices. Thus, the price gap between the foreign owned local manufacturers and the imported used cars in the Cagayan Export zone has resulted to the underlying demand for the imported used car market.

Three, legal loopholes creates economic opportunities especially for those in power. The Cagayan Export Zone has used its privilege to go around the Executive Order (156) banning the importation of used car vehicles for resale in the country.

Fourth, politicians advance and protect their self interests and or vested interest groups other than those of the public.

In this case, it isn’t hard to qualify.

One, trade restrictions benefits car manufacturers at the expense of consumers, through higher prices caused by high taxes (seems like a modus operandi- taxes in exchange for protection from competition). Thus, the national government’s Executive Order is meant to “protect” the narrow interest groups allegedly for the benefit of the economy.

Some would probably argue that taxes serve the interest of the people. No, taxes pay for politician’s boondoggles and some of the people and NOT for the majority of the people (think Pork Barrel). People pay for the politician’s boondoggles directly through higher taxes and indirectly through higher cost of living, lower capital investments and unemployment.

Two, the key proponent of the Cagayan Export Zone (CEZ) has been an important ally of PGMA in the Senate hence the moxie to defy the law; another case of patronage politics.

Besides, here it is evident that politicians make their hometowns as “turfs” or “little kingdoms/dynasties” which make use of laws for the perpetuation of their political and economic regimes…hence more signs of oligarchy.

Another, the recent pieces of the political puzzles are falling into place…the motives behind the excoriation of the foreign chamber of commerce in early June has apparently been made evident. Aside, we now sympathize with our Supreme Chief Justice’s remonstration of "economic colonizers".

The Philippines needs to understand the functional benefits of well developed markets than relying on politicians for advancement. We need more economic freedom and less government intervention.