``Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.”-Murray N. Rothbard, Neo-Mercantilism
If there is anything in life that I am so appreciative of, it is to have acquired the opportunity to self-learn the ways of classical liberalism in order to avoid from getting duped by glib talking politicians and their academic cohorts that populate the mainstream.
That’s because the usual “do-goodism” that inhabits media, the primary source of information by the public, accounts for great sound bites and seemingly “feel good” causes unwittingly comes with nasty side effects unseen by the public.
In other words, promises of free lunches in a world of scarcity are not only oxymoronic, but also unrealistic.
In the words of the fabulous Frederic Bastiat, ``Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.”
Social ‘public spirit’ themes to enhance the supposed weal of society dominate the airwaves, especially amplified during political seasons, as aspiring politicians conjure up striking catchphrases and alluring slogans to attract votes.
And one political theme that recently emerged exhorts Overseas Foreign Workers (OFW) or today’s du jour “heroes” to BUY PHILIPPINES or buy Philippine made products.
The connection made is thoroughly simple: when OFWs, which are presumed as the sector responsible for “saving” the Philippine economy, buy Philippine made products, the ramifications would include more investments at home, which should result to more jobs and more prosperity. Nice huh?
We’d argue that this premise is arrantly fallacious.
No Man Is An Island
Perhaps many are familiar with the famous abridged John Donne aphorism of “No man is an island”. The fundamental significance of this phrase is that people depend on other people in order to survive.
So why do people depend on other people? The simplistic answer is that because we can NEVER be self sufficient. Therefore we need other people to provide us the things, goods or services. In economics, this is called as the division of labor. If I’m a shoemaker and would like to have fish for my meal, I’d have to go to Pedro, the fisherman, and offer to exchange my pair of shoes for his catch. The other term for the conduct of exchange arising out of the division of labor is simply called trade.
Once Pedro and I consummate the trade, our perceived needs for the moment would have been fulfilled. And thus, trade satisfies us. In other words, because no man is an island, trade, and not the state, is the essence of all societies. State depends on taxation which accrues trade.
And trade, in contrast to what politicians say, knows of no political boundaries. The more people are allowed to the trade the better off a society is. Remember the goal of trade is to achieve satisfaction from the angst of scarcity.
In places where such activities are politically restricted, trades are conducted underground via blackmarkets, or what is known as the “informal” economy. And in nations where trade are restricted, the common characteristics are large incidences of shortages, poverty, hunger or economic deprivation.
So how does this apply to OFWs and BUY Philippines?
If the goal of trade is to satisfy a need, then the nationality of the seller or provider should be among the least of the priorities.
Think of it, would it be practical for OFWs to buy Filipino products if the latter are priced very much dearly or are very much inferior in quality relative to the foreign competitors, simply for the sake of being Filipino?
The most likely is answer is no. Why? Because this defeats the objective of trade, which is to achieve satisfaction of a perceive need or want based on the pecking order of needs of people.
Some OFWs may indeed acquire goods or services out of altruism on some occasions. But similar to donations to charitable institutions, such socially accommodative actions can’t be treated as a staple, because the underlying incentive isn’t to get fed or be clothed but for esteem purposes.
In the hierarchy of people’s needs, according to Abraham Maslow, self actualization through identity and purpose are subordinate to physiological and safety needs.
Hence, the call for OFWs to buy Philippine goods simply means sacrificing basic fulfilment for the esteem needs of politicians is also tantamount to subsidizing incompetent or non-competitive ‘zombie’ Filipino suppliers.
In other words, OFWs will be unduly be rewarding local sectors that can’t compete to satisfy consumers (regardless of nationality) but only thrive from the appeal to emotions/nationalism.
Yet, this isn’t a recipe for progress, but a formula for political redistribution through coercive policies (which the Philippines did try in the 1950s).
In addition, charity as the priority for conducting trade is not only unsustainable; it is a fantasy, except in the chimera of ‘socialists’.
That’s because in reality, there is simply no free lunch.
Jollibee’s Success Secret: Serving Filipino Consumers
Buy Filipino is a misguided approach to prosperity. Satisfying the consumer is.
A fantastic example of this should be Jollibee Foods Corporation (JFC).
Jollibee is one of the largest publicly listed companies in the Philippines and is a member component of the elite benchmark of the largest companies in the country called as the Phisix in the Philippine Stock Exchange.
From its a humble entrepreneurial beginning in 1975 as a lowly ice cream parlor in 1975 until it was incorporated in 1978, JFC’s rise to prominence has been phenomenally rapid. The domestic company trumped all its foreign competitors, grew at nearly an exponential rate and now captures some 65% of the domestic hamburger market.
JFC has now expanded beyond its traditional lines in the Philippines and is likewise expanding beyond its conventional market; the company has been acquiring Asian contemporaries!
In 2007, the company’s website says, JFC operates more than 1,600 stores in the Philippines and 9 other countries with 8 brands: Jollibee, Chowking, Greenwich, Red Ribbon, Yonghe King, Delifrance, Chun Shui Tang and it’s latest addition Manong Pepe.
And along with Jollibee’s business success comes with many recognition, such as the top Philippine company according to Wall Street Journal’s Asia 200 awards (see Figure 1)
Figure 1: Wall Street Journal’s Asia 200 2009 vote
So what has been the secret formula of JFC’s success? Appeal to Nationalism?
Unfortunately not.
A Businessweek article in 1996 highlights the typical impression of Filipino consumers on Jollibee’s burgeoning business, ``It's a typical Sunday at the Jollibee fast-food restaurant in Manila's bustling Megamall: The tables are packed, kids are scurrying to and from the playland, and a giant orange-and-yellow bumblebee character is dancing for a birthday party of giggling toddlers. The children say they prefer the spicy-sweet flavors of the local chain's hamburgers and spaghetti over the more bland taste of the fare at McDonald's, whose nearby outlet is quiet. "The Filipino tongue is more accustomed to Jollibee," says 21-year-old student Dave Sevilla, who brought his 7-year-old nephew and 9-year-old cousin. "The burger is juicier." (bold underscore mine)
And here is what Jollibee’s website has to say about their corporate strategy, ``THE WORLD IS GLOBAL, BUT ITS TASTES ARE LOCAL. People adapt foreign foods but change them to their tastes. This is natural. Taste preference along with those of aroma, texture, and presentation evolved over hundreds of years, influenced mainly by the kinds of plant and animal food that grow in their geography. Local preferences are hard to change.” (bold underscore mine, all caps theirs)
So we learn that the Filipino consumers have been warmly reciprocating the way Jollibee has been integrating its products to fit into the Filipinos’ palate and to the Filipino lifestyle.
As Ludwig von Mises wrote about the pre-eminence of consumers, ``The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm.” (bold highlights mine)
In short, Jollibee is simply being rewarded, through profits which partly serves to fuel the company’s expansion programs, which incidentally also contributes to the nation’s economic growth, in the service of the needs of the Filipino consumers.
Jollibee, hence, exemplifies the Mises model of a consumer oriented enterprise!
Importantly, Jollibee adds to social service by providing satisfaction through continuous improvements and innovations on their products and services to adapt to changing times, which is why Filipino consumers keep going back to them. JFC uses its spare funds to also engage in community services.
As you can see trade is not only mutual beneficial but allows for the company to engage in voluntary charity or philanthropic causes.
So in sharp contrast to the contemptuous insinuations of socialists, Jollibee does not ‘suck the money’ out of Filipino, because Filipinos are NOT unthinking individuals hardwired to mechanistically buy Jollibee products. They patronize JFC because they perceive direct benefit from it!
If there is anything that people are forced to pay for, it is the many lousy, redundant and unneeded services provided for by the state, which incidentally most of the services the marketplace can actually provide for.
Yet many of these so-called public goods services cause structural inefficiencies, imbalances in the political economy and immeasurably increase the costs of doing business. And at best, the supposed benefits are mostly indirect!
The Failure of Protectionism: Import Substitution Policies
What politicians tell the public are mostly the silly melodramatic things people like to hear.
Because these politicians live in a world of free lunches, where taxpayers pay for their boondoggles, they hardly ever speak of the alternatives or the hidden costs embedded within their noble goals. They are like the Satan’s snake offering Eve (yes us) the forbidden apple in the Garden of Eden.
The next thing these self-righteous propagandists will do is to enact legislations that would force the public to buy “local”.
And a possible mixture of policies would be in the form of higher import tariffs, selective financing or access to credit (state loans), tax breaks, foreign exchange allocations that are directed to political “organic” ends and other indirect ways to limit imports (licensing, monopolies etc..), all of which may redound to the closing of doors to trade, from which the repercussions would be economically adversarial.
And by restricting trade the lists of evils are innumerable:
-access to more goods will be limited, i.e. substandard quality and more expensive,
-rising cost of available goods,
-limitations of capital goods and capital flows
-investment will be LIMITED and NOT ENHANCED as investment opportunities will be politically distributed-politically connected will be rewarded,
-the lack of investment would mean higher unemployment and greater security risks,
-more dependence on government means higher fiscal costs which leads higher taxes or more inflation and the overvaluation of the domestic currency,
-less competitiveness,
-more economic inefficiencies,
-more bureaucratic corruption,
-dearth of innovation,
-declining productivity and etc...
As said earlier, the Philippines tried quasi “buy Philippines” policies via the Import Substitution Industrialization (ISI), aimed to promoted domestic industries in the 1950s.
According to Philip Gerson from an IMF working paper, (bold highlights mine)
``For many years, the Philippines pursued an industrial policy that encouraged import substitution rather than promoting exports. Until tariff reforms were introduced in 1991, trade policies heavily penalized the primary and agricultural sectors and benefited the manufacturing sector. In addition, the overvaluation of the Philippine peso during several periods between the 1950s and the 1980s contributed to declines in the prices of exports in peso terms and diverted resources away from agriculture and toward import-substituting manufacturing. In addition, incomes in the agricultural sector were depressed by heavy regulation. Beginning in the 1970s, price controls were imposed on rice and other products, and the importation of wheat and soybeans was monopolized. The government introduced controls on the production, marketing, and processing of coconuts and created a price stabilization fund, while fertilizer and pesticide imports were controlled through licensing requirements.
``Overvaluation of the peso, tariff policies, and heavy government regulation discouraged investment in agriculture, with a disastrous effect on productivity. For example, during 1982–85, productivity in the coconut sector—which had long been the country's most important agricultural industry in terms of export earnings and employment—averaged 1.0 metric ton per hectare, exactly the same as during 1962–66. Low agricultural productivity remains a drag on growth, partly because some agricultural tariffs have been maintained at the maximum level permitted by World Trade Organization (WTO) agreements, even though tariffs were dramatically lowered in almost all other sectors during the early and mid-1990s. While real GDP growth has averaged 5 percent annually since 1994, growth in the agriculture, fishing, and forestry sectors has averaged less than half this rate.”
As one would note, errant policies begot another. Interventionism led to more interventionism with even more disastrous results.
The redistribution of economic benefits from to one sector at the expense of the rest led to the massive imbalances cited above (high costs, lost productivity etc...), which prompted for price controls. Yet, in spite of the government support, the local manufacturing sector did not evolve to become globally competitive enterprises. That’s because they had been shielded from competition and therefore lacked the incentives of dynamism due to political cover or dependence.
The worst impact was not only to hurt the Filipino consumers, but the Philippine economy overall suffered from a lag in economic development.
And as for the beneficiaries, according to Joe Studwell, In the short-term ISI produced respectable growth rates in the region. But it was all too easily manipulated by a tycoon class that was raised on trading. Every effort to plan industrial development was another arbitrage opportunity for the politically well-connected. Usually, the procedure was for a tycoon to obtain the necessary license, bring in a foreign partner to provide a manufacturing process that was reduced to kit assembly (with most parts and components imported), and then to hide behind tariffs barriers selling goods that were unsaleable internationally. The results was profits, but minimal progress in constructing a sustainable domestic manufacturing base.”
As you can see, policy advocates of Buy Philippines are not only exposed for being “short term oriented”, but could be either untrue to their constituents, having ulterior motives to promote some sectors at the expense of the rest of society, by manipulating the gullible or are plain economically uninformed, refusing to learn from both local and international experiences.
The Racist Risks From Buy Philippines
While contemporary politicians and advocates of “Buy Philippines” do not specifically dwell on racism, group labeling can also lead to unforeseen catastrophic consequences. That’s because an escalation of political zealotry can lead to the risks of tagging patrons of non-Filipino goods as “anti-Filipino”.
In the realm of politics, black propaganda is a conventional instrument for promoting political goals.
As legendary investor Doug Casey in an interview says, ``Groupthink is not a problem of acknowledging the existence of groups, including human groups; it's treating individuals as though they were the group, or as though they necessarily hold all the traits that define the group.” (bold emphasis added)
In short, in groupthink, role of individualism is seen non-existent, a reductio ad absurdum.
In groupthink, political zealots don’t see that non-Filipino enterprises can be mostly foreign franchises owned by Filipinos or foreign companies with Filipino partners. Where implied boycotts or policies imposed tend not only to hurt these local investors, but also workers employed in these firms aside from the local enterprises supplying these entities, the foregone tax revenues and the lost technology and capital transfers from the politicization and polarization of trade.
In groupthink, political fanatics forget that consumers have the RIGHT to choose and spend on what they think should fulfill them. Buyers are simply voters who vote with their wallets based on perceived individual interests and not in the collective sense. The stakeholdings for consumers are direct unlike in elections where individual stakes are more perceived than real (sorry to be a spoiler, but your vote won’t affect the outcome of elections- 1% of voting population is about 500,000 votes- and neither will your vote affect the policies of the next set of next leaders).
In groupthink, the politically blind see only one direction from their choice of action. They fail to see that if I slap you, then you are mostly likely to respond with similar or more drastic actions. Xenophobic policies incite political brinkmanship and antagonism. And to paraphrase Frederic Bastiat, “when goods don’t cross borders, then armies will”
Therefore in groupthink, rational thinking is jettisoned for sensationalism. What people won’t rationally do alone they will do based on the comfort of crowds, e.g. Fraternity melees.
What lessons can we glean from “groupthink” policies?
Our neighbour Malaysia is no stranger to groupthink policies.
Malaysia in 1971, as a result of Sino-Malay racist riots which culminated in the May 13th incident which resulted to hundreds if not thousands of casualties, prompted for her government to adopt “aggressive affirmative action policies, such as the New Economic Policy (NEP)” The NEP was aimed at achieving a 30% share of equity in the GDP for the ethnic Bumpitera class.
The new policies empowered ethnic Malays (known as Bumiputras, literally “sons of the soil”) which accounted for some 60 percent of the population, with economic opportunities dominated by ethnic Chinese. This meant that “Bumiputras have been given, among other privileges, priority for government contracts, increased access to capital, opportunities to buy assets that are privatized, and other subsidies.”
The result was according to Wikipedia.org, ``These policies have succeeded in creating a significant urban Malay middle class. They have been less effective in eradicating poverty among rural communities. Some analysts have noted a backlash of resentment from excluded groups, in particular the sizable Indigenous Non-Muslim Malays Orang Asli, Chinese and Indian Malaysian minorities.”
Yet according to Joe Studwell, After twenty year term envisaged at the outset of the NEP expired in 1990, the Malay share of corporate equity in Malaysia had increased from almost nothing to around one-fifth, but the Chinese share had also doubled from one-fifth to two-fifths. This reflected the fact that the tycoon fraternity was doing better than ever; the NEP had not ended the deals between the ethnically separate political and economic elites.
Wikipedia.org also quotes former Prime Minister Tun Dr. Mahathir Mohammad criticism on the extreme reliance of Bumiputras on their privileges:
"We have tried to tell them if you depend on subsidies, you are going to be very weak. But they don’t seem to understand. We tell them if you use crutches, you will not be able to stand up. Throw away the crutches, stand up straight because you still have the capacity.”
In other words, Bumpitera policies failed in its objective to achieve a more balanced distribution as intended in spite of the privileges due to the implications from dependency.
Figure 2: Heritage Foundation: Economic Freedom Malaysia and The Philippines
Nevertheless Malaysia’s recent successes have been more about her willingness to embrace economic freedom (left window) relative to the Philippines (right window) as measured by the Heritage Foundation, which apparently has overshadowed the setbacks from NEP.
In spite of the Asian crisis which led to lesser economic freedom for both economies, Malaysia has been showing vital recovery (part of this by dismantling the vestiges of the Bumpitera policies) while the Philippines remains nearly stagnant.
To add, Malaysia in 2009 ranked 59th relative to the Philippines at 109th in the rankings of economic freedom, and the former has been traditionally “freer” relative to the world average even prior to the 1997 Asian crisis.
Importantly, I’d like to point out that the fundamental difference in the nationalist policies of Malaysia’s Bumiputera with that of the genre of “Buy Local” policies is that Malaysia dealt with policies concerning intra-racist distribution rather than xenophobia.
And of course Malaysia is the “benign” example of intra-racism nationalist policies relative to extreme counterparts as Zimbabwe, South Africa or Nazi Germany or even the 1994 Rwanda genocide.
As for xenophobic trade policies, the best example in the extreme case would be the US Smoot-Hawley Tariffs act, that resulted to severely worsened the recession in the 1930s which morphed to a decade long Great Depression.
Hence it would be sheer insanity or foolishness to believe or preach that implied antagonism as an economic or trade policy would result to prosperity knowing that “no man is an island”. In math, the operation required to have more is addition and not subtraction. Beggar thy neighbour policies, as protectionism or racism, epitomizes subtraction.
More Political Nonsense: Invest Philippines and Teach Locals To Save
The same logic should apply to investing.
People should invest based on the merits of the perceived risk-reward tradeoffs as seen through the profit and loss guidance system and not because of the folly of being a Filipino who must “Invest Philippines”.
As Murray Rothbard explained, Every entrepreneur, therefore, invests in a process because he expects to make a profit, i.e., because he believes that the market has underpriced and undercapitalized the factors in relation to their future rents. If his belief is justified, he makes a profit. If his belief is unjustified, and the market, for example, has really overpriced the factors, he will suffer losses.
Any OFW or anyone who plunks their money based on nationalism deserves to lose their equity as this would be reckless and devoid of market or even mundane realities.
Might as well just donate that money to the Philippine government to enhance one’s self esteem (ensure to have photo op with the a key official!) or contribute this money to private charity institutions compared to getting suckered by the political-economic class who would remorselessly use people’s capital to secure economic rents.
Nevertheless it is also wantonly misplaced to even suggest that locals ought to be taught by their OFW principals on how to save.
Figure 3: Asian Development Bank: Philippine Savings and InvestmentI don’t know why many people come to even accept this poppycock as a grain of truth from a political moralizer.
The implication is that recipients of remittances are a bunch of free spending nitwits! What bravado! If this is not an insult to the intelligence of the Filipino, I don’t know what this is.
Far from reality, the problem isn’t about savings, even if the Philippines have one of the lowest savings rate in Asia.
This according to the Asian Development Bank, (bold highlights mine)
``Higher private investment, too, would play a more significant role in upgrading infrastructure and, more generally, the productive capacity of the economy. Saving is not the main constraint, since national saving has steadily risen, bolstered by remittances.
“Rather, sluggish private investment reflects infrastructure deficiencies, particularly in power and transport, and weaknesses in governance and the policy climate. According to the World Economic Forum, the global competitiveness ranking of the Philippines in 2009/10 fell to 87 (out of 133 countries) from 71 (out of 134) in 2008/09, putting it below India, Indonesia, and Viet Nam, among others. The report cited corruption, inefficient bureaucracy, policy instability, and inadequate infrastructure as the main reasons for the low ranking.”
As we earlier said investments is a function of returns. The ‘sluggishness’ of investment means that the returns have not been attractive enough to convince local or international capitalists to fill in the infrastructure deficiencies or that returns have not met what we call as the “hurdle rate”-minimum acceptable returns. Not perhaps unless you are associated with the political class.
And the reasons cited by the World Economic Forum for the paucity of competitiveness constitute as symptoms and NOT the source of the problems. In short, ADB’s congenial words are euphemisms for collective government failure.
The fundamental shortcoming of the Philippines is our overdependence on politicians and politics for economic development, much like Waiting for Godot.
We have been blighted by the lack of economic freedom, bloated bureaucracy, high taxes, the onus of regulatory compliance, the lack of respect for property rights, deficiency in contract enforcement, a maze of complex and incomprehensible laws, politicization of industries, protectionist laws or legal barriers to more competition, politicization of the justice and legal system and public institutions, regulatory capture by the political-economic class, regulatory arbitrage (e.g. legalized smuggling) based on political connections, state instituted cartels and monopolies and many other political obstacles (permits, labor regulation, starting or closing business, registering property and etc.).
All these has translated to high transactions costs, high input and overhead costs (including corruption costs-estimated at $ 3 billion per year), which all add up to a high cost of doing business-the Philippines is ranked 144th out of 183 countries in World Bank’s Doing Business 2010.
And worst we have a public caught ambling between hopes of immediate deliverance from the delusion of an omniscient and virtuous state with that of grinding reality based on the limitations of state authorities with regards to the knowledge over the individual, human relations, incentives guiding people’s actions, as well as their own personal motivations (as officials are human beings too!), and importantly, the supremacy of basic economic laws over politics.
Although we have many aspiring political leaders rambling about political correctness which are all majestically flawed in logic, they only make good electoral themes, hopefully not for real policies.
At the end of the day, to paraphrase US President Abraham Lincoln, “Politicians can fool almost all the people some of the time, and some of the people all the time, but economic reality ensures that you cannot fool all the people all the time."
Bastiat, Frederic That Which is Seen, and That Which is Not Seen, 1850
Wikipedia.org, Maslow’s Hierarchy Of Needs
Jollibee Food Corporation, About us-milestone history
Hub Pages, Jollibee Vs McDonalds - Filipino burger kings fight against global giant
Jollibee Food Corporation, Investor Relations
Wall Street Journal, Jollibee Captures Top Spot in Philippines
Businessweek, HAPPY MEALS FOR A McDONALD'S RIVAL (int'l edition) July 1996
Ludwig von Mises, The Sovereignty of the Consumers
Jollibee Foods Corporation, About us, Community
Studwell, Joe, Asian Godfathers Money and Power in Hong Kong and Southeast Asia p.37
Casey Doug, Doug Casey on Race, lewrockwell.com
Wikipedia.org, May 13 incident
Wikipedia.org, Bumiputera (Malaysia)
Heritage Foundation, 2010 Index of Economic Freedom
US State Department, Smoot-Hawley Tariff
“The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports...
“The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the "beggar-thy-neighbor" policies (policies designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.
Rothbard, Murray N. Man, Economy and the State Chapter 8—Production: Entrepreneurship and Change
Asian Development Bank, Outlook 2010 p.239
Spero news, Philippines: Corruption and waste in Philippines election
World Bank, Reforming Through Difficult Times, Doing Business 2010
