The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics—Thomas Sowell, Is Reality Optional?
In this issue
From One Crisis to the Next: The Water Crisis, The Revenge of Economics!
-From One Crisis To The Next Crisis!
-Back to Back Crisis: A Religious Retribution?
-Water Crisis: The Amazing Government Failure
-The Revenge of Economics: The State Capitalism’s Rent Seeking Institutions!
-The Revenge of Economics: The Backlash from Price Controls!
-Water Crisis: The Stampede for Knee Jerk Political Nostrums
-Health Risks from Water Shortages
-Helped by BSP Easing, Possible Supply Shock From El Nino May Reaccelerate CPI
From One Crisis to the Next: The Water Crisis, The Revenge of Economics!
From One Crisis to the Next Crisis!
Haven’t you noticed that events seem to be spiraling from crisis to crisis?
This time, water taps of the metropolis have run dry.
Admitting to the crisis, the Finance Secretary pushed for the faster rollout and construction of the China government funded Kaliwa Dam. From the CNN, “The water shortage in the eastern part of Metro Manila calls for the faster rollout and construction of the China-funded Kaliwa Dam project as a new water source for the metropolis, Finance Secretary Carlos "Sonny" Dominguez said Wednesday. "Absolutely. In fact, have this been done before, the water crisis would be much less serious or much less of a threat," he said in a media briefing.”
So has this been a crisis because access to water became limited to 6.8 million people to a nation with over 100 million in population?
Or is this a crisis because the severe water shortage struck at the political center of the nation?
Back to Back Crisis: A Religious Retribution?
For the Catholic faithful, could such adverse series of events signify signs of blowback?
Not content with repeated denunciations and issuing threats to its leaders, the political leadership has scaled further by assailing and denigrating the Catholic catechism.
Though the leadership’s proclivity to cast aspersions to the Catholic Church may have been influenced partly to an unfortunate personal experience, embedded in the Socialist-Marxist ideology has been the aversion to religion.
Religious suffering is, at one and the same time, the expression of real suffering and a protest against real suffering. Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is theopium of the people.
The abolition of religion as the illusory happiness of the people is the demand for their real happiness. To call on them to give up their illusions about their condition is to call on them to give up a condition that requires illusions. The criticism of religion is, therefore, in embryo, the criticism of that vale of tears of which religion is the halo.
Could this be the first two of a possible string of plagues to befall the nation, similar to Egypt’s ten plagues in the Old Testament?The difference: the Philippine food and water crisis are man-made.
Water Crisis: The Amazing Government Failure
Like the rice/food crisis, the unfolding crisis is an embodiment of a disaster borne out of government failure.
The regulators admitted to this, from Philstar (March 14): [bold added] The Metropolitan Waterworks and Sewerage System (MWSS) admitted that the government is partly to blame for the ongoing water crisis in Metro Manila and Rizal province. MWSS chief regulator Patrick Ty said the government and water service concessionaires already forecasted water supply problem and have formulated solutions, which have been delayed. "It's our fault. It's the government because the Kaliwa Dam, Laiban Dam has been proposed since the Marcos time and due to lot of oppositions and accommodations for the IPs, from the informal settlers, from this leftist group, church group, these projects keep on getting moved," Ty told ANC's "Headstart" Thursday morning.
Another talked about the labyrinth of regulations and bureaucratic red tape.
From CNN (March 15): “Socioeconomic Planning Secretary Ernesto Pernia said the ongoing water crisis was the result of too many agencies managing the water situation. "Now we have so many agencies dealing with water. It's very conflicting.It's just not been effective, and this is why we have a crisis now," Pernia said in an interview with CNN Philippines Business Roundup.”
This observation emerged only because of the crisis?! Or the crisis exposed the fragility of such an institutional framework.
As far back as in 2007, the National Government predicted a water crisis in 2010!
From the Inquirer “Water crisis in RP seen in 2010” (January 29, 2007) [link broken, bold mine]: “The Philippines faces a severe crisis in fresh water supply in the year 2010 that may set off sectoral conflicts for the use of this most valuable resource, the Department of Environment and Natural Resources has warned. A DENR study estimated that only 1,907 cubic meters of fresh water would be available to each person each year, making the Philippines second to the lowest among Southeast Asian countries with fresh water availability, Environment Secretary Angelo Reyes said. "The uncoordinated and uncontrolled exploitation of our country 's water resources has had a major impact on the availability of clean and safe water at present, and has already jeopardized the supply of this resource for future generations," Reyes said Friday. He cited that the study further identified that as early as now water supply constraints could be felt in nine key cities including Metro Manila, Cebu, Davao, Iloilo, Bacolod, Angeles City, Zamboanga, Baguio and Cagayan de Oro.”
Neither has this been about lack of forecasting nor political will but of fatal conceit.
Whereas, in fact, specialised students, even after generations of effort, find it exceedingly difficult to explain such matters, and cannot agree on what are the causes or what will be the effects of particular events. The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
Political solutions to economic problems have and will continue to backfire.
The Revenge of Economics: The State Capitalism’s Rent Seeking Institutions!
The left sees this crisis as having been caused by greed.
From the Inquirer: (March 16) Water concessionaires continue to rake in high profits amounting to billions of pesos despite being inefficient in assuring stable water supply to their consumers, a water advocacy group said on Saturday. “Corporate management of water services has been efficient in producing profits but inefficient in ensuring cheap, safe and secure water services to millions of consumers,” the group Water for the People Network (WPN) said, as quoted by the research organization Ibon Foundation. The group recalled the hype to justify water privatization during the time of former President Fidel Ramos where residents were promised “that the private profit-seeking East and West Zone concessionaires would provide cheap, safe and secure water services.” However, WPN said “the concessionaires have used their monopoly power to overcharge customers and make these excessive profits.”
Because the private sector has been inefficient, thus the call for nationalization.
From the same article: The WPN then emphasized the need for water services to be publicly owned: “The right to water and consumer access, affordability, a0nd service quality will only be assured in the long-run if water services are publicly owned, managed and controlled.”
If the government saw the problem, yet sat on the supply issue or did nothing (for 12 years!), how and why would the nationalization of water distribution improve it?
Based on faith? The halo effect?
But the left got one thing right: the culprit: MONOPOLY power!
Privatizing profits and socializing losses has been the implicit principle guiding the political framework behind such private water concessions. These are rent-seeking firms or private firms that benefit from political privileges (in this case monopoly concessions).
The National Government (NG) subcontracted or transferred to private sector agents the operation of such utilities to free the former from financial constraints in exchange for regulated profits of the latter through price controls.
Had MWSS been the monopoly distributor, because of public subsidies, water prices would remain exceedingly low compared to demand, which would hemorrhage the agency, as well as add pressure on water supply, thus contribute to the budget deficits and public debt.
In effect, water tariff increases were justified, by the NG, through the privatization. Such tariff increases were substantiated, by regulators, on the higher costs incurred by these private sector operators.
Furthermore, by tapping the equity of these private concessionaires, the NG is freed from capital commitments.
Such private sector monopolies comprise part of State Capitalism, defined in Marxist literature as a combination of capitalism with ownership or control by the state. And since one of the hallmarks of free markets is COMPETITION, the water crisis can’t be attributed to “market failure”.
The Revenge of Economics: The Backlash from Price Controls!
It hasn’t been true that these monopolies were free to “overcharge customers”, because the government REGULATED water prices through Rate Rebasing (RR). Profits are not signs of overcharging.
But here’s what everyone has ignored. Everyone talks about supply. Everyone also talks about demand. But hardly anyone discusses the relationship between demand and supply through prices. Manila Water sells to their products to us in pesos!
Figure 1
Water prices are set by the government with a strong implicit bias towards price ceilings. (see figure 1)
Price ceilings, as previously noted, are MAXIMUM prices SET by the government. [See Economics 101: Price Ceiling Causes Water Shortages! March 14]
Price ceiling creates shortages. Because of political reasons, water prices are priced by the NG BELOW the market equilibrium. Excess demand or supply shortages, symptoms of such imbalances accumulate over time. El Nino simply exposed these accrued maladjustments.
Such ceilings would have been worst under a nationalized setting.
The water crisis, has thus, been an embodiment of the political-economic ramifications of price controls.
So instead of expanding, Manila and Maynilad Water used regulated prices to protect their profit margins. With prices capped, why expand?
So the left sees the evil in profits without seeing the causal mechanism behind them. Statistics is Economics.
Water Crisis: The Stampede for Knee Jerk Political Nostrums
To see the gravity of the situation, the city of Mandaluyong, where I reside, earlier stated that it may declare a state of calamity.
National Disaster Risk Reduction and Management Council (NDRRMC) said there is no need for the declaration of a state of calamity.
Though the water regulator, the Metropolitan Waterworks and Sewerage System (MWSS), citing lack of infrastructure, initially balked, the marching order by the President of a 150-day deadline to solve the crisis will be complied with, said authorities of the agency.
An Executive Order (EO) will be issued by the President. From the Inquirer: (March 17) Among these provisions is the reconstitution of the National Water Resources Board (NWRB) into a body that will be responsible for policy,direction-setting, and the integration of all government efforts pertaining to water. Nograles said that the body may be placed under Office of the President’s (OP) supervision. Currently, the NWRB is under the supervision of the Department of Environment and Natural Resources. “Given the scope and breadth of water-related concerns, the supervision of OP could help ensure that all 30-plus agencies involved in water resource management are on the same page,” Nograles said. The body is also expected to craft a national water management master plan that will integrate all relevant and existing plans and roadmaps of the different agencies that play a role in IWRM. (bold mine)
So the NG intends to solve the water crisis with MORE centralization. Federalism anyone?
Other theories about the crisis had been floated. Some say this crisis has been staged.
By closing the water bypass and thereby stoking a crisis, such would expedite the rollout of the Chinese government funded Kaliwa Dam, apparently the Finance Chiefs favorite fix. Others say that the crisis will be used to justify price increases.
Unless rains will miraculously come to the rescue, the rechanneling or transferring water supplies from one area to another will be the NG’s band-aid fix. However, if El Nino persists or even worsens, then such stop gap measures will unlikely last.
My suggestion: DEREGULATE the water distribution. Allow COMPETITON to set market prices.
Health Risks from Water Shortages
The water shortage will have an impact far worse than 2018’s rice or food crisis.
Water shortages will likely increase health hazards.
The Department of Health warned of the improper of storing water, without proper cover, could bring about more cases of Dengue.
Reduced water supplies in hospitals may restrict or hamper with the medical procedure/s and caregiving services on patients. The Department of Health has limited patient watchers to one, which may have a depressing effect on patients.
Health risks increase from the consumption of unsafe drinking water.
Unsanitary toilets may force people to withhold from urinating or defecating, thereby increasing chances for ailments.
Water shortages may reduce waste treatment that may help spread disease.
Water rationing would reduce the incentives of people to clean merchandise or stores that lead to health risks.
Helped by BSP Easing, Possible Supply Shock From El Nino May Reaccelerate CPI
There are direct economic and social costs from the current water crisis.
Water shortages may also cost business reliant on water to close shop. Many have.
Water rationing may lead to increases in social conflict and theft.
The water shortage from El Nino would result in massive losses of agricultural and livestock output.
The National Government sees 33 provinces suffering from drought. That’s aside from many others province which may endure a lesser dry spell. El Nino damaged Php 464 million of rice and corn in the South. Bohol farmers and Negros Occidental rice farmers have reportedly been reeling from El Nino.
Initial estimates on losses for crop and livestock have reached P1.2 billion in nine provinces and three cities in the Visayas and Mindanao
If El Nino intensifies or prolongs, food prices can be expected to spike from the supply shock brought about by mounting losses of agriculture and livestock output.
And if the Diokno-led BSP should ease, such supply shock would be magnified! As such, the recent collapse in CPI rates may reverse, and reaccelerate upwards!
These are truly very interesting developments.
Of course, the water and the rice crisis had signified the visible events.
But the UNSEEN exists.
This declaration by the late BSP Governor led BSP at the Financial Stability Report hasn’t been publicly evident…
While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise.What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner
Figure 2
The banking system hasn’t had such magnitude of cash reserve drain (year on year in thousands of pesos) since 2010! (this chart is new). Since peaking at Php 2.8 trillion in August 2017, cash reserves have dropped by Php 444 billion in 17 months or an average of Php 26 billion per month. Cash reserves are finite.
If the repercussions from the water crisis snowball, such may aggravate the beleaguered conditions of banks.
Oh don’t worry, all the risks cited by the late BSP Governor Espenilla led Financial Stability Coordinating Council’s FSR will likely vanish in the next FSR report.
A clue from the BSP: The new BSP Governor said that he will continue to build on the progress made by the FSCC as the venue for financial market authorities to identify, monitor, manage, and mitigate the build up of systemic risk in the Philippine financial system. For his maiden meeting, BSP Governor Diokno led the assessment on the impact of the slowing global growth on the Philippines, as well as the changing economic landscape in both the US and China. “Global markets were turbulent when we closed 2018 and there are new developments at the start of 2019 that could affect financial markets,” said BSP Governor Diokno. He added that “we need to consider the possible scenarios and steer our financial system so that we can effectively manage these possibilities, and continue with our economic growth agenda.” Local market conditions were likewise reviewed, including the state of the banking industry and the corporate sector. The analysis of the Council is expected to be shared publicly with the release of the 2018 Financial Stability Report (FSR) in the second quarter of this year.
All external.
Look ma, no hands!!!!
From dislocations of crisis proportions to a rice/food crisis, now to a water crisis!
The Year of the Pig! It is still March.
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