When you look at this new populism – which basically believes in the power of ordinary people – it historically always means authoritarianism. Populism by its definition was first used to describe Julius Caesar. He was the authoritarian ruler of populism and the link has been true ever since. You now have them all over the world: Vladimir Putin, Xi Jinping, Narendra Modi, Rodrigo Duterte, the list goes on and on. And they're appealing to the mainstream of their communities and saying everyone else can go to hell—Neil Howe
In this issue
The Ratchet Effect: Anti-Terrorism Bill, Bayanihan Law Extension; Reopening in Name Only: Regime Uncertainty
I. The Ratchet Effect: Anti-Terrorism Bill, Bayanihan Law Extension and CHA-CHA
II. The Ratchet Effect: Nurturing a Bailout Culture via Free-Money Stimulus
III. Reopening in Name Only: Transportation Crisis
IV. Reopening in Name Only: Regime Uncertainty and Understated Joblessness
The Ratchet Effect: Anti-Terrorism Bill, Bayanihan Law Extension; Reopening in Name Only: Regime Uncertainty
I. The Ratchet Effect: Anti-Terrorism Bill, Bayanihan Law Extension and CHA-CHA
At the end of May, I propounded that this medically induced lockdown has accelerated the 'ratchet effect' or the entrenchment of the expansion of government used during a crisis into the political system post-crisis. It reinforces the transformation of the Philippine political economy into a neo-socialist or a fascist state.
“bestowed with newfound power, the political regime will likely lock into this power by absorbing such temporary programs(or parts of it) into the system
Events supporting this ratchet effect appear to be evolving fast.
First, the passage of the anti-terror bill.
From ForeignPolicy.com(June 5): On Wednesday, the Philippines’ House of Representatives passed
Then, the use of the quarantine law to harass anti-terrorism bill protestors.
From the Inquirer (June 6): Three students, four members of progressive groups in Cebu and a bystander were arrested by police on Friday morning while holding a rally inside the University of the Philippines (UP) campus in the city against the terrorism bill being pushed in Congress and now closer to being signed into law by President Rodrigo Duterte. Police Lt. Col. Melbert Esguerra, deputy director for administration of the Cebu City Police Office, said the protesters violated the government’s ban on mass gatherings aimed at preventing the spread of the new coronavirus disease (COVID-19).
Next, the extension of the repressive Bayanihan law.
From Inquirer (June 6): Senate President Vicente Sotto III on Saturday said he suggested to Malacañang to call for a special session to tackle the Bayanihan to Recover as One Act or “Bayanihan 2” bill that contained a P140-billion economic stimulus package for various sectors sagged by the COVID-19 pandemic.
Likewise, the furtive push to amend the constitution.
From the Inquirer (May 18): The Inquirer learned during the weekend that the DILG had not dropped its constitutional amendment initiative and, in fact, had directed its regional offices and supporters to continue gathering 2 million signatures over the next two months. The signature drive has gone online to meet a July deadline in response to difficulties caused by the coronavirus crisis. The DILG plans to present the 2 million signatures to both houses of Congress to show the lawmakers that it has the support in the regions in pushing for constitutional reforms.
II. The Ratchet Effect: Nurturing a Bailout Culture via Free-Money Stimulus
But there’s more.
The NG has likewise embarked on grandiose stimulus measures to bolster political interference and control over the economy.
The ratification of two stimulus measures amounting to Php 2.8 trillion, the ARISE and CURES bills, representing a staggering 14% of the projected NGDP, which not only increases the government’s use of resources and finances, that will be paid for by the present and future (unborn) taxpayers and currency holders, and that would crowd out the private sector but importantly, further politicizes its allocation that entails the broadening of mandates, regulations, and prohibitions that reinforces the expansion of the government.
Increased dependency on the NG is being programmed and hardwired on a submissive populace.
Moreover, according to the Department of Budget and Management’s latest revised forecast, on the back of a spending surge and revenue plunge, the fiscal deficit-to-GDP ratio in 2020 has been expected to swell by a whopping 8.4% to Php 1.6 trillion, a milestone high, which has not occurred even in the Asian Crisis! The original forecast was 8.1%.
And public spending as % of the GDP is expected to shoot to 21.94% in 2020, another unparalleled development, should these forecasts meet its targets! And that’s only the direct spending. But what of the private sector’s contribution to the political projects?
Remember, because of the failure to anticipate the consequences of its ECQ, the NG’s financial and economic forecasts had to be adjusted many times this year.
Nevertheless, to assuage the public that debt is manageable despite its record amount projected at Php 9.5 trillion in 2020, we’ve been told to look at the debt-to-GDP ratio. But that would be misleading. Public debt to GDP has been in a downtrend alright, but that would be looking at debt operating in an economic and financial vacuum.
Because the banking system took over the cargo of leveraging or credit expansion, public debt has dropped. The BSP used the interest rate channel, the emergency cuts of the Great Financial Crisis, which remains in place even before the ECQ, to conduct this crucial shift in the distribution of credit expansion from the public sector to the banks. Public credit is likely to assume dominance under the current conditions.
The implicit subsidies extended to them by the BSP, not only bequeathed profits to the banking sector but also delivered revenues to the Public sector, which likewise benefited from the broader distribution of credit to the economy.
Banks also lend to the Public sector directly, as well as acquire and hold Treasuries as part of their capital regulatory requirements.
More pointedly, joined to the hip are the banking system, the BSP, and the public sector. So ignoring such interdependence would boil down to a categorical error.
As such, the political institutions were credited for the improvements in the macro-economy, when in reality, the banking system has disguised the mounting systemic risks.
Disguising risks does not translate to its elimination; to the contrary, it increases it.
Proof? No less than the BSP acknowledged the building up of risks on the banking system as indicated on their 2018 FSR, once again:
If there are risk issues to raise, it will have to be the prospects of managing liquidity. Aside from simply having more loans versus deposits, using liquid assets as a source for funding more earning assets needs our attention. However, the bigger issue will be that continuing on the path of being a bank-based financial market means that the provision of credit will require taking on mismatches in tenor and in liquidity. As more credit is dispensed, such mismatches will only increase. Certainly, the banking industry has been able to sustain itself despite these mismatches but moving forward, there is value to providing other avenues to alleviate the pressures on the banking books.
And more…
Developments in the clearing and settlement space are unfolding at two distinct levels. At the most basic, the amounts processed for payments are significant, of the order of 15 times that of the resources of the banking system or of the economy (Figure 3.13). This highlights the substantial amount of (gross) liquidity needed to support financial market activity. This point is not trivial because it means that the magnitude of settlement/pre-settlement risk may be a much bigger concern than credit risk. It also suggests why unwinding failed transactions can have broad system-level implications. Despite institutionalizing the delivery-versuspayment protocol, the system remains vulnerable because a single bilateral failed trade may require a network of unwinding. Unfortunately, such data is not easily accessible and the extent to which these “settlement fails” represent a possible systemic risk—not just in size but more so in terms of interlinkages that can spillover to the rest of the economy—is not readily determinable, at least at this time. In general, payments system data remain largely untapped and not having even a cursory view of the dynamics of the payments network leaves financial authorities blind to their possible consequences. This is a major concern.
Total debt (representing both public and bank debt) has reached a staggering 87.8%, another historic event in 2019. (At 2000 chained prices this was 92.06% but the 2018 prices trimmed this to 87.8%. That’s the magic of statistics!)
Hence, the incredible enormous backstop offered by political authorities in the context of massive fiscal stimulus backed by grand BSP operations, which has been less evident to the public.
And it is bizarre for some experts to laud tax cuts in the face of record public spending and budget deficits. Have they ever thought about the tradeoffs from these? Record deficits financed by debt translates to HIGHER FUTURE taxes, not to mention the distributional, crowding out, and compliance burdens created by them.
To be clear, I am for tax cuts. But inconsistent with tax cuts are the substantial increases in the public's debt resulting from spending binges that lead to record deficits. It’s like promoting federalism (autonomy) but use social policies of CENTRALIZATION to control the economy.
That said, for financial reasons, the NG’s economic managers have pushed back on such lavish or spendthrift stimulus.
From the Inquirer (June 5): The Duterte administration’s economic team is trying to convince Congress to scale down proposed economic stimulus packages costing trillions of pesos, as the government cannot afford them while much of limited public funds continues to go to COVID-19 response…Last week, the Cabinet-level Development Budget Coordination Committee (DBCC) approved a higher deficit ceiling of P1.613 trillion, or 8.4 percent of GDP, from P1.563 trillion or 8.1 percent of GDP. Taking these numbers into account, the P1.3 trillion Accelerated Recovery and Investments Stimulus for the Economy of the Philippines bill, passed by the House on third reading, could be unaffordable to the government. “We are in discussion with the congressmen that such an amount would not be fundable,” said Chua, who also heads state planning agency National Economic and Development Authority (Neda).
The other way to look at this is that administration’s economic team is biased on their PH-Progreso and CREATE bills.
Nonetheless, the Covid-19 induced ECQ economic crisis has served as a pretext to accelerate the transition towards a centrally planned economy.
III. Reopening in Name Only: Transportation Crisis
From my last week’s Reopening in Name Only (RINO)
In effect, under GCQ, economic activities will still operate significantly below their normal capacity. And because public transports will remain largely inaccessible, not only will commercial interactions favor those with owned vehicles, disruptions in production and services remain a significant factor.
With the Shift to GCQ, Has the World’s Longest and Toughest Lockdown Experiment Worked? June 1, 2020
From GMA (June 5): About three-fourths of the Philippine economy has reopened after the government relaxed quarantine measures to contain the coronavirus disease 2019 (COVID-19) spread, the National Economic and Development Authority (NEDA) said Friday.
From the Inquirer (June 3): Anger mounted in Metro Manila on Tuesday over lack of public transportation for workers allowed to return to their jobs after three months of quarantine, with senators calling the situation an emerging crisis and slamming transportation officials for their insensitivity and lack of foresight.
From the Inquirer (June 7): The lack of a sufficient mass transportation defeats the purpose of slowly opening up the economy since productivity suffers when employees struggle to go to work, a private think tank said. The Action for Economic Reform (AER) called out the government on Saturday for its decision to reopen the economy without reopening mass transportation, leaving thousands of workers competing for the few available rides, or walking for hours to get to work so they would not lose their jobs.
While 75% of commercial activities may have opened, the lack of workers due to transport shortages, suggests that firms have been operating significantly less than their capacity. That said, the ongoing slack in the supply or production chain, will not only continue to impact output negatively, thereby increasing risks of supply dislocation, but it will also damage income generation, thereby reducing demand. (Say’s Law)
IV. Reopening in Name Only: Regime Uncertainty and Understated Joblessness
Aside from transport woes, regulatory barriers should highlight not only the ratchet effect but likewise regime uncertainty.
Regime uncertainty, according to Professor Robert Higgs, describes a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights. Increased uncertainty over future tax and regulatory policy may have a depressing effect on investments.
Look at the incredible litany of health protocols required by the Department of Tourism on the Hotel or the Accommodation industry.
From the MB.com (May 27): “Business establishments offering temporary homes to guests will have to double their effort in keeping their spaces safe and free from the coronavirus disease (COVID-19) as the Department of Tourism (DOT) finally laid out its health and safety guidelines for the operations of accommodation establishments under the “new normal.” Accommodation establishments refer to hotels, resorts, apartment hotels, tourist inns, motels, pension houses, private homes used for homestay, ecolodges, serviced apartments, condotels, and bed and breakfast facilities, and others operating primarily for accommodation purposes. In Memorandum Circular 2020-002 dated May 22, the DOT, as mandated under Republic Act No.11469 known as the Bayanihan To Heal as One Act, has provided guidelines to institutionalize updated health and safety protocols under a new normal scenario. These guidelines address guest handling, housekeeping, food and beverage service, kitchen sanitation and disinfection, public areas, hotel transport service, engineering and maintenance services, business practices and management, supplies of goods and services, and the management of symptomatic guests. The DOT said the guidelines apply to all accommodation establishments in the Philippines in areas where a community quarantine is no longer in place.
Without sufficient capital or connection, businesses within the industry will shutter. Again, it is not difficult to see how these obstacles will not only maim, destroy, or kill the MSMEs but likewise become implicit moats for the large politically connected enterprises.
Or how about this article Business World article entitled “Malls try to woo back shoppers”? (June 2): SHOPPING MALLS continue to implement health and safety protocols to ensure their customers can have a safe shopping experience, as Metro Manila is now under a general community quarantine. Following government guidelines, mall operators are implementing standard health protocols such as requiring all customers to wear face masks and conducting temperature checks upon entry. Malls have also placed hand sanitizers, alcohol dispensers and foot baths at entrances. A few open shops have also provided alcohol dispensers for customers…To discourage people from lingering, mall operators are required to set the air conditioning temperature at 26 Celsius and to remove free Wifi. Malls are also limiting the number of people allowed to go inside, and to implement social distancing. Customers are asked to observe a two or three-step gap when using the escalator, while floor markings indicate where customers are supposed to stand while in line.”
With the NG destroying old business models, how are malls supposed to woo back shoppers? From the same article: “To cater to customers who are still wary of going outside, some mall operators are now offering personal shopper services, as well as online delivery or pick-up services.”
Put this way, not only has the government put the consumers to the backseat, they are now dictating how businesses should operate.
Enterprises will suffer from high compliance costs, which if they are unable to pass to the beaten-down consumers, would endure a profit margin squeeze. So how will this not lead to massive losses and joblessness?
Yet, the Ivory Tower experts have no clue of the damage they wrought. From the Philstar (June 7): BSP Governor Benjamin Diokno said the jobless spike in April was grossly exaggerated as the Philippine Statistics Authority (PSA) conducted its latest Labor Force Survey from April 20 to May 16, or during the enhanced community quarantine period.
Exaggerated, really?
A back of the envelope calculation tells us that the spike in unemployment rate to 17.7% or an increase of jobless people to 7.245 million last April may have been UNDERSTATED.
Here’s why.
From the Inquirer (May 1): More than half of the country’s micro, small and medium enterprises (MSMEs) in the country had to stop their operations due to the COVID-19 pandemic, the Department of Trade and Industry (DTI) reported Friday. During the online meeting of the social amelioration cluster of the House of Representatives’ Defeat COVID-19 Committee (DCC), DTI Secretary Ramon Lopez said 52.66 percent of MSMEs fully stopped or closed their operations due to the health crisis as of April 29.
As pointed out last week, MSMEs accounted for 63.2% of the labor force, according to the DTI. Assuming labor force in the large companies are unchanged, and assuming the equitable distribution of workers to MSME firms, if 20% of the SMEs shuts for good, then 12.64% of the total labor force became unemployed. With the labor force at 41.018 million in April, 5.184 million workers were unemployed then. Add to this the 2.39 million pre-ECQ unemployed, total unemployed was 7.574 million above the 7.254 million or an 18.5% unemployment rate rather than 17.7%. All these assume 20% closure of MSMEs. How about the layoffs of large companies? And how about if the number of MSMEs affected may be larger?
And more arbitrary rules, dictates and imposition on businesses.
From the Inquirer (June 2): Employers and workers in essential businesses that closed shop during the lockdown are now suddenly required to pay their rent much sooner than everyone else, revised guidelines from the Department of Trade and Industry showed. Moreover, this would also apply to non-essential businesses that were allowed by the government to open when the lockdown started being relaxed last month. They have to pay their residential and commercial rent even if they opted to remain closed. Trade Secretary Ramon Lopez signed the revised set of guidelines on Tuesday (June 2). A copy of the memorandum circular was released to reporters the same day. The new rules are a sharp contrast from the support the DTI had tried to assure workers and businesses back in April, when they first released a set of guidelines deferring rental payments while on lockdown.
And these sharply vacillating and unilateral rules and guidelines are supposed to set stability and order for businesses to operate normally? These are the ingredients for a V-recovery?
Under the current circumstances, how will MSMEs benefit from the Php 120 billion in loan guarantees offered by the NG when arbitrary, onerous and complex rules are about to break them?
Finally, regime uncertainty hasn’t been a product of COVID-19, but by the deliberate political initiative to CENTRALIZE the economy, even before the pandemic.
German investors have been complaining. From Inquirer (June 1): More than half of German companies are holding back their investments in the Philippines because they find the economy too restrictive, data showed…The German-Philippine Chamber of Commerce and Industry (GPCCI) shared an evaluation of these survey results on Monday (June 1). While the survey was conducted at a time when the pandemic had put many corporate plans on hold, the results point to problems that have existed in the Philippines even before COVID-19 reached the country. The survey said that the three most reported restrictions are on foreign ownership and equity caps, restrictions on specific types of legal entity and license requirements. It did not expound.
When you see that in order to produce, you need to obtain permission from men who produce nothing - When you see that money is flowing to those who deal, not in goods, but in favors - When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you - When you see corruption being rewarded and honesty becoming a self-sacrifice - You may know that your society is doomed
