Philippines’ era of golden infras and economic take-off – it’s hard to be optimistic
By Chemrock
The Duterte administration promises their legacy will be an era of golden infrastructure that will drive the country to it’s economic take-off point, ushering in prosperity and uplifting the nation. This will be realized through public borrowing (both domestic and foreign) and tax reforms to fund the infra spending.
I have written on the Iron Law of Mega Projects here and offered the dim chance of Duterte breaking this law that states these are “over spent, under benefits, over time, all the time”. My feeling remains negative and I’ll expand my thoughts further. Many have written on the financial aspects and provided abacus-figures of huge debt obligations that will be visited on future generations. That’s boring so I’ll not go into the figures. I get a kick out of approaching a boring topic from angles that few explore. Do indulge me.
The Big Push model:
Duterte’s economic managers lay the blame squarely on past administrations’ inability to invest heavily on infrastructure as the prime reason for the country’s inability to take-off economically. To walk the talk, they are gearing up infra spending to 5-10% of GDP. This is nothing new. Back in the 1950s there was a school of thought that backward third world countries cannot get out of the poverty trap with a bit-by-bit investment approach. What was required was big bang investment spending that could launch the country on an economic take-off trajectory. It is, however, something that private capital cannot deliver. It has to be a government initiative.
This was the ‘Big Push’ model, a theory developed by Paul Rosenstein-Rodan in 1943. What was interesting with Rodan was that he made certain specific forecasts of growth rates of various 3rd world countries, something no sane economists would ever do.
Rodan obviously had a faulty crystal ball as we can see in the chart to the right. Such is often the case with professorial economists. He was looking at pure economics from a balloon in high altitude. He did not factor in politics and institutions. So too the economic policy makers of the Duterte admin. Lining up Rodan’s prediction against actual results depicts how wrong pure economic theories can be. Politics and institutions tell the story behind all those figures in the chart. Seeing as we can see on the ground, the state of politics and institutions in the Philippines, the promises of the Big Push is hazy in the crystal ball. The Philippines’ story will not be written by the economic managers alone but by the politics and the institutions in the country, which is not exactly encouraging.
Short term – long term benefits:
All infra projects provide visible economic benefits in the short term. And this is what the admin is counting on. Government expenditure on the infras boost the GDP figures. This is no big deal economic tsar brainware at work. It’s a simple accounting consequence of government spending. Borrow Php 1 billion and pour into an infra project today and viola GDP this year goes up by a billion. Nothing to shout about, really.
It is the long term benefits or problems that show up long after the Duterte troop has left office that will be the legacy of this ‘build build build’ frenzy. Infra projects have long gestation periods and they are mostly in non-direct revenue producing structures — rails, roads, ports, airports, hospitals, etc. Empirical studies have shown that the majority of infras fail to be sustainable in the long term. Such infras nevertheless play important roles as arteries that serve other economic activities. It is the aggregate demand of these economic activities facilitated by the infras that will or will not quantify an infra as beneficial in the long run. Once again, it is politics and institutions upon which the long term success of these economic activities rely.
Jobless growth:
In recent years, advanced countries have seen a new phenomenon of economic growth with no job creation. This is a problem of a matured economy with advanced technology and high productivity. The circumstances clearly do not apply to the Philippines. Nevertheless, it ought to be food for thought. After all, job creation ought to be a top government priority although it prefers the job of decimating drug addicts and pushers.
The government sees new 1.7 million new jobs created by the infras. How many of these will be for Filipinos? The government has not allayed the fears of a million Chinese workers flooding the job market for the projects funded by China. On the contrary, it has tried to normalize that fear, on grounds that local skilled workers are lacking. That is an admission that the government has put the cart before the horse in their infra planning.
The infras will create a lot of jobs in the construction and development phase. These will be contractual jobs, in other words, temporary jobs, or in more fancy terms, just-in-time labor. The majority of these jobs will be off the market after the construction phase. Any job is better than no job. The writer is not here to dampen the effort, but merely to suggest official recognition of the reality. Do not push only the positive picture for political capital and be silent on the negatives.
Business-cycle volatility:
The economy goes through a cycle of depression (trough)-recovery-growth (expansion) – decline (contraction). The cycle itself is a natural occurrence bound by economic laws, so it is not a big concern. What policymakers watch out for are factors that cause volatility in the business cycle. These volatilities create the circumstances that facilitate or prolong each cycle.
Investment is often the most volatile of the components of aggregate demand. It contributes to growth when money is being pumped in. Once the investment phase is over, there is a void in spending. That void is a problem if it is big and over a long period. The 1929 market crash in US is not the actual cause of the Great Depression that followed. It was the long term withdrawal of investment following the market crash that caused the depression. Lack of investment drove aggregate demand down, pulling the whole economy with it.
It is often thought government spending can play a stabilizing role. More spending during a decline, and austerity during an expansion balances aggregate demand somewhat. In reality, there is more volatility in government spending due to sporadic investments, or spending on short term social redistribution targets, or to meet political promises, etc. An empirical study by Davide Furceri (2007 – Is Government Expenditure Volatility Harmful for Growth? A Cross-Country Analysis) using data from 116 countries from 1970 to 2000 showed that the government expenditure volatility impact on growth is negatively significant and that it is robust to several groups of countries. Meaning if government spending is volatile, it has an adverse impact of growth.
The Duterte govt plans to spend US$36 billion over 75 infra projects during its term. Whilst all hands are clapping for the short term gains, there have been no caveats on the possibility the government spending volatility may impact the business cycle.
Preconditions for Take-off and Post-take-off:
Rostow’s model for economic takeoff into the high mass consumption market described some pre-conditions for the takeoff and the post takeoff phases.
These conditions are (as plucked off wikipedia) :
Preconditions :
- External demand for raw materials initiates economic change.
- Development of more productive commercial agriculture and cash crops not consumed by producers and/or largely exported.
- Widespread and enhanced investment in changes to the physical environment to expand production (i.e. irrigation, canals, ports)
- Increasing spread of technology and advances in existing technologies
- Changing social structure, with previous social equilibrium now in flux
- Individual social mobility begins
- Development of national identity and shared economic interests.
Post Take-off:
- Urbanization increases, industrialization proceeds, technological breakthroughs occur.
- “Secondary” (goods-producing) sector expands and ratio of secondary vs. primary sectors in the economy shifts quickly towards secondary.
- Textiles and apparel are usually the first “take-off” industry, as happened in Great Britain’s classic “Industrial Revolution”
Fifty plus years have passed since Rostow’s model was floated. Economies may have changed somewhat but the idea is the same. Infras are not the be-all to move the country forward. What has Philippines done in the politics and institutions in preparation of the precons and takeoff requirements? Infras is never a stand alone solution but it is being played for as such. There ought to be a holistic game plan where serious works are required.
Federalism is the great distraction to the economic policy makers’ infra plans. The politics gets the country side-tracked into a federalism conundrum whilst the economic policy makers are gaming big time positioning the country for economic takeoff.
Rostow’s message is there is a lot of preparatory ground work that needs to be done for a successful takeoff. Not much else is being done in Philippines then beating the ‘build build build’ drumrolls.
‘Build them and they will come’ is the dictum of a fool.
Micro vs macro benefits:
Micro or project-specific benefits are comparatively easier to quantify and their long term sustainability more predictable. The macro-benefit outcome of an infra is far much more complex. Not only does it take a long gestation period, but the metrics are not readily available. Overall long term macro benefits may be positive even though the infra itself may not be sustainable. Such infras may be viewed as the loss leaders in a retail shop.
The challenge of macro-benefits are twofold :
1. In the plan for an infra project, there ought to be subsidiarity of plans for the wider economic activities spurred by it. For example, the Mindanao Railway ought to have many supplementary economic plans built around the rail lines. The lands around the stations will increase in value, thus they ought to be reserved for activities of higher economic value. The politics and institutions ought to be revamped for the future to come. The bottom line is infras come before the pickup in economic activity and serve as a base, but much more work is required to identify the linkages between the infra spending and the economic activities around it, as well as all organizational work to prepare and facilitate those economic activities.
Case in point – decades after the MRT3 came into operation, nobody today questions what happened to the government’s share of the economic activities from the land in the Trinoma area. Diokno, the Budget Secretary today, is displeased with the problems of ‘right of way’ that is hindering development progress. Perhaps he is understanding with humility the slow progress of some of the previous admin’s projects that he severely criticized.
2. The wider the macro-benefits are cast, the more benefits can be attributed to an infra project. Therein lies the creative propagation of projects by the smart politicians. Whilst macro benefits are a crucial part of the economic outcome desired, the net can be cast so wide to its ridiculous extent to support a proposition. The tendency to generalization clouds the issues on hand.
Asian Tigers – Development economics and Capital accumulation:
Six years of Pnoy admin saw a sustained and gradual growth in the economy. It brought the Philippines to the edge of being the next Asian Tiger. Filipinos are all rightly so proud whenever they read of that. The problem is ‘next’ means ‘on the cusp of’. It’s a cliffhanger — will it or won’t it. Before 2016, the answer laid in the vote. Another 6 years of good politics and institutions would have done wonders. Filipinos chose not to go that way, preferring instead a violent strong man over a slow and steady hand. .
In the 60s/70s, Japan boomed. This was followed by the four Asian Tigers (Hongkong, South Korea, Taiwan and Singapore) in the 70s/80s. More recently, China. Some point to their common culture of Confucianism which nurtured social discipline as the driving force. Let’s have father Digong bring in strong man discipline and the country will take off. Others look at the impressive infrastructures in these countries as the causality of their success. Let’s go for ‘build build build’. These are awful and woeful mis-readings of the success stories of 6 Asian countries.
All 6 of these countries practiced some form of economic nationalism and neo-mercantilism in their development economics architecture. Development economics is associated with low-income countries in the way development processes are managed. It covers areas like methods of promoting economic development, economic growth, structural change, on improving the potential for the mass of the population such as through health, education and workplace conditions, etc. In other words, the institutions or the organizationware. They all had their development economics correct. Like them, Pnoy worked on getting some of these institutions correct, notably the unpopular Reproductive Health Bill, the unpopular 12-K legislation, building thousands of classrooms, PPP, revamp of budget procedures, modernising the military, appointing 2 tough ladies to head the Supreme Court and Ombudsman to straighten out the judiciary. Filipinos are unable to see the bigger picture of these Pnoy initiatives. The Duterte admin is now undoing some of these efforts and reverting to the status quo of crab governance.
Capital accumulation in the economic sense is the state built up of all the physical capitals — the airports, ports, bridges, schools, hospitals, power plants, road, rails, etc. The 6 Asian countries did not pursue an economic policy of physical capital accumulation to push them into the mass consumer state. It was the simple ordinary man’s idea of saving up for his meals. These countries have some very high savings rates. Financial wealth accumulation before physical capital built up. In other words, it was from savings that infras were built on. The virtue of delayed gratification, or sacrifice, pays dividends. The infras were not funded from massive borrowing.
The question really is, does higher debt harm economic growth? Some studies have estimated that a 10% increase in debt-to-GDP ratio reduces 0.1–0.2 percentage points in annual growth on average.
Impact of corruption on economic growth:
Corruption affects the economy in varied ways such as reduction of private investments, reduction of FDI, creates a bigger shadow economy, etc. More importantly, it interferes in the proper allocation of scare resources. Corruption reaches its greasy hands into governments and misdirects public sector spending in one deserving area into another which is more conducive to illegal rents and bribes. Invariably, government spending on the poor is reduced. Corruption in government affects investments and military spending and negatively impacts economic growth.
High level public sector corruption is often played out in the way funds from loans avoid projects like health and education and move into defense and infrastructure. High end defense and infra contracts are easier to negotiate for payoff and difficult to unravel due to complexities. Does this not sound familiar in the Philippines? Budgets for health and education are down. Chinese projects are conducted in secret with no public biddings. The Korean frigate deal requires a Senate Inquiry with no believable conclusion that it’s untainted. In Malaysia the ex Prime Minister is facing charges of extracting a commission from the purchase of a French submarine years ago
Public debt itself may not be a big problem. There is, however, a lack of literature on the impact of public debt on growth in the case of poor politics and institutions. Metrics on politics and institutions are not available, however, corruption (bad institution) may be used as a close substitute. An empirical study by Eunji Kim 1, Yoonhee Ha 2 and Sangheon Kim (Public Debt, Corruption and Sustainable Economic Growth 2017) showed public debt has a negative impact on economic growth; its marginal effect depends on the level of corruption in the country.
The level of debt for the massive infras and the level of corruption in the Philippines makes for a strong tailwind coming to lift Filipino wallets. Corruption is not only endemic, but up to the highest levels. The highest authority in the land is a President with suspected concealment of 2 billion pesos in his bank account, and the third highest authority, the House Speaker, has plunder charges against her dismissed by a Supreme Court filled with her appointees. The 2nd highest authority, the Senate President, is a prime time comedian suspected of being the brain behind the murder of a rape victim teenage film star, and he sees no corruption in the two persons that sandwich him in the totem pole of authority. Not exactly confidence building.
The China myth:
The world is awed by China’s economic success within one single generation. Printed and online media, news, and all forms of promotional materials show a picture of cities of new glittering high-rise skyscrapers, massive dams, superb highways, and bullet trains. It builds the myth that China’s success came on the back of their heavy investment in infrastructures. The fact is that all of these massive infrastructures came after many years of economic growth and accumulation of financial capital.
Prior to 1980, China was backward and had poor infrastructures. So if their massive infrastructures came after economic success, and not the ‘Big Push’ that propelled them to economic take-off, what then can account for their achievements? Again there is the failure to recognise that pure economics do not explain everything, as in Rodan’s forecasts for 3rd world countries back in 1960s. China’s success came on the back of bold political and institutional structural reforms. It liberalized the agricultural sector, allowed private entrepreneurship that spurred competition, allowed private wealth accumulation and property ownership from which burst forth such a force of creative energy never seen before. (There were, of course, many other exogenous factors at play that are not covered here.) It highlights the unassailable fact that a system that rewards risk-taking and enterprise in a democratic setting is the best path to success. It’s something that a clientelistic patronage economic system of the Philippines, inclined towards dictatorship, never understands.
An empirical study by Atif Ansar/ Bent Flyvbjerg/ Alexander Budzier/ Daniel Lunn (2016 Does infrastructure investment lead to economic growth or economic fragility? Evidence from China) showed that instead of being the engine of economic growth, China’s massive investments in infrastructures carry immense long term risks for them. From case studies of 95 transportation projects (rail and road), they found 72% produce negative net NPVs. (Net NPV is the long term revenue less project costs in present value terms). A large number of these projects could not even get past robust financial tests to get off the ground in the first place. The micro project-specific implication is mis-allocation of resources and long term social cost in maintaining and operating the structures.
The Chinese lesson for the Philippines is, once again, massive infra spending is not the be all. Politics and institutions play more crucial roles.
A fundamentally more important lesson for the Philippines is, just as in the case of the Asian Tigers, Chinese infrastructures were built on the back of massive financial capital accumulation from years of high economic growth. Whilst they may face long term social cost from non-performing structures, they only contend with sunk cost and there is no debt burden. The Philippines intend to build with borrowed money.
Conclusion:
Financial numbers have not been touched on here as it’s not the angle for the article. Financial figures are dynamic. The latest is a 23 Jan 2018 note by DOF Undersecretary Grace Karen Singson. Of interest are 2 points: (1) total infra is $36B. Beware the Iron Law of Megaprojects that says cost overruns are a sure thing. An empirical study over 258 international infras showed that, on average, a 35% cost overrun is very likely. So expect infra cost to be at least $50B. (2) The target debt level is 37.7% of GDP by 2022. This is not a worrying level, even if there is a 35% cost overrun.
The admin is betting on the massive infras to reduce poverty incidence from today’s 21.6 percent to 14 percent by 2022. A noble objective, remarkable in it’s audacity. A far cry from Pnoy’s slow and steady approach. Will it be achieved? It seems the rising inflation may crash the party.
This is not a dampener on debt or infras but merely a different perspective on challenges to a massive infra program. Removing blinders and the political narrative of more borrowing and infras are good, empirical studies have shown that it is difficult to be optimistic. If pumping massive borrowed funds into infras is the way to jump start an economy, Zimbawe would be an African Tiger today instead of a failed nation.
Lessons of other countries have shown the best approach to moving the country forward is financial wealth accumulation first, build up the software (politics) and the organizationware (institutions), have a holistic plan for infras that identifies and prepares all capital spending linkages to wider economic activities around the infras to ensure comprehensive macro level benefits, and get this done in a democratic setting that proffers inclusiveness in decision making and rewards risk taking.
The Society of Honor by Joe America 
I will first comment on the staffing for the projects.
The Short and long term solution allow foreign workers to work temporarily provided that they train there co-workers in the project.
Continuous training for those on standby every time a project task is finished before they could be assigned to other projects.
If Department Stores hire reserves for School opening and the holidays,the construction industry would be better of than those reserve staff. ( That is another problematic situation, what do the reserves do when it is to peak season?
What will they be building again? As far as roads, bridges, high rise buildings, airport and the likes, weren’t those built in PH before using local labor force? There are also a lot of OFWs who helped built a lot of infrastructures in the Middle East. PH export its Human Resources because there are more workers than jobs. Why is it a problem to employ Filipinos in these BBB projects?
It seems to me that there are two barriers to Filipino employment. One is the lack of skills (probably partially true, considering weakness at small-group management, maybe not so many experienced engineering, and language difficulties – if, for instance, the bosses speak Chinese or Japanese), and the other is that the contractor demands he be able to hire his own people for quality assurance.
The DFA, DOLE and other agencies should have a list of OFWs and their competencies. A lot of them are construction workers abroad. They should be able to offer them local jobs with competitive pay with the added incentive of being home with their families.
Most OFWs know how to read and follow instructions in English. Should a foreign company want to bring their Engineers and Managers, they should be proficient in English to break the language barrier.
I am in touch with some people there and they are telling me that a number of Filipinos are now being trained as Welders, Carpenters, Masons, Electricians, Plumbers, etc. If that is true, there should be no shortage of Filipino construction workers. The unemployment rate in PH is till in the high 20’s the last time I took a peek at the figures.
Or like Karl said, have some Filipino journeymen In the initial construction phase so there will be skill and management/quality control expertise transfer. Filipinos are sharp and hard workers. I am sure they will succeed.
Superb ideas. I don’t think people here think in such terms as they only serve for a short time and are more interested in making an impression or a buck than being innovative. Now that I think about it, the lack of forward-thinking also pertains to legacy. People are serving for now, not what they can do for Filipinos in the future. That realization just struck me. Planning is poor, so is attaching one’s happiness to building something for the future. Here, now, me. That’s it, in the main.
“You come home and I will sell my soul to the devil to look for money so that you can come home and live comfortably here”
~ Duterte
Some Filipinos just want him to put substance to his speeches. He has to prove his grit by negotiating with the lenders their credit terms in a way that the benefits to the Filipinos could be maximized.
JP,
Maybe it has something to do with their contracts.
But there are other reasons,
I talked to a grab driver from Saudi, and he daid taxes and rising orices made him go home only to return to high taxes and high prices.
My brother in law got scared of the proxy wars and said he will go home once he endos at the end of the year.
I hear you, Karl.
I also hear a lot of Filipinos who cannot escape the reality of hand-to-mouth existence. For some, getting out of the country is the only way to stop the vicious cycle of generational poverty.
Some skills are very narrow focussed and job specific and some are generic.
Narrow focussed and job specific types require technology transfer arrangements with the contractors. After project has been rolled out and technology transfer done, it is up to the govt agencies to ensure there is a sustainable path to the supply of those skills and it’s continued skill upgrading. This requires agency interference if the supply pool required is large — eg Tesda or Uni setting up relevant courses, etc. Another requirement is to make sure the unit operating the infra, ie the contracted operational unit, eg MRT3, their maintenance contractors, etc, are committed to building up the pool of workers. Apparently, MRT3 failed miserably.
Generic types are those skills that are applicable across various industries. Eg tool makers, mould makers, metal workers such welders, etc. They have the skill sets that can be used in different industries. These are the blue collar workers who will be the backbone of the build build build. I bet the better ones are mostly working overseas. Lack of these workers can hinder the massive infras. I once had to do a small project in Malaysia and I was displeased with the welders at the site. The contractor told me they have difficulties getting these workers in Malaysia because the better ones are all working in Singapore shipyards !
I honestly think that PH has the capacity to gather/train pool of workers who will play a big role in any infrastructure builds. Ask the barangay captains for a list of able bodied and able minded residents instead of a list of drug users/pushers. Filipinos are better off alive than dead for one. Second, any productive endeavor will end the cycle of poverty which is the very reason why some Filipinos dabble as drug users/pushers.
A good article, @Chemrock.
(Unrelated: This is why I think that outlets like the Inquirer should double its space for opinion columns and such—too little space for in-depth discussion.)
A president once said, “It’s the economy, stupid!” A pithy summary of the article above may put it a bit differently: “It’s the institutions, stupid!”
How can an athlete suddenly aim for Olympic Gold right away—if he hasn’t done any of the rigorous training? To pursue something like a massive infrastructure program without seriously considering and reviewing the state of our institutions first is akin to some random swimmer thinking he can just walk in the Tokyo Olympics and proclaim that he can beat Michael Phelps on the basis of his natural skill alone.
Unfortunately—a critique of our institutional readiness sounds dry and boring compared to bombastic promises of manna on Earth. The complexities of actually running government are already hard to translate into the public discourse—and even harder to do so in the Filipino context, where (unlike in the West) the media ecosystem for meaningful and in-depth coverage and discussion is limited with the rare exception of outlets like Rappler.
…
A thought has occured to me though. A foolish thought.
(I’m no economist, so maybe my sense of numbers are wrong…)
Two ideas struck me, in particular.
One: We have a utilization rate of thirty-something percent for the DPWH. My first reaction was—wow, this is something. My second reaction was—wow, this is a very clear metric for understanding how well government can function.
Pointing to this metric would make explaining why institutions are important much easier. It also nuances the conversation on good governance and makes it frankly less moralistic; good governance isn’t just about “rounding up the bad apples in government” but also making sure that government can do more things and do things efficiently—the reasons why funds are under-utilized can include not just things like the corruption, but also the mere fact that the government only has a limited amount of manpower (something that I hazard is especially pronounced for technical positions) to call upon or that government employees have to rely on a network of computers that is either grossly outdated or incompatible with the networks of other complementary agencies.
Two: We complain about TRAIN and about how it is raising the cost of living. Some have even advocated to roll back some provisions of TRAIN. Government responds by pointing out how we need the cash that TRAIN provides to fund its big infrastructure roll-out.
Hmm.
I’m thinking aloud at this point—but if I wanted to appease the angry public, look like I am doing something and actually do something about all these problems—a possible solution may lie in treating these two issues as two sides of the same coin…
I roll-back some of TRAIN’s provisions which disproportionately affect the poorer parts of the population.
I compensate for this drop in funding by promising to raise utilization rates via major reforms in the bureaucracy.
I recognize that this won’t bear fruit for quite some time—so I make sure to have the expectations of the citizenry and the markets reach a “soft landing” of sorts; I promise them that, while in the short-term and medium-term the government will be unable to sufficiently carry out these massive programs, they can rest assured that government is genuinely building the capacity for such in the long run and that the Philippines is still an excellent bet in the long term.
I use a program that allows me to use savings which I cannot even use anyway to further improve other programs in government.
(Cough.)
Thanks Francis
I like your analogy of rigorous training for the Olympic gold medallist which is the gist of this article.
You mentioned the 35% utilization rate of the DPWD. In economics they call this the absorption rate. Joe commented in an earlier blog on the Duterte admin hitting the same wall as the previous admin — this is one of those walls. Previous Budget Secretary was aware of this low absorptive capability and they planned at a slower speed on infras and tried to work on improving govt efficiency and effectiveness, ie the institutions. Current admin certainly knew about this problem yet they try to bulldoze their plans through. They were betting on Duterte ‘toughness’ to get civil servants going.
The unitary govt faces an absorption rate problem and they think with Federalism at the state level, they have more brain power to see projects through more effectively. Dream on.
About your suggestions on rolling back on TRAIN and reforming the bureaucracy —
In my opinion the govt over-extended itself. Whilst it is good to be ambitious, not being able to see one’s own weakness is a big part of the problem. The govt thinks they are a super breed from the South they can handle so many huge projects at the same time — EJK, bring down political opponents, such complicated and huge tax reforms, massive infras, WPS, and Federalism. I dread to think of the stress factor facing in the Philippines right now.
Ad for the financing, it is good that for now the chinesefunding is just part of the mix.
NEDA only complained that others like Japan process loans too slowly, but I think China has yet to prove its speed in processing loans.
One Japanese trait. They plan carefully, thus they take a bit more time. But once they roll, they are super efficient. In most countries where they invest, they get irritated with the red tape and slow progress.
We only see their red tape and not ours.
Japan will fund six out of thirteen infra projects.
Link of the funding mix.
http://www.neda.gov.ph/2018/03/02/japan-to-help-fund-6-of-13-new-infra-projects/
*******
1. The TRAIN tax reform package is intended to be the domestic contribution to fund infra spending. However, it seems to be causing rising inflation.
2. A method to control inflation is price control.
2.1. In early June, there was talk of direct government intervention to stop price increases and discourage profiteering.
2.2. Price control has been implemented in Antique’s capital since August 9 when the province was declared under a state of calamity.
2.3. The tragedy of Venezuela’s inflation is attributed to price control.
3. The TRAIN package is supposed to broaden the tax base.
3.1. TRAIN 1 removed the preferential tax rate of BPO workers. It reduced income tax on workers but increased the excise tax on fuel products, tobacco, and on sweetened beverages.
3.2. TRAIN 2 will lower corporate taxes. However, preferential tax rates for the BPO industry are being removed. There are fears this will scare away potential foreign investors.
4. Questions:
4.1. Should TRAIN 2 be passed into law?
4.2. Will TRAIN, in fact, cause greater economic hardship for the people? Will the hardship be temporary, to be relieved by the macro benefits of infra spending?
4.2. Will price controls be implemented at a larger scale? And Is there a likelihood that the Philippines will follow Venezuela’s downward spiral?
*****
Price control is an admission that the govt has no other ideas. They prefer a short cut solution which creates new problems.
In a free market, price is the equilibrium to supply and demand. It makes sure resources go to where there is demand. Price control is a govt intervention tool. Interventionist policies are very seldom good.
When prices are fixed below the market price, it creates a shortage in supply because suppliers will not invest in where they can’t make money. Eg low price for rice cause farmers to stop production and there is less local rice, causing the govt to import higher priced rice. Another good example is rent control. It rent is below market price, developers will not build more houses nor maintain their older ones, thus causing a housing shortage.
When prices are fixed high, suppliers can make more profits so supply goes up. If demand is flat, the excess supply cause wastage and a drain on resources. Demand is however, inversely affected by price. If price goes up, demand goes down — the decrease depends on the elasticity of the product. A good example of the impact of fixed high price is MINIMUM WAGE. A minimum wage is actually fixing a higher price for labour, so it’s good the gainfully employed are getting more wages. But higher wages reduces demand, so as more employers make do with less worker, unemployment rate actually goes up.
I want to ask the readers if anybody knows of a plan to establish an institute for transport studies, or any institution that will produce a steady supply of professionals which will be needed for that Manila subway system. Is there?
A subway system (emphasis on ” system”) requires individuals with very good training in specialized fields like train engineering, maintenance, network planners, transport economists, finance managers, etc similar to the professionals that staff the DB in Germany, SNCF in France, etc.
Because once we have that subway in place, who will run it, and can it be sustained?
UP has NCTS.
http://ncts.upd.edu.ph/main/index.php/mission/
Mission:
To contribute to national growth and development by supporting academic instruction, conducting and promoting scholarly research, training, information and other extension services in the field of transportation.
Advocacies:
Sustainable Transport – NCTS is actively promoting the development and greater use of sustainable modes of transport, including the Bus Rapid Transit (BRT), to address the ever worsening problems of traffic congestion, road accidents, air pollution and Greenhouse Gas (GHG) emissions from the transport sector. There are on-going research activities that tackle the social, economic, as well as, environmental dimensions in the transport sector.
Integrated Transport System – The Philippines is an archipelago consisting of around 7,100 islands and connecting economic centers and communities continue present a national challenge. NCTS is actively cooperating with concerned government agencies towards the development of a well-integrated national tranportation system. On-going research activities are focused on multi-modal transportation, land use and transport interaction, planning and decision support systems, and other cross-cutting policy issues.
Road Safety – Every year about 1,000 lives are lost due to road accidents. NCTS is doing a valuable part in promoting safety on the streets. Forums involving different concerned agencies, LGUs and NGOs are regularly conducted to discuss and formulate solutions in preventing and reducing accident occurences.
Institutional Development – There is an urgent need to improve existing Government processes in relation to the transport sector. The Philippine Transport Strategy Study (PTSS) highlights the need for clear strategy for the sector and the need for institutional change and reforms. Since its inception, the Center has been conducting training programs aimed at enhancing the capacities of the institutions in the transport sector. At present, the Center is building partnerships with other concerned agencies and academic units in the conduct of responsive and demand-driven programs in the field of transportation.
Core Competencies:
* Transportation Research
* Transportation and Traffic Studies
* Capacity Building Activities
* Technical Advisory
* Information Management
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My opinion.
BRT already shelved because roads can not be widened,
DOST proposed solutions failed to launch because of lack of funding and project takers and some other reasons.
Strategy so nice, but it is always in the implementation.
In Venezuela, the hyperinflation has caused more smuggling.
We already have that here just look at the cars, motorcycles and shabu they destroyed, maybe it is all for show, but I believe there are honest efforts involved, they are just overwhelmed by the dishonest efforts of the criminals.
So far the train has increased collections 3 percent above last years first semester collections for the BIR.
On TRAIN2 aside from the things mentioned by Edgar.
Free tuition on state universitities made enrollment demand their above supply, so the private Universities lack enrollee so and TRAIN2 will only exacerbate the situation do they will increase the fees.
Making people stop schooling because State Universities can only take so much.
If we don’t watch out, this may happen to us.
http://www.johntreed.net/Smuggling-and-hyperinflation.html
“Smugglers become more important during hyperinflation because Hyperinflation is always accompanied by five evil laws: price controls, capital controls, rationing, anti-hoarding laws, and financial repression laws. Roughly speaking, the combination of U.S. dollar (USD) hyperinflation means all store shelves and gas pumps will all be empty. Google Argentina and Venezuela today to read news articles about those things happening there—because they now have high inflation and price controls.”
@Karl
I’m no expert at economics—but I don’t think that the Philippines is going to end up like Venezuela.
Venezuela is a special case—the worst tendencies of the Left (and I say that as a guy sympathetic to the Left and to the idea of state intervention) combined with a charismatic leader who had the cursed blessing of an oil rich nation experiencing a global boom in oil prices.
The oil ran out, the populist passed away and the institutions were weak and feeble…
…
The Philippines isn’t so dependent on one factor or so unsustainable. We won’t fall as hard as Venezuela…
We could avoid it of they would listen to guys with similar ideas such as yours and ours at TSH. (seriously)
Venezuela is an oil producer, mismanagement is the main reason for fouling in addition to geopolitics.
China tried to take advantage of their misfortunes and they failed in their gamble.
Venezuela will default.
Before, I see the Left as only wanting to protest against the US imperialists, etc
But without their complaints in congress the oligarchy will just get their way, and some of the changes the left clamor for are reasonable.
As for others I would wish the left would support is Universal Health care.
But subsidies require more taxes, because there really is No free lunch.
To my recollection, the infrastructure binge they are now calling Build, Build, Build is nothing new. Marcos did it in the late 60’s thru the 80’s. The infrastructures were also funded by domestic and foreign debts. Part of the money from the debts were squirreled away by Marcos and his family in their personal accounts overseas and spent on their extravagant lifestyle. Part of it also went to his cronies through their assignment of the construction projects. To Marcos credit, most of his cronies were Filipinos and the construction work was done by Filipinos.
We do not need to look at other countries to know the consequences of domestic and foreign debts to the country’s well-being. We only need to refer to PH own history and try hard not to repeat it.
We tend to look for best practices, Marcos is not the Best even in worst practices.
True, but there there were lessons learned there that could help. As far as best practices, I think Japan is a better yardstick than China.
*there were lessons
Yes there were, as Chem said:
The Do not do lessons.
Donut lessons, if you will.
Marcos experience is a good guide to “Everything you should not do in national infra programme”
Could not agree more.
I remember this outstanding example.
https://www.rappler.com/thought-leaders/146852-bnpp-trust-accountability
> Originally, Westinghouse proposed to build two nuclear reactors for a reported cost of US$500 million (US$200 million less than competitor GE’s proposal). However, by the time the contract was signed, the cost escalated to US$1.1 billion for a single reactor so the cost balooned to more than twice its original value. Calculations of the National Computer Center revealed that the single BNPP reactor was overpriced by at least US$75 million compared to similar Westinghouse plants being constructed at that time in Yugoslavia, South Korea and Taiwan.
Thanks for the reply, I think NCTS will be helpful in making policy studies, “helicopter” evaluations, etc. What I’m concerned is the continuous production of qualified personnel who will handle all the day-to-day requirements of running the subway system. I don’t think there’s any current institute that can handle the training and education of these personnel.
Ideally, this should all be ready way before the subway starts operation.
This is a reply to karlgarcia that went here.
Yes Andrew, we suck at implementation.
This is what we have been discussing in TSH, we train for the wrong stuff and unfortunately this is one of the big to do lists or must do lists.
One more thing that may cause lack of personell.
Contractors hire local workers because there really not much journeymen around. If you live in Bicol you would not take a job in Pampanga or Further North, Calabarzon maybe acceptable but not the far ones.
There maybe make shift quarters for the workers, but the practice for the contractors is to hire locals, maybe it is a condition of the Governor or the Mayor.
A beautiful summer dawn (here) wishes for everyone in The Society.
On this and his previous pieces I read HERE, Mrms Edgar Lores (if I may) should be a best Presidential Adviser on National Development. During Martial Law, a UP PoliSci (PhD Political Science) mentor who got arrested several times because he violated curfew as he walks to work at 3 am sought an audience with the UP President and asked to be appointed Professor of Political Economy. He received the suggestion to see a psychiatrist to which he retorted to his boss he should also do the same. Such was an academe LEGEND very few are privy to, of the man who understood the need to marry economics with political science.
The Cabinet of the President is multi-disciplinary but the Cabinet should DO INTEGRATED INTER-DISCIPLINARY work. BUILD to disintegrate can be avoided by the symbiotic OSMOSIS of NEDA, DPWH and DoLE. Cory started the simplistic multi-disciplinary small cabinet clusters which did not prosper under subsequent administrations. Her son Noynoy’s Achilles heel was he did not have a TEAM CABINET of inter-disciplinary sub-teams. Noynoy still got the Mamasapano painful arrow embedded on his heels.
A short course on social psychology for a presidential adviser could help make small group think functional and helpful in cabinet sub-team building.
The Philippines is in quagmire that do not entirely swallow the stranded. Sinking completely shall cease to harm the clueless and end the rewards of the perfs.
The executive, legislative, and judicial branches are so flawed in practice because the theory of check and balance and equal powers CANNOT work in ONE DIRECTION as a solid team (US, UK and Canada underplays and plays no silly obeisance to check and balance and equal powers).
In governance the branches cannot fuse as interdisciplinary; tree branches cannot be inarched or grafted to form a trunk. It is better to forget that snake medicine of democratic governance. The record is strong that even in CORRUPTION the branches go in their own separate lucrative ways.
If government units cannot work in interdisciplinary way, the people to survive should remain motionless in the quagmire or find ways to climb out of it and start punching.
*******
Thank you, Mr. Wakatano. I should be joined by Chemrock.
*****
California?
Good of you to visit. I enjoyed the tale of the job seeker and the UP President.
Actually, President Aquino did try to improve cabinet interface by forming what were called ‘cluster groups’ that dealt with specific topics like poverty, bringing the pertinent cabinet officials together on them. Mamasapano was a case of Filipino culture that brooks no mistakes and pounces on perceived weakness, and that pales when one places 44 soldiers dead against 20,000 poor people dead, with zero due process. That the Senate does not have the courage to address the matter, and accepts Senator De Lima’s jailing, is testimony that bad guys are judged strong here.
In short, the lesson is still “don’t put the cart before the horse.” When combined with the ill-conceived and drafted Federalism idea [reference, The Economic Managers] it is indeed hard to be optimistic. Thanks for the lesson chemrock.
Federalism, Fidelismo, Boobsderalismo, Pekpekderalismo what is that ? Any gadget invented by cave men to e-men of post modern times is ONLY AS GOOD as the HUMANIMALS who use them. To be kind to animals, only humanimals are capable of subterfuge of neutral human concepts.
@Tweeto, just to avoid misunderstandings, this is a discussion blog, not a place to preach one way with witticisms or to overrun the thread with one person’s views. I suggest you participate by finding someone to engage with on a topic you wish to explore in some depth. Build something new and refreshing for readers. Thank you.
I would add that many people have been working diligently here for years, so not much of what you have said is new here. Humility, my good mister or missus, humility.
okay.
You put the cart before the horse if you want the horse to push the cart.
Yep, but with the horse’s blinder on, all he sees is the cart — difficult to navigate. 🙂
😊
My pleasure NHerrera.
The recent comment of Domiguez on his worries of Federalism is timely. Many have written and talked about the lack of specifics on the financial aspects but nobody on the pro side pays any attention. They simply want to railroad Federalism through ala Alvarez way. Domiguez’s comments now puts more weight on the call to the charter change consultative team to come down from the clouds
Yes, and while writing on horse blinders — here is a note to the Heretofore Influencers: take your blinders off for a change!
Comments may be made for the Constitutional Consultative Committee to might have missed the trees with their broad forest perspective. Good job for such undertaking REQUIRE knowledge plus experience (therefore wisdom) in distinguishing reforestation from deforestation and the need for AFFORESTATION. As experienced in Carranglan, Nueva Ecija a piece of katol lighted by an arsonist could result into a big swath of forest fire.
“don’t put the cart before the horse.”
A twist with words twists the mind. In a very steep downhill road it might be better to put the WEAK horse before the cart to avoid being run over or squashed by the cart. Just let the cart pulled down the weak horse. May be, The road engineers failed to cut and fill and just let the horses go up (instead of cut) and fill when the is so deep and steep.
Agree on the horse and the cart in the situation of a steep incline — the cart in front, pulling a weak horse who would otherwise be crashed.
Which brings a variation, an apt and interesting picture: the hurried-up infrastructure and federalism moves [the heavy cart] dragging the unprepared and weak socio-econ- political country [the weak horse] to a very uncertain if not disastrous future. Pity the poor country aka horse.
So sorry Mrms Chemrock my bad I mistook the piece to be written by Edgar; because both of you by your pieces are national adviser timbers. I could make the same mistake for two ladies (Msmr?) contributors here but I shall try not to.
It’s OK Mr Wakamoto, I hv no ego. In any case Mr Lores is the better choice. It’s a no brainer.
I know of M/s, Mrms is new to me. FYI Mr suits me just fine.
And glad you drop by and drop your comments.
Yeah, okay Mistah, este Mister Chemrock.
layman’s opinion on authoritative opinion:
Investments in public infrastructure is like aspirin to chronic hypertension. When Bill Clinton?(“It’s economics stupid”) first took office he improved and created employment by investments in infrastructure. That’s not all he did. Canada investments are in maintenance of infrastructure all seasons because of stable employment. Well, you don’t exactly prescribe aspirin to a country to cure political smallpox.
Clinton’s economic legacy is on balance very positive. In the context of where Philippines stand now and tries to do the massive infras on debt, it is worth noting that Clintonomics had two critical pillars — fiscal management discipline (no deficit budgets) and national debt reduction> The clinton years 1993-2001 were the only time since 1969 when the US has ever reduced its national debt. Dutertenomics is going the other way — budget deficits and increase national debt. ,
I always appreciate your perspective chemrock, being left to wonder what the late R.Hiro would have to say to your contribution.
Former UBS CEO Oswald Grübel was once asked what Switzerland could do to fight against the very strong Swiss Franc. He replied that Switzerland needs to adopt a worse political culture and this wish would be granted.
You cite several scientific papers that “confirm” a certain economic mechanism empirically. There is an interesting meta-analysis (https://ideas.repec.org/p/cam/camdae/0773.html) on a closely related topic where it is shown that a large portion of the academic community concerned with the effect of development aid (which is oftentimes carried out through infrastructure projects) on economic growth seems to have fallen victim to a cognitive bias that leads to falsely confirm some of the good and well-intended effects on economic growth. To the contrary, this analysis finds no evidence for such an effect. The authors show that the research community exhibits a systematical reluctance to publish negative results. I guess the thinking of the masterminds behind the BBB initiative are consciously or subconsciously exhibiting the same bias…
Thank you DO.
Yes cognitive bias is a human factor in all research reports. In the professional fields, all such academic papers are open for peer reviews. That sort of put things squarely on the table for all who are interested.
There are certainly lots of all sorts of initiatives that come with same bias. The only protection we can have is an independent critical mind.
Just a few short observations on chemmy’s article. Rostow’s theories on economic growth and development were novel and groundbreaking in the sixties when much of Asia were essentially rural economies. Many things have changed since including with respect to the Philippines and China. It is not clear at what stage of his takeoff growth model both economies would fall under because they now compete as the first and second fastest growing economies in the world. Perhaps a Keynesian perspective where government spending aka investment is key (pun intended) to stimulating growth is the inspiration behind this humongous expenditure of funds the government does not have. Perhaps the Duterte regime’s economic mahagers are basing their massive infrastructure program on the huge deficit spending Roosevelt’s launched via his New Deal program to create jobs and lift the Depression. Unfortunately many economic historians attribute the
recovery from the Great Depression to WWII and its immediate aftermath and not FDR’s policies.
Given its history, much of the money borrowed (probably from China) will no doubt be lost to corruption as Chemmy points out. II the ZTE admin and the Napoles lawmaker scandalss any indication, up to 50% of the money allocated to infrastructure oending will be lost to kickbacks and corruption.
One should also note that China’s massive infrastructure spending to spread the economic success of its coastal provinces to its hinterland areas has been a failure. The diversion inland of financial and physical resources to build rails, roads and cities away from the already thriving financial and productiive regions has led to ghost cities and factors, high inflation, overleveraged municipalies and corporation, and lowered growth rates. That the Philippines is following in the failed economic footsteps of its suppiosed mentor and future creditor is pretty ominous.
If they were following FDR’s New Deal program :
That would be hitting a square peg into a round hole. FDR was orthodox Keynesian spending in a depression to create aggregate demand. There is no depression in Philippines. In fact, as you pointed out, we are having the 2nd highest growth rate in the world. With GDP of about 6.5% and you pump average 6% of GDP worth of infra investments that ought to drive GDP past 10%. High inflation is to be expected.
Although we always speak of high growth rate in the positive, it is but a journey, not the end. With high rates, accumulate financial capital and reduce poverty – that should be the objective. Many countries lost their way with high rates. At the dizzying heights, they spend foolishly. China is on that path.
About high rates, one has to drink humility and understand where the country is coming from. High rates are ONLY possible because the country is coming from a very low base. Just because our 6.5% GDP is higher than countries with lower figures does’nt mean we are better than them economically. After economic takeoff, the country is headed for a state of matured economy where growth rates will average 2-3 %.
“That the Philippines is following in the failed economic footsteps of its suppiosed mentor and future creditor is pretty ominous.”
That pretty much is the sum of all fears.
My point is that Rostow’s takeoff theories cannot and should not be the economic justification for this gargantuan infrastructure investment project. Rostow’s ideas and models were mainly in the field of developmental economics and were ground breaking
In the sixties because it supposedly mapped out how Third World economies could breakout from their perennial low growth potential patterns and eventually transition into the developed and higher growing economies of the First World. The country has some capable economic and financial minds and I would be surprised if they originated or support the 3B infrastrucure plan on the basis of Rostow’s or his takeoff models. Neither does it make much sense to evaluate the plan from that perspective.
I also disagree with the assertion that China and the Philippines have very high growth raIes merely because they started from a very low base. Just as I doubt that Bangladesh will join their ranks anytime soon. the former two countries have had sustainable growth rates in the past and foreseeable future. It is primarily its export engine enabled by very low labor cost which drove China to grow its economy at such a rapid pace that its now among the world’s largest economies. In a different though similar vein, the Philippine economy has benefited primarily from the rapid and sustainable growth of its call center and OFW sectors.
If anything, I suspect that its not developmental or macroeconomic thinking underpinning the 3B program but perhaps mainly the same political objectives behind the proposal for a new Federalist constitution. It is quite uncanny how this mirrors command economy in China where resource allocation is decided essentially by a politburo whose main goal is keeping itself in power. Presidents Xi and Duterte also seem to be on the same track in seizing and centralizing power, and unfortunately this may extend to perpetuating that power as Xi has has done.
On Rostow — noted and I agree.
On where you disagree that China’s and Phil’s high growth rates came from a low base — that I disagree. All high growths come from a situation of low growth country breaking out into an advanced economy. Once they reached advanced and matured economy, such high rates of growth cannot be revisited because their cost of labour will have risen to a much higher spectrum. It’s a rich country’s trap.
” It is primarily its export engine enabled by very low labor cost which drove China to grow its economy at such a rapid pace ”
Of course there is no arguing with that. It is why I have commented before, Phils must first have an industrialisation policy. Decide which path — domestic economy, import-substitution, export oriented as in China’s earlier strategies. Only when the strategy is clear can other economic development policies fall in place. Clearly, this has not been done.
For the economic takeoff, most countries will aim for 1 or 2 industrial sectors where the country has the competitive advantage. This has also not been identified.
BPO or call centres have been identified as a key area. I appreciate this is an important part of Phils economy but service sector is unusual as a driver for growth for a low based country. Service sector is mostly where advance countries have the competitive advantage. Slowly but surely, with AI improving in leaps and bounds, many of these services will return to home base.
As I mentioned, its difficult for me to view and rate the 3B plan within the framework of Rostow’s takeoff theories. Doing so makes presumptions about what the plan is trying to achieve and whether it will help the Philippines get there. If the objective is to grow the Philippine economy at a high sustainable rate like China has done to tranform its economy, the country is already there. In that case, the plans presents an all-in type of bet from an economic standpoint where the risk of failure is enormous and not in line with its economic situation and priorities.
Suffice it to say on that on the subject of rapid growth, it goes without saying that any growth logically presumably starts from a lower level. Its the sustainability of such high growth that makes China a unique example and a potential benchmark for the ongoing development of its economy. Perhaps a better and traditional goal is not high growth ir takeoff is that of transitioning from a developing into a developed economy. One usual yardstick among many used in describing a developed economy is that gross domestic product per person us at least $12,000 per year. By that measure, China, India, and definitely the Philippines are still developing countries inspite of being the world’s fastest growing economies.
Finally the idea that service instead of cheap labor cannot be a driver for a ‘low-level’country to achieve rapid growth and development is questionable. The fact that that Filipinos sell their services by working overseas instead of in their home country is no different from the China’s rural workers migrating to its assembly lines in the coastal regions to offer their services. The stellar growth of the Philippine BPO industry is further confirmation that not so advanced countries like India and the Philippines can use their comparative advantage in offering services at a lower cost to more advanced and developed countries.
(1) Regarding Rostow — ” If the objective is to grow the Philippine economy at a high sustainable rate like China has done to tranform its economy, the country is already there.”
Nice observation. But there is the ever reluctance to admit nor praise the Pnoy admin for achieving that.
(2) High growth is not yardstick for developed economy — your metrics is correct. India, China and certainly Phils are indeed still NIC countries by per capita metrics.
(3) “Finally the idea that service instead of cheap labor cannot be a driver for a ‘low-level’country to achieve rapid growth and development is questionable.”
This is indeed a worthy thought for interesting arguments.
The proposition is : Can the service sector be the engine of growth to propel a low base economy to takeoff to a developed state?
To recap, I had stated NO to which you find questionable.
Traditional growth path for countries have been agricultural — manufacturing — service economy. Countries that took off all concentrated on 1 or 2 manufacturing industries for which they had competitive advantage, at least that was the pathway of capitalistic countries. Communists went for nationwide all sectors approach.
Whether manufacturing or service, low base economy start off with cheap labour as the common advantage.
The reason for the focus on manufacturing — take advantage of local resource (iron ores, aluminium, etc), wide possibilities for downstream and upstream expansion of industry, scale up to bring production cost down, possibilities of export expand the output base. The overall aim is mass output and consumption which manufacturing is able to do.
Service sectors — traditionally in hospitality, restaurants, government service, health, massage parlours, tailors, casinos etc. These are constrained somewhat, expecially in export. They are all local consumption. You cannot break out into a mass consumption economy in these sectors.
Having said that about traditional services, there is now the modern service of BPOs. India is the country that tries to use service (BPOs and software) as the pillar to push the economy forward. That there are constraints is evident in that they have been at it for 30 years and the country has’nt moved. No doubt BPOs and software for India, and BPOs for Phils, are important sectors economically, but it’s simply 4 gear engine. It can’t be pushed to the 5th gear for takeoff.
Now Phils have always referred to OFWs as exported service. This is not in the same boat as the export of manufactured goods. Inward remittances sure is the lifeline for Phils Balance of Payments. It also contributes to increased aggregate consumption, and tiny drops of investments. But it does not expand the output base the way manufacturing does.
An explosion of the output base is need to propel the economy into the mass consumption economy.
Now less we all make the mistake of downplaying the importance of infras. The road to an explosive expansion of the output base requires efficient infras — transportation, ports, energy resources, skilled labour force, etc, and of course FDIs and financial accumulation. The build build build programme only looks at one side of the coin. We need good politics and institutions to enable the output base expansion.
Someday we should have a more extensive and a deeper discussion on this service versus low-cost labor/manufacturing paths to development. I think there is a need to clarify what we mean by development as the end goal of either path. The idea of relating it to the Rostow takeoff concept is inadequate and reflects Third World development issues and constructs of fifty years ago. For the most part, the burning issue was how underdeveloped economies in Asia, Latin America, and Africa could breakout from the macroeconomic cycles that kept these economies stagnant and poor. To think of development iin terms of how a Third World country can be transformed into a First World country is oversimplistic and vague, and the analytical theories of achieving that goal both have become more important as historical artifacts of economic thought.
https://www.ft.com/content/27f778a8-fb26-11e7-a492-2c9be7f3120a
“This is despite the dawn of what President Xi Jinping has called a “new era” in which local governments will be forced to abandon their traditional bias towards rapid growth and pay more attention to financial risks and environmental protection.
Projects that were once encouraged because they would boost growth are being subjected to greater scrutiny, especially in regions struggling with high debt burdens. Three more subway projects have been cancelled in Inner Mongolia’s capital Hohhot.“
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3 Subway projects cancelled.
Whether it is concerned about financial risks, the environment and the needs of the people, China must admit that the world has been noticing their debt problems and that they have been faking their data on growth.
That probably explains why Chinese projects in the Philippines are slow getting untracked.
I think this spending spree in the Philippines is the idea of Budget Secretary Diokno who is supposed to know the nuances of Government spending having served as Estrada’s budget secretary. Even in the Business World article that Chemrock highlighted, he still insists on spending.
Now as to Pernia, he announced that China processes its loans faster, but in reality we have more Japanese funded infrastructure projects than China.
As to the pace, the excuse of PDuterte is that the provinces are neglected and development only happens in Manila. We all know that is only to push the Federal system.
Ah, thanks. I am still hung up on “highest and best use of money”, from my corporate days, and find that just throwing money at the economy does not get done what needs to be done, like automating all the agencies to prevent corruption. The whole cash-based budgeting approach seems to be one of those ideas that no one really thought through, done for reasons that seem logical if one looks at the broad reason, but messy messy messy when one looks at implementation impacts. Now the whole budget process is stalled because the financial guys evidently forgot to consult with Congress about the plan. SNAFU
And Congress passes laws with no budget.
http://newsinfo.inquirer.net/1019948/cash-based-budgeting-goes-against-build-build-build
The DBM slashed the budget for free College tuition in State Universities, this will anger the Senators and Congressmen who sponsored the Bill.
DBM just said the worst case scenario is Budget reenactment and they are prepared for such eventuality.
Just to reinforce Chem’s Cash based budgeting 101.
https://www.rappler.com/newsbreak/iq/209448-things-to-know-cash-based-budgeting
Indeed.
All countries practice cash based budgeting. Diokno’s beef is the rules allow agencies who could not expend their allocations get to put them aside for future use. By not expending in the year budgetted for, they impact the aggregate government expenditure thereby reducing the GDP metrics.
The root cause is absorptive capacity, as Francis mentioned above. That dang same brick wall all admins ran into. Diokno criticised Pnoy for the same problem he is now facing.
Instead of addressing this problem, the economic managers are now asking Congress to do away with cash budgetting. Let’s get the term correct. From accounting vewpoint, it’s either cash or accrual accounting. The economic managers are not suggesting accrual accounting. It’s still cash accounting. They are asking Congress to change the rules. That un-utilised budget sums cannot be carried forward. They have to be spent in the budget year.
Forcing agencies to spend leads to only one pathway. Rather than having unspent funds taken away, defensive reaction of agencies is to spend recklessly. The result is wanton WASTAGE. As a little kid I saw this with the British Armed Forces in Singapore. My dad does a bit of transportation contract with Her Majesty’s Service. This allowed him free access into British forces’ residential compounds. At the end of the year there were lots of goodies that can be picked at the rubbish bins, many items still in very good order. My dad explained that towards the end of the year the Armed Forces personnel has to expend certain sum of money, so they simply discarded lots of stuff in order to justify buying new ones. That’s just at the residences, wonder what it must have been like in their offices and ordnance depts.
The problem of unspent budget is the result of top-down budgeting. With bottom-up budgeting, the agencies know how much they can and cannot handle for the year. That is not to say the economic planners leave it to the agencies, but that the top will appreciate the bottoms’ problems early and thus be able to take proactive action.
Thanks for the explanation. I recognized the folly of mandating the spending of money, no matter the pragmatics of what it is spent for. I appreciate how you crystallized that.
Both the NEDA and DBM put the figure for infra spending at 6% of GDP.
Surprise surprise, GDP also grew in the vicinity of 6% last year.
What that means, quite obviously, is that without that razzle-dazzle infra spending, economic growth is actually a flatliner. Other sectors of the Philippine economy pretty much registered negligible growth, if at all.
Haha Micha, I like the razzle-dazzle. You reinforced what I mentioned in the article in a simple sentence. Part of GDP is the accounting consequence of infra spending. Govt spending is a large part of GDP contributor but to have it come from infra, almost entirely from infra, well what can you say. That’s one of NHerrera’s horse blinders. Was there actually negative growth without the infras?
Yes, without the infras you’ll be seeing basically a flat line. Most people tend to get impressed when admin functionaries flaunt the 6% growth but it’s not coming from the productive capacity of different economic sectors (agriculture, manufacturing, service etc.)
All that borrowed money will soon be coming home to roost.
Fudging the figures almost always does not hurt the incumbent administration. Its ravages become the problem of the next one. Some incumbent admistrations manipulate economic figures to make them look good. The heck with the next president, for it is not the incumbent’s problem anymore once he/she is out of the office.
Conscientious leaders understand the importance of leaving a positive legacy, self-serving ones, not so much.
In the article to be posted, the secretary of agriculture is lamenting the lack of budget for farm to market roads.
https://www.philstar.com/headlines/2018/08/14/1842407/agri-chief-slams-economic-managers
Not in my area. The roads have been built everywhere the past few years. And widened. His complaint ought to be that LGU’s stink at managing local infrastructure.
Our complaint of federalism, the LGUs can not be left to their own devices.
Plus if we even pass a National land use law then go federal then that would be a piece of trash legislation.
Habito questions the unnecessary road widening and constant reblocking where infrastructure spending goes nowhere.
http://opinion.inquirer.net/114494/infra-spending-goes-nowhere
The cement roads turn to trash in 3 years due to water and heavy trucks. Congestion is a problem so roads need to be widened so cars and pedicabs can work together. He is wrong. Period.
👍
But that time, Habito was taking about a road less travelled.
In metro Manila alone 36 bridges are in dire need of repair, what more of when we talk if nation wide.
That means, maintenance is not a priority, we just destroy roads were repavenent is not needed, what will happen to the bridges after they are built, they will just rot.
https://news.mb.com.ph/2018/07/20/36-bridges-in-metro-manila-to-undergo-improvement-works-under-p1b-fund/
Plus of course we widen roads but leave the posts in the middle of the roads.
https://www.wheninmanila.com/watch-lamp-posts-in-the-middle-of-the-road-confuses-motorists/
Aside from wear and tear our roads constantly get repaired due to pipe leaks.
https://www.philstar.com/business/2018/02/11/1786559/maynilad-spends-p260-m-pipe-repairs
I am copying the whole article.
Pernia was wrong in saying that the loans would be processed faster with China.
China might not be serious with its commitments to us because they already have many more important prior commitments to other nations.
https://business.inquirer.net/255943/slow-loan-boat-china
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Slow (loan) boat from China
The Duterte administration’s expectations that its “Build, Build, Build” program will receive massive financial support from China may be faltering.
Of the 18 infrastructure projects worth P731.7 billion proposed to be funded with Chinese loans and grants, only one—the P4.4-billion Chico River Pump Irrigation Project—has, so far, concluded a loan agreement.
According to reports, the rest are either under loan negotiation or subject of feasibility studies by Philippine and Chinese financial and technical panels.
Many of the projects are carryovers from the past administration’s public-private partnership program and were updated to address changes in the areas of construction and operation.
Some of the new projects will be built in Mindanao in line with President Duterte’s vision that the solution to the region’s Muslim unrest and insurgency problems lies in its economic development.
With the terms of reference and technical specifications of the “old” projects already complete, it is reasonable to expect their covering financing documents to be speedily completed.
Since China has been extending financial credits left and right in recent years to countries it wants to come under its influence, its financial, technical and legal staffs are already experts (or veterans) in the preparation and execution of foreign loans and grants.
As loan officers and lawyers put it, these kinds of documents are de cajon, meaning standard or fill in the blanks types, or to use modern IT language, templated.
Except perhaps for the interest rate or schedule of repayment, there is very little room for negotiation in development-type loan agreements, as in the case of infrastructure projects. It’s usually a “take it or leave it” proposition. Lenders are averse to making changes in their standard loan agreements lest they create unwanted precedents in future transactions.
More so in the case of grants as beggars can’t be choosers. Since the funds, products or services subject of the donation are given free of charge (at least on papers), discussions on the matters are often limited to where, when and how the freebies will be given to their recipients.
So what’s keeping the Chinese government from expeditiously living up to its promised funding assistance to the administration’s ambitious infrastructure program? At the rate financing is being arranged for the rest of the projects, the Duterte administration may no longer be on the saddle by the time they are concluded.
Two things come to mind about the unexplained delay in the execution of the funding arrangements:
First, the Chinese government is not serious about its promised assistance and that it did so only to encourage President Duterte’s foreign policy pivot from the United States, China’s self-proclaimed nemesis.
Note that although China may be awash with money, it has billions of dollars in financial commitments with other countries that, from its global strategic perspective, are more important than the Philippines, so funding the local projects is nowhere near the top of its priority list.
Second, the funding offer has been placed on slow track mode by the Chinese government to send a subtle message (or pressure) to the Philippines that it should watch its steps in dealing with China’s seizure and militarization of some islands in the West Philippine Sea, otherwise the promised funds will not be forthcoming.
A carrot is being dangled before the administration in consideration for its tolerating, if not accepting, Chinese encroachment in the Philippines’ exclusive economic zone. It’s like giving money in exchange for ceding Philippine sovereignty over islands and seas believed to be rich in natural resources.
The Chinese government knows Mr. Duterte’s legacy will rise or fall on the success or failure of his “Build, Build, Build” program. Given this situation, it should not come as a surprise if China is milking it to its advantage through the use of a financial carrot.
There’s more than meets the eye in the slow travel of the loan boat from China.
The feeling I have is the delays are mostly due to feasibility studies being on a slower boat. The buck stops at the Philippines side.
The loan documentation may not be that simple. These are cross border contracts plus they are exim loans involving tying up with commercial contracts. It’s not like having a template and simply fill in the blanks.
Thanks for that Chempo, Indeed we have nightmarish and helliish red tape, but Pernia did mention securing a loan from China will speed up infra.
http://www.interaksyon.com/japan-has-better-rates-for-loans-but-ph-needs-china-too-to-speed-up-infra-projects-pernia/