Fleshing Out The Broad Strokes

MakatiBy Felicito C. Payumo
Mapping the Future,
Philippine Daily Inquirer, July 19, 2010

In a seminar for Liberal Party Congressmen, I was tasked to talk about the Economic thrusts of President Noynoy’s Administration. I thought that the best way to do it was to go through President Noynoy’s inaugural speech and flesh out the broad strokes on economic reforms and objectives he wanted to achieve.

It was a powerful speech. No soaring rhetoric. The objectives were clear and direct to the point. But more than just a thought leader, the speech showed he was also a feeling leader.

Let us start with:

1. Job Generation.

P.Noy declared that “he will make our country attractive to investors by cutting red tape, implementing stable economic policies, leveling the playing fields and making government an enabler…where everyone will say –it works.”

What is the situation now? Our emerging market neighbors, Indonesia and Vietnam, are getting an average of $7 to $10 Billion in Foreign Direct Investments annually, while we have to settle with $2 Billion.

The Institute of Management Development reports that as a percentage of the GDP, other countries in Asia have successfully preserved their shares at significantly higher levels (Thailand -3.70, Malaysia -3.63, China Mainland- 2.13, Indonesia -1.63, Hongkong- 29.23 and Singapore-12.49 vs. the Philippines’ 0.90 in 2008). We rank # 171 in Global Competitiveness Report, # 140 In Ease of Doing Business and #141 in Corruption Perception among 181 economies.

As President Noynoy said, our people have been voting with their feet for lack of employment opportunities at home. He wants the Government to be an enabler rather than a hindrance to investments through a stable and dependable investment and regulatory policies. More often, it is graft that makes these policies and regulations unpredictable and the finger is often pointed to the Legislative and the Executive Department’s regulatory bodies, given the many scandals that media had exposed. But it is about time that the Judiciary is put on the radar screen. Corruption in the Bench is no longer an open secret but a frequent topic of conversations among Bar practitioners.

Is there a connection between a clean and fair judicial system and investments flow, especially Foreign Direct Investments (FDI)? Yes, and plenty. When foreign investors are wary of hometown decisions of the local Courts, they will be reluctant to come. And if they do come in joint venture with local partners- knowing that there will always be corporate disputes-they put an Arbitration Clause in the Stockholders Agreement where the venue is often outside the country. If that is not an indictment of our Judicial system, I do not know what is. What exacerbates the problem is despite a clear Arbitration Clause, our Judges even issue injunctions against arbitral proceedings abroad, making us a laughing stock in the International community.

While it is important to reduce if not eliminate corruption, we must also improve our regulatory environment. The perception that Government regulations often change discourage investment. This is especially significant in the Power sector where regulatory uncertainties may delay investments in new plants. A power shortage will be catastrophic to our investment promotion efforts.

2. Emergency Employment.

It is noteworthy that cash transfer through emergency employment was mentioned separately from job generation in the formal sector. Just where and in which projects can emergency employment be done productively? Certainly, not by hiring roadside sweepers brigades funded from the Road Users’ Taxes, as the past Administration did. Or worse, by doling out cash or food coupons to the poorest households which even the DSWD had a hard time identifying. Instead, we suggest using manual labor where suitable such as in constructing small rainwater-catchments in the countryside for drip or sprinkler irrigation of less water- intensive crops.

You see them dotting the hillsides of China. India builds them while guaranteeing poor Indians 100 days of work each year under the National Rural Employment Guarantee (NREG). The program is self- selecting because only the truly poor would agree shoveling for their supper under the hot sun. And since they can be inspected for progress completion, ghost projects are prevented. Constructed even outside river channels, such water catchments impede the rush of run-off water, filter into the aquifer and raise the water table.

Archipelagic countries such as ours that do not have mighty river systems such as the Nile, Ganges, Yangtze and Mekong must adopt the more suitable small water- catchments technology. At 10 per barangay a year, we can build 400,000 water catchments annually, while guaranteeing work to our rural folks.

3. From Food Security to Self-Sufficiency.

What is the difference? Food security can be achieved by stocking up on imported cereal as we have been doing. But, as Secretary Proceso Alcala said, it is better that we grow out of our dependence on imports by producing rice sufficiently. Why?

a) There is no guarantee that the food crisis of 2007-08, caused not just by disturbances such as floods or drought -now predicted to be a recurring phenomena due to climate change- but by structural imbalances in the world food chain, will not recur. The UN reports that the imbalances caused by rising incomes and changing appetites in emerging countries such as China and India, and the competing use of land for biofuels will persist.

b) Add the fact that most lands in industrialized countries are now producing close to their theoretical potential, future increases in production will have to come from additional lands to be put under the plow.

But with 50 per cent of our irrigable lands still un-irrigated and the rest of the irrigation systems in various state of disrepair, we cannot hope to be self-sufficient. Without water, inputs of hybrid seed varieties and fertilizer will be useless. Unfortunately, RA 6978, approved in 1991, which mandated that the remaining 1.5 million hectares be irrigated within 10 years remain unimplemented.

d) It is not farfetched that rice exporting countries will first secure their food production for their own population, and if ever they export rice there would be a spike in prices again. Clearly, the Organization of Rice Exporting Countries (OREC) patterned after OPEC, does not augur well for net-importing countries like the Philippines.

4. Radical Improvement in Bureau of Customs and Bureau of Internal Revenue Collections.

Again, a situationer- We have a tax effort ratio of 13 per cent, a projected fiscal deficit of up to P350B, a drop in BIR collection by 5.5 per cent, and BOC by 16.6 per cent. No doubt, we have to increase our tax effort ratio if we have to reduce our fiscal deficit without raising taxes while funding our social development expenditures. But the poor BOC performance is further threatened with the creation of more Freeports.

Unfortunately, following the recent approval of two Freeports, Secretary Cesar Purisima is now confronted with more than two dozen Bills, creating Freeports that will punch holes, some as large as entire provinces, in the Customs territory. If passed, we might as well declare the entire country a Freeport.

Unlike the 225 privately funded Special Economic Zones under the supervision of PEZA that had attracted $1 Trillion worth of investments todate, each Bill carries a proposed budget of P2.5 Billion. And while the PEZA –administered Zones give duty and tax-free importation privilege only for capital equipment and supplies (which do not have ready market in the customs territory), Freeports allow duty and tax-free flow of even consumption goods such as oil, cigarettes, liquor, etc. within the Freeport area. That renders Customs administration difficult. And the fact that the goods are not inspected while inside the Freeport area, embolden criminally-bent minds to misdeclare drugs as consumption goods. How else did the 746 kilos of metamemphetamine chemicals get inside a Subic Freeport warehouse?

It is not surprising that P.Noy’s marching order is to stop smuggling, especially of oil, and drugs in the Subic Freeport.

5. The DFA, POEA, OWWA should be responsive to the needs of the OFWs.

Because of OFW remittance (now $19 B per year), we have a surplus in our current account ($4B) and a growing Gross International Reserve ($35 B).

But the sad story is that most OFWs will come home with nothing to show for their many years of sacrifice in foreign lands, save, perhaps, a new or improved house, a tricycle or a beauty parlor. And while they are able to support their children in school, their education is not assured because the absence of a marital partner and lack of parental guidance tend to produce broken homes and wayward children.

A concerned citizen, Marcelo Tecson, suggested that BSP set up a high-yielding special dollar deposit account (SDDA) facility for OFW families. To really attract savings out of the OFW remittances and prevent the use of the saved amounts in inflationary consumption expenditures, BSP should pay as much as 6% to 10% interest rate on deposits in the SDDA facility. To finance the interest cost of maintaining the SDDA facility, BSP should dismantle or drastically reduce its present P805-BILLION Special Deposit Account (SDA) facility for the Banks’ otherwise loanable funds, then use part of the resulting interest-expense savings in paying the interest expense on the new SDDA facility.

Other academicians and investment bankers urge the BSP to reduce the 4% interest rate on SDAs to encourage banks to lend more of their funds instead of parking their money with the BSP. Such move would be in line with a growth strategy that targets a growth rate double than the 4% seen in previous years.

After all, the best way to confront the debt problem is to grow out of it.

6. Develop Infrastructures for Transportation, Trade and Tourism.

We need not only quality infrastructures but strategically planned infrastructures. The SCTEX was strategic in the sense that it created a synergy between Subic’s seaport and Clark’s airport that created a logistical hub. The expressway provides locators of the two Zones an efficient access to both facilities which in turn give them an ability to deliver their products to the market ahead of the competitors. As Bill Gates said, “If the 1980’s were about Quality, and the 1990’s about Re-engineering, the 2000’s would be about Velocity.”

What could be the next strategic infrastructure?

Without doubt, it is not only the extensions but the direct linkup between the NLEX and the SLEX via an elevated skyway along the railroad tracks. The project is a private initiative by the Metro Pacific Tollways Corp. under a BOT scheme. Not only would motorists and cargoes save valuable hours plowing through the traffic on EDSA, but it would make possible the transfer of the NAIA to Clark. With only one runway, the present location of NAIA is not viable long term. Clark has two runways but the present travel time from Manila to Clark makes it also an unviable alternative. With the direct linkup, the transfer can be realized. Clark will not be farther from Manila than Narita is from Haneda.

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Mr. Payumo was a three-term Congressman of the First District of Bataan and a former Chairman and Administrator of the Subic Bay Metropolitan Authority. He is currently Chairman of the University of Nueva Caceres.

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