Thursday, 9 April 2009

Philippines reaps benefits from breakdown in US

Outside the Box / John Mangun
THURSDAY, 09 APRIL 2009 00:43
Business Mirror

Filling up this space with analysis on how the Philippine stock market is going to skyrocket over the next months would be easier. Commenting on how none of the gloom-and-doom forecasts are coming true would be more enjoyable.

However, the events that are unfolding in the United States, in particular, are going to have such a profound impact on the future of the Philippines, that it is necessary to look into possibilities, probabilities that were unthinkable just a few months ago.

Over the last three months, the US government has done things that were unimaginable even one year ago. The government has nationalized a large portion of the banking sector, taken over the US automobile-manufacturing industry and increased government spending to levels unheard of for a “First World” nation. These policies are completely interconnected and the result will dramatically affect the world for decades to come.

State ownership of major portions of the economy is the great failure of government policy of the 20th century. From the former Soviet Union to China and England, Sweden, Italy and every example of crony capitalism, there is not a single success story. Go no farther than state ownership of National Power Corp. in the Philippines for the classic study. In every case, where the government took over businesses created by and thriving in the private ownership, failure resulted. Before you raise the example of state ownership and control of business in Singapore as a positive example, remember that, first, Lee Kuan Yew’s government built most of those business like Sembawang Shipyard, Temasek Holdings, Singapore Telecoms and Singapore Airlines nearly from the beginning, and second, Lee ran those businesses as well as the government, as a business and not as a government-style enterprise.

A crucial reason the government cannot successfully manage companies is that the government has no financial restraints; it can print all the money it needs to run the businesses. Imagine having an unlimited amount of capital for your own business, never having to worry about making a profit in order to pay expenses or to expand operations. Having unlimited and, most important, unearned capital available goes against the essential purpose of a business; that is, to make a profit.

As a government nationalizes businesses, it must raise money to fuel those companies, either through borrowing or taxation, since state-owned enterprises rarely make any profit. The United States has increased spending as a percentage of its gross domestic product to a level that would shame any Third World country and would have the World Bank screaming about fiscal irresponsibility.

Two things will happen to support this massive government spending and the funding of the financial bottomless pits of government corporations: uncontrolled printing of money and high, crippling taxes.

From the Weimar Germany in the 1930s to Zimbabwe of 2008, currency devaluation and screaming inflation are inevitable when the government printing presses roll. Witness the Philippine economy and peso during martial law and crony capitalism.

Higher taxes always start with the “tax only the rich” song, as with Obama. Yet, it is the “rich,” that always created the successful businesses; that is how they became rich. Both Sweden and the UK followed the same formula as Obama is doing. Sweden raised taxes to the point that anyone making over $250,000 per year paid 102-percent tax on the excess amount. They were penalized for making money. And what did these people do? They left their countries; ironically, most for the United States, where wealth-building was still rewarded.

With a substantially devalued currency and with a tax rate that pushes the individuals who drive private-sector economic growth out of the system, what happens?

Read this from an American commentator, Bill Whittle: “The top 10 percent [of income earners] pays 60 percent of the total income tax, and which allows the bottom half to pay nothing. So let me now send a personal message to the rich in America. Leave. Just go away. Retire to the Cayman Islands or Bermuda or wherever, but do it now, please. Close your companies, fire your employees, shutter your factories and offices, sell your property and take all of that somewhere else…better yet: somewhere scenic but poverty-stricken. Somewhere that could use some wealth creation. Somewhere that people simply are grateful to have a job in the first place. Somewhere where you will be appreciated. You are not welcome in America any more. Take your wealth and prosperity and inventiveness and hard work and vision and insight and bold risk-taking and joy in seeing growth and wealth creation and just go away.” And come to the Philippines.

Is this dreaming and wild speculation? No, it will happen. In fact, it is happening. The billions of dollars US companies are spending abroad on outsourcing is a result of the US corporate-tax rates being the second-highest in the world. The Philippines, accused of being a “tax haven,” is the first shot of many more to come in the war to keep the West’s wealthy (and their money) at home.

The Philippines will definitely reap the rewards of this new and doomed attempt at economic statism in the United States. The Philippines has a Western-friendly culture combined with an Asian setting. The overwhelming abundance of natural resources and its wealth will help keep the peso strong and stable, and inflation well-controlled. The Philippines, like many similar countries, is continuously moving toward a more business/wealth creating-friendly environment.

These factors and others will fuel a migration of capital and business from the West to the Philippines. This relocation of wealth will be long, deep and sustained.

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