Friday, 29 July 2011

‘No risk, no reward’ economic policy

Business Mirror

At a meeting of the board of directors, the chairman angrily stood up. Turning to the company president, he shouted, “This kind of behavior has got to stop! It is nothing short of outrageous, scandalous. I was looking over the corporate phone bill from last month and one of you made a long distance call that cost $20.” The president replied. “Our company’s revenues this year will be $30 billion. The stock-market capitalization of the company is nearly $350 billion. Our total communications expenses will be over $10 million this month alone.”

“Yes but,” said the chairman, “those kinds of big numbers are a little hard for me to comprehend sometimes, but I understand a $20 phone call perfectly well and I am going to do something about it.”

Perhaps you have been following the news about the ongoing battle in the US to raise the debt ceiling. By law, the US government is limited in the amount of money that it can borrow and unless a law is passed soon, the US government will be unable to increase the amount of its debt. President Obama wants to borrow more money and raise taxes to fund the government. On the other side is the Republican-controlled House of Representatives that does not want to raise the debt limit without spending cuts.

However, the situation in the US has more to do with politics than it does with economics. This is a political fight and not a disagreement over policy. Ultimately, both sides are positioning to make political capital rather than solving a problem. And the same is true in the Philippines.

The current controversy over the Pagcor coffee caper is political. While the contract appears to have been unfavorable to the corporation and the government, it is all political in the end.

There is no question that the US government running a $1.4 -trillion annual budget deficit is impossible. The only solution is to cut spending. But to do so would be politically damaging.

The Philippine government has no business owning and operating Pagcor. The government could privatize the company and receive about $7 billion on a direct sale. Even taking Pagcor public as the government did with Petron would make a tremendous amount of financial sense. But that would be politically difficult. So instead, the government looks at the inflated coffee bill to gain political points that it is doing a good job running Pagcor.

It is surprising that many commentators are complaining that the President did not focus or highlight any specifics about the economy in the State of the Nation Address. Why should he. It was a political speech meant to please as many people as possible. A speech about the Philippine economy would have required saying; what went right, what went wrong, and what will be done in the future. The “what went wrong” and the “what will be done in the future” are politically dangerous.

Someone described the State of the Nation Address (Sona) as a “safe speech.” The current administration seems intent on absolutely taking no risks.

There are literally hundreds of millions of dollars of foreign investment waiting to come into the Philippines for mineral-resource development. The Department of Environment and Natural Resources (DENR) has made clear that there will not be any approvals for permits until the end of the year at the earliest. The DENR says that this delay is necessary to clean up the permit process and cancel those permits that are not proper. Or is this industry being put on hold because mining is a politically risky business?

The Laguna Lake dredging project was canceled because of anomalies in the contract. Or was it because there are political obstacles that require leadership and hard decisions?

The public-private partnership is a theory with no specifics as “feasibility studies were taking longer than expected.” The only one that is close to bidding out (by the end of the year) is the minor P1.6-billion Daang Hari-Slex road connection.

This is a good example of a lack of creative economic thinking by the government. “According to the Bangko Sentral ng Pilipinas, most of the Philippines’ foreign-exchange reserves are invested in US Treasuries. Because of this, the Philippines could be hit hard should the US government default on its obligations.”

Assuming $50 billion is invested in US five-year bonds, the interest rate is 1.5 percent. Had the BSP bought Philippine four-year bonds, the yield would have been 4.875 percent or $1.7 billion more interest per year.

Contrary to the Sona, the Philippine economy is like the swimmer who is treading water, making lots of movement but not really going anywhere at all. This government must learn the concept of “No risk, no reward.”

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