Recto and Salceda: The issue of the “selfish” rich

Posted on June 12, 2013

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Two government officials recently aired their resentment towards the “selfish” rich for keeping mum about the worsening poverty in the Philippines.

A senator and a provincial governor, both of them economists, are blaming the “selfish” rich for the widening income inequality in the Philippines, which persists despite the economic growth in the first three years of the Aquino administration.

“The job of the private sector is to create wealth and jobs. Unfortunately, the private sector in the Philippines does not have a high degree or culture of giving and sharing,” said Sen. Ralph Recto in a text message to the Inquirer.

Albay Gov. Joey Salceda said there was a need to frontally deal with the central issue of the sociopolitical economy.”

(Source: Link)

Recto and Salceda highlighted the noticeable surge in unemployment despite the achievements of the current president Benigno “Noynoy” Aquino III, the most notable of which is the 7.8% Q1 growth this year. Although, if we talk about Noynoy’s increasingly interventionist economic policies (since a major component of the supposed growth is government spending), then the stability of this “growth” is automatically put into doubt. A sudden economic boom is never a guarantee of long-term economic growth; just ask China, whom the Philippines is only too proud to surpass, and its recent experience with dangerously cooling real estate markets, all for the sake of short-term booms by artificially devaluing their currency. Quantitative figures of apparent growth is one thing; sustaining it in the long run is an entirely different matter.

Anyway, Recto proceeded to explain what the Philippines’ rich people could do for society:

Recto said the job of the government was “to provide the environment for business to thrive (such as ensuring macroeconomic stability) by regulating greed in the private sector and social safety nets for those who cannot help themselves.” He said the rich must do its share in spreading the wealth because the government cannot do it on its own.

“We can do much more to create well-paying jobs and reduce poverty. [Rich Filipinos] are unlike [those] in the US were individuals and the private sector make large donations to charitable institutions. Tax policy may incentivize this practice,” said Recto.

Salceda, meanwhile, ominously looks towards a more interventionist approach to combat poverty.

“Although employment may be affected by the way the government chooses to spend and the way it chooses to tax, employment is an outcome of a far more complex set of economic processes and policies, thus the employment picture must be addressed far beyond fiscal policy,” said Salceda.

Salceda suggested that the government set more ambitious investment targets, such as targeting $1 billion investments in manufacturing from Japan, or host world-class events that would place the Philippines on the radar such as a visit by Pope Francis; increase the current international advertising budget of P1.4 billion to match Vietnam’s $150 million; and focus on growth areas outside of Metro Manila by building infrastructure projects in the countryside to increase these areas’ absorptive capacity.

This is all good intentions and whatnot, being concerned for the welfare of Filipinos way below the economic strata, but certain strings are attached when the government decides to personally take action in a nation’s economic woes. As I mentioned before about Aquino’s dubious interventionist economic policies, unintended consequences happen when the state meddles too much with economic affairs. Moreover, given the current structure of the Philippine market, it isn’t very hard to see things that are likely to occur.

The government, by itself, does not own money. Private citizens do. So, in order to realize the projects envisioned by Salceda, the government has to amass revenues by taxing Filipinos. In creating the infrastructures, tourism projects and so-called world class events, no wealth is being created; resources are merely shifted from one place to another; in this case, from the Filipinos’ pockets to the government’s hands. Given the bureaucratic nature of the government, we will in all likelihood end up with less material wealth as money is wasted into red tape, which is quasi-inherent in any bureaucratic body. After all, as human beings, they have next to no incentive to rationally spend money, since they’re handling someone else’s money for someone else.

Suppose that the government was able to attract investments through these efforts. Where will the investments go? Most of it will go to the local industry here. Those businesses can then choose to proceed with expansion, improvement of their facilities and services, and employ more people to keep up with these new operations. Yet if this holds true, together with Noynoy’s supposed achievements (albeit the sustainability question still stands), then we should be seeing signs of lowering unemployment. Yet we do not. This is a glaring contradiction. How come this is so?

The catch is this: the local businesses can choose not to hire people in the first place and maintain the status quo, and they won’t be hurt one bit. This is because local businessmen feel no threat from market competitors; as far as our market structure is concerned, they are the ones running the show. This ghastly phenomenon can be attributed to the longstanding protectionist provisions in the 1987 Constitution, prohibiting foreign investors (prospective competitors) from fully owning their stuff here.

The 60-40 foreign ownership clause in the Constitution

Why is the Philippines lagging in FDI relative to its competitors? The economic strictures of the Philippine Constitution (Article XII) and the corollary protectionist laws that have emerged from them are key causal factors. Specifically, foreign ownership of property is restricted to a 40 percent baseline share in the Constitution, with minor deviations and adjustments in subsequent legislation. By imposing restrictions on foreign ownership, charter Philippine lawmakers believed they protected the country’s sovereignty from foreign encroachments. The thought was that by imposing barriers on foreign trade and investments and prohibiting controlling property rights of foreign nationals, domestic economic strength and independence would be achieved.

As it turned out, however, these economic restrictions repelled investors and mostly benefitted small interest groups in the Philippines. They are provisions that work against the provision of economic growth and greater employment opportunities. The interest groups that benefited support protectionism in the Philippines and do not want any form of competition, domestic or foreign, to threaten their almost monopolistic access to market shares and government influence.

(Source: Link)

It isn’t really a mystery why the benefits of the supposed economic growth do not trickle down to the poorest Filipinos; the goods are stuck in the upper strata of society, and the current market structure sanctions such circumstances. Should foreign investors be given the chance to have equal footing with the locals, then these investors can be their own investment by setting up actual businesses here. Knowing the maladies of protectionist Philippine markets, these new competitors can opt to give better offers to the stagnant Philippine workforce to jump-start their operations. They can also opt to offer affordable prices for their products and services to ensure patronage from the highly consumerist market in the Philippines. This is free competition at work. In the process, locals become increasingly threatened as more and more people go away from them in favor of these new kids in town. Thus, if they want to stay afloat, they will be forced to comply with the new rules of the game; they are pressured to offer better products and better jobs. Better products mean wealth creation. Better jobs that actually contribute to wealth creation (not just resource-shifting that government jobs do) mean lower unemployment. This market mechanism is what allowed South Korea to attain the fastest Internet connection in the world. Perhaps it might not be a bad idea to emulate similar ideas.

Maybe, Recto and Salceda have recognized the problem well. But then, maybe they are barking up the wrong tree, offering solutions that might jeopardize Filipinos’ lives even further. Maybe, there are other ways to get around the widening gap between the rich and the poor. Maybe we can think of solutions outside the box. Maybe, just maybe, the solution lies on what is written on the laws that govern this land.

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