Introspective

First off, there’s a difference between economic relief and economic recovery. Economic relief refers to the assistance government must extend to workers and businesses because it ordered them to stop due to the public health emergency. Economic relief is both a humanitarian response — help people who suffered through no fault of their own — and an economic one — to prevent consumer demand from cratering. Economic relief is immediate and urgent. Economic relief also includes the managed transition from a total lockdown to a new normal balancing the needs of public health and the economy.

It’s the policy government must adopt at the height of this pandemic.

In this regard, the government spent about P200 billion for social amelioration, about P50 billion to help employees in the MSME sector, and other programs. This is a good start but must be augmented much more to address the toll on people’s livelihoods.

Economic recovery, however, refers to a plan to restart the economy, recover lost ground, and revive. The plan must consider the post-pandemic conditions: hundreds of thousands, if not millions, of newly unemployed, including skilled OFWs returning from abroad, depressed worldwide and domestic demand, and the new normal of social distancing.

However, the economic recovery plan must also be anchored on making structural changes that will sustain the economic recovery for a long time, and not merely on the sugar high of fiscal stimuli. The economic recovery plan should also be developed with the idea of “not wasting a good crisis” as my friend and fellow columnist, former Finance Undersecretary Romy Bernardo likes to say, meaning using the crisis as an opportunity to push for reforms that would not have been possible before.

With that in mind, here are my notes for an economic recovery plan.

1. While we have a Universal Health Care Law in place and despite projected increases in investment in public health infrastructure because of the present crisis, it’s doubtful if these will lead to better health outcomes. The reason is that Philhealth, which is supposed to be the lead agency in implementing the Universal Health Care Law (UHCL), is known to be corrupt, incompetent and inefficient.

Even before the epidemic crisis, there have been several scandals in Philhealth involving fraudulent claims. Also, even before the crisis, Philhealth delayed paying private hospitals, causing the latter to consider denying service to Philhealth members.

Philhealth should be reformed and the implementation of the UHCL should be implemented along Public-Private Partnership lines. For example, Philhealth should bid out a contract to the private sector for the health maintenance of a region and the private sector provider will be paid in accordance with certain agreed health outcomes, with a bonus if it exceeds those health outcomes.

Health outcomes can easily be measured, from lower morbidity rates, hospital stays, recoveries, accessibility, patient experience, etc. Therefore, payments will be made on the basis of those health metrics and health outcomes. The idea is not to pay for the process — more dialysis, more operations, or more unnecessary procedures — but on the outcomes, which is what matters.

In addition, Philhealth can give the contract to different providers in different regions (provided they win the bids), which can provide some competition and basis for comparison (similar to the Maynilad and Manila Water model with different concession areas). These will also produce innovations in the health sector as the different private companies try to innovate on how to provide the best health outcomes at the least possible cost. In other words, the incentive is on innovations and tangible results, and not on expensive procedures or fraudulent claims.

One possible innovation is to use nurse aides to visit households to do preventive health care. In other words, the system is geared toward disease prevention, which is more cost efficient than treating already sick people at hospitals. These nurse aides can also be used for contract tracing should the Covid epidemic persist. Telemedicine can also be used to maximize the time of scarce doctors and allow rural residents to save on going to the urban centers for health advice and diagnosis.

2. I remember my former college economics professor, Dr. Bernardo, aka “Dr. Boom,” Villegas, telling us students that during an economic crisis, “plant camote.” He wasn’t speaking literally but symbolically and lightheartedly. What he meant was that if there’s a crisis, agriculture is the way to go.

It’s really a profound statement. It doesn’t only mean that you won’t go hungry if you go to agriculture, but that agriculture should be the foundation of development.

I also echo Agriculture Secretary William Dar’s chant: “Plant! Plant! Plant!”

What have we learned from this crisis? That food production is extremely important, particularly from a food and national security standpoint. Government should be encouraging even urban agriculture, so cities won’t go hungry, especially if they get cut off from the countryside.

Indeed, probably the age of food surpluses may be gone for good. Climate change and the disruption in global trade will probably cause shortages in the near future.

There’s also another major reason to focus on agriculture. Overall economic demand is collapsing, both worldwide and domestically, due to the loss of jobs and income. Fiscal stimuli can help create demand, but that has a limit. However, agriculture is one of the sectors where the old Say’s law still applies: Supply creates its own demand. Since most of our people are still food hungry, the increased food production will find a ready market. Investing in agriculture, therefore, is a form of economic stimuli.

Finally, another benefit of agriculture is that it’s much easier to do social distancing working in the farms.

3. It’s not enough to just put more budgetary resources to agriculture. Agricultural productivity is key, not production per se. This means the application of capital, technology, and management to agriculture. The old romantic picture of a farmer with a carabao has to give way to mechanized, scientific farming. Agribusiness, in other words.

However, the rigidities in the present Comprehensive Agrarian Reform Law (CARL) will chain us to low-productivity, subsistence agriculture. The five-hectare limitation in the law means that successful farmers can’t expand beyond five hectares.

The CARL was passed in a different era, when the most pressing problem was insurgency caused by the unequal distribution of land. Given a post-COVID-19 world with food security being paramount, it’s time to move away from simple land distribution toward agricultural productivity.

How to amend CARL politically? I propose the condonation of agrarian reform beneficiaries’ debt to the Land Bank in exchange for removing the restrictions in CARL. Only 25% of the beneficiaries are paying their amortizations anyway. The rest don’t. Condonation of their debt, in order to free the rural land market for agribusiness purposes, will serve a public good.

4. Mining and forestry should be part of the post-COVID-19 recovery plan. Both mining and forestry production (and the related wood processing and furniture industries) can easily be jumpstarted to absorb the growing unemployed without any subsidy from the government. What both only need is a signature from the President or the Department of Environment and Natural Resources (DENR) Secretary.

In the case of mining, all the government has to do is to lift the moratorium on mining and remove the uncertainties with respect to taxation. There’s no reason why we shouldn’t push responsible mining, particularly now. It will generate foreign exchange to partially compensate for the loss of dollar revenues from electronics exports, BPO services, and OFW remittances. Gold prices have increased as a result of the crisis. Mining, particularly gold mining, remains an attractive investment.

The top three mining projects in the Philippines — Tampakan, Philex, Kingking — will generate at least $3 billion in new investments. That’s a lot of jobs in the countryside.

As for environmental concerns, that should still be taken into account but securing environmental permits should be made faster and easier and not be an excuse for shaking down the company.

Forestry is another winner, the Philippines being a tropical country. It takes only ten to 15 years to grow a tree to maturity here, depending on the species, while it takes more than 20 years in a temperate country. Finland, a forestry superpower in Europe, produces from five to 15 cubic meters per hectare. Plantation farmers in Mindanao can produce over 100 cubic meters per hectare.

The reason why forestry production has stagnated is the over-regulation of tree plantation by the DENR. The DENR applies the same stringent regulations that they apply to natural forests to plantation forests. Therefore, tree farmers need a permit for everything — for planting, for inventorying, for harvesting, for transport, etc. The same overregulation also killed wood processing plants, the natural buyers of the products of tree farms. The absurdity of this over-regulation is the fact that planting a tree for harvest is no different from planting cabbage to sell, but the government doesn’t regulate the planting and harvesting of cabbage.

All the government has to do in order to stimulate the industry and create green jobs is to issue an Executive Order or a Department Administrative Order (DAO) making a distinction between natural forests and plantation forests and liberalizing tree farming.

There are other major reasons why we need to boost forestry production. One is that forestry production is important for water conservation, and therefore agriculture and food production. The other reason is that this COVID-19 crisis has taught us that diminishing forestry cover could bring more wildlife, which carry viruses, in contact with people.

5. Rigidities will slow down or prevent our economic recovery. Rigidities are unbending rules dictated by law or regulation that prevent economic actors from adjusting to the situation. For example, the constraints in our Labor Code, specifically the legal minimum wage law and the labor security provisions, will make it harder for companies to absorb the masses of newly unemployed caused by this crisis. These rigidities will also make it harder to revive our manufacturing sector (which we have realized is needed to produce goods critical to our health sector, such as ventilators and masks).

Why is this so? The supply of labor will dramatically increase with the mass layoffs and the return of hundreds of thousands of our OFWs. However, the floor price of entry labor is fixed, due to the legal minimum wage and other mandated costs (SSS, 13th month pay, holiday pay, etc.). Furthermore, the labor security provision in the Labor Code discourages firms from hiring more people since they may be stuck with them even if they turn out to be lazy or dishonest.

Normally, the price of labor should fall until the markets clear, i.e. until all labor is absorbed. However, these can’t happen when the price of labor is fixed. Even asking employees to take a pay cut during this crisis to keep them employed is illegal under Philippine law. Therefore, the only alternative for businesses is bankruptcy or mass layoffs.

With the labor rigidities, what will likely happen is that many desperate men and women will go to the informal market, where they will be exploited, or try their luck in the crime market, i.e. steal or cheat or sell their bodies as prostitutes. In other words, the Labor Code will end up being anti-labor as it sets the stage for the desperate unemployed to be exploited.

Furthermore, there’s another reason to reform the Labor Code. FIRe (The Fourth Industrial Revolution) is here. Even the middle class workers, from accountants to call center agents, are in danger of losing their jobs due to FIRe. The Labor Code must, therefore, be flexible enough to adjust to these changes. Rather than labor security, the focus of the Labor Code should be on retraining and some form of unemployment insurance.

Politically, it may be difficult to reform the Labor Code. The leftists (who had also opposed the National ID) and organized Labor will be against it, as will the grandstanding politicians. However, a crisis of this magnitude can force minds to consider the unthinkable.

At the very least, the President must be given the power to suspend Labor regulations for MSMEs during this public health emergency.

Perhaps, it’s also time to act on former Socio-economic Planning Secretary Gerry Sicat’s suggestion of creating special employment zones in areas of high unemployment rates, where enterprises can get exemptions from the Labor Code, but have commitments to create jobs. When the demand for labor has picked up, workers can simply leave for better paying jobs. Alternatively, wage subsidies can be tried to generate employment, but the program would entail resources the government doesn’t have now.

Short of reforming the Labor Code, passing the Apprenticeship Law has become more urgent. This will allow companies to invest in the training or retraining of the vast masses seeking employment without being penalized by the labor security regulations of the Labor Code.

There’s no reason why we can’t get back the labor-intensive industries and light manufacturing that have fled to Vietnam and Bangladesh. Or, attract companies fleeing China. Our competitive advantage remains our relatively more educated and English-speaking workforce. However, we can be a manufacturing powerhouse only if we remove the rigidities in our Labor Code.

6. Another rigidity that will slow down our recovery is the anti-foreign ownership provisions in our Constitution. For example, our airlines are in dire straits because of the collapse in the travel market caused by the pandemic. The Philippine government may not have enough funds to bail them out, or it may do so but create a moral hazard, since some airlines had been suffering from bad management even before the crisis. Therefore, an answer could be foreign white knights who could take over majority control of our airlines and infuse new management. Better to have foreign owned airlines than not have any airline industry at all. However, under our present Constitution and the Public Service Act, airlines are “public utilities” that must be operated only by companies that are majority-controlled by Filipinos.

Another rigidity in the Constitution is the provision on 100% Filipino ownership of mass media. This provision has been made irrelevant by technology, as companies like Facebook, TikTok, and Netflix are practically media companies operating here through the Internet.

There has been a suggestion that we promote creative industries as export winners to compensate for the fall in our exports and OFW remittances in the same way South Korea developed its creative industries after the financial crisis of 2008.

But this suggestion will go nowhere. Firstly, our Filipino mass media companies need more capital to compete in the world market. Cheap, plentiful capital can only be sourced from overseas (especially at this time). Local media companies need an infusion of technology too. However, even now, ABS-CBN is being crucified for using derivatives, which gives foreign holders equity benefits without the control feature of common shareholders. The rigidity in our Constitution will doom any effort of ABS-CBN, or any Filipino media company, makes to go global.

Secondly, there’s the matter of convergence — the fusing of media, telecommunications, and software industries into one. Our telecommunications services remain poor because there’s the lack of competition caused by the Constitutional prohibition of foreign ownership of public utilities. It has enabled the development of a telecom duopoly. How can we develop our creative industries then when the cost and quality of telecom services lag behind the region?

7. Presently, worldwide demand has cratered. Consequently, oil prices have fallen. There is a fear that economic depression, with deflation and mass unemployment, has set in.

However, inflation may roar back. One cause is the supply chain disruptions, which have caused shortages in goods. The supply chain efficiency made possible by global specialization may never come back. For national security and geopolitical reasons, governments may want to keep industries domiciled at home, even if that would be more costly and inefficient.

Moreover, companies may rethink Just-In-Time (JIT) practices, which had allowed them to optimize the use of capital and minimize inventory, because JIT makes companies vulnerable to supply chain disruptions.

Another cause would be a decline in overall productivity. Social distancing at the workplace, work from home arrangements, staggered working hours, as well as social distancing in restaurants and buses will take a toll on productivity. Costs are bound to go up overall. Stagflation may be the result.

We should prepare for this new era, and not assume that inflation will be persistently tame.

In this regard, the answer to stagflation is to enable more competition. In the 1970s, in the era of stagflation after the oil price shock, the US embarked on a period of deregulation. It started with former President Jimmy Carter who deregulated the airline industry, which led to lower fares, better service, and more choices. Former President Ronald Reagan expanded deregulation into other industries such as banking and the US economy bounced back.

The Philippines should pay heed to those lessons as it is the most concentrated economy in Asia. Pro-competition policies should be part of a post-Covid recovery plan.

 

Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.

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