Policy continuity

Does anyone remember the debates during the presidential elections in 2016? In one debate, then candidate Digong Duterte was asked about his economic platform. His answer was that he’d copy the economic platform of the other candidates.

That sounded laughable or ridiculous. But come to think of it, it made sense. For copying what is proven correct is okay. (In other words, make sure one copies the correct answer.)

The lesson we can draw from the history of the spectacular sustained growth in East Asian countries is that policy continuity matters. Economists and political scientists agree that the continuation of policy anchored on good economic fundamentals over a long period of time partly explains the East Asian success story.

For many East Asian countries, policy continuity rests on political longevity. Political longevity assuring policy continuity is easy to do because their political systems either have one-party rule or allow one political party to dominate.

But in the Philippines, we often change administrations wearing different political colors every six years. Worse, a succeeding administration would have an antagonistic relationship with the previous one, resulting in policy unpredictability.

Eventually, when Duterte assumed the presidency, he made true of his promise to “copy” the policy agenda of the previous administration. To repeat, nothing is wrong with that so long as the policy that is being continued is good.

So what has been copied?

Although the Bangko Sentral ng Pilipinas (BSP) is an independent body, its actions correspond with the economic objectives of the administration. What we have seen from the time of the governorships of Amando Tetangco and the late Nestor Espenilla to the current leadership of Benjamin Diokno is a BSP that has leaned towards a strategy that is growth-oriented and a policy stance that favors a competitive exchange rate while keeping measures that stabilize prices.

On public finance management, erstwhile Budget Secretary Diokno, before being appointed as BSP Governor, introduced reforms to address under-spending, including the cash-based budgeting. The House of Representatives resisted this measure, but cash-based budgeting subsequently prevailed. The cost though of House opposition was the delayed budget approval. This delay caused the lower growth rate for the first quarter of 2019.

Note, nevertheless, that former budget secretary Butch Abad (of the previous administration) set in motion the budget reforms. The proposed Public Finance Management Act was unfortunately sidelined during the previous administration because of political constraints. However, this has been revived but given a new name, the Budget Reform Act, which hopefully will pass Congress.

The clearest proof of policy continuity is in the area of tax reform. Not known to many, the comprehensive tax reform, which the Duterte administration named Tax Reform for Acceleration and Inclusion (TRAIN), was part of the reform agenda of the previous Benigno S. Aquino administration. But like the Public Finance Management Act, the reforms on fuel taxation and the like were difficult to pass in Congress during the second half of the administration’s term. The lesson here is to have critical and hard-to-pass reforms done in the first half of the term.

But the Aquino administration was most successful in having the difficult reform of the excise taxes on tobacco and alcohol in 2012. The sin tax reform of 2012 has historical significance. It took 15 long years (from 1997) to correct the structure on sin taxes and impose what the tobacco industry called a “disruptive” tax. The sin taxes freed the country from the binding constraint then of a narrow fiscal space, which in turn led to a credit-rating upgrade. The reform was a factor in the growth spurt that has been sustained. Further, the reform has led to a significant decrease in the smoking-prevalence rate.

Today, we see continuity in sin-tax policy. The Senate will soon pass a tobacco tax bill that will increase tax rates on cigarettes significantly: from the current PHP 35 per pack to PHP 45 in the first year of implementation of the law, followed by a series of five-peso increases till the tax rate reaches PHP 60. Subsequently, the indexation for inflation is increased from the current four percent to five percent.

We hope that the House of Representatives will adopt the Senate version. Everyone wins here. The biggest win is for the health of the Filipino people. The revenue to be gained from the increase in tobacco tax will finance the recently legislated Universal Health Care (UHC).

UHC financing is huge for both the short and long terms. What can be generated from the tobacco tax that the Philippine Congress will soon pass is not enough. Hence, alcohol taxation must follow. And further increases in sin taxes will be necessary in the future.

Again, this shows the importance of policy continuity. We must always find ways to have policy continuity for good reforms.

Despite having a populist president who could have risked policy continuity, serendipity has played a role in having economic policymakers, the core coming from the Department of Finance, who have technocratic expertise, intellectual integrity and political savvy. It is perhaps luck that we have a Finance Secretary who has such attributes and who happens to have the ear of Duterte, having been grade school pals.

In this case, policy continuity is not just about copying the good that the previous administration did. Led by Finance Secretary Carlos Dominguez, the economic managers have enabled other reforms. To wit: bold infrastructure spending that has high multiplier effects and the politically difficult reform of rice policy, which not only has benefited the mass of consumers but should also transform Philippine agriculture.

May this lesson about policy continuity be ingrained in present and future politicians and policymakers.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph