The Duterte- Dominguez Disconnect: Is another golden tide headed for the rocks?

By Raul V. Fabella UPSE and NAST

The eight-point program spelled out by Finance Secretary Carlos “Sonny” G. Dominguez III before the election was duly welcomed by, signaling as it did to the business community, a continuity with the preceding administration. It correctly identified the government capital outlay of 5% and beyond as required for its economic goal of rapid — if not more rapid — growth and poverty reduction. It also acknowledged tax reform and perhaps new taxes as necessary for this target. It recognized the inherent good economic sense in the conditional cash transfer (CCT) program: the decoupling of re-distribution from production. It acknowledged how poorly we have performed in the foreign investment front. Its overall thrust confirmed the conventional wisdom that the gains of its predecessor were real even if it fell short in inclusiveness and in the forcefulness of implementation. More than anywhere else, it is in forceful implementation where the Duterte administration can make a big difference.

Duterte gov’t has more room for boldness

In the June 20 conference call, the incoming economic cluster expanded the eight-point to a 10-point program, adding science and technology and reproductive health (RH) law implementation into the mix. Finance Secretary Carlos G. Dominguez III harped on the inclusion frailty of the Aquino watch and how reduced criminality should attract more investment. Economic Planning Secretary Ernesto M. Pernia reiterated the proximate goals of making the economy more investment- rather than consumption-led and a tilt towards manufacturing. Department of Budget and Management (DBM) Secretary Benjamin E. Diokno batted for an aggressive fiscal spending and revenue raising through reform of tax structure and incentives. Overall, the image is one of a leadership primed aspirationally to outdo the Aquino watch in inclusion and poverty reduction. As was repeatedly stressed by Dominguez himself, the Aquino watch has left the Duterte team much room for boldness not the least of which is the fiscal space. There are others beside.

When the Aquino legacy project — the Connector Road projects — are inaugurated in Duterte’s watch, the traffic snarl will ease up considerably with the 18-wheelers overflying rather than clogging Manila roads. Duterte is inheriting a public works department thoroughly transformed by a modern-day hero, Rogelio “Babes” L. Singson, whose legacy is template for government reform. The PPP program, slowed initially by teething problems, is now over the customary J-curve hump; there is ample resources for health and universal insurance, thanks to the sin tax law. The credit ratings have improved. The sky is clearing for an investment takeoff.

Yet another legacy worth building on: among all the past presidents since the 1970s, only Aquino’s has managed to grow manufacturing faster than services. Figure 1 on the right gives the comparative growth rates.

To put this in proper perspective, Figures 2 and 3 gives the average annual growth rate (AAGR) of Services and Manufacturing for the four decades from 1973 to 2014 for three countries, Philippines, Thailand and South Korea.

What comes out so clearly is that in countries that left the Philippines to eat their dust, manufacturing growth outstripped services by a mile; the opposite is true of the Philippines. The Philippines growth trajectory is what we call development progeria (the premature advance and dominance of the service sector in a low income country) that produces slow economic growth and low investment rate. There is ample evidence (see, e.g., Daway and Fabella, 2015) that manufacturing share correlates positively and strongly with investment rate while services share is the opposite. The Aquino watch has bucked long-term development progeria though six years is hardly enough to erase all the blights. But it is a start. That manufacturing grew faster than services is due to the increments, if still modest, in foreign investment hosted by Philippine Economic Zone Authority (PEZA) under the dynamic Lilia de Lima. That it was by just a meter rather by a mile is due to certain sectors of the economy, namely agriculture, industrial farming, and mining, being effectively closed to legitimate private capital. The horizon before Duterte is a golden “…tide which taken at a flood leads on to fortune…” (Brutus in Julius Caesar).

But the Philippines has a storied tradition of turning golden opportunities into stinking muck.

How not to turn off investors

Duterte’s seeming iron fist idol, Ferdinand E. Marcos, was a prime example of an opportunity-buster-decree-making and massive foreign borrowing connived to support immense waste and immenser plunder! The precious opportunity in the Japanese foreign investment tsunami after the Plaza Accord in 1987 expired before reaching our shores poisoned, among others, by Honasan and his clique’s persistent threat of a coup. To conclude Brutus’ line “…omitted, all the voyage of their life is bound in the shallows and in miseries.” Are we in for another let down?

What should give us pause this time is that, judging from Duterte’s pronouncements, the 10-point program may just be a Dominguez-Economic Cluster (DEC) credo rather than a Duterte credo. Actions speak louder than words and Duterte seems to marginalize DEC.

Instead of building coalitions and rallying the nation behind the already challenging program, he issued vitriols and threats to factions and interests (e.g., the Catholic church, the press, the Commission on Human Rights, the other two independent branches of government) which did not show enthusiasm for his understanding of the rule of law. The subtext is unmistakable: I will do to you what I did to Davao City dissenters: Pusila! More worrying, Duterte embraced the Joma Sison and his Maoist clique as prodigal sons by putting three cabinet departments under their sway prior to a complete disarmament of the New People’s Army (NPA). We know the realpolitik here: “Armed divisions take the cake in negotiations.” It sounds like Hitler because it should — it was the gist of the Fuhrer’s scornful put-down of the Bishop of Rome.

The hope is that this embrace will turn lifelong Maoists into docile democrats and allies. My heart hopes with Duterte, but my mind says that Hitler suckered British Prime Minister Neville Chamberlain into false peace in Munich in 1938.

This tosses a monkey wrench into the Dominguez-Economic Cluster (DEC) program. The DEC program rests in the end on an exuberant investor response. How exuberant investing will fly in an airspace bristling with signals foul weather is a puzzle: “nationalization,” “expropriation” and “blood sucking foreign investors” now broadcast not from street corners but from Cabinet offices will ground even hardened pilots. With social welfare, labor, and agrarian reform portfolios in their clutches, investor appetite for the Philippines, already so fragile because of a multitude of known reasons like high power cost and relatively high wages, is so easily sapped. Indonesia, Thailand, and Vietnam are running slick investment come-ons of utter investor friendliness. These countries, mind you, have themselves either completely physically routed the Maoists (Indonesia and Thailand) or completely repudiated the Maoist ideal (Vietnam) and have left us eating their dust. Duterte’s embrace of time warp relics is helps their already strong case in the cut-throat competition for foreign investment.

With the Department of Labor and Employment (DoLE) under the sway of the National Democratic Front (NDF) and inciting rather than mediating labor disputes; with the Department of Agrarian Reform (DAR) foisting Maoist expropriation and further fragmentation of farmlands (how ironic since the People’s Republic of China, the birthplace of Maoism has initiated consolidation to improve farm productivity (Fabella, 2015), investors will find comfort elsewhere. The signals are there. The Department of Social Welfare and Development (DSWD) secretary-designate stated in an ANC interview that “privatization is profit” with the undertone being the market should be hemmed in because profit is anti-people. Joma Sison has branded Loretta Ann “Etta” P. Rosales, human rights defender par excellence, who dared question the Communist Party of the Philippines’ (CPP) support for Duterte’s decision to bury plunder-king, Marcos pere, in Libingan ng mga Bayani, a “consistent traitor to the revolutionary movement” [To read Filomeno S. Sta. Ana’s June 13, 2016 piece entitled “Jose Maria Sison’s malicious words,” visit this link.]

Feeding frenzy might fritter away fiscal space

And what is the ultimate goal of Joma’s revolutionary movement? The complete enthronement of the Maoist state in the Philippines. Yes, and shall we forget the summary executions ordered by Joma Sison of numerous suspected rejectionists in the underground upheaval of the 1980s? For the Maoists, the tango with Duterte is only a welcome and badly needed respite on the road to total subjugation. Now is the time to advance, not water down, the Maoist vision what with their Trojan horses within the ramparts of the coveted prize.

Putting wolves in charge of the chicken coop compounds the already formidable challenges facing the DEC program. Duterte’s pronouncements have fanned a “feeding frenzy”: higher entitlements, higher wages, higher pensions — in other words, “Eat, drink and be merry.” The excuse: Fiscal Space. Fiscal space was built up on the supply side from the twenty-year slog of government disengagement from direct provision (e.g., abolition of Oil Price Stabilisation Fund (OPSF), the Metropolitan Waterworks and Sewerage System (MWSS) privatization, privatization of power assets, etc.) that plugged enormous traditional fiscal drains; the increase in the Value Added Tax (VAT); the adjustment of sin taxes; the end of Priority Development Assistance Fund (PDAF) and Disbursement Acceleration Program (DAP); the use of Public-Private Partnership (PPP) and (Overseas Filipino Workers) remittance. Government investment compression (2% of GDP throughout the period) pushed the build-up from the demand side. The nation paid dearly for government investment compression: bad infrastructure. Rebalancing means re-training the fiscal space towards infrastructure. While the 10-point program has got this right, the fiscal space could close quickly.

The minefields are there for all to see. The Salary Standardization Law of 2015 approved by Aquino will spend P226-billion for the salary increase and mid-year 14th month pay of government employees from 2016 to 2019. The electric cooperatives un-reformed will have to be bailed out again soon to the tune of perhaps P20 billion. The badly-designed military pension fund (pensions rise pari passu with regular salaries) will run out in Duterte’s watch and it will be a substantial hit on the budget. And so on. “Eat, drink and be merry”; never mind that the next line goes “…for tomorrow we die!”

The imperative now is to obligate the remaining fiscal space towards a Government Capital Outlay of 6-7% of GDP before it gets frittered away in an orgy of entitlements. Talking of arterial highways, for example, the creaky and fragmented national power transmission grid needs upgrade and completion. For the latter, Negros Island should be connected to Mindanao to finally realize the Pan-Philippine power highway. Both projects will involve sizeable investments, but all Filipinos — not just Mindanaoans — will benefit from more stable and lower cost power.

Maoists threaten to throw a monkey wrench

So, the DEC program seems to promise continuity with and to build on the gains of the predecessor president. But Duterte’s actions show a sneaky disconnect. His embrace of Maoist buddies threatens to throw a monkey wrench to increased investment. His is choice for Commission on Higher Education (CHED) Chair is a complete sell-out. From the internet buzz, the said choice seems more at home in a circus or a shrink sofa than in CHED. Pol Pot showed his contempt for the educated by marching them into the Killing Fields”; Duterte seems to show his contempt for science and technology (Point # 9 in the DEC program) by threatening to turn CHED over to Ringling Brothers. His choice of Environment secretary-designate of the “no such thing as responsible mining” fame means mining continues to be open only to unregulated informal miners. Keeping fertile avenues of investment closed will hamstring an investment-led growth. Lest we forget, the shady midnight cabinet of President Estrada blindsided his decent economic team!

It is said that poverty is more in the mind than in the pocket. Most income-challenged nations are poor not because of scarcity of resources but because of inability to seize the opportunities in fleeting instances of plenty. Existence for most poor people and nations is, after all, never one long featureless march of abject indigence. It is a punctuated equilibrium of starts and stops. We now have a nice start in comfortable fiscal space and institutional gains by the Aquino watch. If poverty is in the mind, the gains and fiscal space will quickly close and the green shoots will wither away in the Gobi Desert. If poverty is in only in the pocket but not in the mind, the fiscal space will nurture the green shoots into a lush garden of arterial infrastructure that sustain the future. Would that the latter and not the former adorn the Duterte years!

References:

Daway, Sarah Lynne S. and Raul V. Fabella, 2015, “Development Progeria: The Role of Institutions and the Exchange Rate,” Philippine Review of Economics, vol. 52, no. 2.

Fabella, Raul, 2015, “Liuzhuan: Small Steps to Farm Efficiency,” BusinessWorld, Introspective column, December 15, 2014.

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Raul V. Fabella is a Professor of Economics (ret) at the UP School of Economics where he still teaches advanced microeconomics. He is an active member of the NAST. When he has something to say (not often) he writes pieces for . He gets his endorphin fix from the guitar, for which his love is unrequited, from tennis with wife Teena and from working the pedals of a bike.

BusinessWorld Senior Researchers Kia B. Obang (@kiaobang on Twitter) and Leo Jaymar G. Uy (@leouy037 on Twitter), and Researcher Christine Joyce S. Castañeda (@cjscastaneda on Twitter) assisted in providing data. Margarita Samantha Gonzales (@famamfagonzales on Twitter) designed charts and tables.