Reform in the time of Duterte

“Are we in the midst of a crisis?”
For activists, that’s a valid question. Perhaps the activists’ answer is yes. A yes, mainly because this aligns with the narrative that this administration is incompetent to make sound policy decisions for the country.
It might be easy to dismiss the President’s latest State of the Nation Address (SONA) as empty rhetoric and perceive the accompanying political turbulence as indicators that our nation is completely spiraling out of control.
With the great many controversies surrounding this administration, none have been so pronounced as the blatant disregard for human rights. One can certainly make the argument that our democratic institutions are already in the midst of a crisis.
The narrative, however, is that the political crisis goes together with an economic crisis as well. Inflation is unexpectedly above the government’s own target, which people adversely feel. The recently passed first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law is blamed for the economic woes.
Concerns about the potential impact of TRAIN on the poor are valid. But it is important to make a careful and balanced analysis, and come up with specific solutions for specific problems.
Rising prices have fueled the call to suspend TRAIN. However, probing consumer price index data shows us that inflation in food items such as rice, fish, and vegetables indicates that TRAIN only contributes a small transitory part of the inflation pains. Rising global crude prices and the spike in rice prices are the bigger factors behind the higher inflation.
Nevertheless, the administration must address the higher inflation by liberalizing rice imports (shifting from quantitative restrictions to tariffs), reforming the National Food Authority (NFA), and improving overall agricultural and resource management. Rice has the biggest weight in the inflation index.
We are at a crucial stage in our economic development. Our fundamentals have indicated a positive outlook thus far: GDP growth over 5 percent for the past twenty-five quarters and an unemployment rate below 7 percent in the past fifteen quarters. Accompanying this growth is sustained confidence: an investment grade rating and growing consumption. Moreover, signs point to positive structural changes, growth driven by the industry and service sectors.
Concerns of overheating notwithstanding, sustaining this growth will be instrumental in achieving our goal of eradicating poverty. A more important goal is achieving upper middle-income country status. We have to generate and sustain revenues to meet these goals.
A major motivation of the recent TRAIN Law is to finance ambitious development projects. A boost in infrastructure spending is underway. Specifically, this administration has committed to Build, Build, Build. The Asian Development Bank estimates that the Philippines must invest about 7% of GDP in infrastructure to sustain our growth trajectory. Thus, from 3% of GDP, our infrastructure spending would have to be more than doubled by 2022.
Spending for social services is also dramatically increasing. We have made public tertiary education free, and we are nearing the realization of a truly universally accessible health care system. As the imminent passage of universal health care will require huge financing, excise taxes on tobacco and alcohol need to be raised further.
The second package of tax reform will make our business environment more competitive by lowering the corporate income tax. This will benefit the vast majority of enterprises, which are medium and small. Furthermore, rationalizing fiscal incentives will update and modernize our investment policy, doing away with redundant incentives and making incentive rules more sophisticated, transparent, and better targeted. That is why we laud the speedy approval of the bill in the House Ways and Means committee and hope that the Senate can also see the merits of this proposed measure and act on it swiftly.
We return to the question of crisis. Current inflation, aggravated by the NFA’s gross incompetence, is bothersome but by itself does not constitute an economic crisis. The economic fundamentals remain generally good.
But serious problems will arise when TRAIN is sidetracked or suspended. Investor confidence will wane, our credit rating will be degraded, and public spending will slow down.
It is the politics that has created a crisis of institutions — the violence and violation of human rights marked by immunity.
To be clear, transformative economic policies must be dissociated from the administration’s illiberal brand of politics. The latter must be opposed. The reforms on the economic front must be pursued in the face of the political challenges.
It is certainly a fine line to walk. We must struggle against a false and narrow thinking, which is we cannot fight for sound economic policies because this administration has debased democratic institutions. Economic improvement after all can also lead to political empowerment.
Keeping this in mind, we cannot postpone the economic reform work despite the bad politics.

AJ Montesa and Karla Michelle Yu are research associates of Action for Economic Reforms (AER).