The ouster of President Estrada proves once again my thesis that it?s counter-productive, if not fatal, to go against the market. The cause of economic setbacks and political unpopularity of the past three administrations is when governments go against the market. In the case of former President Aquino, her government?s biggest mistake was regulating the oil market. Oil price control caused the Aquino government deficit to balloon, causing double-digit inflation. Double-digit inflation, in turn, caused growing disenchantment with the Aquino administration, providing Gringo Honasan and his group the excuse to launch destabilizing coups.
In the case of former President Ramos, his biggest mistake was the anti-market sin of controlling the exchange rate. Control of the exchange rate caused hot money to go into real estate and stock market speculation, caused many banks and companies to borrow in dollars, and caused an unsustainable trade and current account deficit. You might remember that when I last spoke to you, I was predicting that this unsustainable bubble, caused by an overvalued peso, would burst. True enough, the economy was vulnerable to the crisis of confidence that hit the Asian financial crisis in 1997. The 1997 economic crisis in turn derailed PIRMA and other schemes to allow former President Ramos to run again. It also caused a backlash against the Ramos administration, enabling Erap Estrada to win the presidency.
Former President Estrada failed to learn from the experiences of his predecessors. Suffering from the hubris gained from being elected with the highest electoral mandate in the post-EDSA history of the country, Erap erroneously chose the path of going against the market. He did this mainly through cronyism. In other words, instead of letting the market pick the winners, he believed he had the right to do so.
The problem of cronyism isn?t new or even unique to the Philippines. However, in this age of globalization, the cost of cronyism and other anti-market practices becomes immediately transparent. Before globalization, as it was during the time of former President Marcos, it would take a severe economic contraction, as had happened in 1983 and 1984, when the economy shrank by 7 percent, before the people would erupt in a People Power Revolution.
Not this time. Today, markets could vote against the presidency of Erap Estrada by selling down peso and the stock market, or placing a high-risk premium on Philippine bonds, which they did. The downfall of Erap Estrada, therefore, was faster.
You asked me to look into my crystal ball and predict how the economy will fare under the new administration. For sure, the economy will fare much better than it would have had we continued under former President Estrada. The political uncertainty, the peace and order problems, and the haphazard decision-making were dragging down the economy.
Now that the political crisis had been resolved and President Gloria Macapagal-Arroyo is expected to restart the peace talks with the CPP-NPA and the MILF, investments that had been held back will flow once again. With the peso recovering, the Bangko Sentral has much more maneuverability in lowering interest rates, which should spur economic growth.
Furthermore, the history of the Philippine economy is that of crisis followed by a spurt of growth. This is because the crisis weakens the vested interests and provides the opportunity to push for some reforms.
I would like to state, however, that while the country should see some growth in the 3 to 5 percent range, on the microlevel, growth will be uneven. This means I don't see a broad-based growth, but that some industries, such as information technology and tourism, will do very well while other industries will continue to struggle. I mentioned that tourism will do well, for example, because I expect the new administration will finally scrap the protectionist policy in favor of Philippine Air Lines and that the re-started peace talks will improve the peace and order climate for tourism. We must also remember that tariffs will go down to zero in 2004, and some companies will simply not be able to compete so you should not take my relatively rosier outlook as an indicator of the fate of your own industry or your own company.
I guess that you are expecting me to make some bold predictions like the last time. I have two.
First, I'm not so sure we have seen the end of crony capitalism. The reason for this is that the structure of Philippine big business creates an incentive to capture, or at least influence, government decisions. Examine the richest family-owned conglomerates. They are mainly in businesses, such as telecommunications, infrastructure development, and banking that are heavily regulated by the government. In fact, these conglomerates usually have a bank as a core. Therefore, there is great incentive for the economic elite in this country to invest in politicians. In the case of George Go, a banker, it didn't hurt initially that he had a friend in Malaca��.
Examine also the composition of the boardrooms of these conglomerates. More often than not, you will find former Cabinet or other high ranking officials in them. The composition of our economic elite differs markedly from that of South Korea, Taiwan, or Singapore. In those countries, the conglomerates are outward looking. They derive a great portion of their income from exports. South Korea has conglomerates that are export-powers like Samsung, Daewoo, Hyundai or Goldstar. Taiwan has export powerhouses like Taiwan Semiconductor or the Evergreen group-. Having to face global competition, they need a strong and efficient government to back them up.
This isn't the case in the Philippines. Name me a Hyundai, an Acer, or Goldstar here in the Philippines. None. Therefore, since our elite is focused on the domestic economy and is into industries that are heavily regulated, it is in its interest to keep government weak and pliable. Therefore, I don't see this demand for good governance, which we have seen in People Power II, to have any staying power.
The second thing I'm predicting is that I don't think we can eliminate poverty and that the class resentment from the poor, which former President Erap so skillfully manipulated, will only increase. The reason for this is that poverty in this country has a rural face, and we have very serious structural problems in agriculture.
We can never be a tiger economy, never have sustainable growth rates, and never eliminate poverty unless we increase productivity in agriculture. Unfortunately, because of the social antagonisms in the past, we have adopted a half-baked land reform program that will continue to drag down agricultural growth.
Land reform is good, if it can be done quickly. But a quick implementation is possible only in revolutionary or wartime situations, such as what had happened in Japan, South Korea, and Taiwan. It necessitates the suppression of rights. But land reform under a democratic setting only fosters uncertainty and corruption. Who will invest in land to make it more productive if it's possible that it will be taken away from you? What worse is that good farmers, under our present laws, are not allowed to expand beyond 5 hectares. More efficient farmers, therefore, cannot buy out the inefficient ones. Without capital, technology, and the process of weeding out the weak, our small farmers will continue to suffer from low yields and low incomes.
Meanwhile our government is too bankrupt to even pay dispossessed landlords or to support the farming sector. Agriculture will continue to be a neglected sector.
Judging from the composition of groups supporting President Macapagal-Arroyo, I don't think the new government will do anything to amend our flawed land reform law or seriously attack the structural problems in agriculture.
I don't think the political support for President Estrada, which comes mainly from the rural poor, is finished. The ones who waged People Power II were urban warriors armed with cellphones, computers, and transistor radios. They will prosper from the growth in telecommunications, information technology, and other industries of the new economy. They will prosper under the new dispensation. Unfortunately, this growth will have few, if any, links to the countryside.
My prognosis, therefore, is that we should experience better growth than we have in the past few years. However, this growth will be uneven across sectors. I see also class antagonisms heightening, rather than weakening. The divide between the urban and rural sectors, between the rich and the poor, will grow. Erap the president may no longer be in Malaca��, but by no means is he a spent political force. Erap, the pro-poor, anti-rich symbol, will continue to haunt the new administration.
Thank you. |