ReInventing Philippines Inc.,

Argentina was one of the richest countries in the world during the turn of the 20^th century, even more so than France and Italy. Philippines was the second richest country after Japan in the 1950s.

Both countries wealth has since declined compared to many countries, and this is an often cited example of how incompetent or corrupt government policies can often relegate a rich country into a basketcase. But other than bad government, what really happened was how a single set of fortunate circumstance can rapidly propel a person up, and the failure of same can as rapidly pull a person or a country down.

In the case of Argentina, it became rich because at the turn of the century, its export of wheat and beef was prized and in demand in Europe.  In the Philippines, it was because it had abundant agriculture produce in sugar, coconut, abaca, as well as timber, gold and copper, most of which were fetching very good prices.

As in companies, no product or service is forever, and the most important thing is to use the profits and money to rapidly improve education and infrastructure so that the success can be broad based and enduring.  In the case of both Argentina and the Philippines, the failure to invest and diversify( most of the money was either spent on expensive imports, or squirreled away in private accounts)  meant that when other nations can produce as efficiently the farm products, or when the forests were depleted, or when mineral prices went downhill, the feast was over.

For instance, low mineral and oil prices contributed as much to the unwinding of the Soviet Union in 1989, as well as its financial collapse in 1998.  On the same token, Russia is so much more stronger financially in the decade of 2000-2010 because of high gas and mineral prices.

The only common denominator of rich countries is the high quality and skills of its human capital and infrastructure, as well as its attractiveness in terms of quality of life, and ease of doing business, and not its natural resource.

Moreover, the excessive dependence on one product can make the country susceptible to the Dutch Disease.

The disease is so called and was named after a phenomena that hit the Netherlands.  In the mid 1970s, the country had rich natural gas deposits, and the soaring price of it  made it a valuable export, and pretty soon, money started to come, which strengthened the exchange rate.

The strong exchange rate made the other Dutch exports uncompetitive, and shut down many industries.  Since the gas industry employed very few people, what it essentially masked that while the export numbers look healthy, and therefore the country appears rich, in actuality, a lot of people were actually thrown out of jobs.

Witnessed countries with strong oil exports in the Middle East, and it most normally means that other industries fail to develop.  Zambia used to have a strong agriculture export, and a growing tourism industry.  When the copper prices became better, they began exporting it on volume, and the strong currency killed their agriculture and the labor intensive tourism industry.

Venezuela used to have a strong export of chocolates, but the discovery of oil and its subsequent reliance on it, killed that industry, as well as many others.

This is the malady that we believe is affecting the Philippines.  The overseas Filipinos have essentially almost taken a sizable share of the dollar earnings of the country.

In 2009, the exports of the country fall to 38 billion, while officially the overseas Filipinos remitted over $18 billion dollars ( some say unofficial estimates of the remittance could be over $20 billion).  By these measures, the overseas income makes up over a third of the dollars receipts, and is largely responsible for the overflow of dollars that is presently purportedly saving our country, but actually is also wreaking havoc.

This remittance have mean that we have an exchange surplus which resulted in the peso being strengthened, and the government has made this a showcase of successful economic policy.

This masks a very big problem, because our strong currency means that we are becoming uncompetitive in many of our service exports, as well as agricultural, furniture, tourism  and other exports.  The exporters have bewailed this problem, and many of them have shut down operations – the Dutch Disease is starting to spread.

In countries which rely on one dominant export like oil, like Norway, or the Middle East, or even for those that are able to get a big surplus through a variety of exports, like Singapore or China, many of these countries have wisely made sure that the money is not converted into the local currency, and thus not contribute to its strength, but they have wisely use this to create sovereign funds that invests abroad in behalf of its citizens, money that will be ready to be used when the oil or the competitive advantage is gone.

The OFW bonanza will not endure and cannot endure – we have all so many of our people in other countries, that some countries understandably are concerned, and will limit Filipinos as immigrants.  The OFWs will not send money forever—when they are established as migrants or citizens of other countries, or when their dependents have also become independent, they will stop sending money. The OFW bonanza is a temporary phenomena, and cannot be our competitive economic agenda or serious ticket to prosperity for the country.

What happens after that?  What if by that time, many of our industries will have died, because during the feast, we have not wisely planned ahead, and instead of investing these money, we have instead spend it with abandon, and also did not prevent it from destroying our other industries? We missed that in the 1950s, and it looks like we will missed that again.  History repeats itself when we don’ t learn.

This has always been an inviolable principle – for businessmen and for economists. You cannot have your cake and eat it too. You either save the money,  invest it, or spend it.

Societies that seek high levels of instant gratification and are willing to borrow against future incomes to achieve it have more often than not suffers inflation and stagnation.  This goes for Latin America, United States, and unfortunately the Philippines.

We have low levels of savings, either households, or the government. Rich countries like the Untied States are in trouble not because they are not earning enough, but they are spending too much.  We unfortunately have ignored the hard work ethic, but have chosen to follow the profligate practice of Uncle Sam. At least Philip II invested the money on explorations, we spend it on consumption.

Like the United States, our GDP is all about consumption, while GDP of countries like Singapore or China are about investments.

There is no way you can have a balanced budget with  politicians on board.  You come up with 1 billion of money, and congress will instantly come up with at least 20 billion worth of ways to spend it.

Sale of government corporations are used to cover the deficit.  For companies, it is almost like you sell a building, and use the proceeds to pay for your party, and give everybody a few thousand pesos.  Next year, you have no more building and nothing to show.  When you do that, your GDP this year will grow, but your national wealth will sink, and you will have less GDP next year.

Most money either end up in politician’s pockets, or in projects that are for populist purposes, not something that will give returns in the future.

While trade and technology can become a win-win, government intervention is a zero sum game. More likely than not, government allows somebody to win at the expense of somebody else.

Milton Friedman, a Nobel Prize-winning economist once observed that he would prefer a federal government budget of $1 trillion even with a big deficit than a federal budget of $2 trillion that was balanced.His obvious point is that a bigger government puts more burden into the economy whether it finances its spending via taxation, borrowing or printing money.

When the government gets taxes, it gets the money from consumers who could have spent it, or the businesses who could have invested it.  When it borrows, it competes with businesses.  When it prints money, it stokes inflation.

When given two choices  a.) get from Peter to help Paul  b.) allow Peter to help Paul with the proper incentives, then government should do the second.

The unwinding of the Soviet Union, Eastern Europe and China into market economies show that government is not the best agency to create economic growth, manage a business, or even help the people get employed.

The best way to reduce poverty is to put in place policies that deliver sustained, strong economic growth.  Simply redistributing wealth will not cut it, not with our current track record. The late Ravjiv Gandhi, former prime minister of india, famously said that only 15 percent of the government funds intended for the poor actually reached them.

My hope is that by taking the steps we are taking today…the government can get out of the way and let the private sector do what it does best — innovate, create jobs, and grow the economy.                                 – US President Barack Obama

Whatever you say about opening up for globalization ( it has its bad sides), no country anywhere has achieved sustained high economic growth without opening up. Japan started to grow after they opened up in 1860, so did China in 1980, and so did India and Eastern Europe in the 1990s.

The last 50 years owes its greatest growth due to technology and globalization.  World GDP rose 240 percent from 1900 to 1950 and grow even further by 700 percent from 1950 to 2000, as technology and trade accelerated. Before that, it was almost negligible.

Technology enables better products for lower prices, and improves productivity.  The increases means more money for consumers to spend, and more profits for the business.

In 1962, President Kennedy declared that the major challenge of the sixties is how to maintain full employment at a time when automation will be replacing men.  Well, not only were no jobs  lost, but tens of millions more were created due to tech advances.

When NAFTA ( North American Free Trade Agreement which allows free trade between Canada, United States and Mexico without tariff) was to be signed, Ross Perot, a presidential candidate, declared that this will result in the giant sucking sound of jobs going to Mexico since the salary there was  much cheaper.

It did not happen. In fact, the next few years after that agreement, the United States generated 22 mllion new jobs, and unemployment rate feel from 7 percent to 4 percent as new technology and trade created new jobs.

Trade has been the weapon that have made numerous countries rich.  You cannot find a country that is rich that does not trade.  And you become competitive in trade by investing in people and technology.

The Soviet Union, former Eastern Europe, China, Latin America, and  India experimented with various forms of communism and socialism in order to redistribute wealth more equitably.  They failed.

This philosophy of redistribution is anchored on the thinking that people are entitled to their share of the pie, and therefore have created the fundamental policy of taking from Peter to give to Paul.  However, the growth of the Philippines the last 50 years have been limited to 3 to 4 percent.  At this rate of growth, and especially if the population is growing 2-3 percent as well,  no amount of redistribution will lift people out of poverty, and we have failed as well.

According to Arthur Okun, whose saying has become known as Okun’s law, GDP growth of 3 percent will not be able to lower the unemployment rate.

The experience of the 4 tigers ( Hong Kong, Singapore, South Korea, Taiwan) , SouthEast Asia and lately of China and India have shown us that when the GDP is growing faster than 7%, then it is like a tide that lifts all boats.   The wonder of China’s economic growth is not only that it created millions of millionaires, but that it lifted a few hundred million people out of poverty.

Philippines should adopt a policy of fast growth, and should do what it can to insure the competitiveness of its industries, by insuring that the cost and ease of doing business is competitive, and remove all hindrances to growth.

It is great to talk about justice or land reform, but above all else, we need to grow…. Fast!  The number 1 priority should be to lift people out of poverty and the only proven way is to grow the pie by focusing on positive sum strategies, not zero sum policies.