Jan 14, 2012
The UP School of Economics Report: Overdue, Selective, Not Daring Enough
By Walden Bello, Lidy Nacpil, and Ana Marie Nemenzo*
What is one to say about the report entitled The Deepening Crisis: the Real Score on Deficits and the Public Debt by 11 prominent faculty members of the University of the Philippines School of Economics (UPSE)?
Overdue
We have great respect for the authors of the report, some of whom are friends of long standing. Nonetheless, we must register our disappointment.
First of all, it is a report that is not so much timely as overdue.
It is now over nine months since Isidro Camacho declared that the country was in fiscal crisis along with the submission of his resignation as finance secretary.
It is over six months since the Standard Chartered Bank of London warned that the country faced an Argentina-type scenario.
This is a report that should have come out before the election campaign. Then it could probably have acted as a brake on the administration’s spending its way to victory in the May 10 elections—a fact underlined by the sharp P7.8 billion rise in government expenditure in April compared to the figure for April 2003.
Biased
But timing is not the only problem with this report. It is selective in its identification of causes of the fiscal crisis, and because of this, the solution it proposes is woefully inadequate.
In accounting for the fiscal crisis, the report identifies what it regards as the main causes on both the revenue side and the spending side. On the revenue side, a whole host of factors are identified. One key—if not the key—culprit is, however, missing: the unilateral trade liberalization program pursued by our neoliberal technocrats. Customs collections declined from 5.6 per cent of GDP in the mid-1990’s to 2.8 per cent in 2002. Indeed, shortly after he resigned, Camacho said: “The severe deterioration of fiscal performance from the mid-1990’s could be attributed to aggressive tariff reduction.” Had the government not implemented its tariff reduction program, the former finance secretary estimated that it could have earned more than enough in customs revenue to cover its 210 billion peso budget deficit in 2002.
The report implicitly congratulates the Ramos administration for its balanced budgets or budget surpluses of the mid-1990’s. What it fails to point out is that the unilateral liberalization program initiated by Ramos’ technocrats made it more difficult for succeeding administrations to balance the budget.
Why is such a major cause of significantly reduced revenue completely ignored by the UPSE report? Can it be that the reason lies in the ideological bias of some of the authors, who were uncritical supporters of the program of unilateral trade liberalization?
Lacking in Courage
When it comes to accounting for the culprits on the expenditure side, the problem that hobbles the UP economists is not ideological bias but the absence of intellectual courage. Despite the spike in government spending during the election campaign, the report rightly claims that the national government spending has been reduced to a bare minimum, “with large chunks of the national budget preempted by salaries, maintenance and operating expenses, and the internal revenue allocation to local governments, leaving little room for infrastructure spending and other development needs.” Yet the report hesitates to directly point to the chief culprit: the growing public debt. Only indirectly does it acknowledge this, as when it admits that, “Net of interest payments, national government spending (i.e., primary spending) has, in fact, declined significantly since 1999, and is now at its lowest level in a decade.”
The fact of the matter is that if there is anything that has prevented government from fiscal balance, it is the swelling public debt. The total national government debt is currently P3.4 trillion, and total public sector debt to P4.13 trillion. Total public sector debt is now estimated at 130 per cent of GDP as of the end 2003. Debt service now comes to a third of the government budget, with some estimates putting the real figure at 46 per cent at the end of 2003.
But why does the UPSE step so gingerly around the public debt issue? Could it be because about 80 per cent of the total debt is owed to foreign creditors, and dealing seriously with it will mean having to confront these lenders? True, the paper early on nervously discusses the idea of defaulting with local lenders, which it rejects. But dealing with our foreign debtors? It is testimony to how full debt repayment according to the terms dictated by our creditors has become a sacred cow that the UPSE paper fails to even suggest mention the possibility of managing it rationally. Instead, our authors at times speak like apologists for the creditors, saying that interest rates have been “quite benign.” This is a strange way of characterizing interest rates charged to struggling developing country governments like the Philippines, which have always been so much higher than those charged to developed governments and corporations.
The truth of the matter is that the main item that has busted and will always bust any attempt at fiscal alleviation, much less balance, is the never ending and rising payments to foreign creditors. The truth of the matter is that unless we find a way to bring rational management to our foreign debt—which means devaluing it—we will have a woefully inadequate strategy of containing the deficit. We can agree—and we do with many of them, though not all—with the measures proposed by the UP economists, but they are simply icing to the cake of debt devaluation.
The economists of UP were not always this timid. During the first explosion of the debt crisis in the period 1983-86, in the famous White Paper written by several of the same economists, the following statement appears: “The search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one and should therefore be abandoned.” The advice was not followed by President Corazon Aquino, who chose the “model debtor” strategy of fully complying with debt obligations to foreign creditors. Thus repaying the debt on the terms demanded by the creditors became the national economic priority, with development taking a backseat.
This priority was institutionalized by Executive Order 292, which affirmed the “automatic appropriation” of the full amount to service the debt from the budget of the national government that was originally mandated by Marcos’s Presidential Decree 1177.
Making constantly rising debt payments a sacred cow legally not only made the national budget structurally prone to deficits. Government is usually the biggest and most important investor in developing countries like the Philippines. Owing to the prioritization of foreign debt repayment, government spending has been, over the last two decades, confined largely to financing salaries and other operating expenses. For the last 18 years, very little of the budget could be devoted to capital expenditures, thus practically eliminating government spending as an engine of development.
Along with the structural adjustment measures imposed under the guidance of the World Bank and the International Monetary Fund, the strategy of making debt repayment the national priority—which has been followed by every administration since Marcos—has created a condition of structural stagnation—what Massachusetts Institute of Technology economist Rudiger Dornbusch describes as a low-level trap in which low investment, increased unemployment, reduced consumption, and low output interacted to create a vicious cycle of stagnation and decline. This is the source of what we have called in a recent book the permanent structural crisis of the Philippine economy.
The Way Out
There is no easy way out of the fiscal crisis. The measures proposed by the UP economists should be seen for what they are: measures that will help alleviate but will not fundamentally confront the problem.
On the revenue side, reversal of the unilateral liberalization program is essential. The government has already begun this with Executive Order 241, which raised the tariffs on many manufacturing products and Executive Order 264, which froze the liberalization programs for a number of agricultural and fishery products. The reversal of the program should, however, be accelerated and the government must resist determined efforts by neoliberal economists and technocrats to reinstitute it. Of course, reversing unilateral liberalization will not only result in greater revenue. Equally if not more important, it will banish a program that, in the words of Isidro Camacho, “has killed so many local industries” because of “the uneven implementation of trade liberalization, which was to our disadvantage.”
On the spending side, there is no getting around the fact that we will need to devalue the foreign debt. What this means is political courage of the highest kind, and that, unfortunately, is in short supply in the current administration. But we only have to look at our Argentina’s experience to realize that we have no choice but to grab the foreign debt bull by the horns.
The main reason for the collapse of the Argentine economy was the policy of being a good debtor even when it was clear that servicing the debt was dragging the economy over the cliff. When Argentina defaulted on its foreign debt in 2002, it was because it could no longer service it at the onerous terms imposed by the creditors. The period of crisis has now given way to a period of growth, with resources going into investment rather than debt service. Unburdened by debt repayments, Argentina grew by 7 per cent.
With an economy on the mend, the creditors are asking for full debt repayment. No way, says Argentine President Nestor Kirchner. The best offer, he has told bondholders, is 20 to 25 cents to each dollar owed them. Take it or leave it. And he has been able to get away with it, with even the IMF giving way and rewarding him instead with a $3.3 billion loan.
To our creditors, many of whom have been paid many times over for the original sum lent us, we can say, loosen your terms to, say, 50 cents to the dollar now or you will get a bankruptcy that will drag you along with it. Better 50 cents to the dollar now, rather than 20 cents or nothing later. Of course, there are many variants to such a negotiating strategy, and they need not involve brinkmanship. But the point is that that we must be much, much tougher with our creditors than we have been so far.
Our friends from the UP School of Economics say we must all share in the sacrifice that will be needed to avoid economic collapse. We agree, but we must include our foreign creditors in that burden sharing.
Now, the political courage that will engage in that sort of negotiating is what we need in our leadership circles at this point. And what we need from UP and other economists is the intellectual courage to recommend and guide such a course of action. Without frontally confronting and following a strategy of devaluing the foreign debt, fiscal collapse and bankruptcy will not only be a strong possibility but a certainty.
*Walden Bello is professor of sociology and public administration at the University of the Philippines, Diliman, and executive director of the Bangkok-based Focus on the Global South; Lidy Nacpil is secretary general of the Freedom from Debt Coalition; and Ana Marie Nemenzo is President of the Freedom from Debt Coalition.
(Originally published in: Focus on the Philippines No. 36, http://focusweb.org/oldphilippines/content/view/75/6/)