Heritage Foundation’s Errors in the "2006 Index of Economic Freedom"

I like the idea of economic freedom and its correlation with economic growth and progress. I completely agree with Heritage Foundation on that point. Nevertheless, I’ve noticed several gross inaccuracies in its report on the Philippines that need to be corrected to ensure the credibility of the “Index of Economic Freedom” Report. Let me discuss each one of them:

1. On Page (319) the second paragraph says that “In 2004, tsunami aid graft was but one sign of rampant corruption, along with human trafficking and a ballooning black market.” [Italics supplied] The Heritage Foundation must be referring to another country in South Asia. The Philippines was never hit by the tsunami in 2004. The last time a tsunami created havoc in the Philippines was in 16 August 1976, killing more than 3,000 people (some say its 8,000). That incident was caused by the faulting of the Earth’s crust in the Moro Gulf in Southern Philippines. About “human trafficking and ballooning black market,” this statement is also an overstatement because these are probably not rampant as what Heritage Foundation would like to suggest. In fact, these are not real issues here.

2. Paragraph number 8 (Page 319) says that “Arroyo has increased government spending, which combined with lagging tax revenues, has led to massive deficits.” [Italics supplied].Yes, there is “massive deficit” and but government spending has not been rising in real terms under the Arroyo Administration in an effort to bring down the Philippines’ deficit to GDP ratio and, hopefully, get a better sovereign ratings. The fiscal deficit has largely been due to the worsening tax effort and the reduction of import tariffs under the country’s trade liberalization program that accelerated since 1995 when the government joined the World Trade Organization.

3. Paragraph Number 9 says: “The government is slow in promoting privatization, as the state still owns a majority of Filipino corporations.” [Italics supplied] This is grossly inaccurate. That scenario was true only during the Marcos dictatorship more than 2o years where a lot of Filipino companies were either owned by Marcos and his cronies or by state that are also managed or controlled by Marcos and his cronies. Since the Edsa Revolution of 1986, most of these government-owned and controlled corporations, several hundreds of them, were privatized. Right now, the only few government-owned or control corporations are the National Power Corporations (Napocor), the National Food Authority, and the Channels 4 and 9 (TV stations). Napocor’s assets themselves are being privatized. These are substantial assets under government control but nowhere do they represent “owning a majority of Filipino corporations” as claimed by the Report.

4. Paragraph Number 10 says: “The chief obstacles to stable growth remain high tax rates, poor infrastructure, extensive government ownership of business, low foreign investment, and entrenched government corruption.” [Italics supplied] Again, this is inaccurate for reasons cited above and inconsistent with the score (2, “mostly free”) that Heritage Foundation gave on “government intervention in the economy.” If Heritage thinks there is “extensive government ownership of business” in the Philippines, why should it gave a high score of 2 or “mostly free”?

5. On “trade policy,” the report said that “licensing, quotas, and safeguard measures are widespread.” Again, another inaccuracy. Licensing and quotas has long been gone in the Philippines—January 1995 when the World Trade Organization came into force. “Special safeguards,” yes but they are used sparingly for fear that the Philippines, a poor country, could get into legal troubles in the dispute settlement mechanism of the WTO.

6. On Page 320, on “Wages and Prices,” the report, quoting the Intelligence Unit says: “Price ceilings are usually imposed only on basic commodities (such as rice, milk, sugar, pork, chicken, cooking oil, and flour) in areas … under a state of calamity or emergency, such as those devastated by typhoons.” Again, this is a gross inaccuracy! Since the fall of the Marcos dictatorship, the Philippines has never imposed price controls or price ceilings on any commodity. And if it would, the government can never effectively implement it anyway. If I were to give a score on this one, I would give the Philippines 2 (“mostly free”).

Overall, my own take is that the Philippines’ deserves a higher “economic freedom index” than what Heritage Foundation has given. Maybe the Philippines belongs somewhere in between 2.5-2.99 (“mostly free”). I suggest that the Foundation should stop using secondary reports. Maybe the best thing that Heritage Foundation could do is come here in the Philippines and conduct their own research. Or maybe, the Foundaton should commission local academic researchers or institutions to prepare the draft on the Philippines for them.