Tuesday, January 23, 2007

Heritage Foundation needs to free itself from ignorance!

WOULD anyone with some literacy in economics and business consider the Philippine economy “mostly unfree” after joining the World Trade Organization and signing all these regional trade and business facilitation agreements? Unlikely, given the standards which the West likes to impose on other people.

One is thus surprised to find out that the Heritage Foundation, a conservative think-tank based in Washington D.C., has ranked the Philippines 97th out of 157 countries in its index on “economic freedom,” a figure that seems to say the people and organizations here are not free to pursue economic activities.

First, a point of clarification: We have nothing against the main thesis of its recent report titled “2007 Index of Economic Freedom.”

Just like its report, we believe that economic development and progress are easily achieved if citizens, entrepreneurs, business organizations and other economic entities in society are unfettered by the dead hand of the State. And it’s not for some uncritical worshipping of market forces’ magic; it’s because the freedom to transact in and withdraw from the market is part of people’s human rights.

Besides, economic growth and the uplift of people’s living standards are better achieved when the State intervenes in areas where it can really do better: providing economic and social infrastructure; ensuring the rule of law, peace and order, and political stability; protecting property rights and regulating activities that have a strong impact on the environment; enhancing people’s human resources; among others. Based on historical experience here in the Philippines, it’s when the State’s tentacles sleazily intertwine with the economic and business spheres that corruption rears its ugly head.

Yet, one must complain about the disservice the foundation committed on the Philippines in using wrong information in making our ranking. Following its wrong assumptions, it concluded that countries like Morocco, Gambia, Zambia, Guyana, Pakistan, Senegal, Sri Lanka, Moldova, Swaziland and Namibia—countries that are not necessarily known for superior virtues in attracting and hosting foreign investments—are ranked better than the Philippines? Heritage arrived at this ranking for the Philippines simply because it did not try to go beyond stereotypes and biases against the country by looking at fresh data and interviewing the right people who know what they’re talking about.

The Index ranks countries worldwide based on 10 variables: business freedom, trade freedom, fiscal freedom, freedom from government, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labor freedom.

On trade freedom, Heritage gave the Philippines only 74.8 percent because, among others, the Philippines supposedly maintains import and export bans, numerous import restrictions, and quotas. Of course, we know that since the Edsa Revolution most of these barriers to trade like export and import bans were abolished and the quantitative restrictions on imports were converted to tariffs. We are among those who imposed the lowest average tariff rates.
On monetary freedom, Heritage complains that the “government is able to influence prices through State-owned enterprises and utilities;” “price controls exist for electricity distribution, water, telecommunications and most transportation services;” and that “price ceilings are usually imposed on basic commodities.”

Except for regulations on fares in nonair-conditioned buses, all these notions about the government influencing prices are hogwash. This probably describes the Philippines 30 years ago, but not these days when it is a signatory to numerous bilateral and multilateral trade and business facilitation agreements.

Heritage also complains about high inflation—6.9 percent—but it used old data from 2003 until 2005. Had Heritage used fresh data, its researchers could have found out that inflation rates has been going down in 2006, culminating in a low 4.3 percent in December 2006.

Do local and foreign investors have less financial freedom? Heritage thinks so. But any person, Filipino citizen or foreign, can attest to the fact that they practically have all the access to most financial services that are available in any typical modern country in the Asia-Pacific region. It also claims that the government requires banks to lend specified portions of their funds to preferred sectors.

Heritage is probably referring to the old agri-agra requirement where banks were supposed to lend 10 percent to 15 percent of their funds to the rural sector. Anyone here knows that it has not really been practiced since the Edsa Revolution. Even during the Marcos era, most of those banks preferred to park their money in high-yielding Treasury bills, one flexible option they were allowed to.

Heritage also condemns the Philippines for inflexibility in employment regulations, meaning it’s so hard to hire and fire. This is curious because labor legislations are probably similar to most countries in Asia-Pacific region. While we have a tripartite wage system that serves as a wage-setting body, companies here are practically free to hire and fire provided due process is observed.

Perhaps, what really damaged the country’s ranking are the low scores (25 percent to 30 percent) Heritage gave to investment freedom, property rights and freedom from corruption. These are highly subjective criteria for which their judgment is likely to be clouded by bias and negative perception.

It complains about restrictions on foreign investments but we all know that such restrictions are actually few and are limited to some service industries like utilities and communications. It also complains about restrictions on foreigners to practice professions here, but we all know that the same restrictions are imposed even in the economically freest countries like the United States and Australia. For instance, can a Filipino doctor practice in Australia or the US? He could only do so if he takes a board examination there and undertake residency and training again. The same thing applies here in the Philippines.

Certainly, corruption is a problem in the Philippines. But it’s the height of exaggeration to say that the Philippines is worse than Uganda, Kazakhstan, Vietnam, Zambia, Zimbabwe, Swaziland, Gambia, Yemen, Laos, Burkina Faso and Mozambique. Our misfortune really is that more than 20 years ago, we had a dictator whose colorful society-page wife possessed 3,000 pairs of shoes. That was good media copy and the stigma simply stuck to us.

In short, we believe in economic freedom but we also hope that “policy entrepreneurs” like the Heritage Foundation could do serious research before they pass judgment on us. The United Nations Development Program (UNDP) produces a global “human development” report each year and it does its business thoroughly and professionally—by, among others, engaging local experts (mostly independent economists and social scientists) who know the hard facts in a particular country. That’s why UNDP always produces a very credible report. An unsolicited advice to Heritage: It should free itself from ignorance before passing judgment on others.

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