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.

Tuesday, January 16, 2007

Alternatives to legislated wage fixing

DO workers need better wages? Definitely. But do we have to do legislate it? Not necessarily.

The debate vis-à-vis the wage rise proposal by Congress seems to be framed that way. But that may be peripheral to the bigger issue of whether or not the legislative wage-setting is still relevant to the economy’s need for sustained growth and development at this time. We use the term “at this time” because it is clear that minimum wage setting is a framework that was established in an era that is no longer with us. Policy makers should appreciate that before they ever make up their minds about legislating wages.

Legislative wage fixing was conceived in the era of import substitution following World War II. Thinking that the best way to nurture local industries is through protectionism, policymakers then showered factories with all sorts of goodies including blanket tariff protection for “infant industries.” Because industries are not exposed to the dynamics of foreign competition, many of our so-called local industries became monopolistic, many of them selling products and services at exorbitant prices. Today, a refrigerator or a washing machine or a color TV set is cheaper than a cellular phone; those days only the really rich families could afford those amenities. That’s how companies then made a killing. And because they enjoyed unnaturally high mark-ups then, what better way to force them to share the bounty than through a legislated minimum wage?

That’s how it was then: we had a protected manufacturing sector enjoying high state subsidy and protection and a labor aristocracy that was protected by tenure and wage levels set by Congress. The unintended effect of course was that as mandated wages rose, companies minimized the hiring of workers by buying labor-saving machines. It was cheaper to do so because government then actually encouraged such behavior by offering fiscal incentives (such as duty-free importation of machines, plant and equipment) to companies buying such machines from Japan, America, and Europe. The ranks of the jobless rose, but the inconvenient symbiosis between the protected industries and the labor aristocracy persisted until globalization hit hard—since the 90s when the government of President Corazon Aquino instituted tariff reforms that coincided with our joining the World Trade Organization.

With Congress doing the labor unions’ jobs of agitating for higher wages and better work place relations, the ranks of organized labor hardly grew as the formal sector stagnated and many entrepreneurs went underground to evade wage laws.

As import liberalization started to bite into the balance sheets in the late 80s, many companies felt that the politicized wage fixing was untenable and agitated for reforms. Companies then reasoned out that wage fixing was hurting their global competitiveness. As more wage order violations and related breaches were reported, the labor sector also became restless, particularly during the leadership of then labor secretary Augusto Sanchez. Labor unrest forced President Aquino to fire Sanchez and replace him with Franklin Drilon, who instituted the tripartite approach to wage negotiations within the context of the regional wage boards. That system, until now, works as the labor front has quieted in the last two decades. Since wage rise discussions are done in low-key manner, the process doesn’t attract politicians who tend to grandstand. Ever heard of investors complain of labor unrest as deterrents to investments? Not anymore.

The law on regional tripartite wage fixing does not prevent Congress from legislating wage increases. Nevertheless, resorting to such option right now may politicize the process once more, especially since the country is approaching an election season. But this in itself is a peripheral issue; the bigger one is that such a policy action may even hurt the working class that it purports to serve. Why? The main reason is economics.

In the last decade or two, the work place, transformed by the Information Revolution, has suddenly changed. Knowledge has become the key ingredient of growth; and along with services, it has emerged the most dominant growth drivers. This structural transformation suggests that labor demand is largely focused on those who have adequate or even specialized skills. This is clearly revealed by our Research Staff’s job ads monitoring project where the bulk of the ads for work are accounted for by managerial and administrative; professional and technical; and clerical jobs. Do we wonder why we often hear about jobless growth? That’s one major reason.

That brings us to the question whether or not the nationwide legislated wage increase across the board would ultimately serve the interest of the working class. Our own take is that yes, it will indeed benefit those who are in the formal sector, specifically those in companies that can afford the higher wages. But there are only a few of them, as more than 90 percent of companies are small and medium. But overall, the proposed legislated wage hike, especially at the P125 level, might even work against the interest of the working class, especially the unskilled ones, as the wage rise would further make labor more expensive at a time when managers and employers are largely looking for knowledge workers.

Right now, the best option really is to maintain the regional tripartite regional wage-fixing approach in place since the Edsa Revolution. Better still, those companies that can really afford to give higher wages may have to negotiate with their own workers at the plant level without attracting the intervention of politicians and bureaucrats. That of course presumes that labor unions are not lazy to organize their ranks and are doing their homework.

Of course, the drive for better bottom line suggests that many companies are not going to be generous. But policy makers could still remedy the situation by allowing the market forces to drive up wages. How? By going for growth-oriented policies (more infrastructure investments, strengthening the educational system, effective skills training program, improved job market information system, career counseling for high schools and fresh graduates, scholarship programs for the poor, lower tariff for food products like milk, greater investments in mass transit that lowers the cost of transport, among many others).

Notice how workers in cyberservices don’t have to agitate for higher wages at all, and yet companies are offering them signing bonuses ranging from P15,000 to P30,000. Companies need them so badly that they are willing to pay even before workers started working. Notice how the 400,000 workers in the electronic sector are not picketing their company gates yet companies pay them well because they know how hard it is to replace those pirated.

Of course, factors like “macroeconomic stability” do contribute a lot to preserving workers’ incomes. When the inflation rate is low and stable, purchasing power is maintained; there is no need to raise wage levels.

There are a thousand and one ways to raise workers living standards. Obsessing with the too-pat, oversimplified approach of legislated wage fixing could hurt more of them than it would benefit some.

Monday, January 08, 2007

Geology is a hot profession in the Philippines

YES, the miners, geologists and mining engineers in this country are leaving en masse. The sooner our policymakers in both the private and public sectors realize the gravity of this situation, the better.

The country badly needs these people especially at this time. Geologists scour the mountains, the plains, rivers and the ocean floor to find the minerals, oil and natural gas needed by mankind for survival, growth and progress.

The world is riding a minerals boom owing to rising demand from the Asia-Pacific Region, particularly China and India. This boom is propping up a lot of economies throughout the region. Australia, a major exporter of coal and iron ore, is growing fast because of this boom. And if the Philippines wants to ride this growth bandwagon to boost the Philippine economy, we better have enough of these mining professionals home.

Of course, prices of fossil fuels have been high since the last three years. The Organization of Petroleum Exporting Countries (Opec) thought all along that crude oil costing beyond $28 a barrel could break the back of the global economy. Late last year, the crude prices reached as high as $75 a barrel and the global economy remained strong. That means Opec and other major producers are likely to try maintaining high prices.

What this means is that finding our own oil or its substitute like natural gas remains a paramount concern. The Philippines right now is a minor player in the petroleum industry. That’s because for so long we have neglected investments in oil and gas exploration. Again, we can only gain headway if we have enough geoscientists in the country.

Besides needing them for lucrative economic sectors, we also need geologists to determine where the geohazards are. The country is prone to natural calamities like volcanic eruptions and landslides; specific and accurate information about these dangerous places are necessary to prevent or, at least, mitigate these disasters. And most of all, the information generated by geologists on the nature of the soils and rock formation beneath are the foundations with which engineers and builders make their decisions. Without geologists or geoscientists, engineers and architects wouldn’t have any idea whether or not the structures they designed and build would collapse once the quake or the strong winds come.

That’s how important geologists are and yet they are leaving in droves. These days many of the geoscientists at the Mines and GeoSciences Bureau and the Philippine Institute for Volcanology and Seismology (Phivolcs) are gone, either temporarily or permanently. Right now, many companies that invested in the government’s 24 priority mine projects are into exploration and development. Managers of these companies are experiencing an acute lack of geologists and mining engineers. Worse, only three schools—University of the Philippines, Mapua University and Adamson University—teach geology and even the teachers and professors are being lured away by high-paying jobs abroad, particularly in China, Indonesia, Guyana, Mongolia, Saudi Arabia, Australia, Canada, Thailand, Vietnam, Bulgaria and Papua New Guinea.

“We have come to a point where we get paranoid about sending our geologists to conferences. We have this constant fear they are not going to return,” said one mining executive. That’s how acute the problem is and it’s likely to get worse three or four years from now when many of the new mining investments start production.

Well, the good news is this: Filipino geologists are so good that global companies are so eager to hire them. Unlike geology graduates from rich countries, Filipino geologists are used to working in “Third-World” conditions. Filipino geoscientists write and speak good English, a major advantage. This is important because they are supposed to regularly inform their company’s board of directors about their field activities, and good language skills are extremely necessary—especially when writing technical stuff. And they work so hard. In fact, from 1980 until 1990 alone, 69 Filipino geologists are credited to have made 40 major discoveries worldwide worth $469 billion.

Local companies are addressing the problem by throwing money at Filipino geologists. There is talk that smart fresh geology graduates right now can get as much as P120,000 a month. And yet, the diaspora has not abated. Other countries like Australia are also throwing money around just to get good people, but are offering more: citizenships for Filipino geologists and many others. Having everybody screaming for more geoscientists is bidding up the prize money so they could have their own fill of geoscientists to run their own companies.

This problem will only get worse before it gets better. The Philippines could not possibly win this bidding war for talents. Besides, geology as hard science is a difficult and expensive course. Unlike nursing where someone who is not afraid to see blood could probably enroll, only students who loves mathematics, chemistry and physics are likely to survive geology’s rigors. More so because students are always trekking up and down mountains and valleys as part of their laboratory courses. Obviously, it doesn’t have the glamour of information technology courses whose graduates are bound to wear coat and ties and work in air-conditioned offices.

Nevertheless, we could probably institute measures to help ensure a stable supply of geoscientists. For instance, to keep the good professors home, the Chamber of Mines and private companies should explore engaging the participation of the faculty and staff of UP, Adamson and Mapua in their research and development, as well as in the exploration stages of their operations. That would provide additional incentives for these talents to remain in the universities. They could also have tie-ups for visiting professorships. Opportunities for travel and professional exchanges would help ensure that local talents maintain their edge.

To raise enrollment, mining companies and the Chamber of Mines should also offer scholarships to smart high-school students. In the last five years, science high schools have been proliferating all over the country. The private sector should approach these schools for possible recruits into the geology departments of our universities. High-school students are probably not aware of the opportunities in the geosciences. An extensive information-dissemination campaign would go a long way in solving the problem.