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Contra Factum Non Esse Disputandum: Reply to the UP School of Economics on the Fiscal Crisis

Contra Factum Non Esse Disputandum: Reply to the UP School of Economics on the Fiscal Crisis

Jan 14, 2012

Contra Factum non esse disputandum: Reply to the UP School of Economics on the Fiscal Crisis

By Walden Bello, Lidy Nacpil, and Ana Maria Nemenzo*

The contribution to the debate on the fiscal crisis by the UP School of Economics graduate students is welcome (Talk of the Town, Sept. 19, 2004). Unfortunately, the positions they take in rebutting our arguments are simply untenable.

First, they throw doubts on our claim that trade liberalization is a major cause of the fiscal crisis. Second, they argue that trade liberalization has led to macroeconomic stability. Third, they assert that while the foreign debt situation is very serious, there is little we can do about it.

On the first point, we simply can’t understand why our UP economists cannot face the facts. “It is erroneous,” they write, “to assert that tariff reduction should lead to a corresponding decrease in customs collections…” It did, and drastically. On the revenue side, the trade liberalization that started with EO 264–which phased in, beginning 1994, a radical program to unilaterally reduce all tariffs to 0 to 5 per cent by 2004–resulted in radically decreased customs collections in a very short period of time. In the period 1995-1997, customs collections of import duties plunged from P64 billion to P45 billion. In the period 1995-2003, while the value of imports grew by 41.1 per cent, customs collections of import duties declined by 35.7 per cent; imports rose from US$26.5 billion in 1995 to $37.4 billion in 2003, but import duties fell from P64.4 billion to P41.4 billion.

Imports and Customs Collections, 1995-2003

Year Imports (in millions of US dollars) Customs duties (in millions of pesos)
1995 26,537 64,410
1996 32,427 62,457
1997 35,934 44,602
1998 29,660 42,347
1999 30,741 42,485
2000 34,491 48,428
2001 33,057 38,631
2002 35,427 36,541
2003 37,447 41,414

Sources: Bureau of Customs, National Statistical Coordination Board

As a percentage of GDP, total customs collections (import duties plus import taxes) fell from 5.6 per cent of GDP in 1993 to 2.8 per cent in 2002. True, the figures show that local tax effort also declined in the period 1994-2003, but they are clear that the bulk of the loss of total revenue was accounted for by tariff reduction.

Probably, the best estimates of foregone revenue are provided by economist Clarence Pascual of LEARN, who finds that total foregone revenue rises from P58 billion in 1998 to P108 billion in 2003, averaging 2.4 per cent of GDP for the period. These are magnitudes that are, he notes, simply “mind boggling.” These are the magnitudes that led former Finance Secretary Jose Isidro Camacho to admit the obvious: “The severe deterioration of fiscal performance from the mid-1990’s could be attributed to aggressive tariff reduction.”

The UP economists then fall back on a second line of defense, which is to parrot Professor Ben Diokno’s line during a recent television appearance that while radical tariff liberalization may have reduced government revenues, it contributed to taming inflation owing to cheaper goods flowing in, thus bringing about macroeconomic stability.
They present no empirical evidence that tariff liberalization contained inflation, but there is a lot of evidence that it induced macroeconomic distress. Again, to cite Pascual, the two growth episodes of the period of radical tariff liberalization, 1993-1995 and 1999-2003, spanning a total of eight years, were accompanied by rising, not falling unemployment. “The flood of imports occasioned by the tariff reduction program represented massive job creation—abroad.”

Radical tariff liberalization has not only contributed to an escalation of the unemployment rate but to severe damage to our agricultural and industrial producers, a great many of whom have been driven to bankruptcy. A glimpse into the depth of the structural crisis induced by radical tariff liberalization is provided by the recent report of a government review committee constituted under Executive Order 241 to review tariff rates. In the end, the committee—composed of people with no discernible bias for protectionism–was forced to recommend raising tariffs on 627 of 1371 locally produced goods owing to overwhelming evidence that they had been damaged by unfair competition from imports. The list of industrial casualties is awesome: paper products, textiles, ceramics, rubber products, furnitures and fixtures, petrochemicals, beverage, wood, shoes, petroleum oils, clothing accessories, and leather goods. One of the industries most affected by the tariff cuts as well as the abuse of duty free privileges is the textile industry, which has shrank from 200 firms in the 1970’s to less than 10 today. Again Camacho is unequivocal: “There’s an uneven implementation of trade liberalization, which was to our disadvantage,” with the result that “it has killed so many local industries.”

Turning to the expenditure side of the debate, the UP graduate students simply repeat their teachers’ stance that yes, foreign debt repayments are bleeding the country, but the time to do anything about it is long gone. As Prof. Solita Monsod said recently, “We have been overtaken by events. We should have done something 17 years ago. To say something now, no one is going to be sympathetic.”

We don’t need to do anything drastic with our creditors because we are not yet in
Argentina’s situation, they say. We say, on the contrary, that unless we do something drastic now in terms of renegotiating the terms of repayment, we will end up very soon like Argentina and be forced to default. Debt servicing, according to former NEDA chief Cielito Habito will eat up 81 per cent of government revenues this year and is projected to consume 89 per cent in 2005. Another way of looking at this is that in order to enable the government to keep functioning, we must resort to borrowing from foreign and local creditors to stay current on our debt servicing. However one reads them, the figures underline one thing: we are essentially back where we were in the early 1980s, which is that of borrowing new money at increasingly disadvantageous rates to pay off old debts.
And the day of reckoning is fast approaching: Interest payments now account for 46 per cent of the budget, and the combination of a peaking payments schedule and declining revenues may soon push that above the 50 per cent mark owing to the automatic appropriations law. To repeat: to do nothing now about restructuring the debt is precisely to bring about the very bankruptcy and default that the UP economists hope to avoid.

The collective paralysis at the UP School of Economics is partly due to a gross misreading of the temper of the times. There is now a great awareness in the world’s financial centers that financial crises promise to be even more disruptive in the future and there is, therefore, an urgent need to create multilateral mechanisms to deal with such events as the Argentine default.

One of the ideas that has been mooted is the creation of a Sovereign Debt Restructuring Mechanism (SDRM) that would allow countries in the throes of or entering a financial crisis like the Philippines to freeze or reduce their repayments with full legal protection as well as with financial support from the IMF while they undergo an orderly restructuring of their debt with their creditors. Surprisingly, the otherwise orthodox Deputy Director of the IMF Ann Krueger of the United States has become the main proponent of this idea, though the Bush administration continues to reject it.

The point in raising this is not to support the current SDRM proposal (which we feel has serious flaws and is still inadequate for effectively dealing with financial crises) but to emphasize that no one wants another Argentina, and the Philippines must capitalize on this mood to push its creditors to negotiations to radically restructure and devalue its debt at this point. In a recent interview, Prof. Monsod, reminiscing about the debt crisis of the 1980’s, asserted that in debt negotiations, “If you don’t know how to negotiate, you’re dead. You capitulate immediately.” We agree. Unfortunately, Prof. Monsod and UPSE’s current position amounts to something worse—capitulation even before negotiations begin.

Fortunately, there are now more courageous voices from the economics establishment that increasingly recognize the need for renegotiating the terms of our debt, such as former NEDA chief Habito, who recently proposed that we begin by renegotiating with a view to reducing the debt we owe the World Bank and the IMF, which comes to 22.8 per cent of our total public foreign debt.

As a final point, we would like to point out that it is disconcerting to note our UPSE graduate students adopting the habit of some of their mentors, when they are getting the worst of an argument, of dismissing disagreements with orthodox positions as an “ideological reflex.” We are dealing with facts here, not faith, and, as the Romans used to say, “Contra factum non esse disputandum.” You cannot argue against the facts.

(Published in: Focus on the Philippines No. 38, http://focusweb.org/oldphilippines/content/view/77/6/

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