Financial strength, development weakness

The Inter-Agency
Task Force on the Management of Emerging Infectious Diseases (IATF), presided
by Pres. Rodrigo Duterte, addressed the country on Tuesday. Finance Secretary Carlos
Dominguez III was a moment of lucidity especially compared to his principal’s
rambling incoherence. Unfortunately, being lucid doesn’t necessarily mean being
correct.

Resilient and the
best?

Sec.
Dominguez opened by rejoicing about the Philippines being ranked number six out
of 66 countries in the world for “economic resiliency” and supposedly “the best
in Southeast Asia for financial strength”. The compulsion to welcome any sort
of accolade is understandable especially coming from The Economist, a well-regarded business newspaper. We’re so starved
of good news that ranking highly on any international scale – like in boxing or
beauty pageants – always gives an endorphin rush.

But
then again, it’s probably useful to be a little more circumspect about the
metrics used to say that the country is supposedly doing well. The four
measures of ‘financial strength’ in the magazine’s report are of course fine as
they are and include the most important usual measures of financial strength –
public debt, foreign debt, cost of borrowing, and foreign exchange reserves.
Hence Sec. Dominguez’s elation over our so-called financial strength and the
country’s credit ratings.

But
we should presumably see things from a real development perspective and beyond
the shallow endorphin rush. In which case, the main problem is the confusion
between means and ends. This is actually a recurring problem with our
neoliberal economic managers in particular, and free market-biased economists,
policy folks, and business minds in general.

The
four metrics and credit ratings aren’t valuable in themselves but for how
useful they are for the presumably real development ends of policymaking – enough
jobs and livelihoods so that there are no poor Filipinos, and an equitable,
stable, self-reliant and sustainable economy. It’s always been odd that
whenever policymakers see a conflict between financial strength and social
development, the latter always loses.

Which is also to highlight that while those measures are of course better favorable than unfavorable, supposedly favorable performance can actually be undesirable depending on the price paid to get them.

Financially
strong for whom?

So,
some thoughts on Sec. Dominguez’s self-congratulatory echoing of an assessment
that the Philippines “continues to enjoy the confidence of the international
community” – meaning all the foreign creditors and investors whose main
interest in the country is that we keep borrowing and stay profitable for them,
to put it bluntly.

First,
“financial strength” is a misnomer if this is in any way taken to refer to the
level of development of the Philippine economy or even of the government. The
only underlying so-called strength these metrics refer to is the country’s
perceived ability to pay its foreign debt obligations. There’s no direct
correlation between such so-called financial strength and a country’s level of
development – a quick scan of the ranking with countries like Botswana, the
Philippines, Nigeria, Indonesia and India ranking high should make that easily
clear.

Finance
secretaries, central bankers, and other economic managers around the world are
regularly feted as the World’s Best this or that by global finance magazines
and organizations. Their countries, economies and governments correspondingly
benefit from the halo effect and are projected as developing – even if, as is
often the case, they’re not.

Second,
it matters how “good performance” along these indicators was achieved. Put
another way, what may be good for financial strength may be bad for
development. As is often the case.

For
instance, the Philippines has had comfortable foreign exchange reserves since
the 1990s mainly because of remittances from the unprecedented export of cheap
labor and overseas Filipino workers. We’re so used to it, but it’s worth
keeping in mind that this enormous reliance on overseas work is at huge social
costs for families and exposes the inability of the domestic economy to create
enough jobs for its population. It also actually distorts the economy with a
huge imbalance between domestic production and incomes and final household
demand. Mammoth overseas remittances – not brilliant economic managers – are
arguably the biggest factor in the country avoiding foreign debt payments
crisis such as in the 1980s.

Public
debt, including public foreign debt, has moderated and credit ratings also
improved. However, this was done on the back of an increasingly regressive tax
system that relies more and more on consumption taxes rather than on direct
taxes. The regressive trajectory of the country’s tax system started in earnest
with the introduction of value-added tax (VAT) in the 1980s then worsened with
VAT expansion in the 2000s and 2010s, and with cuts in personal income, estate
and donor taxes particularly through the regressive Tax Reform for Acceleration
and Inclusion (TRAIN) reforms since 2018.

All
this increases so-called financial strength by unduly burdening poor and
low-income groups who make up the majority of the population, while making it
easier for the narrow sliver of the richest in the country. Sec. Dominguez is
unrepentant and noticeably still pushing for the Corporate Income Tax and Incentives
Rationalization Act (CITIRA) bill which, among others, lowers corporate income
taxes – most of all to gain further favor from the international community.

Lastly,
what is prevented by insisting on these measures as if they were ends in
themselves also matters. The onset of COVID-19 and the national and global
measures to control the pandemic have a tremendous impact on the economy. The
Philippines and the world are in recession, and some are saying that the world
is in its worst economic crisis since the Great Depression almost a hundred
years ago.

Our
current pandemic panic will eventually settle in the coming months, but the
economy will still be stumbling. Worse, poverty and unemployment will be
soaring. In such circumstances, it doesn’t make sense to be so insistent on
narrow indicators of so-called financial strength to the point that urgent
development measures are prevented.

Today,
it’s incredibly important to put more money in people’s pockets both to help
them maintain their welfare as well as to boost effective demand. It’s also
important to support rural producers and small enterprises to ensure that the
goods and services needed are still available. It’s also important to rapidly
expand the public health system to deal with the pandemic and to meet the
country’s vast COVID-19 and non-COVID-19 health problems.

Attending to all this means the government having to spend more as well as building up its capacity to intervene. Giving unwarranted emphasis on measures of ‘financial strength’ unfortunately sets artificial limits to the government meeting its human rights obligations to intervene on a massive scale.

To force an analogy, it’s like being in the hinterlands of the Philippines with an emergency case in the back of the car and the nearest hospital hours away. In this kind of situation, you don’t obsess about fuel-efficient driving or not red-lining the tachometer or limiting the car’s mileage – you step on the gas. Glorifying ‘financial strength’ is stepping on the brakes.

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