Finance, Technology and Macroeconomics

Economic tango

By Cielito Habito
Inquirer
Last updated 09:53pm (Mla time) 09/10/2006

Published on page B2 of the September 11, 2006 issue of the Philippine Daily Inquirer

POLICY reversals and policy inconsistencies have been one of the key reasons the country and its government are persistently unable to earn enough faith and trust from the foreign business community, international development and finance institutions, and from its own people. Our economic policymaking has been characterized as one where we keep stepping backward even as we also try to step forward--sort of like dancing the tango. We can't seem to move forward consistently and continuously.

Another step backward

This relatively low level of trust has been a key factor that has kept the Philippine economy from attracting as much investments and attaining the same dynamic performance displayed by our closest neighbors in recent decades. Economists describe it as having a lower level of sustainable growth than our better-performing neighbors. While Singapore, Malaysia and Thailand managed to sustain rates of economic growth of at least 8 percent for well over a decade in the 80s and 90s, it is estimated that the maximum rate of economic growth we can sustain would be more in the neighborhood of 5-6 percent. Indeed, that's where we are at the moment.

Whether we can finally break out of this lower sustainable growth path has been put into serious question with yet another glaring backward step taken recently by the government. Offering no justification whatsoever, Executive Order 558 repealed EO 138 in a one-liner order, two days short of the latter's seventh anniversary.

In the wrong business

Last week, we explained when government is justified in making direct interventions in the economy, and when it is not. One of the widely agreed principles is that the government has no business being in a business that can be handled more efficiently and more effectively by the private sector.

Is lending money to the public one of them?

Experience through four Presidents had led us to an unequivocal answer. The Aquino administration made it a policy to abolish direct lending by government nonfinancial agencies. The Ramos administration created the National Credit Council to rationalize all directed credit programs. And the Estrada administration issued Executive Order 138 spelling out the government's clear policy on directed credit programs: It put a definitive end to the granting of loans to target sectors by its nonfinancial agencies.

Failed experiments

EO 138 articulated a wisdom gained from accumulated experience out of numerous failed government experiments with direct lending, spanning the Marcos-era Masagana 99 rice program of the 1970s, and the Kilusang Kabuhayan at Kaunlaran (KKK) in the 1980s. The bulk of the subsidized loans were never paid back, and the rural banking system nearly collapsed.

The lessons learned then were clear. Funds lent directly by the government were seen by borrowers as dole-outs that need not be repaid--and so they hardly did. Nonfinancial government agencies do not have the capability to run loan programs, and invariably mismanaged them at great loss. Interest rate subsidies entail huge costs to the general taxpayer and had contributed to the fiscal instability of the government. The programs became a disincentive for private financial institutions to provide credit to smaller borrowers, as they could not compete with the cheap funds being dispensed by the government. And the list of lessons goes on.

Microfinance boom

Estrada's EO 138 paved the way for the current dynamic growth in microfinance initiatives coming from the right source: The private financial institutions. In recent speeches, BSP Governor Amando Tetangco has noted that from just about 55 banks claiming to do microfinance before 2000, there are now nearly 200 private financial institutions, with a portfolio of P3.3 billion reaching more than 600,000 beneficiaries, engaged in microfinance operations. And now the rural banking system is not only back on its feet; it is actually doing quite well and is playing a key role in financing the livelihoods of the rural poor.

Indeed, EO 138 helped earn for the Philippines recognition from the United Nations for having the best micro-finance policy in the world.

Politics first

It would seem irrational, then, that Malacañang--especially with a Ph.D. economist President--would repeal a policy that had not only achieved so much and done so much good, but earned us international admiration too. Not even the key economic managers were consulted in the issuance of the offending EO 558; thus, they have been hard-pressed to explain it. Gone are the days of President Ramos's strict requirement for "CSW"--completed staff work--before he would sign any presidential issuance.

But it doesn't take a genius to understand why some people in government would want its various agencies to be able to hand out cheap money to the public all over again. This time, they carried the tango and won out over the forward-stepping economists.

Comments welcome at chabito@ateneo.edu

posted by JD @ 3:16 PM