OPINION: Duterte economic agenda shuns socialism

Jose M. Galang

Presidential candidate Davao City Mayor Rodrigo Duterte. Jonathan Cellona, ABS-CBN News

Eliciting no surprises, the 8-point agenda unveiled by presumptive president Rodolfo Duterte’s likely economic czar Carlos Dominguez indicates an adherence to laissez-faire principles rather than socialist concepts that Duterte had repeatedly vowed to pursue during the campaign.

However, this stance is bound to face tough tests in the coming months in the wake of a punishing El Niño weather on farms, industries and certain services sectors. The cry for more interventionist responses from the government may also grow louder with extreme weather events spawned by the equally harsh La Niña phenomenon forecast in the second half of the year.

What can be considered relatively new in the Duterte regime’s economic agenda is the strong bias toward a dispersal of economic opportunities outside the urban centers, in particular, strategies favoring the agriculture sector. This can immediately be started by channeling more infrastructure resources in regions around Metro Manila, with results that can even pave the way for decongesting the metropolis.

The economic program also aims to “put more money in the pockets” of income earners through a tune-up of tax rates to reflect movements in consumer prices. How this could be achieved through an “indexing” system—later amended to “bracketing”—needs to be further clarified. Indexing of wage rates never worked in both developed and developing economies.

READ: Duterte wants tax reform, 'Davao model' for economy

Dominguez cited as an example an income bracket of P500,000 and a tax rate of 32 percent. He did not say how exactly the tax burden can be reduced to soften the impact of inflation—which monetary authorities project at around 3 percent this year.

But the P500,000 income bracket covers individuals earning more than P41,500 per month, which is way above the ordinary wage earner’s pay. And the tax due on P500,000 is actually P125,000 (P50,000 on the first P250,000 and 30 percent on the amount in excess of P250,000), which really comes to an actual rate of 25 percent.

How about a call center employee who receives P15,000 per month? The tax, as per BIR regulations, would be P32,500, or 18 percent of an annual income of P180,000. By how much will the Duterte economic program reduce this tax burden and through what policy? Will the resulting saving be worth the effort, or will it not be felt by the wage earner?

If the inflation rate reaches 5 percent this year, will the Dominguez scheme mean cutting the tax rates by the same amount? If that is so, then the call center employee’s income tax payment will go down to P30,875, a saving of P1,625. On the other hand, the taxpayer who earns P500,000 will pay, under the Dominguez plan, P118,750, for a saving of P6,250. Does that mean the rich will become richer in terms of tax payments reduction?

The Dominguez team obviously still has a lot more to do in pursuing this populist move (maybe the focus should be on corporate taxes). Other effects of this plan to revise the tax rates would be its impact on the budget deficit and its potential to fuel inflation since the affected wage earners can only be expected to spend this saving. It would be nice to watch how fast the Dominguez team can formulate and refine this policy.

What is missing in the economic agenda is a declaration of clear support for entrepreneurship and small businesses, which in recent years contributed not a small share in livening up the economy both in the cities and in remote towns.

While large industries are pampered with tax exemptions and other incentives, it is the small and medium enterprises across the archipelago that contribute more to job creation. If the countries that now hire large numbers of Filipinos continue to face economic difficulties, these Filipinos employed in those economies can be expected to return home. Local jobs may be scarce, but boosting small businesses and entrepreneurship just might fill that demand.

FOREIGN INVESTMENTS

The incoming administration’s economic agenda also pledges to “ensure attractiveness” to foreign direct investments. Duterte himself stated during the campaign that he preferred to see more foreign direct investments to inflows of hot money.

Many foreign investors are not easily enticed by incentives dangled by governments. Even if the tax relief rates are high, other key factors like peace and security, stability of policy, low “cost of doing business” (a euphemism for corruption), and key macroeconomic fundamentals. Killing suspected criminals instantly may send wrong signals to investors.

In welcoming more investments, the incoming administration might as well also begin cutting the favors that are given to “crony industries” that, according to economists, derive more profits from land, labor, machines, and capital than they would in a competitive market.

Such crony industries, noted The Economist magazine in a recent issue, include businesses that often involve a lot of interaction with the state, or are licensed by it. The journal listed industries vulnerable to cronyism: casinos; coal, palm oil and timber; defense; deposit-taking banks and investment banking; infrastructure and pipelines; oil, gas, chemicals and other energy; ports and airports; real estate and construction; steel, other metals, mining and commodities; and utilities and telecoms services.

While crony capitalism has been on the wane in both developing and developed countries, the reverse is true in the case of the Philippines, according an assessment by The Economist. It listed the Philippines on 3rd spot in its latest “crony-capitalism index” that it devised two years ago, when the Philippines was number 5.

Some of the industries that are bound to gain from the economic program being drafted by the Duterte administration include those listed by The Economist as the most vulnerable to crony capitalism and cozy arrangements with the government.

If the incoming administration can avoid such “rent-seeking” arrangements with investors, then the prospect of rebalancing opportunities and spreading among a larger number of people the wealth that these industries will create.

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