UP economists warn of RP crash in 2 years
Gov't urged to check deficit, debt problems


Updated 00:27am (Mla time) Aug 23, 2004
By Juan Sarmiento
Inquirer News Service



Editor's Note: Published on page A1 of the August 23, 2004 issue of the Philippine Daily Inquirer


THE COUNTRY faces economic collapse in two years unless the government reins in the widening public sector deficit and the ballooning debt by adopting a package of revenue and cost-saving measures.

The warning is not from the chief economist of the London-based Standard Chartered Bank, who spoke early this year of a crisis similar to that which befell Argentina, but from 11 faculty members at the University of the Philippines School of Economics.

The UP economists themselves are not ruling out a Philippine crisis similar to that experienced by the Latin American country.

Argentina defaulted on its $88-billion debt in 2002, causing its currency to plunge, inflation to pick up, output to collapse and riots to break out in the streets. Political chaos ensued as a succession of presidents assumed office briefly.

The economists expressed alarm that the public has not recognized the government's worsening fiscal and debt problems as the country's "most urgent problem"
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as pointed out by President Gloria Macapagal-Arroyo in her State of the Nation Address last month.

"Though business people may wring their hands, bureaucrats may fret, and a polite audience may click their tongues, public debt and government deficits, it must be acknowledged, are no immediate concern to the great majority of Filipinos," the UP economists said in their 28-page paper titled "The Deepening Crisis: The Real Score on Deficits and Public Debt."

This situation poses "risk and danger," according to Emmanuel S. de Dios, Benjamin E. Diokno, Emmanuel F. Esguerra, Raul V. Fabella, Ma. Socorro Gochoco-Bautista, Felipe M. Medalla, Solita C. Monsod, Ernesto M. Pernia, Renato E. Reside Jr., Gerardo P. Sicat and Edita A. Tan.

"(B)ecause the issue is crucial but esoteric, well-known but unpopular, it is almost inevitable for some politicians, media and public intellectuals to make political capital of the situation by pandering to public ignorance instead of relieving it," they said.

They noted that the national government's total debt stood at P3.36 trillion as of the end of 2003, or equivalent to 78 percent of the gross domestic product. The public sector debt, which includes the obligations of government-owned and controlled corporations, rises to more than 130 percent of GDP, the total value of goods produced and services rendered in the country.

The government expects a budget deficit of about P200 billion this year.

They said falling revenue and tax efforts were the main reason for the worsening deficit picture since 1997. The tax effort fell from a high of 17 percent of GDP in 1997 to only 12.5 percent by 2003.

"That this occurred even during years of continuous, though moderate, economic growth strongly suggests that serious structural flaws have crept into the revenue system. Bureaucratic corruption and tax evasion could not have been the sole or major culprit in the declining revenue effort," the economists said.

They said the growing debt and deficit were undoubtedly the biggest reason that investments and growth in the country had remained sluggish seven years after the start of the Asian crisis.

Because the government is increasingly dependent on debt, any sudden increase in global interest rates, which according to them can no longer be ruled out, would cause huge difficulties in repayment, whether or not the government defaulted formally.

The economists said a sharp rise in global interest rates would result in a sharp reduction in loans from foreign lenders and "precipitate a crisis such as that Argentina or Turkey experience."

"As the 1983-84 crisis showed, the cutback in foreign lending would lead to a sharp peso depreciation, mostly aggravated by capital flight, severely contract trade as the price of imports rose, and correspondingly cause a deep recession and unemployment," they said.

The UP economists said a crisis would not be averted even if government sought relief by reneging on paying the debts held by Filipinos. "Even that would also cause major difficulties and bankruptcies for the domestic banking system, which holds a large amount of government paper, and ruin millions of depositors," they said.

"Such systematic shock would entail no less severe economic contractions, causing thousands of bankruptcies and throwing millions into the streets."

The economists said these scenarios were being fended off only by the fact that the country continued to earn more foreign exchange than it was spending as a result of remittances by overseas Filipino workers.

But this could just as easily change, according to them. "Any large external shock, such as sustained increase in world oil prices, or a sharp fall-off in workers' remittances, or ironically, even rapid growth that would cause the import bill to rise, would make the country increasingly vulnerable."

They said that while the economy was not yet on the brink at this time, "it can probably afford at most three years to avert such crisis -- with possibly a year at most to convince financial markets it is doing something to reverse the situation."

Alternatives

"In the spirit of beginning a constructive public discussion of alternatives," the economists are proposing the following:

• Limit the burden of servicing off-budget liabilities to 1.5 percent of GDP through price-and fee-adjustments, cost-cutting and management pay cuts in government corporations.

• Raise the national government's primary surplus to control the size of the debt and to safeguard the basis for future growth.

• Raise revenues by closing off tax loopholes, updating existing taxes, passing new revenue measures and reallocating spending.

They suggested that the criteria for evaluating proposed revenue or cost-cutting measures be as follows:

• Implement the full intent of existing laws ahead of new taxes.

• Distribute the burden of cost-adjustment and spending cuts throughout government.

• Consider only new taxes based on strict economic justification and ease of collection, in that order.

On this basis, the UP economists endorsed the following revenue measures:

• Indexation of specific taxes on tobacco and alcohol, which is expected to raise P14 billion.

• Closing off tax leaks plus additional effort by the Bureau of Internal Revenue -- P12.4 billion.

• P2 per liter specific tax on petroleum products -- P12 billion.

• Motor vehicle fee increase of 50 percent -- P2 billion.

• Eight-percent increase in excise tax on new vehicle registration -- P3.2 billion.

• Increase value-added tax rate from 10 to 12 percent and expand coverage -- P25 billion.

• Reduce Internal Revenue Allotment to 30 percent -- P35.2 billion.

• Halve pork barrel allocations -- P10.7 billion.

• Other measures to be identified -- P10.3 billion.

"Timing these measures presents a distinct challenge to economic statesmanship on all sides. Two factors must be considered: first, the pace of the measures must demonstrate sufficient credibility and resolve before both foreign and domestic creditors to forestall any further slide in credit ratings or increase in interest rates.

"A second concern, on the other hand, is calibrating the phase-in of the measures in order to maintain macroeconomic stability and not to interrupt growth. Implemented in a haphazard and uncoordinated manner, the spate of tax increases and new measures could provoke an economic downturn," the economists said.

If the country avoids collapse in the next two years, it will be a first, they said.

"For this to happen, however, will require unprecedented cooperation and open-mindedness among the country's political elite as well as a great deal of forbearance and capacity for sacrifice among the people," they said.

"In such circumstances, staving off a crisis becomes a classic 'free-rider' problem: no one wants to be the bearer of bad news or the first to volunteer to sacrifice -- the hope, of course, is that someone else will at sometime. Precisely to minimize the free-rider problem, we have sought to show that only a package of measures assigning a fair burden to all stands a fair chance of success.

"All that remains now is the test to determine whether the nation's institutions and the quality of its leadership will suffice to save its people from an impending ordeal that has been largely predicted and is perhaps entirely unnecessary," they said.

(Full text of the paper can be downloaded from www.upd.edu.ph/~econ.)

LISTEN TO VOICE OF THE YOUTH NETWORK RADIO PROGRAM
LAKAS KABATAAN: R E C H A R G E D !
TINIG KABATAAN: R E C H A R G E D !
A MERGER WITH
VOICE OF THE YOUTH NETWORK(TINIG KABATAAN)
DZME 1530 KHZ. SATURDAY 5-6 PM

Lakas Kabataan, Tinig Kabataan Recharged!, a youth-oriented program of DZME 1530kHz, Ang Radyo Uno, has been true to its goal of becoming an on-air venue where the Filipino Youth is heard with regard to social and political issues affecting their lives.

The program also gives recognition to inspiring young achievers and youth organizations that make a difference and significance to the lives of the Filipino youth.

With the goal of reinforcing the program and servicing the Filipino youth in a more progressive scale, it is an honor for Lakas Kabataan to welcome an official fusion with Voice of the Youth (Tinig Kabataan).

Tinig Kabataan (VOTY), a brainchild of a youth advocate and young achiever Pocholo D. Gonzales, has evolved through the years from a radio program segment to a successful youth organization with a nationwide scope.

VOTY members are dedicated in:
· “Empowering the youth through leadership, advocacy and education”
· “Encouraging the youth to take control of their life situations while building self-esteem and improving quality of life”
· “Developing leadership among talented children and youth to make a difference by focusing on education, youth participation and development”

The project also initiated the Voice of the Youth Network, “an incubator of national partnerships among youth organizations in the Philippines”.

It’s MISSION is to “facilitate youth participation and intergenerational partnership in national decision-making, to support collaboration among diverse youth organizations, and to provide tools, resources, and recognition for positive youth action to change our country.”

VOTY Network “brings together young people in more than 78 provinces within national networks to collaborate on concrete projects addressing national problems and creating positive change.”


For it’s part, Lakas Kabataan pledges to be a part of the upcoming projects and activities of VOTY by providing it with sufficient exposure while welcoming it’s officers, members and affiliated youth organizations.

Lakas Kabataan shares the purpose of VOTY, which is to Inspire, to Inform and to Involve the Filipino Youth through an energetic radio programming.

This could be achieved through the evolution of Lakas Kabataan: Recharged!* which promises to be more dynamic and to become a more powerful force of the youth in the airwaves with the following segments:

Voice Out!*
Maximum of 15* minutes of interactive talk about current national issues and events that occurred the past week. Aside from promoting awareness and critical thinking, it would encourage the youth to air out their opinions and take a stand.

Bilib Kami Sa’yo!*
15 – 30* minutes dedicated to giving recognition to Youth Leaders and Achievers who could inspire our fellow young people in discovering their talents and realizing their dreams.

Join Ka Dito!*
15 – 30* minutes of featuring active Youth Organizations from schools, private and government sectors, where they could promote their group and their activities. The segment encourages the youth to be active in their schools and other communities. It would also promote nationwide and international youth activities.

Ribyu sa Radyo!*
10 – 15* minutes of reviews, comments, recommendations and trivia on Movies, TV shows, Music, Books, Sports and Places that keep young minds entertained as much as informed. This would also encourage callers and requests.

“Lakas Kabataan: Recharged!” envisions itself at the center of the Power of the Youth in Radio Broadcast in the near future.

THE UNITED NATIONS SECRETARY-GENERAL
--
MESSAGE ON INTERNATIONAL YOUTH DAY

12 August 2004

The theme of this year’s observance of International Youth Day is “Youth in an
Intergenerational Society”. Today’s world has the largest number of youths ever, with almost half its population under 25 years of age. At the same time, by the year 2050, the number of people 60 and older will triple, to nearly 1.9 billion. To prepare for the future, we must promote solidarity between generations today.

Young people everywhere are preparing for productive, meaningful lives in work,
society and family. To be successful, they need access to education and health care. They must also overcome obstacles such as HIV/AIDS, drug abuse, crime and persistent unemployment, which frustrate the potential of all too many young people at a crucial stage in their lives. Two decades from now, these same people will form the middle generation that supports ever increasing numbers of dependents: not only their children, but their parents as well. They understand the importance of fulfilling this responsibility, but they will be able to do so only if we invest now, and ensure they have the knowledge and skills to take advantage of the opportunities opening up to them.

In most societies, older persons continue to contribute actively, yet the dependence
between generations will grow ever larger. The ageing of our world is an issue for young people, too. The General Assembly, for its part, will address the question next year as part of its ten-year review of the World Programme of Action for Youth to the Year 2000 and Beyond, which was adopted in 1995.

On this fifth observance of International Youth Day, let us celebrate generational
interdependence, and recognize that all members of society have contributions to make and needs to fulfill. Intergenerational solidarity means they can do it together. I encourage everyone celebrating International Youth Day, including the many young people gathered in Barcelona for the Third World Youth Festival, to do their part. Let us draw on the talents and wisdom of all people, and build societies for all ages.