Analysis
‘Economic populism’
By Amando Doronila
Philippine Daily Inquirer
First Posted 01:05:00 06/18/2008
Filed Under: State Budget & Taxes, Crisis, Macro Economics
Following the onslaught of the explosion of prices of food, oil and essential utilities, the government, threatened by public unrest over inflation, has fallen back on populist nostrums mainly based on subsidies doled out to poorer sections of the population.
Over the past three months, the Philippines, one of the developing countries threatened by political and social instability, has embarked on a program of subsidies that include: a P2-billion power subsidy program that offers a one-off P500 cash dole to four million families using less than 100 kilowatt-hours of electricity monthly to help cushion the impact of high electricity rates; a plan to offer a P2-per-liter discount on fuel purchases by public utility vehicle drivers in order to forestall a fresh round of fare increases; and a P300 per child subsidy for each family in addition to the P500 subsidy. These cash handouts come on top of the million-peso subsidy for cheap rice imported and stockpiled by the National Food Authority to enable it to sell rice at P18.25 a kilo, against the current price of P40 a kilo in the free market. A fertilizer subsidy is part of a P43.5-billion program aimed at dramatically increasing rice production in the short term.
These subsidies are to be taken from the 12-percent value-added tax, which the government claims is a bounty from one of its key fiscal reforms. The public coffers are claimed to be full because of this revenue.
The government has not come up with comprehensive estimates of the costs of this ad hoc cash handout program, which appears to be the biggest spending spree ever undertaken by any Philippine administration outside of the periodic splurge in public works and cash handouts during national elections every four years. This current splurge is dictated by a more acute political contingency: the survival of a sitting government coming to the end of its elected term in less than two years. And this is what makes this massive subsidy program so ad hoc and so unplanned, unfocussed, thinly spread out with hardly any regard for infrastructure building or boosting production.
By the end of its term, the Gloria Macapagal-Arroyo administration will leave lasting legacies that are unlikely to benefit the successor government, regardless of whether it will be formed by its heirs or the opposition. But it cannot be expected to leave a legacy of a rational food production program that would make the country self-sufficient in food, or at least in rice.
The government’s responses to the food price and oil price spirals have been dictated by populism, resulting in short-term measures designed to defuse public unrest over food shortages and more importantly food prices that the poor cannot afford and that have also hurt the middle classes.
In his memoirs, “The Age of Turbulence,” Alan Greenspan, retired chair of the US Federal Reserve, devotes a chapter on populism in Latin America, symptoms of which appear to be emerging in the responses of the Philippines to the current food price inflation that is also afflicting a number of developing countries in Asia and Africa and threatening their governments with political and social instability. Greenspan, with lucid hindsight, defines “populism” as a “political philosophy that supports the rights and power of the people, usually in opposition to a privileged elite.”
He writes: “I see economic populism as a response by an impoverished populace to a failing society, one characterized by an economic elite who are viewed as oppressors. Under economic populism, the government accedes to the demands of the people, with little regard for either individual rights or the economic realities of how the wealth of a nation is increased or even sustained.
“In other words, the adverse economic consequences of the policies are ignored, willfully or inadvertently. Populism is most evident, as one would expect, in economies with high levels of income inequality, such as in Latin America…
“Economic populism seeks reform, not revolution. Its practitioners are clear about the specific grievances to be addressed but its prescriptions are vague. Unlike capitalism or socialism, economic populism does not bring with it a formalized analysis of the conditions necessary for the creation of wealth and rising standards of living. Populist leaders offer unequivocal promises to remedy preconceived injustices. Redistribution of land, the prosecution of a corrupt elite who are allegedly stealing from the impoverished are common cure-alls. The leaders promise land, housing, and food for every one. Justice is also coveted...
“In all its various forms, of course, economic populism stands in opposition to free-market capitalism. But this is fundamentally wrong, and is based on a misconception of capitalism…
“Economic populism makes large promises without considering how to finance them. Too often, delivering on the promises results in a fiscal revenue shortage and makes it impossible to borrow from the private sector and foreign investors.
“This almost always leads to desperate reliance on the central bank to serve as paymaster. Requiring a central bank to print money to increase government’s purchasing power invariably ignites a hyperinflationary fire storm. The result through history has been toppled governments and severe threats to social stability.”
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