Commentary
Compassion and common sense in times of crisis
By Raul V. Fabella
Philippine Daily Inquirer
First Posted 03:04:00 08/23/2008
The 2008 State of the Nation Address had one rare bright spot for dismal scientists and businessmen: the decision made by Malacañang to maintain the value-added tax (VAT) on oil—a decision that came under withering attack from many sectors.
The Catholic Bishops’ Conference of the Philippines (CBCP), echoing many NGOs, had recommended the lifting of the VAT on oil and the review of the oil deregulation law to help the poor. (Philippine Daily Inquirer, 7/8/08) If government forgoes its tax take, the price of gasoline will fall; the public at large will experiences a price relief.
Malacañang’s stance is to collect the taxes to finance the provision of targeted subsidies for the most vulnerable in society. Thus far, the subsidies have come in the form of a P500 one-time assistance to lifeline customers of Manila Electric Co. (Meralco), a P2-billion conditional cash transfer, a provision of subsidized rice. The Consumer and Oil Price Watch (COPW) proposals (Philippine Daily Inquirer, 7/9/08) were in general agreement with the government stance except on the extent and size of a safety net program.
The two views are contrasting modes of the concept of safety net provision, where the cost of safety net is borne by government taxes, whether collected or foregone. Which stance best provides relief without mortgaging the future?
The CBCP’s proposal also called for a review of the 1998 oil price deregulation law blaming it for the high fuel price. How else to explain the “bukol” of about P70 billion in profit earned by the oil companies? Administered pricing is the cure! (Conveniently left out: This “bukol” was a 10-year aggregate representing a puny rate of return!) Relief under administered pricing is financed either by government subsidy or by private groups still operating in the market. Will administered pricing, intended to help the poor, effectively help the poor?
No evidence exists that administered pricing in the oil industry will keep world petroleum price from getting reflected in the pumps. Even oil rich countries (Indonesia and Malaysia) have been forced to reflect world prices in the pump to stem fiscal hemorrhage. Before 1998, pump price was administered through the Oil Price Stabilization Fund (OPSF) and yet world price increases had to be reflected, if with a lag, in the pump prices. The subsidized OPSF also gutted the fiscal health of the Philippine government, near-bankrupted the central bank, Bangko Sentral ng Pilipinas, and ensured slow growth and poverty. OPSF was thankfully abandoned in 1998.
Before water distribution was privatized in 1997, water in Manila was “cheap.” The problem? It was not available. The very poor bought trucked water at exorbitant prices. It was anti-poor and anti-regions. Also like a cocaine fix: temporary relief is paid for by permanent disability.
The government stance better serves the safety net provision idea. This entails the concentration of relief on the poorest to ensure the minimum number of people falling below some accepted standards (say, Millennium Development Goals’ $1-a-day person). This concentration of relief on the poorest produces the greatest bang. More people are thus kept from falling below the net.
By contrast, the price relief due to VAT suspension benefits the rich and poor alike with the share of the poorest quickly dissipating into insignificance. A targeted subsidy program for public utility conveyance (perhaps with the use of vouchers) would convey much more relief to public conveyance riders for the same fiscal drain. Keeping the poor above water requires concentration rather than dissipation of relief.
The classic brickbat against targeted subsidy is the “leaky bucket problem”: The pipelines can be very leaky diminishing relief to the intended beneficiaries. An especially acute problem in weak states where larceny rules. (Note the Court of Appeals scandal.) Fortunately, the technology of targeting has become smarter with the use of sophisticated identifiers such as electronic IDs, geography-based access and verifiable markers to reduce the leaks.
Can the government keep its hands from raiding the cookie jar intended for the poor? Venality in this soft state of ours counsels skepticism. Wary of this, Malacañang offered to let the churches and NGOs be a party to the safety net delivery. Not a bad move. There is ample room for public-private sector partnerships even in safety net provision. Fast-tracking much needed arterial infrastructure projects—the darling of last year’s State of the Nation Address—will create jobs and enable future growth. Government even needs to raise its tax revenue (by indexing the “sin taxes” to inflation and forceful enforcement of the Attrition Act). Other remedies cost taxpayers nothing. Replacing the feckless mandatory drug test for drivers and emission test with random testing will unburden the beleaguered jeepney and tricycle drivers. Scuttling the Panglao International Airport is another.
Retrained spending must target not only mitigation but also the seeding of a future less dependent on fossil fuel: incentives for increased use of, and investment in, renewable energy. It is now high time we made allies rather than enemies of the two energy sources abundant in the tropics: wind and solar. In the case of food, the opportunity of enabling corporate farming to modernize our food sector beckons. For this, we may need to seriously rethink Sec. 27 of the Comprehensive Agrarian Reform Law. Not only that, to also allow the revival of the rural credit market to benefit the small farmers.
The nation is duty-bound to provide safety nets in the name of compassion. The best strategies are those where compassion and common sense meet.
Raul V. Fabella is a professor at the University of the Philippines School of Economics. He is also a member of the National Academy of Science and Technology.
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