Collateral damage

The fiasco at the National Food Authority that has led to surging domestic rice prices couldn’t have come at a worse time. It’s largely to blame for the higher-than-expected inflation rate we’re seeing lately, with the August figure of 6.4 percent being the highest in nine years.

We are again reminded starkly that our distortive rice policies have perennially done far-reaching harm on the rest of the economy and our people, much farther than our agricultural authorities seem (or are willing) to see. There’s clearly a better way to give focused assistance to 2 million Filipino rice farmers than with a policy regime that’s not only costly, but inflicts universal collateral damage, penalizing 100 million consumers with expensive rice—most especially 21 million poor and mostly malnourished ones.

If good policy is defined as serving the greatest good for the greatest number, our age-old rice policy hinged on the stubborn goal of full self-sufficiency is anything but.

What makes it even more pernicious is that the damage will be with us for decades to come. Our young children of today that are stunted due to severe malnutrition—who make up one in every three Filipino children five years old and below—are damaged for life, and will never reach their full brain and physical development potential. They are severely malnourished because their poor parents can ill afford to buy “ulam” of protein foods after buying their rice staple at prices up to twice what our Southeast Asian neighbors pay.

I have constantly sounded the alarm that our so-called “demographic sweet spot”—where working-age people will dominate our population in future decades—is looking more like a demographic time bomb, if one-third of them will be misfits of low productivity.

The recently-released second-quarter GDP growth data were also widely seen as a letdown, having slowed down to 6 percent from 6.6 in the previous quarter and 6.5 in the same period a year ago. A major reason was the almost negligible 0.2 percent growth in the agriculture, forestry and fisheries sector, a drastic slowdown from its 6.3 percent growth in the same period last year.

Now, it appears that we may have to settle for slower growth than we otherwise could achieve, because our Bangko Sentral ng Pilipinas (BSP) is being pushed into a corner to use monetary tools to tame inflation that is actually coming from cost-side pressures. This means that the BSP must tighten money supply even more, to further quell self-fulfilling inflation expectations. This is the tightrope the BSP has to keep walking: It must now tame inflation using money supply tools such as raising interest rates, but which in turn tend to choke the economy.

How so? Tighter money or higher interest rates dampen growth on both the demand (spending) and supply (production) sides. It slows consumer spending because durables like cars and appliances are mostly bought under installment schemes that are interest-sensitive. And in a society increasingly dependent on credit for daily purchases (via credit cards), it can slow consumer spending on all else.

On the production side, higher interest dampens access to working capital and investment in greater productive capacity, which are mostly funded with loans. The net effect is to slow production activity below what it otherwise would be.

All this is not helping at a time when overseas remittances have not only slowed down in growth, but have lately turned negative (that is, they actually fell) for the first time since they became a significant contributor to our economy. As a major driver of consumer spending, this does not bode well for our growth outlook.

Our export earnings have also dropped, even as foreign exchange-draining imports continue to surge. This growing trade imbalance is the main reason the value of the peso has been falling (i.e., its exchange rate with foreign currencies is rising), further feeding into the rising inflation. And one reason for the export decline is the decline in key export crops like mango, coffee and cacao, which have traditionally received disproportionately less attention and budget relative to—you guessed it—rice.

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