To compete globally, we must open up, slug it out
ECONOMIST Alejandro Lichauco in his article “Estrada’s political tragedy” (Today, Nov. 18, 1999) again assailed free trade and globalization, which seem to be the avowed direction of President Estrada in his campaign to amend the Constitution.
His piece has stirred a spirited debate, even among Filipinos abroad who have been keenly following developments in the home country.
Readers like Ely Bacolod Jr. note that Lichauco and another “nationalist” economist Walden Bello “had dominated the field for so long, pandering to the interests of traditional Philippine elites.” Does Lichauco feel so bold that his claims will go unchallenged? Bacolod asks.
Well, here is Norman Madrid, a US-based Beta Epsilonian and an economist (not necessarily in that order) throwing a challenge in his comments run in the cybertambayan of Pinoy55, a UP-based brotherhood with members all over the globe. Some of Madrid’s comments follow:
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A KEY Lichauco argument is that protective tariffs are needed for development. History has told us that that is not so. Let us understand both theory and history on this matter.
Tariffs serve three purposes.
- To raise revenue — This is a desirable use of tariffs only if the tariff on foreign goods is also imposed on competing local manufacturers (such a locally-directed tax is called an excise tax). The equal application of the tariff to foreign and local goods is called a “trade-neutral” policy.
The taxman bites both locals and foreigners equally, and no protection is given the locals. Thus they are forced to be globally efficient, to be as good as foreigners in world markets in price, quality, delivery time, marketing, financing, and design.
If they are that efficient, a nation could boom because its sales would suddenly expand in the big world markets, as Tigers found. In the past 40 years, Hong Kong’s exports rose 90-fold. South Korea’s went up 6,500-fold (from $18 million in 1959 to $125 billion by 1998).
The strong growth in dollar earnings would allow the importation of machines for rapid development. In this way, tariffs are beneficial for they are not tariffs—they are not protective. They force locals to be global while raising tax revenues for the government.
When Lichauco refers to tariff protection among Japan and Asian Tigers, he is not aware that the tariffs there are not protective but are trade-neutral. The Tigers were wise. They imposed both tariffs and excise taxes at the same time to raise revenue and also force their locals to be global and efficient.
Lichauco misleads us when he does not mention this neutral but revenue-raising and non-protective aspect of tariff policy among the four Asian Tigers and Japan.
2. To curtail consumption and promote production — A trade-neutral system of tariffs and excise taxes is also beneficial because it raises the prices of products, thus discouraging their consumption and raising the national savings rate. If the collected levies (called forced saving, which are collected by the government) are spent wisely for export-oriented ports, warehouses and utilities, the nation’s competitiveness would further rise, further promoting a nation’s boom.
The Tigers and Japan, when they were poor, needed to curtail consumption and raise savings to finance investment. The trade-neutral policies served them well. The policies boosted savings and investment for global competition.
3. To protect local industry — This third use of tariffs—protection—occurs only when competing locals manufacturers are not hit with an excise tax equal to the tariff rate. This third use of tariffs is what Lichauco is arguing for.
This third use of tariffs, which favors locals, is evil because it is disastrous. A purely protective tariff system allows inefficiency. Suppose tariffs on imports are 20 percent to 100 percent, as in the Philippines from the 1950s. Then locals could charge prices a lot higher than overseas. The locals could be inefficient and have high costs and they would still be viable against foreigners.
Such inefficiency would hurt badly. The inefficient firms would be unable to sell products abroad and we would miss out on the big sales and profits there. We won’t earn the dollars needed to buy machines and technology for our growth.
Instead, the protected firms would be limited to the local market that is tiny and can only generate peso sales. We would lack dollars to pay for needed imports.
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THE effects of dollar starvation are devastating. The most general result is a sick Philippine economy.
We can’t ever boom in a protective system cuddling inefficiency (high costs + poor quality) in the factories. Under such a system, local firms import raw materials to assemble into final products that are sold only to the local market. Global sales are not made, because the local cost structure and quality are not world-class.
As a result, the nation bleeds dollars. The dollars spent on imported raw materials are not replenished by dollars earned from exports.
That was our alarming situation starting in the 1950s, when we started to build up our protective tariff system. Our rate of loss of dollar reserves was so alarming that in about one decade, then President Macapagal, in 1962, was forced to devalue the peso from P2 = $1 to P4 = $1. He wanted to cut the import rate and our loss of dollars.
His move was a palliative, because he did not put in place a system of excise taxes (the trade-neutral policy) to force local manufacturers to become globally-competitive.
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DURING Marcos and OPEC’s oil price increases in the 1970s, our lack of dollars forced us to borrow heavily from foreign banks to sustain our lives and our tariff-dependent industrial system.
But, without excise taxes to force our tariff-protected industrialists to be globally efficient, these industrialists still earned no net dollars.
The Ayalas were net dollar users, not dollar earners. Lucio Tan and the Sorianos and Concepcions were all net dollars users instead of earners, and still are. The 50 largest local firms spent more dollars on imports than they earned from exports. They were all global losers, and still are. Our balance of trade was ever in the red.
Consequently, the Philippines fell. By late 1983 we did not have the dollars to service our foreign debts. The world caught Jimmy Laya, the Central Banker and ex-Stanford graduate and UP professor doctoring the nation’s dollar books. The economy collapsed and our GNP fell 5 percent in both 1984 and 1985.
The misery, joblessness, and the Ninoy Aquino assassination led to the fall of Marcos in 1986.
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THE Lichauco story has many holes. He says we’ve had free trade. Not so. During American colonial times we did, starting in 1909. But, we have not had free trade since the 1950s.
It would be nice if we had free trade. Our firms would get whipped into a frenzy of global energy. They would be forced to find foreign partners to ally with and be efficient to survive. Suddenly we are world class, selling manufactured products to the world at a volume and quality much higher than now in the local market.
With the immense dollar earnings, we suddenly could increase our imports of machines and technology. Juan de la Cruz would rise. We would rise. We would become Tigers.
Lichauco says that under colonialism and free trade, local manufacturing is stifled. Not so. When a people are globally-energetic, local manufacturing booms.
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TAKE Hong Kong, a colony of the United Kingdom till 1997. In that time, by the 1990s, Hong Kong grew into the world’s largest or a key exporter of textiles, clothing, watches, stereo, jewelry, and cameras.
Free trade forced HK firms to be globally-efficient. The locals responded to the whip of free trade with world-class vision and energy. Result? Hong Kong’s per capita income surpassed that of its colonial mother, the United Kingdom, by the late 1980s, and most of Europe’s (Germany, France and Italy included) as well as Japan’s by 1995.
Our firms must be forced to contend as gladiators globally. They won’t survive? Oh yes they will, if a system of Government + Business + People collaboration will focus on:
Building infrastructure for export war; shifting resources from agriculture to that war; abolishing the Land Bank, the PNB, and the DBP to turn them into an Export Bank; doubling or tripling the budget for foreign investment promotion; promoting foreign joint ventures in the Philippines; teaching locals how to succeed at teamwork, business plan proposals, and management with foreign joint venture partners; working with and training workers and unions on industrial partnering for global success; and promoting one Tiger course in economic theory and history in every student’s high school and college studies.
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AMONG Lichauco’s many errors is in saying that America in 1776 revolted because the UK was impeding American industrial growth. Excuse me—the Industrial Revolution was still in the womb at that time. We usually date the Industrial Revolution variously as starting in the 1750s, 1800s or 1850s.
The Americans revolted because of taxation without representation, not because of industrial suppression by the UK, as Lichauco with intellectual license proclaims. In any case, US residents then were mostly British. Would the British home government prevent industrial growth in one of their outposts of empire?
Imagine us Filipinos conquering and colonizing Sabah. If Filipinos settled there, would our government prevent our industrial growth there? We would not be that foolish. Why would the British be so foolish during American colonial times?
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LICHAUCO is rash with facts, because he knows he won’t be challenged by information-starved Filipinos.
Another error of Lichauco is in saying that China and Taiwan are not in World Trade Organization, as if these nations did not want to be in there. They do. But, Taiwan cannot get into WTO because of the global fiction adopted in the UN, IMF, US, World Bank, and most of the world, that Taiwan is not a state but a province of China. Only states can be members of WTO.
With license, Lichauco maintains that Malaysia, South Korea, and Indonesia, though members of WTO, flout its rules, and that that is why they grow. But, the WTO is very strict. Lichauco must back up his claim with specifics.
As for China, it has wanted to be a member of WTO (or of GATT, the WTO’s predecessor) for 13 years, but could not get in because of various objections to its membership, such as its closed nature, prison labor, and unsound environmental practices.
But, lo and behold, as of Nov. 16, after 13 years of negotiations, China agreed to WTO terms. It is becoming a member of WTO shortly!
Lichauco has been overtaken by facts.
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