Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Archive for January, 2008

Cheap Medicines

Posted by butalidnl on 26 January 2008

In the Philippines, I noticed that the price of medicine was quite a major factor for people. Some people had health insurance which covers doctors consultations and tests, but not medicines. This meant that you could find out what’s wrong with you, but it would mean that you need to pay yourself for the medicines to cure it. This was a good enough reason for some to not find out what was wrong with them – after all, they can’t afford the medicines anyway.

This is a long way from what I am used to here in the Netherlands. Here, we aren’t aware of the price of medicines. The doctor prescribes them, the drugstore gives them to me, and I take them, and the insurance companies pays the bills. I don’t even get to know what the medicines cost. Once, I asked why the drugstore gave me something else than what the doctor prescribed; and they explained that the one they gave was generic and thus the same as the prescribed medicine but cheaper. Of course, it would be the health insurance company which would notice that it was cheaper – and I suppose it was due to the pressure of these companies that the drugstores shift to the generic versions of prescribed medicines.

The Cheap Medicines Bill that is now being discussed in Congress is an attempt to address the problem of having too expensive medicines. The Senate and the House of Representatives have different versions which still need to be reconciled. The bill would give the government the right to import patented medicines which are cheaper in another country, and require doctors to offer the cheaper generic versions of medicines.

Already, the pharmaceutical lobby is working double time to sabotage this law. Some doctors are threatening to go on “strike” over the issue – in the sense that they will refuse to prescribe generic medicines. The doctors raise all sorts of questions re the quality of the generic medicines.

The issue boils down basically to the pharmaceutical industry’s right to charge whatever they like for their patented medicines, as opposed to the government’s duty to ensure that health care is affordable and available to the people. The pharmaceutical industry is banking on their “intellectual property” rights as shown by the patent they hold for certain drugs. But in their implementation of these rights, they seek to maximize profits by having different prices per country (and the Philippines ends up with some of the highest medicine prices, simply because the pharmaceutical companies can get away with it).

But this goes beyond what the patent entitles the pharmaceutical companies to do. A patent is simply the exclusive right to produce and sell the medicine for a given number of years. But it shouldn’t prevent people from buying the medicine where it is cheaper; which is what happens with parallel importation. Under the principle of the “International Exhaustion Regime”(which is adopted in the Cheap Medicine Bill), if the holder of the patent has placed the product on the market, the Intellectual Property protection of this product is deemed exhausted, meaning that the patent holder could not influence the further distribution of the product. Companies that oppose parallel importation of medicines are not protecting their Intellectual Property rights, but rather trying to improperly exercise monopoly rights.

A pharmaceutical company’s patent rights is not absolute. Under the TRIPS (Trade Related Intellectual Property Rights) agreement, agreed in the 2001 WTO meeting in Doha, governments are allowed to access or produce cheaper generic drugs in the face of a public health crisis. A government can issue a compulsory license, which would allow the country to locally produce a generic version of a brand name drug to meet domestic demand.  Thailand has issued such a compulsory license in order to produce a drug used to treat HIV, which resulted in reducing the price of the drug by half.

I hope that the Cheap Medicines Bill becomes law,  and that it would indeed result in the price of medicines going down.

For a lasting solution to the problems re the price of medicines and of health care in general, what the Philippines needs to do is to adopt a system of universal health care. Under such a system, everyone would have health insurance coverage, and that this coverage would include all medical expenses (with the exception of optional procedures e.g. cosmetic surgery etc.).

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Some Positive Effects of Peso Appreciation

Posted by butalidnl on 18 January 2008

The negative aspects of the dollar’s decline vis-a-vis the peso is very much in the news, what with OFW families getting into financial trouble, and exporters complaining about their products getting to be too expensive for foreign buyers. What often gets overlooked is the fact that the dollar’s depreciation also has a positive side, and if one takes a good look at this, it is at least equally important as the negative side to this trend.

Let us name some positive effects of the dollar depreciation.
Increases in the world market prices of imported goods have lesser effect. Oil prices have shot up in dollar terms, and thanks to the increased value of the peso, the actual effect on the prices of oil products have not been as much as otherwise would have been the case. The same could be said of wheat prices, etc. which have also risen.

Dollar-denominated foreign debts can be repaid with less pesos. The Philippine government has saved billions of pesos as a result of the dollar’s drop in value. Philippine companies with foreign debts have likewise benefited.

Capital flight from the Philippines has lessened. The strengthening peso means that it is no longer a wise financial move to move funds to a foreign dollar account. It would be much more profitable to keep the money in pesos. At the same time, there is some kind of poetic justice that corrupt officials with funds abroad suffer from a severe cut in the value of their “loot”.

Skyrocketing real estate prices would be dampened. Many Overseas Filipinos (mostly in the dollar area) have driven up prices of real estate throughout the country. The decreased value of their dollars may result in the cooling down of the buying frenzy for land by OFs.

Increased attention to the domestic market from investors and (former) exporters. Some exporters are coping with the decreased demand for their products in the US by either shifting to other countries or to selling domestically. The increased supply of products to the domestic market would help to lessen prices and improve the product quality of domestically available goods.
At the same time, the value of the local market for foreign investors has increased. Since the peso’s value has increased, the potential sales and profits offered by the domestic market has increased in terms of dollars.

Lower interest rates. The steadily depreciating dollar is pushing the US Fed to decrease their interest rates – in response, countries like the Philippines decrease their interest rates accordingly, in order to avoid the interest rate differential to get too high. Low interest rates are good because it stimulates business, and also consumer spending, both of which are good for the economy.

Lower cost of imported capital goods. For example, the peso value of new airplanes is now much less than it was even a year ago. This is the same for other items e.g. heavy construction equipment, computers, etc. This would help stimulate the economy, and could also lead to decreased prices for consumers.

see also Peso-Dollar Rate

Posted in peso-dollar rate | 3 Comments »

We should seriously take steps to lessen our energy use

Posted by butalidnl on 15 January 2008

In the run-up towards an Energy Summit, which is supposed to be in response to both the crisis of global warming and the skyrocketing price of oil, I am disappointed to note that there doesn’t seem to be much in terms of substantial proposals on the table. The big debate on whether to exempt oil products from the EVAT is quite inconsequential – the resulting price difference would be small anyway. Besides, since the price of oil will continue rising anyway, the response should be more strategic, addressing the whole range of energy use, and not just the present. At this point, it seems that the country’s leadership does not really feel the crisis, and are just taking ineffectual, photo-op measures instead.

The crisis is real, and it calls for real measures.Steps should be taken to reduce the overall use of energy in the country. Some steps that could be taken could include:
Accelerated implementation of mass transit projects. The whole LRT-MRT system should be expanded and inter-connected. More trains should be acquired to accomodate the high demand in the present system. New mass transit systems should be planned and implemented for areas e.g. Metro Cebu, lines north and south of Metro Manila, etc. Mass transit displaces a lot of motor vehicles, as well as allows people to live a bit further from their place of work than otherwise.

Promotion of wind, solar and other alternative energy sources. Wind energy is already being tried out in the Ilocos, and it seems to be working well. It should be expanded to more areas of the country, especially since it potentially can produce electricity that is cheaper than otherwise.
Solar energy could also potentially a big source of energy for the Philippines, with the abundant sun. However, people still think that solar cells are mainly for far-flung areas which the electricity grid cannot reach profitably. This effectively keeps solar energy on the margin. Recent developments have increased the efficiency and reduced the cost of solar energy, making it more mainstream. In California, they have achieved what they call “grid parity”, meaning that the cost of producing electricity from solar cells is the same as that of the electricity grid. Given the proper government policies, it should be possible to produce a lot of solar energy from our urban areas.

Undertaking big-impact energy conservation projects. For instance, it should be possible to cut the electricity use of shopping malls and office buildings by as much as 50%, using technologies that are already available. The government only has to provide the needed push for this to take place. A lot of savings could also be made in street lights’ energy use. Government vehicles could be required to be more efficient, e.g. phasing-in more hybrid or LPG vehicles.

Given enough political will the country could drastically reduce the dependence on fossil-fuels without sacrificing economic growth. We should be able to overcome not only the challenge of the $100/barrel oil, but also any other energy crises in the future.

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The peso will continue to strengthen in 2008

Posted by butalidnl on 11 January 2008

Some economists are saying that they expect the US dollar would gain strength in 2008, on the logic that it has declined too much in 2007. On the face of it, it seems to make some sense. I disagree with this for two reasons.

First, the dollar decline in the last couple of years is not a normal decline caused by temporary fluctuations in international money flows. Rather, it is a result of a trend in which the dollar’s role in the world is declining. In 2000, 70% of the total international reserves kept by central banks were in dollars; while today it is about 60%. Central banks throughout the world are set to further reduce this percentage in the next couple of years. I think it would be fair to predict that this would be reduced further to 50% in the near future. So, while the dollar will remain influential, it would be less and less the currency of choice in international transactions.

Going back to the prediction of recovery – this is premised on the assumption that the dollar’s role in the world remains the same, and that a swing one way will be followed by an equal and opposite swing. But if the underlying basis for a stable dollar is itself shifting, the swing we now see is actually accompanied by the movement of the equilibrium point itself. Thus, when the dollar swings back, it will no longer go back to the original “equilibrium” point, but to one nearer its present value.

The second reason why I think the dollar will continue to deteriorate in the short term, is the a combination of the inertia of the last years’ decline, plus the recession that the US economy is entering. The potential positive effect of a cheaper currency takes up to a year (at least) to be fully reflected in terms of increased exports. At the same time, it affects import prices and volumes much faster. Since the dollar had been declining for most of 2007, it will take a whole year before increased exports would be able to counter the bad effects of imported inflation. And the coming recession will make the US economy even less able to make the necessary adjustment.

What does this mean for the Philippines? Since the dollar is set to decline, the Philippine peso is set to continue its trend of appreciating vis-a-vis the dollar in the coming year (at least). But since it has raced faster than other currencies during 2007, in 2008 it will be tempered by a tendency to fall in step with the rest of the world’s currencies. Thus, this means that the peso will only appreciate by a few percent during 2008.

Interestingly, the expectation that the dollar’s decline will continue will itself be one of the reasons spurring on its decline. Persons and companies hedging against possible loses from a falling dollar will take actions that will undermine the dollar. For example, if they dispose of their dollars as quick as possible, and exchange these for pesos or other currencies, this will help weaken the dollar. If they buy dollar put options (to insure against dollar rate drops), this will also weaken the dollar. Add to this the actions of those who want to gain from the falling dollar e.g. international investors who borrow money in dollars and invest in currencies that have both stronger currencies and higher interest rates (the so-called carry-on trades), then these will all result in a big inflow of dollars into the Philippines, and a strengthening of the peso.

The Philippine government’s plan to borrow more funds locally to finance the budget deficit in 2008 (from 68% before to up to 80% of the required funds) is supposed to help by lessening the inflows of dollars into the Philippine economy. However, a significant part of the extra government bonds would probably be bought by foreign investors wanting to gain through carry-on trading. Thus, these foreigners would first dump their dollars for pesos, and then buy the peso-denominated bonds that are going to be offered.

Thus, in 2008, the peso will continue to strengthen against the dollar, perhaps reaching an exchange rate of 38:1 by November 2008. People should just get used to the fact of the higher value of the peso, since it is here to stay for some time.

see also Peso-Dollar Rate

Posted in peso-dollar rate | 3 Comments »

Looking forward to 2008

Posted by butalidnl on 2 January 2008

With the new year, some people make new year’s resolutions while others write up their predictions for the coming year. I am not the type to make resolutions with the new year; so I guess I’ll just have to try my luck with some forecasts for the year which has just started.

The Philippine peso will continue to appreciate vis-a-vis the US dollar.  By November 2008, I expect that the peso:dollar rate will have reached 38:1.  The dollar will continue deteriorating worldwide this year, and the peso’s value will rise in step.

The US will experience an economic recession this year. This is most probably already the case starting this January. However, since the official definition of a recession is two quarters of negative growth, it will only be in July when officials will declare that there is a recession (on the basis of the statistics for the 1st and 2nd quarters of 2008). The disappointing Christmas sales, the housing crisis, the credit crisis, and rising costs for imported goods especially oil, will squeeze consumer spending enough to cause this recession. And depending on how the government responds, it could be either a short or a long recession.

World economic growth will slow, but not go into recession.  In a reversal of the usual case of “the US sneezes, the rest of the world catches a cold”,  2008 will see the “US catching a cold, while the rest of the world will sneeze”. The world economy, with the possible exception of stock markets, is no longer led by the US economy. Countries suffering from the decreased demand for their exports from the US will be able to redirect their trade elsewhere. The US recession will dampen the growth of oil prices, which in turn will help other countries.

Philippine opposition forces will continually try to destabilize, impeach or topple the GMA government; and they will all fail.  The government has grown stable these last couple of years, because of political maneuvers and the positive economic trends. Also, opposition forces are far from united, and will be unable to muster enough forces to seriously threaten the government.

In the US, Hillary Clinton will win the presidential elections. The US recession will be the main issue in the elections, and the democrats are usually favored in times when the economy is the issue. Hillary Clinton will gain the democratic nomination, also due to the economy becoming the main issue.

In the rest of the world, it will be the year of the almost-wars.  First of these would be Kosovo, with its declaration of independence. Serbia will be quite mad about this, and there may be skirmishes at the local level, but no armies will clash on this. The lame-duck US presidency will induce other countries to saber rattling against their neighbours, but these will not reach the scale of large-scale conflict.

Now, we just have to wait till the end of the year to see if any (or all?) of the above forecasts have turned out to be correct.  Happy new year!!

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