Looking forward to 2010

I am not one to make New Year’s resolutions. So, I will just make projections of what I think will happen in the coming year.

Economic
The Philippine peso will appreciate to around PhP32:$1 by the end of the year. BPO income and remittance will be strong during the whole period, and of course, the elections will help to raise the exchange rate of the peso.

The US economy will not really recover, although it is nominally out of the recession. Unemployment will remain high.

Oil prices will exceed $100/barrel. This will be due mainly to the growth in consumption in places like China and India, but also due to production problems in some other places.

Political
Noynoy Aquino will win in the presidential elections. The CPP and its above-ground organizations will be in disarray, as a result of  internal struggles; perhaps it would split.

No climate-change deal among governments will be made during this year, inspite of valiant attempts at doing so.

Iran will have a change in government, probably into a toned-down theocracy (i.e. much more democratic). Big strides will be made in the Israeli-Palestinian peace process, but peace will not yet be attained.

Philippine wages are too low

Philippine wage policy has been based on the principle of making the Philippines competitive by keeping wages as low as possible. With low wages, products made in the country will be cheaper and more competitive, and companies would want to base their manufacturing plants in the Philippines. The logic indeed seems impeccable. Unless, of course, we note the practice of the last few decades.

Foreign investors, even Philippine businesses, set up companies in the Philippines not mainly because of low wages. What counts more are things like productivity, infrastructure, location near markets or transport hubs, availability of specific skills, etc. The industries that are really labor-intensive have based elsewhere – thus, we see textile manufacturing in Bangladesh, small manufactures in China, etc. In short, the Philippines low-wage policy has not done much in terms of attracting foreign investors to the country. So, why bother with a low-wage policy? For one, low wages mean that profit margins are a bit higher; thus, businessmen will be the last to propose raising wages. Also, low wages makes it possible to employ more people to do the job than otherwise – notice how many salespeople crowd you when you enter some stores? Thus, it seems, the low wage policy is pro-employment, and pro-growth.

But we can try to look at things the other way. The low wage policy could be seen as hindering productivity growth and the overall growth of the economy. Since it is easier just to employ more people, the incentive of companies to become more efficient – and the workers more productive – is much less. With all the employees companies have, they have an incentive to have a revolving workforce, replacing one batch of temporary workers with another, in a bid to avoid employing them permanently and incurring higher wage costs. This hinders profitability in the long run, since stagnation in productivity growth will hamper competitiveness.

Another problem with low wages manifests itself at the level of the overall economy.  Workers’ wages are the main source of funds for consumption – the higher the overall wages in an economy, the higher the consumption capacity of that market. Minimizing wages may benefit individual companies, but the overall effect is that lesser products will get sold. This couldn’t be good for the economy.

How about foreign investors? Well, foreign companies do not really see the Philippines as a low-wage country.  Thus, wage levels are secondary for their basing decision.  It would be better if the country concentrated on the other, non-wage, measures e.g. improving infrastructure,  making the market efficient, ensuring an adequate pool of skilled labor, etc.  In addition, the country will be more attractive for foreign investors if they see that the domestic market is growing. Thus, if the total consumption capacity of the population is seen to be continually growing, this would be a plus point for investors – especially those which also wants to aim for the local market.

Low wages also mean that Filipinos will continuously be going abroad for employment. But, if wages increase continuously in the Philippines, at a certain point, they will be high enough to retain more workers.  Studies in Europe show that wages abroad have to be four times local wages for the flow of workers abroad to continue. Thus, if teachers earn Php 16,000 in the Philippines, they will be attracted by $400 wages as domestics in Hongkong. If they earn Php 20,000 they will stay in the country.

I propose that it would be best for the economy if wages are consciously made to increase every year.  The rate of increase should be just about 1 or 2 percent higher than inflation. This would at least keep it in pace with productivity growth, which we hope is improving every year. Actually, productivity is also a function of higher wages, because the prospect of increasing wages every year would push employers to increase the productivity of their employees.

Proposal for a carbon tax

I think that a carbon tax would be a good idea to implement in the Philippines. A carbon tax is a tax based on the amount of carbon dioxide that is produced by various fossil fuels.  In order to lessen the impact of such a carbon tax on the people, we should make it “revenue neutral”, that is, that the tax is not aimed at making more money for the government. Thus, the amount it raises should simply offset the amount that is freed as a result of lowering income and other taxes.

My proposal is to have a substantial carbon tax – something in the tune of increasing gasoline prices by 50% or so. At the same time, income taxes on individuals and corporations should be lowered accordingly. Of course, the effect this would have per individual will vary, but it should not vary too much. The tax will be on the amount of carbon dioxide produced – thus, coal will be taxed the most, while LPG the least.

The advantages of this carbon tax will be:

Facilitate Tax Collection
There is no escaping a carbon tax – so in this sense, everyone will have to pay this tax. And it is easy to implement – simply tax the oil and coal importers. The cost will then be passed on “downstream” through the electricity cost, transportation cost, etc.

While the aim will be for it to be revenue-neutral, it may end up taxing people who do not pay income taxes at the moment. Take the case of the families of Overseas Filipinos – they will have to also pay for this tax.  A problem with the carbon-tax will be that poor people may pay disproportionately more tax than those better off.   In order to offset this effect, minimum wages should be raised a bit.

Lower income taxes
The income tax on individuals and corporations will be lowered, freeing money to be used in paying the carbon tax.  People will have more disposable income, and while they will probably use most of it to pay for transportation, they still have a choice to lessen this in various ways. The money freed would also be used on other things, thus stimulating the economy.

Stimulate service industries
Service industries, particularly those that use comparatively little carbon, stand to gain from this scheme. Take for instance the business process outsourcing industry, which spend more on salaries and less on carbon, will gain from this. Of course, the carbon tax will fall heavily on industries such as metal processing or even fertilizer manufacturing; but this will be partially offset by the decrease in corporate income taxes.

Lesser Carbon
As a result of the carbon tax, there will be a noticeable reduction in electricity and gasoline/diesel expenses by the population. Since it will cost more, it will pay to economize in the use of vehicles; and it will pay to buy more efficient vehicles, such as electric or hybrid vehicles. Also, things like airconditioning would be made more efficient. In general, people will consider economizing on electricity, since it would be count as a more significant expense. Alternative energy will also become cheaper when compared to traditional fossil-fuel generated energy, and this will in turn facilitate the installation of alternative energy sources, such as wind and solar energy, all over the country.

Taken together, all of this will reduce the carbon dioxide emissions of the country.

Bayan Muna ang BongBong Marcos

It is a done deal. Satur Ocampo and Liza Maza are running under the Nacionalista Party banner as senatorial candidates.  So, it seems that the representatives of the Maoist left are accepting the fact that they would be in the same list as Bongbong Marcos. It must have taken all  kinds of ideological gymnastics  to pull off  this kind of thing.

Why are they doing it? Well, in short, they want to  become senators. Running as independents would not get them enough votes to become senators. Besides, I think they will be able to get campaign money with the alliance with NP. They will just have to swallow some of their principles by running together with Bongbong Marcos.

They would have wanted to run under the LP with Noynoy and Mar Roxas. But the problem was that the LP did not want them. So, it had to be the NP. Because outside the LP and NP, the choices would have been either Lakas-Kampi of GMA or Erap’s PMP. And these choices would have been even worse for them.

It is a case of the “politics is addition” principle.  Villar calculates that the voters for Marcos, and that of Makabayan, don’t have to vote for each other, but that they may vote Villar for president. And that means that Villar has something to gain from having both in his ticket.

All this is fine, except that Ocampo and Maza are supposedly representing the revolutionary left. What happens to the revolution then? I think this is simply a case of sealing the fact that Makabayan (and Bayan Muna, Gabriela and Anakpawis) have long ceased to be revolutionary. That they are in fact, propping up the very system that they supposedly want to overthrow. That they not only benefit from the status quo, but actively support it.

For the CPP bosses that decided on this matter, watch out: when Ocampo and Maza become senators, they may be too powerful, and too much part of the status quo to go against it. Their election as senators may signal their leaving the “centralism” of the party line.

Grid parity and Copenhagen

The world is about to reach grid parity – that is the point when alternative energy sources, notably solar energy, would cost the same as the energy coming from traditional fossil-fuel sources.  The way that trends are going, this point is expected to be reached between 2012 and 2015.  In the light of this, is it still necessary to come to a world-wide agreement on green house gases?

Grid parity
I think so. For one thing, grid parity is a situation that will stretch out for a long time. As renewables go down in cost, so too would fossil fuels, until they reestablish price parity. This will go on for a long time, and it is quite easy for people to simply stay on the fossil fuel “side of the fence”. However, with binding agreements on reduction of green house gases, energy producers would be pushed to go to renewables – which actually would then cost the same as fossil fuels – when they would otherwise not do.

Another point re grid parity, is that it covers electricity. But global warming is concerned with much more. Take transportation, it will be some time  before cars become mostly electric, so laws on mileage will still be important. Or household heating, this is a big source of greenhouse gases, and this also needs to be tackled. And of course comes industrial processes such as steel making, which require huge amounts of coal to produce. These all go into the CO2 accounting of a country, and will be included in the measures that countries take to lessen greenhouse gases.

Third World
Then, there is the participation of Third World countries in reducing greenhouse gases.  Probably the biggest contribution would be in the countering of deforestation. Forests absorb CO2, and if Third World countries are given sufficient motivation to do so, they will reforest their countries to get necessary cash. Also, many of the world’s deserts are in Third World countries. These deserts are perfect places to place solar power projects.

But beyond this is the possibility of Third World countries to skip the polluting form of development altogether. If Copenhagen or future treaties make this possible, then it would indeed help them achieve development for their peoples without going through the process of polluting the environment first.

Efficiency
Then, there is the question of energy efficiency, which will play a big part in national plans for meeting the CO2 targets. This is independent of grid parity, which is mainly concerned with the generation of energy. Carbon dioxide production will be reduced with increased efficiency. Recycling too would lower green house gases, since with recycling, we save in the energy needed to produce these materials. Even organic wastes becoming compost would save energy, which would have been spent in producing fertilizers.

So, while grid parity would contribute to reducing greenhouse gases esp. in the long run,  the Copenhagen process would help reduce greenhouses gases now in many  different sorts of ways.