Three symbolic economic changes to kickoff the Aquino Presidency

There are times when symbols matter more than substance, and times when symbols and substance coexist.  The latter times give a window of opportunity for the new Administration to set the tone for shifts in economic policy that make sense.

For consideration are three suggestions.  One is to roll back the EVAT rate from 12% to 10%.  Another is to negotiate a new “basic” text message rate of 10 centavos (compared with the by-now archaic P1 rate).  Still another is to empower parents and teachers of students in public schools to decide which textbooks the students will use.

A rollback of the EVAT rate implies an admission that this tax has become unduly regressive, which is a substantive concession to the poor and middle class who voted for both Aquino and Estrada.  It goes against the known tendencies in the views of the IMF staff and the private capital markets.  The IMF staff is reported to support an idea floated by some government officials to increase the EVAT rate to 15% on the theory that the fiscal deficit “problem” would be thus fixed.  Underlying this mind-set is the idea that the private capital markets like “fiscal discipline” as reported in the budget deficit figures.  (It should be noted that under conventional IMF measures and calculations, fiscal policy in the Philippines puts it among the class of “responsible” countries, and certainly far away from the likes of Greece, Spain, Portugal, etc. that have recently sparked some sovereign bond market jitters.)

But there is something not quite right with this so-called conventional fiscal-policy wisdom within the IMF.  It appears that it assumes that the 15% EVAT rate will be accompanied by a cut in income tax rates, which would benefit rich individuals and corporations.  While this may attract foreign investment inflows, it does nothing to fix fundamental problems relating to the low productivity of the domestic economy.  All it does is redistribute income towards the already-rich, and the foreign investments attracted in are also those that could easily go out. A reduced EVAT rate of 10%, on the other hand, will be a welcome relief to many households, even if in theory it will reduce consumer prices by only 2%.  On this basis, the rollback is largely symbolic.  However, the government’s economic “managers” must now contend with a “tighter budget,” which means less room for corrupt deals, etc., since, of course, the IMF staff and the capital markets will still insist on fiscal discipline.  It is not all that bad even from the point of view of government’s economic managers: the symbolic cut will likely bump up the GDP growth rate, which would allow for a recovery of some of the initial revenue losses from the rollback.

Another symbolic policy shift relates to the “hands off” approach that has been the policy towards the pricing practices of the major telecom corporations.  This has allowed the telecoms to play a game of setting up a “basic” P1/text price for text messages, while engaging in various “promo schemes” that have cut the true average price to something like P0.10/text.  The time has come for both the government and the major telecoms to recognize Moore’s Law, which suggests that the cost of computing halves every 18-24 months.  The true cost of text messages is almost zero by now, and a “negotiated” basic rate of, say, P0.10/text for 2010, and an expected cut in this rate by half every two years  (to say, P0.05/text in 2012), would signal to consumers that they need not play games to save money.  The major telecoms can then concentrate their efforts in improving services to their clients as a means of gaining market shares.

Yet another symbolic shift in attitudes may be had in the public schools which can help kick-start new ideas on how to arrest the long-term decline in the quality of education in the Philippines.  A good first step is to “reform” the process of determining and allocating textbooks to be used by public schools.  Instead of giving discretion to national government officials, which invites corruption, it should be public policy to provide that the choice of textbooks be given to parents and teachers of students in the public schools.  Textbook publishers and their authors will have to compete in a textbook market where choices are actually made by those who will use the textbooks.  It is a good guess that such an approach would vastly improve the quality of textbooks, and with such improvement, the quality of teaching can be more readily increased.  This may require an active support from local governments, who should use some of their revenue allotments to help fund the “textbook budgets” of each public school in their territories.

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