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Perverse revolution in economic fortune: Adding obstacles to economic recovery

perverse revolution in economic fortune adding obstacles to economic recovery - Perverse revolution in economic fortune: Adding obstacles to economic recovery

A group called The Mayor Rodrigo Roa Duterte National Executive Coordinating Committee (MMRI-NECC) has called for the establishment of “a revolutionary government.”

This is a roguish exercise in military adventurism. It is devoid of sound rationale. It is also ironically self-contradictory. The President has currently distanced himself from the absurd proposal.

This is a good move as experts and constitutionalists have critiqued the alternative set-up as illegal and violative of the constitutional framework under which the President himself was elected. We hope he remains opposed to the idea.

National Defense Secretary Delfin Lorenzana immediately declared the proposal unconstitutional and called for investigation of its proponents. In the same vein, Armed Forces of the Philippines (AFP) Chief of Staff Gen Gilbert Gapay assured the public through the AFP spokesman, Major Gen Edgard Arevalo, that the AFP “will uphold (its) sacred obligation and rejects the establishment of a revolutionary government.”

Senator Joel Villanueva urged the government to criminally charge the proponents as  committing an act of inciting to sedition pursuant to the Revised Penal Code. Senate President Tito Sotto also rejected the idea, saying a revolutionary government would turn the country into “a rudderless ship launched without a compass nor an agreed destination.”

Presidential Spokesperson Harry Roque was suspiciously more tolerant, dismissing it by saying that the organizers “are free to publicly express their opinion.” In fact, while the Integrated Bar of the Philippines dismissed the call for a revolutionary government as another exercise of freedom of expression, it was also emphatic in clarifying that it should be denounced and discouraged from progressing into actions that violate existing laws.

The advice for caution has a basis.

We must remain vigilant.

We agree with Justice Antonio Carpio in describing Roque’s weak reaction as “intriguing.” Roque stated that the call for a revolutionary government “does not enjoy any support from the government right now.” Justice Carpio suggested that this implies “there may be government support in the future.”

Justice Carpio also called out Chief Presidential Legal Counsel Salvador Panelo’s explanation that “the call of a revolutionary government must come from the people and not from a single organization or an individual.”  This means that “if there are more groups supporting the call, Mr. Duterte may consider it.”

This is dangerous. A glaring red flag that must not be ignored.

Bayan Muna Rep. Carlos Zarate calls the proposal out as “just another ploy in the arsenal of schemes of the pro-Duterte camp to perpetuate themselves in power.”

On the same issue, Vice-President Leni Robredo was both firm and conciliatory. She denounced the exercise while urging the National Government not to tolerate the distraction. She reminded that priority must be given to the fight against COVID-19 and to ushering in economic revival.

As if COVID-19 was not enough to paralyze the economy, it is extremely frustrating that there are those who wish to add obstacles to our already challenged recovery. They are adding fuel to the fire that continues to ravage lives and business.

From an economic perspective, the call to junk the Constitution adds serious harm. Advocacy of a revolutionary government births even more instability and uncertainty.

We recall that in the 1970s, martial law dampened investment and business and depended on foreign borrowings to produce growth. Dollar salting was rampant and remained so until the late 1980s. Until this recent pandemic-driven recession, average economic growth was lowest during the Cory years which were punctuated by political uncertainty following the seven coup attempts.

It would be useful for public policy makers to remember that when assessing the business potential of, say, emerging markets, investors normally consult the World Governance Index which employs several indicators. Rule of law is one of them.

The metric shows that in the last seven years through 2018, the Philippines has exhibited a constant downtrend starting 2016. In 2018, our latest index for rule of law was just a little over a third of Singapore’s rating, 34.13 versus 97.12. Membership in the Philippine Economic Society is not necessary for anyone to know that this index could drop like a rock should the movement for a revolutionary government take root in the Philippines.

The rule of law index also impacts the corruption index. A country that does not respect the law and the Constitution plays good host to corruption. This is not rocket science. In its latest corruption ranking for 2019, Trading Economics rated us at 34 out of 100. This puts the Philippines at 113th among 180 countries. Among the ASEAN 6, the Philippines ranked lowest at 113th. Singapore ranked at 4th; Malaysia, 51st; Indonesia, 85th; Vietnam, 96th; and Thailand at 101st.

This is our current ranking under a constitutional democracy. Imagine how we would fare under a revolutionary government?

We also remind policy makers that when assessing a sovereign’s credit worthiness, Credit Rating Agencies (CRAs) look at the quality of governance and politics. The scoring employed by CRAs such as Fitch Ratings, Moody’s and S&P cuts across more than 150 countries. Their sole purpose is to assess if a jurisdiction or corporate entity can afford to pay back its creditors.

Politics and governance are key determinants considered critical by these CRAs. Fitch examines structural features like composite governance indicators and assigns a weight of 19.6%. Political risk is also assessed. Moody’s focuses on institutional framework and political risk as part of susceptibility to event risk. S&P assigns 25% importance to institutional and governance effectiveness. Predictability of policy making, political institutions and civil society are primary considerations.

Investors rely heavily on these credit assessments before they embark on doing business. Investors enthusiastically subscribe to periodic updates on key economies including emerging markets.

Even a whiff of establishing a revolutionary government will make us unattractive to capital investment. Multinationals and venture capitalists will not risk sinking in millions of dollars in unstable soft states. More so during this world-wide pandemic. God-forbid that we return to a junk credit rating! This would make it impossible for us to grow beyond current potential capacity because it would then be necessary to borrow one’s way to higher and more sustainable economic growth. In these pandemic times, tight debt spreads and credit default swaps are game changers.

Finally, we stress that in its annual surveillance reports of its 189 member countries, the International Monetary Fund is also mindful of politics and governance when making its macroeconomic assessment. This is even more true in the context of increased global uncertainty. As the Fund confirms, “uncertainty reduces the willingness of firms to hire and invest, and of consumers to spend.”

This is also the position of the World Bank: “If a country does not need to worry about conflicts and radical changes of regimes, the people can concentrate on working, saving and investing.”

Based on its new quarterly measure of uncertainty, the World Uncertainty Index (WUI), the Fund found some interesting insights about uncertainty and politics. Uncertainty is high in low-income economies because, among others, they suffer from “more domestic political shocks like coups, revolutions, and wars.” The Fund also found that an inverted U-shaped relationship between uncertainty and democracy exists. A revolutionary government will certainly move the pendulum closer to uncertainty and economic whammy. This would result in “significant output declines.” The “effect (will be) larger in countries with weaker institutions.”

We reiterate that our focus today should remain on controlling the pandemic and working for economic recovery. Even children know that these are the real problems we must now address.

Those who champion the formation of a revolutionary government should go out of their tunnel to see that they might be unwittingly advancing a perverse revolution in economic fortune. It might be what Marx referred to in 1843 that while reason has always existed, it does not always come in reasonable form.

 

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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