We first situate the proposal.
The Department of Finance (DoF), the National Economic and Development Authority (NEDA), and Congress are contesting how best to reverse the economic free-fall wrought by the COVID-19 pandemic lockdown. The DoF and NEDA contend that the best way is to grant private corporations breathing space via a corporate income tax reduction, the centerpiece of its CREATE (Corporate Recovery and Tax Incentives for Enterprises) program. Congress contends that the better recovery program is demand-oriented by saving jobs and income, especially among the SMEs, the focus of its ARISE (Accelerated Recovery and Investments Stimulus for the Economy) bill; and to create jobs by ramping up state infrastructure spending, the focus of its CURES (COVID-19 Unemployment Reduction Economic Stimulus) bill. The total bill for ARISE and CURES together could reach P2 trillion or about 10% of GDP. How about CREATE, the DoF/NEDA brainchild? It is a supply-side stimulus program. It seeks to reduce corporate income tax on firms from 30% to 25% and to extend the NOLCO (net operating loss carry-over) privilege to five years. It will also take from Philippine Economic Zone Authority (PEZA) locators to partly pay for the hole created by the CIT (corporate income tax) reduction. Will private firms convert the tax savings into new meaningful investment, create jobs, and put money in the hands of starving millions?
In 1936, at the height of the Great Depression, JM Keynes in his celebrated volume The General Theory of Employment, Income and Money, proposed the idea that supply-side initiatives such as lower interest rates for loans or lower income tax for firms in bad times are like “pushing on a string.” Nothing happens. Firms batten down their hatches, boost their balance sheet, buy back shares or they pay down debts rather than make meaningful investment while effective demand is nowhere. Dr. Stella Quimbo, now Congressperson, and her team showed as much in their 2015 paper. It’s not that firms are greedy; they are just prudent.
Realistically, it is only demand-pulling stimulus mounted by a welfare-oriented, rather than profit-oriented, government that could arrest the negative feedback loop of a free fall. Classical economists were horrified by Keynes’ heretical position: “What? Pay people to dig holes in the ground only to refill them?” asked detractors. President F.D. Roosevelt initiated the New Deal along Keynes’ lines: hired idled workers to replant America’s forests, build dams and roadways, and this pushed back the crisis.
With the best of intentions, the Bangko Sentral ng Pilipinas (BSP) has weighed in by lowering the RRR for banks and the base interest rate in the hope that banks will lend to firms who will convert the cheaper loans and reserves into investments. Instead, banks and private firms are flocking to the BSP and government auctions for riskless placements. Lending to private corporations and SMEs remains deathly anemic because borrowers and lenders alike know that the returns to investment today do not cover the risk heightened by the slowdown. Both CREATE and the BSP liquidity efforts to stimulate will “push on a string.”
But the BSP, buying national government treasuries to enhance national government’s expanded infrastructure spending, is at least thinking out of the box. Such purchases would have been anathema pre-COVID-19. The BSP purchases, through up-scaled government infrastructure spending, would indeed pull rather than push on the recovery string.
ARISE and CURES are more in keeping with demand-pulling but the DoF/NEDA is balking. “Not fundable!” they say. “No money!” beyond P140 billion or a ninth of the price tag of either CURES or ARISE. But their own CREATE proposes to condone forward the P625 billion in tax liability of firms in five years. When Thailand’s and Malaysia’s anti-COVID budget is 13% and 17% of GDP, respectively, we shouldn’t scruple over 10%? The first task of government is to keep the economy alive by every means rather than dead by penny pinching. Asks an old adage and appropriately, “Aanhin pa ang damo kung patay na ang kabayo? (Why harvest the grass when the horses already dead?)” In the ICU, you “beg, steal or borrow,” as the song goes, to save a life. Outpatient clinic wisdoms may kill the patient.
The best stimulus policy sports both a quick energy boost but also a lingering boost for sustainable growth. These twin requirements are best met by the scaled-up infrastructure spending as, say, for a new dam. While it creates jobs and incomes now, it also ensures added bulk water and electricity supply for the future. There are others.
One stimulus spending idea that clearly meets these criteria is the debt condonation for agrarian reform beneficiaries. Land reform beneficiaries have, by Section 26 of CARP (the Comprehensive Agrarian Reform Program which expired in 2014!), to amortize the debt they incurred for awarded land to repay the government for acquiring the land. The proceeds are a very small part of government revenues (0.008% of GDP). A hefty 82% of awardees with Land Distribution and Information Schedule (LADIS) are in default. But can one blame them for being in default?
No! For this repayment scheme is a raw deal: the government buys a 100-hectare farm at market price; subdivides it into effectively 50 two-hectare plots, and awards these on condition that the awardees amortize the government for the 85% of the purchase price of the 100 hectares. But 50 two-hectare plots are way less productive than the single 100-hectare farm because of scale economies, mechanization and innovation possibilities, and access to formal sector banking. If the productivity of land in large farms is higher than that in small plots by 15% or more, each separate plot is amortizing a debt much higher than its capacity to pay. That is a recipe for bankruptcy.
A good demand stimulus would be for the government to exonerate wrongly indentured farmer beneficiaries by writing off the agrarian reform debt of beneficiaries. Apart from the short-run boost, condonation has a long-run boost to farm productivity: with full ownership, beneficiaries can now sell or lease their lands to consolidators who will either cultivate large farms themselves or attract large private capital to go into industrial scale farming. The beneficiaries become rentiers on top of having more stable employment in large farms. This is now being done in China and Taiwan (Fabella, “Luizhuan: Small Steps to Farm Efficiency,” BusinessWorld, Introspective, Dec. 16, 2014). Farm fragmentation is a terrible blight to farm productivity: Adamopoulos and Restucia (2019) show that CARP has reduced the average farm size in the Philippines by 37% which reduced average farm productivity by 17% (note >15%). The cost to government is pittance (P800 million) compared to the proposed forward condonation of CIT payments (P625 billion in five years) for large corporations by CREATE; more importantly, it will justly restitute the farmer beneficiaries for wrongful indenture due to three decades of a wayward land law.
Raul V. Fabella is a retired professor of the UP School of Economics, a member of the National Academy of Science and Technology and an honorary professor of the Asian Institute of Management. He gets his dopamine fix from bicycling around the subdivision and tending to flowers, especially bougainvillea and golden shrimp, with wife, Teena.