Economics: Gloria Macapagal-Arroyo and Bill Clinton

The current hoopla about the expanded value added tax (E-VAT) on petroleum products in the Philippines got me thinking about Philippine President Gloria Macapagal-Arroyo's economic thinking.

Macapagal and former U.S. President Bill Clinton were friends and they shared some ideas on economics. Both believed in balancing the budget, and viewed excessive national debt as a core problem.

Clinton managed to balance the budget through painful cuts particularly in military spending. His drawing back on the military industrial complex is believed by some to be the main cause of his intense dislike among conservative Republicans. The latter tend to be well-invested in this sector.

During the Clinton administration, many military bases and facilities were shut down and military procurement was downsized.

Eventually, Clinton did manage to balance the budget and the economy began to jumpstart out of recession.

Clinton's economic growth was real and not based on debt spending, which had been the hallmark of Republican "supply side economics." Growth based on debt is rather meaningless unless the growth continues enabling one to pay off the borrowed money.

For Clinton, it was information technology (IT) that brought success. His administration was really responsible for helping to build up the internet. However, Clinton did not interfere much in the financing that went on in the IT field. Speculation ran wild.

Speculation really is just another form of lending. Debt became a problem here too, eventually resulting in the dotcom meltdown.

When Clinton left office, his successor George W. Bush went back to the old Republican ways of a debt-driven economy. The government will break the budget deficit record again this year at nearly half a trillion dollars.

Now, Macapagal may for the first time in her adminstration, balance the nation's budget this year. This will be the first time the budget will have been balanced in many years. When she first came to power, the nation was deep in debt and in danger of defaulting like Brazil when the latter country captured world headlines.

It was at this time, that Macapagal came up with a stroke of genius -- the E-VAT tax. The 12 percent consumption tax on petroleum products keyed in on the country's growing dependence on imported oil.

Suddenly, the deficit began shrinking dramatically but not through any drastic budget cuts as occurred when Clinton balanced his budget. In fact, government spending has instead increased sharply, something needed in a country which still has inadequate infrastructure. And last year, the country registered its strongest GDP growth in three decades, while very nearly balancing the budget. Even in the current world inflationary crisis, the Philippines will still grow at a very brisk pace this year also.

In many ways, E-VAT has been sort of a panacea for Philippine economic woes.

For example, not only did the country face a debt problem when Macapagal came to office, but they also had balance of accounts woes. Foreign currency reserves were low. The deficit here was also due in no small part to the need to buy foreign oil. By taking a slice of oil sales, the nation has been able to build up record foreign reserves.

Oil imports also meant loss of capital and the vast majority of petroleum products were used by the wealthy citizens of the Philippines. Much of this was excess wasteful spending that had no benefit for the majority of the people. Traffic congestion and pollution were becoming intolerable problems.

E-VAT helped curb this excess spending and the resulting environmental problems.

Curiously there happens to be another type of E-VAT, not an expanded valued added tax, but an ecological value added tax. This latter tax is defined as a consumption tax "to make what is more polluting, depleting, and ecologically damaging more expensive, and what is sustainable less expensive."

What could be less sustainable and more ecologically-damaging than petroleum in today's society?

Thus, E-VAT in the Philippines helps move the country in the direction it should be moving -- toward greater conservation and toward development and adoption of green technologies and practices.

Eventually in this scheme of things, E-VAT revenues would decline as petroleum consumption is replaced by local sources of energy including geothermal, solar and wind power. Vehicles would use greater percentages of biofuels, and more efficient vehicles would replace the old fuel hogs. The loss of revenues though would not be a bad thing.

The new power sources would become also sources of new government revenue. The outflow of capital from the country would naturally decrease. Everything would become more efficient.

Of course, in order for this to happen, the Philippines needs to avoid what happened in the U.S. after the Clinton administration when the country shifted back to the old debt-driven economy mode.

There are two forces that would not like to see ideas like E-VAT spread around to other appropriate countries -- the banking sector and the oil companies. With the latter, the reason is obvious. The bankers of course make their money mainly on loans, and thus they would naturally oppose anything that reduces debt spending.