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.

Tonga's King Tupou V Crowned

After a traditional anointing and installment ceremony, Tonga's King Tupou V was crowned in a British-style royal church service in Nuku'alofa on August 1, 2008.

The lavish ceremonies in the tiny, poor South Pacific nation have drawn mixed reaction as shown in this Al-Jazeera news video.



The king's coronation had to be delayed by a year after deadly riots ripped the nation following the last king's death.

King Tupou V has already agreed to give up many of his royal powers, and there are some observers who believe he is placing the nation on the path to democracy and may be the last Tongan king.

Many foreign guests including royals from Japan, Britain and Thailand, and South Pacific chiefs and heads of state were present for the ceremony.

Macapagal's State of the Nation Address

As Gloria Macapagal-Arroyo prepares to give her State of the Nation (SONA) address today, we can examine how well she has delivered on some of her economic promises from last year and from earlier addresses.

One of the president's most noteworthy achievements is the reduction of the federal deficit from P200 billion in 2003 to P12 billion in 2006. This year the government has announced that it will balance the budget despite the worldwide inflation woes. The reduction of the deficit, though, has not come through drastic cuts in government expenditure. In fact, the national budget has gone up by about 80 percent over this period.

What has made this possible is the expanded valued added tax (E-VAT) on petroleum products.

Macapagal has delivered on building infrastructure. In fact, she is built more than any president since Marcos and without the same authoritarian powers to bypass the bureaucratic red tape of the current process.

The NAIA 3 terminal, for example, at Manila's international airport is already partially open and is expected to begin receiving international flights by around Aug. 8. The Subic-Clark segment of the Subic-Clark-Tarlac Expressway (SCTEx) opened on April 29, and has since collected daily tolls of about P550,000. Construction has started on both Clark North and Clark South and two Japanese contractors have agreed to build four SCTEx interchanges.

Refurbishment of airports in the Visayas and other parts of the Philippines is also well underway. A number of airports have just started receiving flights from major domestic airlines after years of absence.

The NorthRail project has been a subject of controversy but according to the administration the rail system is still scheduled for "substantial completion" by the original target date of Feb. 2010. We should bear in mind that the Northern Luzon rail line was not originally Gloria's baby. It was conceived many years before she came into office, but it has been this administration that has gotten the project off the ground.

Most of the anger directed at Macapagal in terms of her economic performance has been related to the current high price of fuel and food, both of which are due to external factors beyond the government's control. However, prices in the Philippines have still remained lower than those in other Asian countries, in no small part due to the funds provided by the E-VAT tax.