Nye’s nays

I missed conservative economist John V.C. Nye’s talk before the Bangko Sentral the other week, as well as a dinner hosted for him later by the free marketeers of the Foundation for Economic Freedom. Luckily I got hold of the transcript of his BSP talk, which offers a lot of interesting prescriptions for the country from someone who’s not only in the mainstream of his profession, but considerably to the right of his colleagues.

Despite his name, John is actually Chinese Filipino, the valedictorian of his high school class at Ateneo (right behind him was the BSP’s very own deputy governor Nesting Espenilla). He is presently the Frederic Bastiat professor of economics at George Mason University, a sprawling Virginia campus that includes two Nobel Prize winners in its economics faculty and has always represented the conservative point of view, from the quantitative monetarists of a generation ago to the supply-side insurgents of the Reagan revolution in the eighties.

The first part of his talk covers the current recession in the United States. John’s thesis is that the debacle in the housing mortgage market there two years ago, which quickly became a banking crisis because of the rapid depreciation of defaulting bank assets, could have been prevented from becoming a full-blown macroeconomic crisis if the Fed had applied quantitative easing (QE) earlier, longer, and stronger than it actually did.

A sustained, gradual expansion of money supply in the wake of the contraction in real demand would have maintained positive growth in nominal GDP and avoided feeding deflationary expectations that eventually became self-fulfilling. Instead, after the initial cut in interest rates in early 2009, the Obama administration shifted to a policy of massive fiscal stimulus—one that included not only bailouts of distressed non-financial companies like General Motors, but also attempts to push through the Big Government agenda of the Democratic Party—the biggest of these initiatives being the successful legislation of so-called health care reform.

Unfortunately, says Nye, fiscal stimulus ran up against the contrarian disinclination of investors to invest—fueled in part by the earlier noted deflationary expectations—as well as the stubborn refusal of unemployment to go down, mainly because of structural inefficiencies that have accumulated in the labor market over two decades. With the continuing slump in aggregate demand and investment, high unemployment, and then the appearance of new fiscal mandates like health care “reform”, I guess it was no surprise that the inherently conservative American electorate booted the Democratic majority out of the House (though not yet the Senate) last November.

These days, President Obama is trimming his left-leaning sails and tacking the ship of state a lot more to the right, even hiring some of the so-called “New Democrats” who used to work for the right-of-center Bill Clinton. I believe the return of quantitative easing (“QE2”) late last year may also have been in part a response to indicated voter preferences. And so far, says Nye, there has been no major backlash in the US against international trade, although America’s trading partners will have to learn to live with a weak dollar in the foreseeable future as the world’s biggest economy continues to reflate its way back to sustained growth.

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Back in his native country, though, John does not see the critical economic issues as involving either monetary or fiscal policy. “The idea that a slightly better monetary policy and increased tax revenues [in the Philippines] would fundamentally alter the investment outlook seems rather fantastical and certainly at odds with the experiences of most Asian countries that have seen successful and sustained growth spurts,” he says.

“At the end of the day, the Philippines’ major problems have less to do with macroeconomic or fiscal stability but with a badly distorted microeconomic price situation, poor and unreliable property rights and contracting, a stiflingly legalistic bureaucracy, a slew of policies and institutional constraints that are anti-investment and anti-competitive, and a political economy that favors the worst mix of populism, elite rent-seeking, and high-minded but unproductive nationalism.”

John ticks off a list of microeconomic issues that need fixing, none of them surprising by any means, some of them mentioned below:

“A poorly thought out and poorly implemented land reform seems designed to keep agriculture inefficient while preventing farmers from either becoming more productive or leaving farming altogether. The implicit aim of policies like CARP seems to be to keep small farmers weak, poor, and backward without shrinking the size of the agricultural sector.” This is a timely reminder indeed for our government peace panel in Oslo when they meet an NDF that has put their ideological version of land reform front and center on the negotiating table.

“Infrastructure is poorly developed and not adapted to the needs of promoting regional expansion. Industry is excessively concentrated in the NCR region and there seem to be no serious initiatives to promote effective economic decentralization.” I have statistics to show that infrastructure and decentralization were greatly advanced in the previous administration, much more than under its predecessors, but—I’m willing to concede—not as much as some of our neighboring countries, and certainly with enough unfinished work left over for the current and future administrations.

“Nationalistic rules on ownership and investment limit competition and entrench special interests. So many policies in the Philippines seem to be motivated by a nationalism that says it is better to be protectionist and nationalistic even if the end result is greater emigration and lower growth.” A lot of these rules, as many people know, reside in the 1987 Constitution, which is why it is difficult to imagine how a truly open investment climate can be promoted without Cha-cha, because the enemies of such reform can always take refuge in a protectionist Constitution.

“Above all, competition is systematically throttled throughout every stage of the economy. Not least among these are the constitutional restrictions on foreign ownership and investment in the Philippines coupled to the mix of bureaucratic red tape, complicated taxes, and petty corruption that impedes the investment that is permitted within the current rules. A crazy patchwork of subsidies, price controls, and regulations give the illusion of helping the poor, while effectively stifling economic progress and enriching the corrupt and the politically well connected.” Again, words worth remembering by the government peace panel facing an NDF determined to roll back privatization and deregulation, of which we have had, not too much, but too little.

Curiously, John says nothing at all about the population problem, an issue that obsesses many of his mainstream fellow economists especially in the Philippines. I’d like to think that his silence indicates his agreement that this issue, while perhaps important, is not the central challenge of development. Rather than the RH bill, there are many other proposed economic reforms on which I’m perfectly willing to applaud this administration’s boldness—abolishing the NFA, de-subsidizing transport fares, “open skies” for foreign airlines, even expanded cash transfers if realistically sized–all of which will require real political will and not just fancy slogans. –Gary Olivar, Manila Standard Today

Readers can e-mail gary.olivar@censeisolutions.com