Sunday, November 20, 2016

What do we do when America assumes economic nationalism?

Now that we know the direction America would take in the coming months, which Trump's chief strategist defined as a movement towards "economic nationalism", a phrase which is just synonymous with protectionism, what do we do now?

The Chinese has a saying, " when a door closes, another door opens." US president John F Kennedy says the same thing when he said that crisis has a dual character: it is dangerous yet opens a great opprtunity.

Before I delve further deep into this topic, let us agree with our definition right now of the Philippine economy.

Right now, our economy stands on just three pillars: foreign remittances, offshore funds from foreign firms and a robust consumer market. Remittances from abroad come from diverse places, not just in the United States. This is variable. It depends on about 10 million or more Filipinos with jobs abroad, with 2.5 million of them based in the United States.

Trump says he would fix the American economy by bringing in jobs, while discouraging the entry of illegal immigrants. Maybe Trump knows things we don't because 90% of the American economy consists of small and medium-sized firms, most of them dependent on illegal immigrants for cheaper labor costs. If Trump successfully extricates 3 to 4.5 million illegal immigrants out of America, just how many American SMEs would lose their productive capabilities, we sincerely don't know. It is highly possible that in the interim, this will affect the U.S. economy, much the same way Malaysia experienced in the sixties and this African country when it tried to implement a "race-only" state policy.

There might be disruptions because this will be temporary. Now, will this affect the flow of foreign money remittances? No. The fact is, it would just create a momentary disruption, and the possibility of this even benefitting the Philippines in the long run is there. More Filipino professionals would be able to find work and this translates into more remittances.

The thing is, this is not the situation on the second pillar---offshore funds. Trump says he will encourage US offshore companies to shift production hub focus from Asia unto America. This is harder than what Trump thinks because the reason why the shift occurred in the first place is based on a business decision--cheaper labor. Many analysts say offshore funding would not stop because these firms will stay put in the Philippines.

I don't know with you but based on my own analysis--there would be a temporary disruption. When Trump-ism begins, expect US companies to do what is necessary to pursue their own country's interests and I believe we will see an exodus of these companies back to America.

If this happens, there are two expected events from this: first, loss of local jobs. Thousands of young Filipinos would lose their jobs and this will have a direct impact on the consumer market because the reason why the markets remain extremely active is due to the participation of these young consumers.  The retail and the services sectors would surely be affected by this.

Momentarily, this will also create a dominoe effect----it will affect the property sector which has been targetting the younger segments of the market for years. Will there be a property bubble burst? Yes, most likely.

How about the transport sector? Yes, there will be. When this happens, it will affect the financial performance of our local banks many of which have allotted billions worth of loans to car loaners. What to do with those thousands of cars which banks would surely get back?

A solution

Two days ago, the Inquirer bannered that the Philippines is the fastest growing economy in Asia posting a 7.1% growth in the third quarter of 2016, which is even higher than China's. Of course, the growth is still the effects of election spending which is bigger than foreign direct investments. Try to read the papers again after six months or two quarters.

The reality is, the Philippines remains an underdeveloped economy. The country still lacks the necessary infrastructures to further growth. There are no critical industries to enable it to produce or manufacture products that the rest of the world needs, except of course, in the agri-technological sector which is still generations away from other countries' agri-tech sectors.

What can the Philippines sell that would give it competitive advantage other than its labor pool? Former senator Ed Angara says it's agriculture, which previous administrations tried to develop but failed all because of corruption. Another one is in the tech industrial sector.

Our country should aim to be the world's food basket. We have millions of hectares worth of land, and with proper management and planning, we would be able to convert these into productive uses.

Of course, this will not be useful if we don't have a fully developed supply-chain infrastructure. Those agri produce should reach its intended destination faster and more efficient than our other competitor countries such as Indonesia, Thailand and Vietnam.

So, aside from developing our capacity to produce, we need to develop our capabilities to process and distribute to the world. Thus, we need to focus our efforts on providing the necessary infrastructures for this to happen.

We need roads, bridges, processing plants, distribution centers with state-of-the-art facilities, freight forwarders, rail-based transport systems, and more expansive airports and seaports. Instead of allowing foreign agricultural products to penetrate our market, let us transform into an agricultural center for foreign markets instead.

This idea needs two things: local investor support and government subsidies and possibly funding. Government should create an inter-agency firm that would manage this initiative, so that this will happen. If we work under the current system, nothing will happen because right now, government agencies are hard pressed putting out fires. There should be an agency solely dedicated on this.

Right now, the government is selling projects left and right all in the name of private-public partnerships which, to be frank, is disastrous to us in the long run. We surely don't need vital utilities under private domestic firm management, because these firms have only one thing in their minds--profits.

We need to increase government assets by building these infrastructures using public monies. Of course, you'll say this will surely bear down the economy, but look at the greater risks these PPP pose to the ordinary Filipino. When you make these critical industries open to private firms, they will pass it on to the consumers the costs of making these projects thru tolls and fees, which, in the future, might hurt ordinary Filipinos.

The best thing really is to sell more global bonds and ensure that only a fraction of these bonds are sold to big corporations and conglomerates. The wider the base of buyers in domestic markets, the lower the risks of government being indebted to foreign or private business interests.

Okey.

Now we go to the second suggestion which is to fully develop the industrial base of the Philippines. We cannot have an industrial manufacturing base if we don't have a minerals extraction sector. This sector must be nationalised, and there are two components which need nationalisation: extraction and processing. Duterte is right when he says we need to rebuild a National Steel industry, because most of our ore right now is being shipped to China for processing.

Congress should create a law reviving a National Minerals industry which will build processing plants for mineral ores extracted by government, with the help of foreign mining firms. Those operating in the Philippine mining sector right now should be allowed to resume operations with one caveat---they need to send whatever they extract to our government funded processing plants and barred from exporting these to their home bases.

Processed and finished products are then allowed to be exported to other countries. Government therefore profits two-fold: fees extracted from extraction and fees from processing.

How about our dependence to coal power? Government should encourage more firms to revert or shift to geofriendly power sources. But of course, this would surely take time. In the interim, we might rely on offshore power plants to satisfy current demand.