Investment common sense

Reacting to the criticism that I had quoted from Philippine Senator Manny Villar to the effect that Philippine banks would rather acquire Treasury bills and other sovereign debt instruments than lend to businessmen because aside from the rates being so attractive, the “investments are risk-free and protected from depreciation,” commenter UPn at mlq3’s blogsite was quick to riposte: Wouldn’t you want your own retirement funds (along with funds from the GSIS or SSS) to be in such instruments (attractive rates, risk-free, protected from depreciation) as opposed to being lent to businessmen-cronies of whoever is sitting in Malacanang?

Our exchange was part of a broader discourse wherein I have proposed, among others, that the Philippines should look at the best practices of successful economies in the region that have attained “late-industrialization” such as South Korea and Taiwan. I have cited that the high investment rate of the Koreans has kept the debt/GNP ratio unchanged despite heavy foreign borrowing.

The analogy between individuals and nations in terms of investment goals is not farfetched. For example, building one’s nest egg through investment in “growth” equities involves higher risk than, say, in the “stable” bond market. For younger investors with a longer time horizon, growth stocks (of companies that reinvest earnings back into the firm for business expansion) can provide protection against escalating cost of living due to inflation. But individuals nearing retirement would be wise to put their money in safer portfolios such as sovereign instruments that provide current income and protection of principal.

Just as individuals ought to be guided by sheer common sense in investment, so must nations.

The Koreans, to break from the confines of a traditional society, have defied the bitter “stabilization” prescription of the Washington Consensus and adopted expansionary policies to achieve productivity and growth. It would have been nonsensical if aiming for industrial expansion, the community’s surplus were left in the hands of hoarders or lackadaisical entrepreneurs who would rather conserve their rents. The Korean economy has taken off because profit-maximizing entrepreneurs in targeted businesses or sectors in conjunction with state intervention ploughed back a substantial portion of their earnings in further productive investments. As a result, the manufacturing sector rapidly shot up even as it imparted its growth impulses to the economy in general to attain industrialization.

Young and emerging economies could not afford to aspire merely for stability, unless the goal is nothing more than the preservation of the wealth of existing economic power and/or guarantee the repayments of foreign debts at the expense of national development.

In an economy like the Philippines where there is a high concentration of interlocking ownership among the manufacturing sector and banking institutions, the supply of working capital for industrial expansion could be much easier to assemble if the internal will is there to grow, and compete with other economies. Unfortunately, the will to develop, as suggested by Trade and Industry Secretary Cesar V. Purisima in 2004, is wanting. Purisima stressed: “(P)rivate domestic sources alone could finance a critical mass of projects that will be necessary to jumpstart and sustain the country’s economic development.”

Do you still remember the UP 11 report of August 2004, which has raised for the Philippines the specter of “rapid growth”? Here’s what I have written then:

One of the notable assertions the UP economists made almost axiomatically was: the “growing size of the debt and the deficit are undoubtedly the biggest reasons that investment and growth in this country have remained sluggish.” Is the issue really too “esoteric,” as the distinguished economists would want others think, to be comprehended by non-economist like many of us, specially when their paper also claimed that “rapid growth” is one of those “external shocks” that could make the country “vulnerable”?

It seems that when the problem is premised on being supposedly “arcane,” it becomes easier for intellectuals to ascribe the blame to the already severely battered public sector, the bureaucracy specifically, or even the poor tax structure, perpetuating even more popular disenchantment with the government. It had also the effect, unintended or not, of skirting “constructive public discussion” of other relevant important questions and actual economic experiences despite pretenses to welcome them.

First off, bear in mind the position paper affirmed that the Filipinos—or logically the economic elites for that matter—hold most of the government’s peso-denominated debt and “a good chunk” of the dollarized domestic debt (and the further fact that the national debt at 3.36 trillion pesos as of the end of 2003 is “split almost equally between foreign and domestic liabilities”). This is indicative of the overriding interest particularly on the part of the domestic wealth holders in renting their money at guaranteed earnings relative to otherwise risking such wealth in rational productive investments, conceivably fearful likewise that too fast a growth rate and inflationary pressures could threaten the value of their money. With the debt service (the income to the lenders) calculated at about 30 percent of the national budget, the money involved going to only some individuals is obscenely mind-boggling, or, to put it differently, enough to lull the rentier persona of the entrenched economic elites into an ongoing passive investment spree at the expense of the real economy of the nation. . . .

As Filipinos should by now have learned . . . restrained economic growth propels governments into ballooning indebtedness given that low productivity in the real economy undercuts tax revenues while the resultant unemployment or declining wages generally impact disposable income and the direly needed newer capital formation. This more or less calculated scenario—or imposed “structural adjustments” as others put it—leaves the “model borrower” (that the Philippines as a sovereign debtor has been programmed to always aspire to be) the unfortunate choices of either more belt-tightening, or more borrowing with higher risk premiums, or both, often as we all know, in wanton disregard for the plight of the voiceless citizens.

If then the paramount goal were to stop the escalating government debt as a proportion of GDP, won’t it be possible to attain it should the growth of GDP outpace the ever-rising debt? This would only mean that past the crisis and beyond some short-run government bureaucratic measures (such as new tax schemes and pork barrel curtailments), the wealth creators at the firm level must lead the march toward competitiveness and productivity growth, the intuition of the now famous “UP 11” that it would be “no more than whistling in the dark” notwithstanding. Therefore, rather than despair, perish or self-destruct, Filipinos must take the course that remains wide open for them—build and produce to earn enough to pay debts, provide basic needs, keep an efficient bureaucracy and build even more. When government capital expenditures are at a minimum, the private sector must take up the slack in investment to boost employment and enable the citizens to pull through a sense of confidence in the future.