UP 11 Strikes again
Shattering Fiscal Myths

Eleven faculty members from the University of the Philippines School of Economics have debunked two misconceptions on the country’s fiscal difficulties in another position paper issued 25 March, entitled “The economy on a cusp: The proposed VAT amendments and their larger significance.”

“Contrary to government pronouncements,” the UP 11 believes, “the Philippine economy is not yet out of fiscal trouble” because the country still needs to raise P54 billion this year “simply to placate financial markets and pave the way for refinancing of maturing debts.”

“Failure to pass an adequate VAT law,” they warn, “would be most inopportune, particularly when the national government is expected once more to tap international credit markets” to raise some US$3 billion.

Another myth they debunked is the supposed regressiveness of VAT – that it hits the poor and the middle class more than the affluent. Media has reported that the rich contribute only 2% to VAT revenues, while the very poor and the middle class give 44% and 55%, respectively.

Recent computations, however, show that “almost 40% of VAT is due from the richest 10% of the population, while only 17.1% is due from the poorest half.” They conclude “the existing VAT is actually progressive and probably more so than some forms of income tax, which are progressive in principle but barely collected in practice.”

The paper claims “an effectively collected indirect tax can be more progressive in practice than a poorly collected direct tax” although “it is not the purpose of a consumption tax to be progressive.”

The UP economists advocate the withdrawal of VAT exemptions on some goods consumed by the rich to make the VAT measure more progressive. They question the VAT exemptions favoring international air transport and shipping operators under HB 3705. On the other hand, they remain apprehensive over subjecting petroleum products and electricity generation since they have far-reaching effects on the economy and they are already subject to specific taxes.

While actual inflows of foreign portfolio investments expanded 173.0% to US$801.2 million in January 2005 from US$293.5 million in the same month last year, foreign direct equity investments registered with the Bangko Sentral ng Pilipinas for the same period contracted 86.3% to US$7.8 million from US$56.6 million.

More than two-thirds of foreign direct equity investments went into the wholesale and retail trade sector, while the rest went into manufacturing (11.7%), financial intermediation (7.2%), real estate (9.8%), and education (2.6%). On the other hand, more than a third of registered foreign portfolio investments inflows went into government securities, over a fifth into manufacturing, especially into shares of food products and beverage companies listed in the Philippine Stock Exchange, and less than a fifth into shares of telecommunication companies.

By nationality, more than three quarters of foreign direct equity investments or US$5.9 million came from Singapore. Singapore likewise emerged as the top registered foreign portfolio investor in January, with a 31.1% share, followed by Japan (20.0%), United Kingdom (18.7%), USA (13.3%), and Hong Kong (5.1%).

International Partners
French Re-connection

The French were back in full force last March. In the first visit by a senior French minister since 1997, Minister of Foreign Trade Francois Loos led a large business delegation to the Philippines for a four-day working visit. The visit included business meetings hosted by the Makati Business Club, Philippines-France Business Council, and Le Club, private calls on the Bangko Sentral, Department of Trade and Industry, and Department of Energy and even store visits to Louis Vuitton, Yves St. Laurent, and Lacoste shops.

Research and innovation will keep companies on top, according to Minister Loos

Minister Loos emphasized the need for both French and Filipino businessmen to step-up to the competition in the global market and perform with utmost quality. One of the ways by which companies can maintain their edge in the market is to invest in research and continuously search for ways to innovate and introduce newer products. He underlined the need to keep up with breakthroughs in technology in order to be on top, which also means that business presence should be felt in the global market.

One of the more striking points of the Minister was the message that growth and development cannot completely be had through external trade. The creation of an environment, which provides for the growth of the people, is one of the best ways to achieve a better quality of life. He believed that providing for the needs of the people, through better wages would benefit the companies themselves because it would provide for greater consumer power, which would ultimately favor the companies. He also discussed the concept of international taxation as proposed by President Jacques Chirac of France and President Lula of Brazil in order to double the funds for aid to developing nations, which currently stands at US$50 billion.