Caution: PH federalism could go bonkers like Venezuela’s socialism
YEN MAKABENTA
First word
I DECIDED to write this cautionary note for our people and government after reading two startling reports:
First, the announcement by the National Economic and Development Authority (NEDA) of its estimate of the cost of the country’s shift to a federal form of government, and the planned meeting between the government’s economic managers and the leading voices of the consultative committee on Charter change, which wrote the much-discussed draft federal charter.
Second, a report and analysis in Forbes magazine on the heavy cost of the failed socialist experiment in Venezuela, which has undergone four years of recession, hyperinflation and political crisis.
The South American country, endowed with the biggest crude deposits in the world outside of the Middle East, has been crippled by misgovernment and hyperinflation.
After reviewing much of the literature, I suddenly made the connection between our current headlong rush to federalism, and Venezuela’s fateful embrace of socialism.
From Smartmatic to Venezuela’s crisis
On second thought, it is fortunate that Smartmatic, the Venezuelan-owned electronic voting system provider, remains to date as our only known connection with Venezuela. The harm that Smartmatic has inflicted on our election system in three elections (2010, 2013 and 2016) is indisputably severe and traumatic. It will take years before the nation recovers from this deplorable association.
Lately, I have been reading with much interest and shock some serious articles and commentaries on Venezuela’s experiment with socialism. The results have been catastrophic for the Venezuelan economy and for the people of Venezuela.
In contemporary political science, Venezuela’s crisis is ranked as one of the worst tales of government dysfunction in history.
Venezuela’s socialist experiment
In mid-July 2016, Forbes magazine, published an article by Ivana Jacob, which quickly summarized the scope of the experiment with socialism in Venezuela and the scale of the economic crisis that resulted.
She wrote:
“At the start of 2014, Venezuela’s GDP stood at $371.34 billion, with nearly half of that coming from oil (it accounts for almost 100 percent of exports). But after a year high of $105.54 in June, crude plummeted by more than 50 percent to $48.51 by the end of the year. Oil has held steady in the $50-a-barrel range since, allowing the country’s socialist policies to materialize without the guise of high crude — and economic disaster has ensued.
“Just this year 2016, Venezuela has faced shortages in toilet paper, diapers and milk (and more) forcing more than 6,000 people to cross the border in Colombia to purchase necessities. The country had to ration its electricity use because of severe power shortages. It also could no longer afford to print its own money. Come 2016, the IMF forecast that Venezuela’s inflation rate would exceed 1,600 percent.
“A Bolivarian republic, Venezuela turned to socialism in 1998 when Hugo Chavez was elected president after two unsuccessful coup attempts to oust his predecessor. The new regime brought not only a new constitution, but higher oil prices as well. The following year Chavez passed laws redistributing land and wealth, which he followed in 2005 with a land reform decree that would eliminate larger estates to the benefit of the poor in rural areas.
“In 2007 the government took control of important oil projects in the Orinoco Delta and later expropriated two US oil companies, furthering Chavez’s nationalization plans.
“Nationalization continued with the Bank of Venezuela and household fuels distributors and petrol stations. In 2011, with a 27 percent annual inflation rate, the Venezuelan government introduced price controls of some basic goods (they would extend to other products in the following years).
“By the time of Chavez’s death in 2013, inflation had grown to 50 percent and rose to 63.4 percent in the following year. Towards the end of 2014, the country entered into a recession.”
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“Present-day Venezuela is facing a humanitarian crisis and Nicolas Maduro, Chavez’s hand-picked successor, and his socialist regime is rightly shouldering the blame. The country’s emphasis on oil exports, price controls and a heavily controlled economy are all features found in other current and former socialist countries — features that have contributed to the demise of whole economies, or brought them close to it.
“Perhaps the most obvious example of economic failure is the Soviet Union (or USSR), With its highly centralized government and economy, the USSR survived for 69 years until its collapse in 1991, representing the longest time a state has been led by a Communist Party (China comes in second at 67 years).
“While oil prices were high, the Soviet Union appeared to have a strong economy and could maintain its focus on increasing its military power. But when oil prices fell towards the end of the 1980s, the USSR found itself forced to borrow from Western banks. Its sluggish economic system and dependency on the West also weakened the control that it had over countries under the USSR’s control and eventually led to its demise. Venezuela now finds itself in the same difficult position.”
The cost of federalism
Alongside this hard-hitting piece in Forbes, I want to reprint the report on NEDA’s estimate of the cost of federalism, which was published by the Manila Times yesterday.
The article was reported by Mayvelin U. Caraballo. I quote her story in full:
“Shifting to a federal form of government will incur additional public expenditures of as high as P253 billion during the first year of implementation, the National Economic and Development Authority (NEDA) has estimated.
“The bulk comprises incremental costs ranging from P156.693 billion to P243.502 billion, NEDA figures presented by Undersecretary Rosemarie Edillon during an economic development cluster meeting late Wednesday showed.
“Included is a General Appropriations Act-stipulated “equalization fund” of P85.8 billion, equivalent to about 1.0-1.6 percent of gross domestic product (GDP).
“On top of this, another P10 billion will be needed for new buildings that will house government agencies to be created under a federal system.
“‘First year of implementation will require additional capital outlay to fund construction or expansion of administrative buildings to house the federated regional governments, besides additional vehicles and various equipment,’ Edillon said.
“She warned that the incremental cost could cause the budget deficit to go beyond target to as high as 3.4 percent of GDP.
“The government has set a deficit program of P523.682 billion or 3 percent of GDP for 2018, P624.370 billion or 3.2 percent for 2019 and 3 percent for 2020-2022. Last year’ shortfall of P350.6 billion was equivalent to 2.2 percent of GDP.
“The NEDA also said that the spending split between the federated national government and federated regions would not be 50:50 but 60:40 and could even hit 80:20 if expenditures on subsidies, tax, interest payments, net lending, financial expenses and capital outlay were included.
“Given a mismatch in funds and spending, it cautioned against ‘inevitable disruptions to the economy’s growth momentum and progress in infrastructure improvement efforts.’
“The NEDA added that the ‘unquantifiable economic costs, repercussions and externalities include impacts of FDIs (foreign direct investments) and international trade, reaction of credit rating agencies to fiscal deficits and debt effects.’
“Economic managers have warned against rushing a shift to federalism, with NEDA chief Ernesto Pernia saying it could “wreak havoc” on the country’s balance sheet. Finance Secretary Carlos Dominguez 3rd also claimed that the current draft federal charter was lacking in terms of financing.
“In a recent report, credit rater Moody’s Investor Service tagged charter change as one of the downside risks to the Philippine economy.”
Precautionary principle
To avoid the pitfalls of radical and foolhardy reform, it is prudent for policymakers to always observe the precautionary principle in the making of public policy.
The precautionary principle (or precautionary approach) generally defines actions on issues considered to be uncertain, for instance applied in assessing risk management.
The principle is used by policymakers to justify discretionary decisions in situations where there is the possibility of harm from making a certain decision.
Federalism, I submit, must be approached in the same way.
It troubles me that the contemplated shift to federalism, which some groups, including President Duterte are assiduously promoting, could result in government dysfunction as catastrophic as Venezuela’s.
yenmakabenta@yahoo.com
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