Crossroads (Toward Philippine economic and social progress)
Philippine Star, 12 February 2014


Last week, I made the point that smuggling, corruption and protectionist policies are almost the same thing. Where one of these activities is prevalent, chances are it is because the other two elements are also there as partners in misconduct.

Economic winners in a corrupt world. I should add that all three also make for below par economic performance for a country. Competitiveness and economic efficiency are often sacrificed when excessive protection is given in the guise of good intentions.

The “winners from protectionism” are producers who can exclude market competition with government help. In today’s WTO-world, unreasonable tariffs on imports of competing products are the remaining weapons of protectionism.

“Smugglers” make huge profits when high tariffs are in place. The differences in import and domestic prices make smuggling an attractive activity in spite of the risk of being caught.

Smugglers manage this risk by buying off corrupt Customs personnel or coddling by politicians. If the justice system is not corrupted or corruptible, catching the corrupt is easier.

This is like a chicken-and egg-rigmarole. What is the record of the country’s justice system? And what is the record of the Customs authorities? The answer could be depressing. True reformers remove the cause of the problem.

Consumers are losers. The losers in this corrupted world are consumers. Consumers are those who buy the goods at retail, the end-users. They could also include industries that use the protected products as inputs in production. Government also lose billions in uncollected duties and taxes

But ultimately, it is the end-consumers, you and me, who are the most adversely affected! Consumers are numerically more in numbers than producers. Protectionist policies favor the few producers while sacrificing many consumers.

Consumers get the short end: a litany of wrongs including high prices, unstable supplies of goods, and poor quality of produced items in the home market.

Average-income consumers may not feel the pinch. Sometimes seemingly small price differences do not rock the average consumption budget. That is not the case, however, among the poor whose budgets are of course very limited. What might be a simple pinch to the average budget is a knockout punch to the very poor.

Severe long term impact on all. We have lessons in our experience that demonstrate for severe pain even on producers when we consider the longer run.

The overall economy becomes uncompetitive. The protected activities are perennially dependent on state support of the protection policies. And also, the government expends and dissipates resources going after smugglers than focus on important problems.

Producers lose their incentives to become innovative or to survive through competition unless their protective cover is removed. The resources of the country are spent on the wrong industries.

Take the case of the textile and garment industries in the country. Because of the persistently high protection rates for textile producers in the past, we spent too much time monitoring smuggling. The textile industrialists became victims of high costs in the end.

The result: our textile industry became very weak and lost out. And our garments industry today is still highly dependent on imported textiles.

Rice smuggling will continue. The fact that low cost producers of rice in Southeast Asia can produce rice at a large advantage should be seen in another light: we can buy cheaper food for our people. The gains will be for the people, the consumers.

Even as ASEAN becomes one free trade area in 2015, rice has been excluded because it is considered by our government as a “sensitive” good. By this exceptionalism, rice is “tarified” at 35 percent of value of rice imports by the special provisions of the ASEAN trade in goods agreement, a concession for our country.

This means that ASEAN producers have “minimum access” to Philippine domestic supplies at that agreed rate after 2015. Of course, the country could obtain more rice at tarified rate for all suppliers.

The tarified rate for rice under the WTO agreement is 50 percent of value. Under WTO rules, the extended time for allowing the import quotas expired on June 5, 2005.

With these powerful tariff incentives written in stone, all would-be smugglers are fully informed.

Even then, the powerful Philippine rice lobby is goading the government to continue the rice import quotas which have been the cause of smuggling in recent years. They want to risk even a court case being filed against the country in the WTO if only to continue the past practice of import quotas.

Food security in terms of rice. Buying cheaper rice from other countries as a means to guarantee food security should be a boon to the domestic economy even as we produce rice in the country.

We should balance a wise import policy for rice with domestic production program that helps our domestic farmers to produce rice.

Such a program includes higher investments in agricultural infrastructure, government price support and credit, and technical extension. Under this framework, rice farmers of high quality rice and high productivity can find niche markets even for export.

(Remember the early 1980s when we met all our domestic needs through concerted government efforts with rice farmers?)

Shorn of high protection, however, our land, labor, and entrepreneurial resources used in agriculture will find better use if they engaged in activities that earn them good economic returns.

“Food security” is the only good argument for pushing self-sufficiency in rice production. Food security means having the food produced by us and having that food available when we want it. It is a guarantee against being too dependent on foreign supplies.

ASEAN, however, under free trade rules could be an additional assurance of food security for us. Malaysia and Indonesia import some part of their rice needs. Thus, they keep food security as well while they support domestic production of the staple.

Hong Kong and Singapore – two highly successful regional economies – never had to produce rice to feed their millions of residents. By allowing free trade in rice, they obtain the rice that their population need and eat.