MAPping the Future

1st of 2 Parts

 

For many years now, the whole world has been struggling with how to deal with the twin evils of Inequality and Exclusion. These two evils have led to worldwide poverty and hunger, and many other dehumanizing ills of society in countries, big or small, developed or under-developed, autocracies or democracies.

 

In his apostolic exhortation, “The Joy of the Gospel”, Pope Francis had this to say about these twin evils: “Today we also have to say “Thou Shall Not” to the economy of Inequality and Exclusion. Such an economy kills. How can it be that it is not a news item when an elderly person dies of exposure but is news when the stock market loses two points?…. Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the secularized workings of the prevailing economic system. Meanwhile, the excluded are still waiting….”

 

This exhortation followed the Pope’s earlier encyclical “Laudato Si” where he lamented that…”Never have we so hurt and mistreated our common home as we have in the last 200 years…. The world must hear both the cry of the earth and of the poor.”

 

How serious are these two global problems?

 

On Inequality, we read that the 10 richest men in the world own more wealth than the 40% (3.1 billion people) of humanity. The richest 1% have 22% of global income. In the Philippines, the wealthiest 1% has 17% of national income while the bottom 50% earns only 14%. Our GINI Coefficient, which is a measure of inequality in a country, is at 42.3% – the worst in ASEAN and one of the worst in East Asia (based on the latest World Bank report). We also have the distinction of having the worst poverty ratio in ASEAN which, due to COVID, had even worsened from 16.7% to 23.7%. All the other ASEAN countries have single-digit poverty ratios.

 

On Exclusion, there are still glass (if not brick) ceilings for women in the professions, even in boardrooms. In some family-owned and controlled companies, there are limits to professional growth of non-family members. In hiring, some companies prefer graduates of elite schools as some discriminate against older people if not people with disabilities. Many financial institutions continue to require more stringent requirements for farmers and small entrepreneurs. And banks would rather pay penalties for not complying with loan level requirements for the agri-agra sector (which deprives this sector of up to P600 billion of financing annually). Other examples of Exclusion are: ostracizing the unwilling targets of sexual harassment, exclusion due to religion and economic status, and many more.

 

 

What can be done to combat these Twin Evils?

 

The World Bank prescribes Shared Prosperity along with ending extreme poverty. This means, among others, increasing the incomes and welfare of the bottom 40% of society, wherever they are. The 17 Sustainable Development Goals of the United Nations include not only reducing inequalities but other societal ills, like poverty, hunger, education, gender equality, etc. The Institute of Corporate Directors in the last 20+ years of its advocacy had been helping the corporate world create more wealth with good governance and encouraging them to sharing that wealth with their stakeholders.

 

What is the Response of Business to the Twin Evils?

 

In August 2019, the Business Roundtable, a business association in the United States made up of the top 181 CEOs in America (Tim Cook of Apple, Jeff Bezos of Amazon, Jamie Dyson of JP Morgan, and other CEOs – Microsoft, Google, GE, General Motors, etc.) issued a statement that reflected a collective change of heart of Corporate America – from a stockholder-centric mindset (total stockholder returns) to a stakeholder-centric one. The CEOs promised to: (1) deliver value to their customers, (2) invest in their employees, (3) deal fairly and ethically with their suppliers, (4) support the communities in which they work, and, (5) generate long-term value for shareholders who provide capital that allows companies to invest, grow and innovate. This document essentially declared that the purpose of a corporation is now for the interest of all stakeholders, and not just for the stockholders.

 

In November 2020, the Management Association of the Philippines (MAP) and the Institute of Corporate Directors (ICD) together with 26 other large business and professional organizations, in a convocation called for the purpose, signed a Covenant for Shared Prosperity (CSP) that detailed the business groups’ commitments to six stakeholders; to wit: (1) quality products and services to customers, (2) meaningful and gainful employment for employees, (3) fair, ethical and respectful treatment of suppliers (product, service and funds providers), (4) active involvement in the community, (5) protection of the environment, and (6) reasonable and just returns to stockholders. These commitments are described in detail in the Covenant signed by the 28 business groups.

 

Subsequent to the signing of the CSP, MAP organized a committee tasked to promote the adoption of the Covenant and to develop a set of metrics to guide the future individual company-signatories in the operationalization of Shared Prosperity in their respective companies. Using the World Economic Forum’s 45 metrics on Shared Prosperity as basis, the Committee decided to adopt 19 measures on SP plus another 3 measures for the companies’ board of directors. This will soon be rolled out to the membership of MAP, first, and later to the membership of the other 27 organizations that signed the covenant. The 19+3 metrics will soon be part of the MAP website once these are finalized.

 

Why Shared Prosperity? (This question will be answered in Part II of this article.)

 

(The author is Co-Chair for Social/Shared Prosperity of the MAP Committee on ESG. He is also Vice Chair of Center for Excellence in Governance (CEG). Feedback at <map@map.org.ph> and <rex@drilon.com>).

Supply shocks are those that disrupt production or raise production costs. Examples of these are high oil prices, natural disasters, or other similar factors. This causes what is called a “cost-push” inflation, where the inflation is caused by a disruption to the supply.

 

Expansionary policies can also affect inflation. Examples of these include the lowering of interest rates, increasing government spending. While these policies tend to improve economic growth, it could put a strain on the country’s resources and cause “demand-pull” inflation. Demand shocks, like stock market crashes, may do the same.

 

Finally, of course, is the subjective concept of “expectations.” If people expect prices to go higher, they naturally include these expectations whenever they’re negotiating their wages, prices, rents, or other factors.

 

Why increase interest rates?

 

We are raising interest rates because inflation is too high. High interest rates means higher borrowing costs. It encourages people to save money to earn higher interest rates and discourages people from borrowing money because of the higher financing costs. In effect, it cools down the economy and eases demand pressures.

 

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) has the mandate to implement monetary policy, e.g., increasing interest rates, while the government has responsibility to adopt fiscal policy, e.g., cut government spending in addressing inflation and ensuring economic growth. BSP is an independent monetary authority mandated to ensure price and monetary stability while the Department of Finance is part of the economic team of the President that is responsible for the formulation and administration of fiscal policies, and the management of financial resources, including, among others, taxes and debts.

 

It is important to distinguish monetary policy from fiscal policy, but also to realize how these policies can complement and help each other in addressing economic issues like high inflation. (See Table A)

 

 

 

To address high inflation, the President must focus on fiscal policy as part of his socio-economic agenda starting with rationalizing its government budget to cut unnecessary spending (i.e., confidential and intelligence funds) and prioritize economic stimulus to the agriculture sector to increase productivity, lower food prices and increase exports — which will also improve trade deficit to improve peso valuation against the dollar.

 

Are we in a recession?

 

The government appears to have a positive outlook on the economy. In a press release on October 20, 2022 National Economic and Development Authority (NEDA) chief Arsenio Balisacan has stated that the government has developed a plan to manage “the economic risks brought about by high inflationary pressures, the Russia-Ukraine conflict, global supply disruptions, and recessions.”

 

Citing a World Bank report, the press release stated that the Philippines is slated to grow by 6.5% in 2022 and by 5.8% in 2023. It likewise relied on a report by the Asian Development Bank, which stated similar prospects.

 

The IMF similarly agrees with these figures. In its 2022 World Economic Outlook, the IMF projects that the Philippines would grow its GDP by 6.5% in 2022 and by 5.0% in 2023.

 

In another World Bank report, Senior Economist Kevin C. Chua stated that the Philippine economy is expected to recover over 2022 to 2023 following the deep recession in 2020. This suggests that the Philippines was in a recession, but its economy is likely to get better in the following years.

 

Filipinos, however, seem to disagree. In its Consumer Pulse Study, TransUnion noted that most Filipinos (76%) agreed that the Philippines was already in a recession or will enter one by the end of 2023.

 

Moreover, data from the PSA shows that the unemployment rate has been on a steady decline over the past year (from 8.9% unemployment rate in September 2021 to 5.0% in September 2022). However, the same report also showed that the underemployment rate has increased since June 2022.

 

Aside from consumers losing purchasing power which hurts the poor more disproportionately, inflation can cause a painful recession due to sustained increase in interest rates resulting in a slow down of the economy — increasing unemployment and job losses. While no policymakers would want to see job losses, the government must address inflation now before it becomes much higher that would need an even more painful recession to tame it. This herculean task of  addressing high inflation with the least possible job loss is the main task of the BSP using monetary policy tools.

 

This caveat on looming recession and stagflation (or inflation with stagnation) is the reason why addressing high inflation requires a whole-of-government approach — with the BSP on monetary policy, and the Department of Finance and Congress on fiscal policy (i.e., whether to increase taxes and/or cut government spending). This issue will be the subject of my policy memo as a final requirement for API 121 course (Recession, Growth and Macroeconomic Policy) at the Harvard Kennedy School under Professor Karen Dynan. The same will be published and forwarded to the Philippine Congress and the economic managers of the Marcos administration for appropriate action before the year ends.

 

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is a MPA/Mason Fellow at the Harvard Kennedy School. He is a member of the MAP Tax and EODB Committees, Co-chair of Paying Taxes on Ease of Doing Business Task Force and Chief Tax Advisor of the Asian Consulting Group. Feedback at <map@map.org.ph> and <mon@acg.ph>.)