Friday, December 21, 2007

Counterfeit Drugs 1: On the Growing Fake Drugs Worldwide

In my free time, I join a few on-line discussions, and one of the blogs I like participating is that of the International Herald Tribune's. In "managing globalization" blog, one discussion is about free trade zones and counterfeit drugs. Below are the original post by the blog writer, then my comment, plus a counter-comment from another reader, then my rejoinder.

A side effect of free trade zones
Posted by Daniel Altman in General, Rough trade
17 December 2007 7:38 am
How much regulation of trade is too much? It's a tough balance to strike. On the one hand, if you're too finicky about the provenance of the goods you import, then you risk being accused of protectionism. On the other hand, if you regulate too loosely, you may leave the door open for scams and fraudsters. The latter case, as Walt Bogdanich writes, is apparently what's happening with some counterfeit drugs.
Bogdanich reports that drug counterfeiters have found safe havens in free trade zones ranging from Hong Kong to Dubai. With regulations designed to restrict trade as little as possible, the zones offer the makers of fake drugs a chance to conceal their products' origins and move them around with little fuss. Even when the local regulators suspect what's going on, they aren't even sure if they have jurisdiction.
It seems like it should be possible to stop fake drugs without significantly impeding trade. But governments may worry that by rooting out fake drugs, they will also find numerous other violations of rules of origin, e.g. goods produced outside the free trade zone that are masquerading as local output. The solution may be for for importers like the United States to relax their rules-of-origin requirements in exchange for better monitoring of fake and dangerous products in free trade zones. Given the difficulty of moving global trade talks along, though, my expectations for any sort of quick, clean resolution are extremely low.


Anything can possibly enter in free trade zones — useful/original drugs and counterfeit drugs. Food and drinks, medicines and poisons, fertilizers and bombs, and so on.

The presence of counterfeit drugs can never be an excuse to relax international trade, or in the case of Hong Kong and Dubai, to undertake unilateral trade liberalization.

Brand or original manufacturers of medicines can check the origin of drugs that were purportedly "manufactured" by them from some countries. After all, when counterfeit drugs purportedly from GSK or Pfizer or other big pharma companies will be detected, it will be those pharma companies' image (and their sales and profits) that will be adversely affected. Corporate screening mechanisms will help minimize if not stop trading of counterfeit drugs around the world. But free trade must continue to march forward. Protectionists simply do not appreciate the "net gains" in trade - winners are plentier than losers. Otherwise, people will not trade voluntarily with each other.

Posted by: Nonoy Oplas — 18 December 2007

Nonoy - There was a lengthy article just a day or two ago in IHT about a very widespread problem within and between free trade zones, in which counterfeit drug makers seem to easily evade detection amid massive confusion over jurisdiction and regulation of international commerce. Please clarify how the big pharmaceuticals could succeed in catching the counterfeiters or in screening the illicit drugs when governments have so far been unable or unwilling to do so. You're probably right that much tighter inventory control measures would help, but such measures would be expensive and probably would defeat the purpose of importing cheaper drugs.

I generally support the concept of free trade, but Mr. Brinkman is right that the American government has negotiated very poorly for American businesses in its so-called "free trade" deals. As far as I know, America's trade deficits have widened with every country involved in such agreements, although I haven't checked statistics since the dollar's sharpest and most recent declines. Even with the falling dollar, I don't believe these agreements will be in America's interests for a long, long time. Perhaps someday when developing nations have narrowed the gaps between their own living standards and America's, the economic benefits might be more reciprocal. I'm not holding my breath, and until that day comes, the principal beneficiaries of these agreements will be people at the top of corporate America, and of course, their trading partners.

(From Japan)
Posted by: Gary Henscheid — 19 December 2007 7:32 am

Hi Gary, the issue of counterfeit medicines is also a problem here in the Philippines, partly because of the government's "parallel importation" policy I think. Cheaper medicines from India and China, same brand from same manufacturers, are imported into the country. Turns out that a number of those "same drugs" were counterfeit, very cheap, yes, but ineffective if not dangerous to the patients. A friend I talked to who works for Pfizer says some of those drugs purportedly manufactured by Pfizer India, imported into the Philippines by the government's international trading corporation or some of its accredited importers, turn out not to come from Pfizer India, but by some of those pharma companies in India that produce fake drugs. And the government has no capacity to detect such fake products, or perhaps the government does not care, all it wants is to sell cheaper medicines perhaps at all cost.

That is why I suggested that the pharma companies based in the importing countries be involved just to check if indeed those cheap but counterfeit medicines indeed came from their own manufacturing plants abroad.

But what escapes from many debates on counterfeit and expensive drugs, are taxation. Medicines are not taxed in India and Pakistan, for instance, one reason why they can produce cheaper drugs. Here in the Philippines, there are at least 2 taxes slapped on medicines — import tax and value added tax (12%). Plus income and other taxes on companies selling drugs, wholesalers and retailers. So when the Philippine (or other) government complains that local drugs are expensive compared to those available abroad, it blames somebody else, not itself.

Abolition of import tax, and free trade, as in free — zero tariffs and non-tariff barriers –and have a full range of competition among pharma companies and retailers, should help reduce drug prices. Then no need for "parallel importation" that risks entry of counterfeit drugs.

Posted by: Nonoy Oplas, Philippines — 21 December 2007

Wednesday, December 19, 2007

Transport Econ 1: Public Transpo Regulation

In many countries around the world, public land transportation is either a government monopoly or privately-run but highly regulated. The logic of government monopolizing public land transportation (or air and sea transport or health care or education, etc.) is along socialist and central planning philosophy: prevent “chaos” by the free market and unregulated competition. Thus, government will plan which roads and places will have public buses and/or trains and which ones won’t have; which time of the day the buses/trains will ply, and which time they won’t be available; how much will be charged to passengers as fares and how much to be charged to taxpayers as subsidies to those buses; and so on.

In the Philippines, all those buses, jeepneys, vans and tricycles are not government-owned and controlled. They are privately-owned but government-regulated, so competition is often limited. Here’s how.

One, routes are regulated and certain sectoral monopolies (like tricycles or jeepneys) are created by giving certain routes exclusively for them. Passengers on the monopolized routes have no other option to take other public vehicles unless they take a taxi which is more expensive.

The effect of route regulation and monopolization is this: Some people who live about 20 or more kilometers from say, Makati, take 3 or 4 rides: (a) tricycle from their village or barangay to the main road, (b) jeepney or van or bus to the train station; (c) train (MRT or LRT); then (d) jeepney or van again to designated stops near their offices or schools. Tricycles are monopolies created by the municipal or city government; train is a “natural monopoly” and some routes are often monopolize by jeepneys, like the Ayala-Washington route.

The various transfers alone from tricycle to jeep or van to train to jeep again are already very inconvenient; total fares are relatively high too, and many of those tricycles and jeepneys that were assured route monopolies are ugly if not dilapidated and notorious smoke belchers. They also tend to squeeze passengers, like forcing a 16-seater jeepney to pack 18 passengers. These inconvenience force many people to buy and use their cars from their house to their office, or school for their children.

Two, getting a license or franchise to run and operate public vehicles is highly regulated, bureaucratic and costly. Some businessmen, possibly friends and buddies of those in franchising regulatory agency, get a franchise, others don’t. So some of those in the latter group operate illegally, the so-called “colorum” vehicles.

Three, fares are regulated, like minimum fares for tricycles, jeepneys, taxis, vans and buses. Fare regulation discourages some private bus and taxi operators to introduce newer and more convenient units because there is a cap or maximum fare that they can charge passengers. Some bus operators do introduce newer buses but they have to take in as many passengers as possible to maximize revenues, which results in over-crowding of these new bus units, which discourages some people to ride those new buses and force them again to use their cars or motorbikes.

If fares are deregulated, some bus lines can charge higher fares so that they can give better service to their passengers (like non-crowded and comfortable buses), then many of those car-riding people may be encouraged to leave their cars behind and take the buses. Those bus lines cannot “over-charge” their passengers because the latter have the option to take other bus lines that are cheaper, or ride their cars or motorcycles. Budget-conscious or poorer passengers will patronize cheaper bus lines which may have older and non-air-con units, and tend to pack their buses with squeezing passengers.

Fare regulation in taxis work against passengers. Petroleum prices have increased several times over the last few months yet the fares have remained unchanged, because the government’s franchising and regulatory board has not approved any fare hike yet. One can conclude that fare-setting is not a function of the price of petroleum products and other operating costs, but of approval by the government regulatory office. That is, fare-setting has become politicized, something that should not be done. So some taxi operators do not maintain their units well to save on operating costs, and their taxis are ugly and dilapidated. Also, some taxi drivers always ask for “additional charge” on top of the fare reflected in their taxi meter to reflect the higher cost of gasoline, which makes taxi fares less transparent and subject to arbitrary setting by some taxi drivers. If the passengers will not agree with this, the taxi drivers can opt not to take them in. And so some people are again forced to bring their cars to avoid “over-charging” taxi drivers.

It is evident that it is the government – through its various regulation and monopolization plicies – that force many people to buy and use their cars more frequently, which worsens traffic congestion, which increases gas emissions, and which worsens global warming situation. And government says it wants to “fight” global warming too, something that is improbable because all it does is resort to more regulation, if not more monopolization and more taxation.

Public transportation is essentially a “contract” between passengers and public utility operators and drivers. Those that offer bad service (including frequent incidence of passenger hold-up) or unreasonable fares will lose their passengers and they will go bankrupt naturally. Those that offer good and safe service even at higher fares will keep their passengers and their business will naturally expand.

Let there be less government monopolization, regulation and intervention, and more enterprise competition, in public land transportation.

Tax Cut 7: Reduce Business Taxes

Why RP’s business taxes should be reduced

The World Bank (WB) and the Price Waterhouse Coopers (PWC) recently published their joint report, “Paying Taxes 2008: The Global Picture”.

‘Taxes” are defined by the paper as “paid to government, compulsory, used by the authorities as part of public finances, and with no direct return of value to payer” Hence, various fees and charges levied by various government agencies like DTI business permit fee, municipal/city business permit fee, and so on, officially referred here as “non-tax revenues” are actually taxes. Total business taxes is composed of corporate income tax + labor taxes + other taxes.

For Philippine-based companies, the total tax rate they have to pay to various national and local government units, is 52.8 percent of commercial profits. This is the highest among ASEAN member-countries. And not only that the Philippines has the highest tax rates, it also has among the plentiest business taxes in Asia and other countries in the world. See table below.

Table 1. Paying Taxes

Total number of tax payments
Total time to comply (hours/year)
Total tax rate (% of comm’l profits)
Hong Kong
New Zealand
United Kingdom
United States

One may wonder if the Philippines a socialist economy since it has more business taxes than socialist governments of Vietnam and China. Or the welfare states of North America and Europe. Since the Philippines is not a socialist economy, those multiple taxes were possibly meant to “correct” the loopholes of previous tax measures. Fine, but this gives tax administrators and legislators some arbitrary power in deciding to whom those taxes will apply and to whom they will not apply.

If the Philippine government is serious in making the economy more competitive compared to its Asian neighbors and other countries around the world, one very important measure it should do is to drastically cut the number of tax payments it imposes on productive enterprises. Cut into half, even three-fourth, those 47 business taxes. Then fully implement those taxes that are retained.

Private enterprises are doing the social welfare function of expanding domestic production of various goods and services, which fights high inflation, and in creating jobs, which fights high unemployment and poverty. Imposing several dozens of taxes on them is one goof formula to discourage if not kill them, or drive them to cheat their tax payments to preserve their earnings and their existence.

* See also: Tax Cut 6: Retreat of High Income Tax Philosophy, September 19, 2007

Sunday, December 16, 2007

Spontaneous Market 6: Removing Pork Barrel

More than three years ago, we were discussing in MG yahoogroups the crafting of a statement about removing pork barrel. Here are our raw exchanges then. This is 8 pages long.

Removing Pork Barrel

September 2004

Guys, see the draft that I made below:

Why Legislators' Pork Barrel Should be Cut, Eliminated over the Long-Term

The job of governments is to improve their citizens' and taxpayers' well-being, not the politicians and bureaucrats' well-being. If governments can help the citizens with efficient delivery of social and economic services through efficient taxation, so be it. If governments can help the citizens with lower taxes because of inefficient and corruption-tainted services, so be it.

Philippine legislators and politicians, including presidents, past and present, are largely to blame for those perennial budget deficits and ballooning of the public debt. Even when taxpayers were unwilling to part with their hard-earned money because of perceived malfeasance in governance, politicians' spending spree continued. Even when tax collectors were diverting many collections into their pockets and padrinos, politicians' unsustainable subsidy policies continued. Even when interest rates were going up because of the expanding public debt, politicians' penchant for endless borrowing continued.

Thus, legislators should not call the proposed cuts in their pork barrel as "sacrifice". It simply is the right thing to do. Legislators are called as such because their main task is to legislate and craft laws, not to execute and implement local projects. Their task is to talk and debate how to cut expenditures when these are no longer supported by projected revenues for the year, not to further bloat expenditures with their pork barrel and justify irresponsible borrowing spree by the President and the DOF.

The real "sacrifice" that legislators can proudly boast to the citizens is when they will enact legislations giving relief to taxpayers, like cutting income tax so salaried and fixed income earners will have more take-home pay to bring to their families. The real "sacrifice" that legislators can give to taxpayers is when they slash agencies and programs that abet inefficiency and corruption in government, not expand budget for corruption-tainted
agencies and programs.

Those moves are considered "sacrifices" because many of their peers in the Legislative branch will frown upon them when they would seriously push for those reforms. Sacrifices because the President and his/her Cabinet officials will be deprived of further extending political "pogi points" at the expense of taxpayers. Sacrifices because some citizens who prefer to beg for political favors and rely on dole-outs by politicians and state bureaucrats than working hard will begin to oppose them.

In addition, if it is true that legislators can identify the needs of their constituencies better than those agencies of the Executive branch, then we better shrink those agencies by demoting them from line departments to bureau-level offices, just implementing the wishes of the legislators and the President. Us taxpayers can save money with the abolition of many
Secretaries, Undersecretaries, Assistant Secretaries, planning and related departments of those agencies.

- Nonoy


Legislators are supposed to formulate laws; laws that are designed to improve the quality of life -- physical, mental, moral, cultural -- of our people.

For so long, this has not been the case. A vast majority of our national legislators (and in many respects even local ones) aspire for office because of the political and financial benefits that are available as booty when one is a member of the house of congress or the senate.

The single most indecent reality of philippine politics is the fact that candidates spend millions of pesos in campaigning for a seat that pays officially less than a million pesos a year in salaries.

That by itself is the single betraying fact of the hunting-gathering instincts of legislators. And the embodiment of that booty mentality is the so-called "pork barrel".

To heap injury upon insult upon injury, the proposal to cut and/or abolish the countrywide development fund (cdf) is being labelled as a "sacrifice".

We believe that it is about time our country's political leaders show some semblance of decency by scrapping the "pork barrel" altogether, and across the board. "pork barrel", intelligence funds, and discretionary funds are all the same -- they have no accountability. And when a government has no
accountability, it has no business collecting taxes, much more increasing them.

Scrap the "pork barrel"!
No to increase in tax rates!
Yes to stopping corruption in the revenue agencies (bir and boc)!
Yes to minimal government!

- Citizen Kori

Dear Sir Kori, Noy,

Although I don't really like what Sen. Pimentel and Sen. Joker Arroyo stand for these days, I think their points are valid when they dissented the scrapping of the pork because then the President will have the sole discretion and therefore the sole privelege to corrupt and neknok certain percentages of the funds. It will be like transferring the loot from Congress to OP. In a sense, you're making the OP responsible for a bigger portion of the expenditure pie.

There is reason to doubt the accountability and credibility of Pres. Arroyo to manage the funds. It is going to be a frenzy of finger-pointing and mudslinging unless we qualify our position. Make the Executive Department accountable by alligning the scrapped pork solely for interest payments and retirement of the principal.

Dapat hindi mapunta sa infra or social ekek kasi siguradong neneknokin. I mean we know exactly how much our debts are (unless may porsyentohan din sa bayaran ng utang?). We can easily predict when exactly we'll be able to pay off our debts because these are exact amounts.

When were we're able to pay off our debts and the economy stabilizes, let's begin the dismantling of unnecessary government agencies. Now the supposed-to-be pork barrel should be used to fund early retirement claims. Dapat hindi na utangin ang early retirement kasi babalik na naman tayo sa pagbabayad ng utang.

If the President wants to increase her social and development expenditure, kunin nya sa PAGCOR or similar entities.

Eventually, the size of the expenditure pie should shrink. No pork barrel, no utang, ergo, no need for too much tax.

I think, and I've been meaning to post this, the minimal government position should be tempered by the sensitivity for macro-economic stability. The UP Professors are speaking with wisdom when they said that phasing is very important if we're serious about averting a fiscal crisis and moving the economy forward. For instance, we can't possibly retire government employees now because early retirement claims will further widen the deficit; we can't fire them either and scare away investments with social unrest.

Let's pepper the minimal government position with the appropriate number crunching.

- Ellen

Hi Noy,

I agree with the principle you laid down about the pork barrel-- that the legislator's primary purpose is to establish the laws/policies for their constituents. It would be nice if someone can trace the history of the largesse. Has it always been around, or did it evolve due to some failure by the executive branch at one time or another.

Strictly speaking, legislators only "earn" from the pork barrel if contractors who bag the project will give them a %. If procurement in this regard is made more transparent and less discretionary, maybe it won't be a source of leakage.

Remember also that congressmen have to hire political officers and not just technical people. Why? To handle all those requests for assistance in funerals, hospitalizations and other "calamities" from their constituents. Joker Arroyo can afford not to accommodate those requests when he was still congressman of Makati because the local government is affluent. But what about the poorer municipalities in regions, where the congressman is the only source of grasya. It is patronage pure and simple, but it is the reality there. The congressman then becomes the last resort for situations where SSS, Philhealth, DSWD and even the church and civil society fail. Maybe that is part of the reason why they are hesitant to part with pork. Of course, that is a big MAYBE. But think, only the congressman has the incentive to really help because he can expect loyalty in the next election.

- Chichi B.

Hi chi,

Chicken and egg story yang "pork barrel to finance personal requests by constituents to buy their loyalty to get reelected to get more pork barrel to finance requests by constituents..."

A break from this cycle is impossible in the short-term, even in the medium-term.
long-term engagement talaga. kaya nga sa MG philosophy, highlighted ang

greater individual freedom,
greater individual responsibility,
lesser individual dependence from the state and the politicians,
lesser power by the state and politicians to raid our pockets.

As i discussed in my powerpoint presentation, The range is between the "collective/state" on the left, and the "individual" on the right. The extreme left is socialism (practically everything owned by the collective through the state). The extreme right is ultra-libertarianism, zero government (practically the state is unnecessary). The MG advocacies are in-between the current govt's programs and interventions, and the zero govt. philosophy.

the pork barrel politics is pulling the public, the citizens, to embrace the statist, forced collectivism, philosophy. citizens to depend on the politicians in exchange for the politicians' right to raid the citizens' pockets and political beliefs.

so i think, the call remains valid: cut pork barrel in the short-term, abolish it in the long-term.

- Nonoy

Hi Nonoy,
For the administration/executive, legislative, and judicial branches of government, I suggest that the group create a list of two types of areas of concern: (A) areas that the particular branch should be primarily responsible for; and (B) areas that it should stay out of. For example, the judiciary should render constitutional and legal judgments but should do its best to stay out of technical/engineering/accounting/financial/commercial issues that are best handled by the executive branch and also out of certain primarily political topics that have no juridical or legislative significance.

I know that this will be quite difficult and take a long-time to finish but if someone can start working on a basic framework or table for the various topics listed in the MinGovt position paper, the rest of us can just download it, work on it at his/her convenience, and then upload it to a volunteer compiler. This work in progress can then be posted in our website for others to look over and give comments on. Once the framework is done, we can designate sub-areas that we all fully agree on (e.g., that legislators should stick to law-making 90% of the time) versus more controversial sub-areas (e.g., that legislators should minimize or avoid showboat-style exposes “in aid of legislation” which don’t really accomplish much except put their names in the newspapers).

I guess such a checklist should look like the following, more or less:


Executive:     Administer and execute policies                     Creating unbudgeted projects or institutions
Negotiate international treaties                       Discontinuing successful projects of   predecessor/s
Collect and disburse funds                             Executing projects willy-nilly and without transparency
Legislative:      Debate proposed policies                              Prioritizing and assigning
                                                                                                expenditures in/of LGUs
Create and amend laws                                  Initiating investigations without resolving them

Judiciary        Determine constitutionality of laws                 Issuance of unnecessary TROs
                        Render legal judgments                                  Intrusion into technical or political

The purpose of this exercise is to develop an easy-to-read checklist for each of the three major branches of government so everyone can see whether it is fulfilling its responsibilities or straying away from its main mission (as defined by the constitution and by agreement of the majority). Later on, we can add more specific branches of government such as the police forces, the armed forces, the local government units, the presidency, the different government bureaus, the constitutional bodies, etc. With a fully evolved checklist (it could take weeks to over a year to finish), it will become easier to delineate whether or not a particular agency or branch of government is doing its job or usurping another agency’s function. With a job-function checklist in hand, we can point to individual legislators or courts or agencies that are wasting people’s time and money by not doing their job and also doing some other agency’s job (and messing it up), or preventing another branch of government from doing its job.

The country’s political scientists and lawyers would be the major participants and contributors (if they are interested) but I also see a place for specialists in operations research, knowledge engineering, and other professionals to provide their expertise.

Can some others please help flesh out the list and trim/edit it nicely? I’m sure there are a lot more that can be added to the initial framework.

- Selwyn A.

Pareng Noy, Just want to share what i know on this issue. on your question on the history of the pork barrel, i believe it has been in existence for quite a while now, although the amount of the allotment for each legislators have ballooned by so many folds (largely by their own effort and to their sole benefits) and the ways and means by which it can be disbursed have been short-cutted.

pork barrel came from the counrty wide development funds. during pre martial law, each congressman has different percentages of allotment based on the economic status of their district and province. these funds were meant for infrastructure as well as other social projects given to legislators on the assumption that they have a better understanding of their constituents' and districts' needs.

they are, however, obliged to file a bill for a particular project with the corresponding amount to fund the bill. this will be subjected to the natural process in congress wherein fellow legislators will debate on the merit of the bill and the funds requested for it's purposes until seconded and referred to the proper committee. kung local di na to aakyat sa senate.

at present, this is another reason why alot laws passed are useless or do not have enabling laws due to lack the funds for their enactment. Ngayon kasi wala ng bills-bills pa. identify mo na lang ng ghost project bigyan ng pondo 50% and kick back.

- Raymond A.

Noy, Mayroon lang akong kaunting additions on abolishing pork barrel. According to some US papers, pork barrel is coming from the national budget and therefore is to fund national priorities. since we already have the IRA for the local governments, there is no longer any need for the pork barrel. on this note, cutting the IRA must not be across the board and should be prorated by type of municipality.

since most of our apprehension on pork barrel is that it is a major source of corruption, the best way to disprove it, is to have each representative list the details of his/her pork barrel representative and how the money is spent. similarly, other funds that are "discretionary" in nature can be allowed as long as there is regular reporting of how it was used.

abolishing the pork and their similar natured funds will break a lot of the chains that have enslaved philippine society for decades. studied thoroughly and operated carefully, the cutting of these funds will release ultimately efficiency.

- Alvin

Dear Nonoy,

You may want to rephrase the last sentence of the first paragraph under the "Role of Government" section. The point should be made that the government should help its citizens with lower taxes and efficient and corruption-free services. Helping its citizens with inefficient and corruption-tainted services should not be accepted nor tolerated.

I suggest to rephrase the first paragraph under the "Abolishing the Pork Barrel" section like the following:

Thus, Legislators should focus their time and energy on finding ways to prevent the slippage of the economy to a possible debt-default crisis. This may require cutting the Executive Branch's excess fat and expeditures, raising power rates to control the financial bleeding of NAPOCOR, scrapping the President's and legislators' pork barrel, and reducing the LGU's Internal Revenue Allotment(IRA) for at least two years.

- Prof. Patalinghug

Kori, Ellen,

How about these compromised formula:

(1) Phase out pork barrel in 3 years time, zero on the 4th year, instead of outright abolition now.
Say 75% in 2005, 50% in 2006, 25% in 2007, zero in 2008 onwards. So, legislators running for the 2007 elections would know that they'll have zero pork barrel starting 2008 should they win.

(2)Phase out also the President's pork barrel at the same rate as phasing out of legislators' pork barrel; ie, 75%-50%-25%-zero in 4 years time. The president to take her social fund and "neknok" funds from Pagcor.

(3) Use the scrapped pork funds of legislators and the President to retire some local debts.
For every P10 billion of domestic debt retired at 8.5% interest rates (upper range of the 91-day T-bills), that's P850 million savings from interest payment per year, a big amount already.

(4) On shrinking government, a 1 paragraph statement in this pork-barrel position paper would go something like this:

"We need to make the government bureaucracy do more for less costs. Currently, about 70% of total budget net of IRA and debt service payment goes to salaries/personnel services alone. Early retirement for redundant personnel should be started soon, starting from agencies with functions that can better be left to the markets. It will be painful for some affected personnel, but maintaining said bureaucracy is even more painful for the taxpayers because of wastes and perceived uselessness of those agencies and/or personnel."

(5) On privatization of govt. corporations, the process takes about 4-6 years/corporation to be completed.
the process should be started this year or next year. So that by 2011, we'll be rid of many of those losing corporations, in particular: Napocor, NFA, PNOC, LRTA, NEA, NHMFC.

- Nonoy

(1) Phase out pork barrel in 3 years time, zero on the 4th year, instead of outright abolition now.

Say 75% in 2005, 50% in 2006, 25% in 2007, zero in 2008 onwards.

So, legislators running for the 2007 elections would know that they'll have zero pork barrel starting 2008 should they win.

Are government programs ever phased out? It seems to me that if you leave anything left then the politicians will just increase funding when the pressure is off.

Two examples from my own experience in the US -- taxes and farm subsidies.

1) In Massachusetts, the raised the state income tax from 5% to 5.95% during a "fiscal crisis". The outrage over the increase was extensive so they promised to make it "temporary": when the crisis passed and budget deficits disappeared, the tax would be lowered. Lo and behold, the crisis passed, surpluses returned, and the money was spent. The tax was not lowered. Eventually, through an initiative petition for a ballot question the tax was returned to the original level, but it took years and the politicians put up a fight all along the way.

2) When the Republicans took over Congress following the 1994 elections, they moved to severely cut if not eliminate farm subsidies, called the Freedom to Farm Act. Unfortunately they did not, in fact, end them. When the farm market soured, Bush promised in the farm state of Iowa, while running for president in 2000, that he would boost funding, and that is what he did. It would have been better to have killed the entire program and dismantle the bureaucracy. Instead, a program was left for Bush to increase.

When given a chance, end a program entirely. Shut down its offices and sell its furniture. Kill it, completely, without mercy, at its roots. It is much harder then for politicians to come back, when no one is looking, and refund the program. They need to start all over again, rebuilding the program, passing enabling legislation. They cannot just quietly add more money to an existing program, a la farm subsidies.

We better end this "pork barrel" now. If any of it survives, it will come back stronger and healthier and it will be much, much harder to kill off.

- Bruce H.

See also:
Spontaneous Market 1: Profit, Trade and Personal Responsibility, May 22, 2006
Spontaneous Market 2: Market Failure vs. Government Failure, June 07, 2006
Spontaneous Market 3: No Nurses' Brain Drain, June 21, 2006
Spontaneous Market 4: Entrepreneurship, Community and Property Rights, October 23, 2007
Spontaneous Market 5: Limits to Free Market? November 16, 2007

Monday, November 19, 2007

Global Capital 1: Why Market Turbulence are Necessary

Market turbulence shakes and shocks many people. It is those painful financial adjustments, sometimes approaching crisis situation, where stock markets swing wildly if not tumble, currencies significantly depreciate or appreciate, values of assets and properties often head downward while prices of major commodities head upwards, and big debt write-offs are reported along with announcements of resignation or sacking of CEOs of some very big banks and companies. Hence, fear of such turbulence is understandable because at the end of the day, incomes, savings and jobs are in danger.

But what people often refer to as "turbulence" are only those periods of economic downturn such as those described above. When new innovations and products come on stream, or new discoveries (petroleum and mineral deposits, attractive real estate development, etc.) are announced, they are also part of turbulence where old technologies and processes are discarded in favor of new ones. So that many people make money, and many new jobs are created. Thus, people are scared only of negative turbulence but applaud positive turbulence.

Increasing globalization should result in more turbulence across all countries and economies around the world. This is because in theory, mobility and migration of capital, technology, labor and commodities should result in equalization of their prices (other factors held in constant) across the world. And for many decades, the world has known only very expensive countries and dirt-cheap countries, so that "price equalization" over the long-term is a far-out possibility.

But markets can also follow natural laws. The law of gravity says that objects will fall down the earth or low-lying areas when the force that hold them up high is spent up. Capital can follow countries or territories where skilled (or trainable) labor, land and office rental, and other factors of production are lower, so that profits can be maximized. Thus, poorer countries that are capital-deficient suddenly becomes capital-surplus, and this creates positive turbulence there. Whereas countries that used to be capital-surplus suddenly find a growing portion of their capital migrating elsewhere, and this creates negative turbulence for them. In short, market turbulence is as natural as sunrise and sunset, as natural as the Newtonian laws of gravity, inertia and action-reaction. Market turbulence therefore, is necessary, so that countries will be forced to adjust, to liberalize their trade and investment rules, to encourage and respect innovation, and to abandon complacency, if not laziness.

The current market turbulence in the US subprime and house mortgage markets, the bigger than expected losses of big US banks, the continued depreciation of the US dollar relative to all major currencies and many currencies of developing economies, and the slowly-but-surely inching of world oil prices towards the symbolic 3-digits $100 a barrel or more, is causing headaches to many people, both economic policy makers and ordinary citizens alike. In the case of high world oil prices, it is unlike in the 70s, the 80s and the early 90s where the spike was driven by supply disruptions, both actual and anticipated. These days, the spike is due mainly to sustained high world demand as millions of people from emerging markets become richer and buy more cars or travel more often via public transportation (land, sea and air). Which is a case of positive turbulence creating some negative turbulence elsewhere.

Should governments step in to introduce new regulations, or upgrade existing regulations to stricter ones? There is no logic in doing this except to show that the state is "doing something". As argued earlier, turbulence like these allow markets and people to adjust to changing situations. Some people bought expensive houses though their current and future incomes cannot support the high amortization needed, so loan default should happen along the way. You multiply this a thousand times, or a million times, and you have an economy-wide, or world-wide financial turbulence. If we allow individual responsibility to take its course, to allow individuals learn lessons from their earlier decisions and actions made, then more government regulations will be unnecessary, if not counter-productive over the long-run. Because more state regulations often encourage complacency among individuals, not to mention financial costs in terms of taxes and fees, to sustain a new army of bureaucracies and regulators being created.

Friday, November 16, 2007

Excellence in math and science of Confucian Asian students

There's a report today saying that students (about 13 years old) from Singapore, Taiwan, S. Korea, HK and Japan -- the "Confucian Asians" (China should be part of this group) -- are the best in math and science around the world. Below:

East Asian students shine in study of math and science scores
By Sam Dillon
Published: November 15, 2007

”Students in Singapore, Taiwan, South Korea, Hong Kong and Japan significantly outperform American students on math and science tests, according to a new study from a U.S. nonprofit organization. But U.S. students, even in low-performing states like Alabama, do better on math and science tests than students in most other foreign countries, the study found. "In this case, the bad news trumps the good, because our Asian economic competitors are winning the race to prepare students in math and science," said the study's author, Gary Phillips, chief scientist at the American Institutes for Research, a nonprofit independent scientific research firm….”

I wonder why Chinese students are not in the top list. I am among those who believe that "Confucian ethics" is one of the important factors why many East Asian countries experience veryfast economic growth. The ethics are simple, like "hard work and frugality is a virtue". You compare that with the growing "entitlement mentality" in many developed countries today.

The neighboring countries of these Confucian Asians, mainly the Malay Asians -- Thailand, Malaysia, Philippines, Vietnam, Indonesia, etc. -- are somehow "infected" with these ethics and discipline by virtue of closer proximity. It's just that many governments of these Malay Asians have tried and got burned, with socialist or dictatorial governments, which explains for their slower economic growth than their Confucian neighbors.

Spontaneous Market 5: Limits to Free Market?

A friend, Geronimo "Indian" Sy, wrote in his column in Manila Times last week, a paper entitled “Face control”. He noted that
In the land of equality, liberty and fraternity, I find the strangest thing—face control. In certain places in Paris, notably in bars and party places, there are gatekeepers—bouncers in our parlance—who allow people in or exclude them not based on anything except how they look…. The face control is not based on science. Neither is it based on logic. My friends tell me the ones who are turned away are usually Middle Eastern-looking…. To top it all, the queues are long, snake­long. The crowds continue to jostle in and be counted. In a democracy, can one really do that?
I wrote him and argued that in a free society, or where there is a "rule of law" (unfree society only have "rule of dictators and bureaucrats"), people are free to set their own limited rules, so long as such rules do not result in harming other people's lives and property.

For instance, if I put up a pizza house, the food are soooo great at a good price, then I attract hundreds of customers everyday, I can make my own rules whom I can allow entry or whom I can refuse. This attitude might turn off other people, so they also put up a rival pizza house nearby, they also attract plenty of customers, and they make their own rules that are different from mine. Fine, that is free market and competition. Nothing wrong, right?

Problem would arise if my pizza house is a government corporation, funded by tax money, and I am just an appointed bureaucrat, a crony in short, and I make rules that exclude other taxpayers while allow entry to other taxpayers. This is wrong. But if my pizza house owes nothing from tax money, then I have the freedom to set my own rules.

Indian replied that while I got some good points, he believes that there is “inherent limit to free markets”.

Yes, there is a limit to free markets -- competition. Competition makes sure that players behave well in dealing with their customers, with the public in general. Because if they don't take care of their customers, others will, and that can be the end of their business, the end of their job creation capacity.That is why policies that limit competition, like government-created monopolies and oligopolies (through franchise, whether by congress or by certain national government agencies or local government units), in the name of "protecting the public", actually works against the public.

Another friend, Rica, wrote that “there is an inherent limit to private enterprise being free, that point is where you infringe upon human dignity or human rights. This face control is similar to someone’s policy of physically banning a caddy from the private compound which is indirectly managed by him, and he does not even own the property. Although they are "free" to do this because it is private property, there is a point of human dignity.”

Yes, there will be some abuses or disrespect of human dignity elsewhere, somewhere, but such incidents don't invalidate the freedom that humanity enjoy under a free market system.

A father spanks his son for saying words the father does not like, the mother fights her husband. One can call this abuse of human dignity of the son by the father, or a mother consenting with the bad attitude of her son who abuse the dignity of his father.

Micro cases, household level cases, firm or company level cases, school or church level cases, you will find millions of different cases like these. But they do not invalidate the freedom that individuals enjoy under a free market system. That is why there are rules and laws that apply to individuals, even rules that apply to members of a household or family (like no wife or husband battering), to preserve order in society.

In the case of that guy who bans a caddy, if that golf course is owned by the state, and that guy is a cabinet minister or big-gun Party official of a dictatorial government, not only that he can ban the presence of that ordinary caddy, he can even kick and punch the caddy for no reason at all, and that caddy nor civil rights groups will have no power to punish any bureaucrat for his abusive behavior. And the caddy may not be able to find other golf courses to work for because all golf courses are owned by the state and all are managed by cronies and state bureaucrats.

My two related papers in recent weeks:

(1) Beelzebub and Government DNA

October 30, 2007

Last October 24, 2007, the International Policy Network ( announced the winners of the 6th Annual Bastiat Prize for Journalism. There were 5 finalists -- Mr. Clive Crook of Atlantic Monthlymagazine, Mr. Jonah Goldberg of National Review, Mr. A. Barton Hinkle ofRichmond Times Dispatch, Mr. Dominic Lawson of The Independent, Mr. Patrick Mcllheran of Milwaukee Journal Sentinel, and Mr. Amit Varma of Mintnewspaper in India.

First prize winner got $10,000, wow! Second prize got $4,000 and third prize winner got $1,000. The winner, Mr. Varma, has a witty writing style. The 3 papers he submitted were, "Where's the Freedom Party?", "A beast called government", and "The devil's compassion". The latter is about a speech given by the devil Beelzebub at the convention of demonic beings.

Remember The Queen's song, "Bohemian rhapsody"? There's a part there where Freddie Mercury sang,

"Mama mia, mama mia
(mama mia, let me go)
Beelzebub has the devil put aside for me,
for me, for me..."

In "A beast called government", Mr. Varma argued that wastes in government is not an aberration, but it is written in its DNA, because government bureaucrats (a) want to multiply subordinates, not rivals, and (b) officials make work for each other.

Second prize winner, Mr. Crook, has a more formal writing style. His 3 articles were: "The fruitful lie"(about lies that trade protectionism benefits the poor), "MiltonFriedman's unfinished work" and the "The Ten Cent solution" (aboutprivate schools that educate the poor).

For 6 straight years, IPN has attracted more journalists and columnists from around the world who write about the principles of a free society -- including free market, rule of law and property rights -- to join the competition.

(2) Advancing Property Rights and Liberty

November 07, 2007

A friend from Singapore, Pin-quan Ng, wrote an essay on market solutions to developing world health care access issues. His paper has been published in the 'Young Voices in Research forHealth 2007' compilation for the 11th Global Forum for Health Research in Beijing.
Compilation pdf can be found here:

Yes, we need to assert more market solutions, not more government solutions, to health care -- and pension, housing, education, infrastructure, food production, etc. -- issues. Markets are driven by real service; you don't serve well your clients and consumers, others will, and you lose your business and your shirt. No forced revenues (aka taxes) that will subsidize or bail you out.

Another friend from Sri Lanka, Atty. Mala Gunasekera, got a new website --
It's the site of Women's Chamber of Industry and Commerce, empowering women in business (not in bureaucracies) . The site is cool and easy to navigate.

Mala is also busy doing research and legal work on forgery of title deeds in Sri Lanka, other Asian countries. In short, she is busy making private property rights work in her country.

Meanwhile, Asia is really a place of irony. Our continent has the fastest growing economies in the world. Three of the 4 largest economies in the world (size of GDP expressed in PPP values) are Asians -- China, Japan, India. The tallest buildings in the world, the longest buildings, etc. are in Asia. Yet in our midst are also some of the notorious dictators in the world. People like Gen. Tan Swe of Myanmar, Gen. Musharaff of Pakistan, and Kim Jong il of North Korea. Less notorious but also prince and princess of treachery and public deception are also with us, including the Philippine President.

Advocating collective freedom is already hard. Advocating individual freedom and liberty is much harder. But we're in the midst of this fight already, we need to persist.

* See also Spontaneous Market 4: Entrepreneurship, Community and Property Rights, October 23, 2007