Cry Babies
By Michael Alan Hamlin
April 19, 1999

The continuing debate over tariff reform and liberalization is testimony to the influence beneficiaries of protectionism hold over government officials, politicians, and rainmakers alike. Last week, the debate between taipan-industrialists and proponents of free market reform reached new heights of absurdity, with so-called nationalists alleging that tariff reform was scaring off multinational investors.

What an irony. Protectionists lamenting the departure of multinationals.
In effect, the protectionists are now arguing that high tariffs are important in order to sustain the viability of low-value-added manufacturing jobs in the Philippines. A by-product, of course, is that uncompetitive local industrialists are also able to sustain themselves despite their inability to produce quality products at reasonable prices.

This selective fear mongering also conveniently ignores the uncomfortable reality that delaying tariff reform is handicapping local businesses and entrepreneurs who are struggling to create viable enterprises despite tough conditions. And who are doing these things rather than wailing to government and publishing advertisements in the newspapers.

Take the tariff on sugar imports for example. This is a truly hideous example of overt duplicity in the use of political correctness for selfish ends. The argument is that farmers must be protected. The reality is that the millers are protected. The farmers aren’t getting rich, they are getting by. That’s not to say that they don’t contribute to the inefficiency of sugar production. They do. But will they — and the country — be better off sustaining inefficiency or addressing the inefficiency?

And just how should that inefficiency be addressed? In case anyone has noticed, this is a fairly important question, given the government’s intent to raise agricultural incomes. It’s important not because of the ponderous reality that most people derive their income from agriculture-related work, but because of the fragile reality that Philippine farmers work small plots of land. Unless they begin to grow designer vegetables that fetch a premium they are going to remain solidly inefficient.

Government believes that it can somehow address this huge problem by convincing farmers to form cooperatives to attain economies of scale. Okay, what’s in it for the farmer?

Absolutely nothing. Unless, of course, there’s no alternative. Now, what will bring about conditions that will convince farmers — and the millers — that this is a wise thing to do? The threat of tariff reform? Or tariff reform? If government is serious about accelerating reform and enhancing efficiency, productivity, and profitability in the agricultural sector, tariff reform is the way to go.

Of course, the Philippines is hardly alone in wanting to protect its agricultural sector — and other industrial sectors — for the sake of political expediency. Ironically, the U.S. is one of the absolute worst offenders. Japan and European governments likewise. This is because like the Philippines, most people in these countries live in rural areas whose prosperity is closely tied to agricultural output. Except maybe in Japan. When too many farmers moved into the city, the Liberal Democratic Party conveniently redrew precinct borders, giving rural voters more bang for their vote than urban voters.

So the Philippines is in good company. Umm. Well, at least it’s not alone.

There’s a difference though. The difference is that these other countries can sustain this distortion of the market much easier than the Philippines can. The Philippines can’t afford subsidies, and the high tariff on sugar acts to subsidize inefficiency. Worse, it sustains inefficiency. To understand why, let’s revisit our argument about tradeoffs. In this case, the tradeoff is between protecting the domestic sugar industry from competition and nurturing competitiveness.

On the foreign investment side, consumer products companies are pulling out because of the ridiculously high cost of sugar. Added to the high cost of power and real estate, the difficulty navigating onerous labor laws, and the frustration of dealing with the bureaucracy, for instance, the exorbitant cost of inputs throws profitability completely out of whack. But isn’t liberalization responsible for the pullout, since these companies can now import finished product, instead of just sugar, from Thailand, Indonesia, and China?

Yes, and no. You see, the tradeoff is not the protection of farmers over a relatively few workers in low-value-added jobs. It’s between inefficiency and competitiveness. Let’s illustrate the point by taking a look at the oil industry. For years, local refiners were protected, and yet handicapped, for political expediency. As a result, the industry’s growth was stunted.

With liberalization, UniOil, a Philippine family corporation, began importing oil and gas from Singapore. Although Singapore is a dwarf in terms of population compared to the Philippines, if all three of the major oil companies in the Philippines were combined they would add up to less than a single Singapore refinery. And, the output of the local refineries is of lower quality but costs more.

Now, there are two important points here. The first is that competition results in better output and lower prices for all consumers, who can then spend the money that would have gone to gas and oil on something else. But the really interesting point is that here is a beautiful example of a Philippine company that relied on its resourcefulness to capitalize on the opportunity — rather than the threat — of liberalization.

What does this say about all the cry babies — sorry, I mean protectionists — who insist that "the writing is on the wall?" It says this: Yes, indeed it is. But if you do disappear, there will be someone to take your place. It might be a multinational, yes. But chances are, it will be an excellent Philippine firm run by Philippine managers who were concentrating on business while you were concentrating on bellyaching.
Sounds like a good tradeoff to me.

Copyright © 1999 The Events & Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.

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