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A Tax
on the Economy
By Michael Alan Hamlin
May 31, 1999
"Take US$100 of assets,"
best-selling author Philippe F. Delhaise told a group of bankers
and insurance executives last week in Manila by way of explaining
the inefficiency and low productivity in the Philippine banking
sector. "How much of that do you give to expenditure?"
he asked. "In Singapore or Hong Kong, about US$1.15 a year.
"In Korea," he continued,
"it is US$2.75. That’s US$1.60 per US$100 in assets of
inefficiency. But in the Philippines, it is US$3.75. This is huge,"
Mr. Delhaise exclaimed. "But banks can afford it because of
their margins."
Despite that indictment, Mr. Delhaise
was quick to defend the Philippines’ tiny but inefficient banks,
noting that Filipino bankers are highly regarded in the region for
their expertise — "the best," he says — which
is "why they are found as expatriates everywhere." But
if they are so good, why are they getting away with what Mr. Delhaise
calls "a tax on the economy? The economy is paying for bank
inefficiency," he warns.
To illustrate how this virtual inefficiency
tax can pull down an economy, Mr. Delhaise cites the example of
Taiwan, where banks are much more efficient — and interest
rates much lower — and the economy significantly more vibrant.
"Efficiency (in the banking sector) translates into a stronger
economy," he argues.
How is this so? To explain, let’s
look at the inverse. First, the cost of credit in the Philippines
is high, and this negatively impacts the competitiveness of Philippine
enterprises competing with other regional companies in countries
where interest rates are more competitive. Coupled with the high
cost of power, telecommunications and transport, and corrupt bureaucracy
and poor infrastructure, Philippine exporters and manufacturers
are at a significant disadvantage.
That disadvantage slows growth in
exports and job creation. The result: slow economic growth. While
the banks can’t do anything about such things as power and
telecommunications, a more competitive banking sector would enhance
the competitiveness of Philippine enterprise by lowering the cost
of capital. Given the other hurdles to competitiveness Philippine
enterprise faces, the lower cost of capital is a critical factor
affecting the pace of the Philippines’ recovery. Because enterprise
generates value, and jobs.
Mr. Delhaise went to considerable
length to suggest that he was not just conveniently dumping on Philippine
bankers. Compared to the rest of the region, he said, the Philippines’
banking sector is in far better shape. And he’s prepared to
act on that conviction: "The Philippines is the only country
where my company has decided to open a domestic rating agency,"
he said.
The Philippine branch of Thompson
Bankwatch — Asia, which Mr. Delhaise heads as president, will
open in June. He is also the author of Asia in Crisis: The Implosion
of the Banking and Finance Systems.
Mr. Delhaise also said that the high
spreads Philippine banks enjoy do have some basis in the peculiar
circumstances associated with banking in this country. First, "branches
are spread out all over a large country," he explained. That
increases costs. Second, "the size of many transactions is
very small. The cost to a bank to process a US$1,000 transaction
is the same as the cost of a US$10,000 transaction." Obviously,
banks will do better processing fewer US$10,000 transactions than
many US$1,000 transactions.
Neither of those reasons, however,
is good enough reason to sustain the large inefficiencies prevalent
in the Philippine banking sector. Philippine banks "still have
to address this problem (of inefficiency and low productivity),"
Mr. Delhaise said, for the sake of the economy — and the country.
By the same token, it is incumbent on the government to foster competition
so that it is clearly in the banks’ best interests to improve
efficiency and productivity.
If competition is fostered, well-managed
banks — along with the enterprise sector — will find that
the benefits of a vibrant but competitive sector outweigh those
of a limping economy stunted by cartel-like banking practices. Competition
may cause bankers to lose some sleep, but in the end, it’s
the best thing that can happen to them, too.
Indeed, Mr. Delhaise warns that while
the danger is greater elsewhere in Asia, the Philippines is also
suffering from a serious bout of complacency. Putting off such things
as improvements in inefficiency and productivity to bring banks
and enterprise alike up to international standards in favor of waiting
for the recovery to happen will ultimately result in another crisis.
And the next one is not 10 years away. More like three to four years.
But again, Mr. Delhaise went to considerable
length to underscore his conviction that the Philippines itself,
overall, is in much better shape than the rest of the region. For
my part, I continue to regard that blessing as just as much a curse,
because it undermines the sense of urgency with which the Philippines
must make its key sectors globally competitive. I’d much rather
have us thinking the end is near, and that we better do something
meaningful about it fast, than basking in our relative "prosperity"
while the world passes us by.
If there is anything that I have
learned from 25 years’ watching Asian companies — from
the North to the South — and founding and running a number
of them myself — mostly entrepreneurial ventures that were
sometimes successful and sometimes not — it is that there really
is no rest for the weary. Return is proportional risk.
The thing is, we didn’t realize
that here. What I mean by that is that a safe bet — cartelized
banking, for instance — wasn’t so safe after all. For
the banks, enterprise, or the economy at large. We masters of the
universe allowed our potential to flutter away. The irony of that,
of course, is that we haven’t — most of us anyway —
changed.
Too bad for us.
Copyright © 1999 The Events
& Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.
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