Wanted: Systems View on the Traffic Issue

The traffic woes in Metro Manila could make a killer out of Gandhi. It is frustrating as watching a cross-eyed trying to thread a needle. There are many solutions that have been brought forward; some are witty and many others border on the dumb and dumber. 

As an intermittent economist who also dabbles as an armchair urban planner (oh, a potent combination!), I agree with certain proposals that focus on enforcement. People are known to respond to prices. When there is a price to pay, behavior can be changed. 

Others dwell on the obvious physical limitations of the roads. They say we have too many cars and too little road space. So, when one puts two and two together and get three, that person is likely to suggest that the solution is to have less cars by forcing them out of the system. Some others get five, so they look to requiring a minimum number of heads in a car to be allowed to partake of the limited space. 

And then there are the limited few who  get it  right between the eyes. The ones who would say, let us be holistic. If we fix the trains, people will choose it over their cars when the roads are full. People will even choose the buses if the buses are on time, clean, drivers are behaved, and have express services, the last one being a point to point service with no stops in between, and with some extra mile services such as newspapers and maybe even coffee. But then we will have to have carparks in train and bus terminals so people can park and ride. Others can even kiss and ride when the wife can drop off husbands on their way to the grocery, or that could also be husbands dropping off working wives before their muscled arms do the laundry. 

The really enlightened ones would propound creative solutions and say,  we should create systems for temporary house swapping, so families who dare participate in this system could swap houses (or apartments, condo units) so that they may live closer to their workplaces. Schools could create swap systems to optimize home-work travels for their teachers and students, government offices can also do the same for their employees. 

But wait, there's more! Malls and business establishments can seriously localize hiring of sales staff, and private companies can shift a whole work force into a 10am-7pm work schedule. I would even push it to 11am-8pm to really skip the rush hours altogether. Or for the brave CEOs, work-from-home could also be the new flexitime. Otherwise shift workdays from Tuesday to Saturday, and avoid killer Mondays like they do now in some State Unis. 

Government can incentivize these private-led solutions. 

Until we realize that the traffic is just a manifestation of lack of a systems view of urban planning issues, we will continue to get piece meal solutions from politicans. 

There I said it. Yes, i did. Now I will sit back and drink my decaf coffee. 

The Economists' Disease

Before you read on, please watch this.

As you watched through the video, I would guess that you were thinking about the beauty of nature, diversity,  sustainability, environmental awareness and so on. If I am right in your case, then you are likely not an economist, but for sure you have a beautiful heart.

If you are one of us, a gang of people burdened by a "rational brain" to the point of it being in fact an affliction, you would have not seen the beauty you just saw; the birds and the rabbits and the regrowth of willows and the less-meandering river. You would have not seen the colors and the hues as your brain connected the dots from the reintroduction of the wolves to the changing of the river.

Instead, you would have seen a multiple regression model, with predictor variables and correlation coefficients. You would have thought, "hmmm, what tests are applicable: multicollinearity, heteroscedasticity  and/or autocorrelation? Will the values of x's be true blue unbiased estimates? Do I just look at the residual plots or perform the White Test or the Goldfeld-Quandt Test?" You would be yearning, longing, thirsting, aspiring for a data set, both time-series and cross-section. You would be fumbling for what dummy variables can be used. And after all the number-crunching you would have came up with a thought: "It makes me wonder, what it we introduce dingoes and not wolves?"

Yes, we kind of always spoil it, even in the case of love and beauty.

And that is why I call it an affliction.

 

The Yuan and the Bald President

 

On the heels of China's devaluation of the Yuan, economists all over the world knew that this one will be felt all over the world in staccato fashion. China has been for a time regarded as the last bastion of the once highly-regarded BRIC nations. Brazil and Russia had seen low growth for a while now, and India had been quietly limping along. And China has finally entered a massive deceleration from a previous regime of high growth that had been mainly fueled by government spending, mostly in vertical and horizontal construction. This is not really a big surprise. From 2-3 years ago, we already knew this will happen.  A nation, even one as big as China, cannot build roads, rails and Olympic stadiums forever.

Main exporters to China, the likes of Australia, Japan, Brazil, South Korea and Malaysia, will surely take a hard hit. The construction machine has gone past its overheating point and has to slow down. It will therefore buy less of the raw materials that it once gobbled up in big numbers. With the devaluation, it will also be more expensive for China, thus adding more pressure to import less.  

The Chinese government had been trying hard to fix their woes  by way of monetary and fiscal policy; the most recent is the decision to devalue the Yuan. And every economy strongly linked to China will take a hit.

And the Philippines? Well, no matter how much we throw mud at the balding President, we have to admit, this one knows his job. There might be some stroke of luck in there where our economy currently stands, but undeniably our strong economic fundamentals is also a result of good leadership. Our well-known fiscal and monetary prudence did not happen by accident.

Thanks as well to our solid BPO industry, and the forever heroes that are the OFWs. Also a much deserved thanks to Filipinos who invest in the Philippines. Our stocks and bonds are only 10% foreign-owned. When the going gets tough, foreign investors cash in and run. But even if they do as in the case now, 10% of them is not enough to make the edifice crumble. 

I hope I have whetted your appetite about this issue. I will not repeat what has already been written, and might as well let you read it straight from the Chicago Tribune (http://www.chicagotribune.com/news/sns-wp-blm-news-bc-philippines24-20150824-story.html?ref=yfp).

As a parting shot I wish to hammer this one home: We are in good footing today despite the financial chaos elsewhere because Filipinos (incl. the OFWs) invest in the Philippines, and the bald leader has the ability to see the big picture; the acumen to put society first before politics.

Finally, the Filipino as a citizen has evolved. We keep our money here because we believe in what we have become; a new version we could aptly call Filipino 3.0. This is the version that holds real our ability to rise and rise again, until lambs become lions.

Notes:
Pic from vox.com
Join the Filipino 3.0 community in Facebook

TradeLib in the ASEAN - By Nonoy Oplas Jr.

This one here is a well-written paper on the topic of Trade Liberalization in the ASEAN by a good friend of mine, Nonoy Oplas, Jr. A must-read, for those who wish to understand the relevant economic concepts and likewise see ASEAN trade in graphs and numbers. True to his advocacy of having less government intervention in areas where the free competition should thrive, Nonoy draws the conclusion that governments should promote and not interfere in business trade. Two thumbs up!

 

The Economics of Roger Moore

I saw the link to this article (http://www.realclearmarkets.com/articles/2014/12/02/the_economics_of_roger_moore_the_greatest_bond_of_them_all_101412.html)on the internet. And the sucker that I am, of course clicked it, and enjoyed the next few minutes of my life. The quote from his new book " One Lucky Bastard" goes:

"When I started playing Bond it became apparent, in 1977, that I would have to leave the UK if I wasn't to pay ninety-eight per cent tax on my salary: an actor's life in the spotlight is short, so we need to look after our pennies, and that's why I decamped to Switzerland with its lovely snow-capped tax benefits."

The quote above from Roger Moore gives a semblance of how John Galt (of the Atlas Shrugged fame, by Ayn Rand) decided to leave the politicized society and established a separate objectivist society in a faraway hidden valley. Ah. He may not be my favorite James Bond (as I do like the swagger of Pierce Brosnan), but I will definitely hunt for this book.

 

Establishing a Framework for Rural-Urban Fringe Planning-Part 1

To be able to analyze and assess the effectiveness and appropriateness of the rural-urban fringe plans and management systems, an analytical  framework is necessary. There is a great danger of committing a very subjective  analysis in the absence of an appropriate analytical framework. The framework  should serve as a  rational and objective basis of any judgment that will be drawn in the course of the planning and analysis.

One relevant framework is what is known as Integrated Area Management or IAM. The IAM concept involves the consideration of economic, social and environmental aspects as equally important goals of development. The aim of giving equal importance to economic, social and environmental aspects is similar to what was presented  by Khan (1995) as the Paradigm of Sustainable Development.

Traditionally, capitalist economies were primarily concerned with economic development,  and the basis for almost all economic decisions was  efficiency.  Efficiency in production, distribution and consumption dates back to as far as the late 18th century when  classical economics was  the prevailing body of thought concerning development. It was then the time of economic rationalism or what others has termed as neo-liberalism or Thatcherism (in UK). The free market, by virtue of Adam Smith’s “invisible hand” principle, was considered as an essential ingredient of an efficient economy. The law of supply and demand ruled and most if not all developmental decisions were based on the price mechanism. The value of resources were based primarily on the movement of prices in response to demand and supply conditions (McConnell, 1988). The allocation of resources to their “highest and best use” is one of the most important functions of price (Macmillan et. al., 1987). A piece of land would therefore be used for whichever it is deemed to be of most value.

It was based on the  price mechanism that the location theory (in physical planning) was developed. Location Theory is the area of economics concerned with the factors that determine where people and economic activities choose to locate, and the effects of the “economics of distance” on land-use decisions. The basic points of this theory was professed by Von Thunen in 1826. Consistent with the location theory, it was posed that there is an inverse relationship between land value or its rent-producing capacity and the distance from the market centre (Godall, 1972).  It was an urban-biased point of view but still very much valid if viewed in the context of economic rationalism.

But we have seen in the recent past that developmental decisions based on economic rationality alone do not assure sustainable development, especially because social and environmental goods  such as clean air, safety, and the aesthetic component of nature, are public goods and no markets exist for them. Ergo, they cannot be secured by private action. Non-hedonistic and pro-social behavior which is the underlying concept behind cooperativism may not also be applicable to public or common goods. The market will tend to fail in considering externalities in the use of these goods. Water and air pollution problems created by certain type of land-use is an example of a market failure (Kitamura and Kobayashi, 1993). The intervention of the government is therefore necessary to ensure that social and environmental goods are secured.  The inapplicability of the price mechanism to manage these public goods justifies any action of any government to realign policies and ensure that these goods are accessible to all of those who seek to benefit from them (There, a nice justification for governments to exist).

If rural land-use is controlled by the principle of a market economy, then the order of  its use will by decided by standard economic valuation (e.g., productivity and profitability metrics). But since rural land embodies qualities of a public or common good (Tsuji, 1993), it is a necessity to have a change from the existing method led by  free competition of land use on the basis of market  prices to a new method paying enough attention to land’s attribute as a common good.

As Khan (1995)  explained,  there are contradictions among economic, social and environmental concerns. It was in fact in view of these contradictions that he presented the paradigm that would assist in reconciling the issues at hand.

According to Khan (1995, p.65):

“The main objectives of social sustainability include aspects such as empowerment, equity, accessibility and participation. However, from the point of view of welfare economics, none of these can be achieved without sustained economic growth and development. However, it is also true that growth alone will not guarantee social sustainability. Economic growth without  social equity arrangements often results in social inequality and limits the accessibility benefits to those who own the capital and assets.   At the same time, prolonged inequality itself inhibits economic growth in the long run. Thus the achievement of economic and social sustainability must go hand in hand, and further, it should also be noted that one particular aspect cannot be achieved that one aspect can not be achieved  at the cost of the other”.

Similarly, Khan also posed that it is also not possible to achieve environmental sustainability without achieving social and economic sustainability. Poverty alleviation and sustained economic growth are essential  elements of environmental sustainability and vice versa.  To this, Jacobs’ (1995) notions about sustainability and carrying capacity, may be added.  Jacobs explained that sustainable development does not necessarily mean that economic activity must be controlled. Living within the earth’s carrying capacity means accepting that there are environmental limits which should not be transgressed. A sustainable economy is an environmentally bounded one, which develops within the constraints of maintaining resource stocks, waste assimilation capacities and environmental services that will ensure its continuation into the future. It should be understood that this can not be done by market forces, thus decisions can no longer be done in the context of economic rationalism. Market forces cannot produce sustainability because individual firms and consumers cannot act in the knowledge of what others are doing, and therefore, of what the collective result will be. According to Jacobs (1995), even those who wish to act responsibly for the world face a dilemma. If one decides to behave and the others do not, chaos will still ensue. So why behave? The individual, self-gratifying decisions of millions of firms and consumers in unconstrained market situations add up to arbitrary results at the overall level of the world economy. At the other end of Adam Smith’s invisible hand, according to Jacobs (1995) is an invisible elbow which, through exactly the same processes, yields environmental ruin.

Therefore, the paradigm of sustainable development, which seeks to pursue growth and equity within the context of inter-generational resource stability, sees development as achieving the total marriage of objectives of social, economic and environmental sustainability both in the short  and long term. The imperatives of such  integrative and interlinking objectives are manifold  (Khan, 1995):

·         There will be  a need for the development of appropriate methodological tools to appraise projects and assist investment planning decisions by weighing equally the requirements of social, economic and environmental sustainability.

·         To do the above, new accounting methods costing nature will have to be evolved.  An appropriate sustainable development index will also need to be developed to measure development in the context of an integrative framework of social, environmental and economic sustainability rather than doing so through the conventional method of measuring growth by way of GDP.

The Economic Problem of Rural Towns

The  main pressure on rural lands emanates from   urban  en­croachment.  Changing  needs  and trends encourage  urban dwellers to move outward to rural towns, carrying with  them their urban lifestyles and tendencies. Businesses follow  when critical  mass is reached to sustain high levels  of demand  for products and services. The rural towns, somewhere  along the  process, lose their character and slowly  become  urba­nised. Since, urban-related land uses can offer returns  way above what  can be realise if lands are  used  in  farming, farmlands are indeed susceptible to the pressure. Moreover, the  changing  policies as regards land-use  creates  and/or reinforces what planners call  the  "impermanence  syn­drome",  which  causes farmers to resort  to  low-input  farm practices and to ultimately give up farming.

Non-sustainable  land  uses can  likewise  exert  additional pressure to rural lands. Extractive industries for  instance can  realise massive profits compared to other  more  tradi­tional uses. These pressures are actually external to the farm. A  number of economic factors, which  internally affect farm  opera­tions, may be the real culprits that exacerbate the susceptibility of these farms. 

The economics of time, for instance, may assist in weakening the  intent of farmers to continue with production.  Invest­ments  in  primary  production  are  long-term  investments (Cook, 1994). Realization  of  returns can take a long  time  compared  to secondary  sectors  like manufacturing and processing.  For instance, investments in backyard piggeries can take  some years  to  break even and fully recoup the  initial  capital investments.  Given this fact,  and while at the same time,  the farmers do not feel secure about the land-use policies which define  the security of tenure of farming in a  given  area, the tendency to give up the farm is strengthened.

Changes in the national economy can also affect the viabili­ty of farms (Cook, 1994). As the economy expands, it is often accompanied by  increases  in real wage rates, which  means  that  labor becomes more expensive to employ in farming. Moreover,  real prices  may  also  increase  such that  the  price of  farm products sometimes can not keep pace with the rise in  costs of  farm  inputs thus there is a net decrease in  real  farm incomes.  

A natural fall in the inherent productivity of  bio-physical resources  can  also occur as a result of  intense  use  and degradation (Cook, 1994).  The  usual tendency of farmers is to  turn  to better  technology which more often would entail  additional capital  outlays.  Health risks and  negative  environmental effects  may  also be faced if farmers decide  to  intensify their usage of farm chemicals to boost productivity.

Cyclical and random changes in the prices of goods and input costs are also factors which can adversely affect the finan­cial  standing of farms (Cook, 1994). Changes in prices of goods  may  be caused by many factors. Financial  deregulation could increase volatility of  inter­est  rates and currency exchange rates, which in  turn,  in­creased  the  fluctuations   in the prices  of  farm  goods. The restructuring of former East  Bloc  countries from 1992 following the fall of communism in Europe  changed demand  patterns  for several farm  commodities in Asia and Australia. Trade and protectionist policies of major  economies could also inhibit  some farm products to enter  those markets.  

Lastly,  natural  calamities and changes in weather patters as what is happening now can spell disastrous effects to the farms' finances performance.

The interplay of these factors complicates the farming predicament.  It may be noted that except for natural events,  all others  of the above-cited  factors are economic  in nature.  They have a singular effect on the  farming  opera­tions  and  that  is the weakening of  the  farm's  economic viability  and financial standing. The financial  difficulty faced by farmers make them very prone to the external pres­sures e.g. the monetary benefits that developers and  specu­lators can offer in exchange for their lands.

There  are  only  two options for farmers  to  choose  from. Either  they cling to their farms amidst economic  difficul­ties  or  simply sell out. Farmers tend to  cling  to  their farms  for  a number of reasons, among others,  because  the farm is synonymous to home, due to peer pressure, the  availability of off-farm income which enable them to cross-subsidise farm losses,  and  the notion that to leave the farm is  to  fall into the poverty trap, that is, they have no better place to go  and therefore they will have to continue farming by  all means.  When they decide to continue with farming,  farmers may  need  to resort to  cost-cutting,  diversification  and partial sale of other assets. Those who are eligible turn to government for assistance.

(from R. Azanza's academic paper)

First Quarter 2015 Update on the Economy: On Solid Ground

I attended the Economic Forum organized by the Nordic Business Council of the Philippines (NBCP) last April 23, 2015 at the BDO Corporate Center in Makati City. One of the speakers was Mr. Jonathan Ravelas, Chief Market Strategist of BDO, who gave a very interesting take on the prospects of the Philippine economy.

Mr. Ravelas showed forecast data that while the Euro Zone, the USA and the world economy will continue to show meagre growth in 2015 and 2016 (the world growing at 3% at most in 2016, with Europe only by 1.6%), Asia will continue to lead the charge as it had since 2011. Asia’s growth is forecasted to be 6.7% in 2015 and 6.2% in 2016. China and the Philippines will still be the 2 fast-growing economies, but with the prognosis that in 2016, the Philippines (7%) will overtake China (6.7%), growth-wise.

The main drivers behind the growth of the Philippines according to BDO’s Chief Market Strategist are: (1) growing population, (2) growing middle class, and (3) BPOs & OFWs.  However, he also explained that the continuing government infrastructure spending will be a key factor as well. After the drive to clean up the bureaucracy of corruption, government has shifted its efforts last year to infrastructure development, both in terms of government-funded projects and PPPs.

We all know that a growing population acts like an engine in terms of fuelling demand for goods and services such as utilities (power, water, transport) and consumer products. The economy grows as goods and services are produced and money exchange hands several times, generating a multiplier effect. With a growing middle class, it means that more people will have the ability to pay for those products and services, therefore also allowing for producers to focus on producing more durable and quality outputs in order to court the paying public into patronizing their brands.

While it is absolutely fascinating to see how the middle class is able to drive an economy towards expansion, it is particularly enthralling that the rise of the middle class in the last decade is really a combo effect of the rise of the BPOs and the continuation of the OFWs’ significant contribution to the economy (which in recent years were more than 10% of GDP). The BPOs are providing decent jobs and decent pays. They are not just in the metro areas these days. They have moved out to the provinces in more than 20 new locations to avail of both cheaper regional wages and good, less congested communication infrastructure. On the other hand the OFWs are sending money back to send their siblings to school. As these people graduate from college, they join the army of the employed, and it would not be a surprise that they actually join the BPO industry, where young, energetic and ambitious people are welcome to take part in a hectic, fast-paced job, and the money is good. Barring any complications that may be brought in by natural calamities or early marriages (which could happen to young people who get overwhelmed by the sudden ability to earn thick wads of cash), these people will in turn help their younger sibling to go through school. And the cycle turns anew.

Indeed if you look at it, education is still the main tool in breaking the poverty cycle, and is the main reason behind the rise of the middle class in the country. As an aside, I know of a woman from 10 years ago who sent two daughters through college by operating a small pigpen and doing laundry for the neighbours. Now she lives in a 3-storey concrete house and goes to Singapore twice a year to visit one of daughters who now works there as a physical therapist.  Her family is certified middle class these days.

The faith of BPOs in the Filipinos’ gift of gab (or gift of tongues?) has led to our unemployment rate staying below double digits since 2005. In 2014, the unemployment rate is only 6% and expected to drop some more.

Mr. Ravelas also emphasized that this a very good time indeed for the Philippines, noting that 2016 is another election year. By experience, the massive spending that occurs during an election year tends to drive the economy to expand. This expansion is not only felt in the current year but straddles a few years thereafter. We should just be on the lookout for inflationary effects. Having said that, BDO’s prognosis is that inflation rate will rest at 2.5% in 2015 and 3% in 2016.

 We all know that a high-growth, low-inflation economy is the best there is. And this is what we had been having since 2013, when Dr. Nouriel Roubini (a.k.a. the Prophet of Doom in the economists’ circles) turned into the Prophet of Boom and deemed that the Philippines is Asia’s new rising tiger.

Mr. Ravelas opined that the Peso will stay within the 44-46 levels against the dollar. And the key sectors where investments could really thrive are: Food & Beverage, Retail and Real Estate. These are the three (3) main sectors driven by consumer spending. At this point it comes to mind that the proliferation of milk tea shops and retail perfume stalls in malls and every nook and cranny in metro areas is evidence of the spending power of the young, free and single. Testimonial evidence also shows that young people in early to mid-30s compose the main market for studio-type condo units in Metro Manila.

What remains as risk areas for the Philippines are apparently, (1) the growth challenges (I presume referring to growth with equity, trickle-down or what has been a buzzword these days: inclusive growth), (2) the geopolitical noise (both the outbreak of wars in the Middle East and elsewhere affecting our OFWs, and the territorial disputes in the West Philippine Sea), and (3) the rising US interest rates, which up to this time is not yet felt locally.

The Philippine economy indeed stands currently on solid ground; roaring in the first quarter of 2015. Moving forward, the government has to complete the infrastructure investments. Those airports, roads, communications, power and water supply need to be in place and operational. Moreover, more school buildings, hospitals, transport terminals, public markets and sports arenas should be built, spreading out these facilities to the regions and provinces where they are most needed. It is no rocket science, and no need for an economist’s gobbledegook.