[SIZE=3]Piling debt could cause economic collapse[/SIZE]
By Beting Dolor, PHILNEWS.COM(CLICK HERE!!)
Mar 16, 2005


MANILA — Is the Philippine economy, like the U.S. Social Security, headed for a serious crisis, if not outright collapse, by the middle of the next decade?
Two separate and seemingly unrelated studies indicate so, with both likening the Philippine economy and U.S. Social Security to a Ponzi scheme, where loans are used to pay loans.

The former conclusion comes from a group of economists from the Asian Development Bank, while the latter is from the Fairfax, Va.-based Future of Freedom Foundation (FFF).

The Ponzi scheme, a variation of the ages-old pyramiding scam, takes its name from Carlo “Charles” Ponzi, an Italian immigrant to the U.S. at the turn of the last century who in 1920 swindled some 40,000 investors mostly in the New England of about $15 million, or $140 million in today’s money.

Five economists and consultants from the ADB – Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay Ramos and Pilipinas Quising – assessed the feasibility of the Philippine government’s debts and concluded that a crisis would strike the country by 2014. The principal cause would be the public sector debt, which has already deteriorated from sustainable to unsustainable levels at the present time.

On the other hand, Sheldon Richman of the FFF estimates that in a dozen years, or by 2017, Social Security would have reached breaking point.

The ADB economists point out that a government is said to be playing a Ponzi game “when it just keeps paying old debt by issuing new ones.” These are usually in the form of debt papers such as bonds.

A government cannot continuously engage in a Ponzi scheme. Its debt cannot grow indefinitely, they add.

FFF’s Richman says U.S. Social Security is in fact a Ponzi scheme because “It taxes workers and promises to provide retirement income to them later.”

Then it hands the money to current retirees as it plans to tax the next working generation to keep the promises it made to the current one. “No money is invested, so there is no new production and no true return.”

Yet while there are similarities, there are also differences.

According to Richman, Social Security is headed for a crash since “government produces nothing, it was a mistake to think it could provide retirement income constructively.”

In the case of the Philippines, or any other country for that matter, “production” is based on gross national product, or the sum total of all goods and services produced by a country, including remittances from its overseas workers.

Governments have been likened to private companies that operate from revenues generated. When revenues are not enough, governments and private firms resort to borrowings. But while companies in the red have the option of closing down, governments do not have this escape route.

What worries the ADB economists is the fact that the percentage of government income used to pay the country’s debts has grown to about 24 percent as of 2003.

“From an average of 4.6 percent in 1975-79, it went up to seven percent in 1980-83, ballooned to almost 25 percent in 1984-89” and stayed at its present level. In simple terms, for every peso collected from taxes, 25 centavos goes to the payment of loans.

What’s worse is that the payments are for interest alone. The principal remains untouched.

An unbelievable worst-case scenario will see the Philippines not even earning enough per year to pay the interest on its loans.

The Philippines’ total outstanding debt was pegged at P3.36 trillion, or 78 percent of GDP circa 2003. Including contingent liabilities, this grows to P4.1 trillion, or 94.5 percent of GDP. The consolidated public sector debt is at P5.9 trillion, or “a whopping 137 percent of GDP.”

Could it get any worse? Unfortunately for the Philippines, the answer is yes. All three “are on an upward trend,” said the ADB economists. There is also another pattern they find disturbing, and rightly so.

In the ‘70s and ‘80s, they said, “large debt inflows were used to stimulate the economy and to provide a cushion against external shocks that had often plagued the economy.”

By the ‘90s, the debt inflows “had become a means to service the liabilities of ailing government agencies.”

Debts were being used to pay debts, the classic Ponzi scheme.

Philippine President Gloria Macapagal Arroyo has recently warned that the country could face a scenario similar to Argentina, where the mismatch in public debt composition led to a crisis, triggering a currency devaluation shock.

With the value of the Argentine currency sinking like a rock, hyperinflation became the order of the day.

Although the Philippines has had periods of double digit inflation, it has never experienced anything remotely resembling the Argentina scenario.

Arroyo is proposing draconian measures, some of which have met fierce resistance from various quarters, including within her own administration.

While there are many long-term solutions to the country’s desperate economic problems, she has concentrated on short-term ones. Taxation is the key on which she pins her hopes for a reversal of the negative economic indicators. The only way that loans will not be paid with loans is to increase tax revenue for the short term, then raise productivity. With that, government revenues would increase even if tax rates remain the same.

“There is a light at the end of the tunnel,” she promises her countrymen, and these will be borne of “strong macroeconomic fundamentals, including fiscal responsibility, aggressive market initiatives and a positive climate for investment.” Under her vision, the Philippines’ Medium Term Development Plan provides the formulas by which the negative view of the ADB economists will not come to pass.

World Bank Country Director for the Philippines Joachim von Amsbert, for one, believes Arroyo is in the position “to address long-standing issues and move the country out of fiscal vulnerability and into a virtuous cycle.”