The current crisis: Learning from COVID-19

Our distance from the escalating US-Israel war on Iran is of no comfort. Sure, Iran won’t fire intercontinental ballistic missiles to hit US military bases on Philippine soil.

Well, a disingenuous political science professor insists that the Philippines does not host US military bases. What we have, he says, are EDCA (Enhanced Defense Cooperation Agreement) sites that harbor US troops, weapons, and facilities.

My flippant response: The political scientist needs to brush up on his English literature and reread Shakespeare’s Romeo and Juliet (Act 2, Scene 2): “What’s in a name? That which we call a rose, by any other word would smell as sweet.” But I hasten to add that US military bases or EDCA locations do not have the identity of a rose and would not smell sweet.

It is in the economic sphere where the Philippines is being hit badly. The global economy is in shambles, and this does not spare the Philippines. Most dreadful is that the doubling down by the war protagonists — the escalation trap — could lead to what BlackRock chief executive officer Larry Fink described as a “steep and stark recession.”

The energy crisis in particular is intensifying. Crude oil prices are surging in a volatile manner. Current trading for Brent crude oil, the global benchmark, is priced between $110 and above $115 per barrel. Before the US-Israel war of choice commenced, Brent crude oil was trading at $72 per barrel.

The data from the Department of Energy (DoE) show that fuel prices in the Philippines have skyrocketed to between 101.68% and 109.39% for diesel and between 44.28% and 76.33% for gasoline. To contextualize the soaring prices in the Philippines, the country imports 98% of its crude oil from the Middle East, according to the DoE.

We can gauge the magnitude and intensity of the current crisis through the acute perception and opinion that compares the Gulf war catastrophe to the impact of the COVID-19 pandemic.

In his BusinessWorld column “When the Middle East burns, the Filipino nanay feels the heat” (March 16 and 23), Rafael Lopa wrote: “I see a parallel between how this crisis could unfold and how we lived through during the COVID-19 pandemic.”

Similarly, the Manila Bulletin (March 25) cited Isidro Consunji, Chairman and President of DMCI Holdings: “Fuel shock may hit economy harder than pandemic disruption.”

That paper also quoted former Department of Finance (DoF) Secretary Carlos Dominguez III: “Solving the oil crisis could be harder than fighting COVID.” In the same vein, as reported by the Manila Bulletin, Mr. Dominguez said that “the current fuel shock could be a more ruthless adversary than COVID-19.”

To be sure, given their different nature and context, COVID-19 and the globalized war on Iran would have distinct, dissimilar strategies and solutions. In the case of COVID-19, it was a sound and sensible strategy to first “freeze the economy” to slow down the spread of the virus (to “flatten the curve”).

With regard to the war on Iran, the ideal solution is to enable the warring parties to de-escalate and pursue negotiations. But this is easier said than done, for the enemies are now mired in an escalation trap. Besides, the Philippines does not have control over the situation, thus “leaving the nation at the mercy of volatile international markets,” in the words of Mr. Dominguez.

Still, our government and society cannot be paralyzed. The imperative tasks are manifold: Provide relief to the population, protect jobs and income, and keep the economy afloat.

Here, we relearn the basic lessons from how we addressed COVID-19. Messrs. Lopa and Dominguez both point out the necessity of collective action. Mr. Lopa calls this the “collaboration imperative.”

He notes: “When COVID-19 arrived, the Filipino people demonstrated a surprising capacity for collective action.” Mr. Dominguez, in a similar manner, calls for a “united front,” involving local governments, the national government, and the private sector.

The intervention to provide immediate relief to households through social protection such as insurance and cash assistance will unavoidably result in severe fiscal strain.

Sadly, before the war erupted, the Philippine economy was already suffering from a serious fiscal problem, resulting from massive corruption, non-productive expenditures, and weak revenue collection.

In other words, before the Gulf war’s onset, a central economic task was fiscal consolidation by way of rationalizing spending and increasing tax revenues.

But the war has abruptly changed economic strategies. Government is now forced to spend more and thus increase borrowing. That said, economic policies that address the population’s immediate needs in times of crisis should not lead to the worsening of underlying problems. Policymakers and legislators must apply prudence and discipline.

To illustrate, the suspension of the fuel excise tax and a proposal to likewise suspend the value-added tax (VAT) on fuel are unsound, considering both equity and efficiency objectives. Suspending fuel taxes is in fact anti-poor. A recent paper “Who benefits from suspending fuel excise taxes in the Philippines?” (March 25), authored by Jan Carlo Punongbayan from the University of the Philippines School of Economics shows that the bottom 30% of households capture only 17% of forgone gasoline excise revenue and 2.5% of forgone diesel excise revenue, while the top 30% capture 48% and 85%, respectively.”

Punongbayan’s study is consistent with the earlier DoF estimate released in March 2022 that the top 10% of households accounted for 48.8% of the country’s fuel consumption, while the bottom 50% consumed 13.9%.

Further, the suspension of taxes will not make a significant dent on the process because the real problem is supply. To quote Mr. Consunji, what we face is a “no-supplier” situation that makes oil become an absolute scarcity or makes fuel prices so astronomical.

Hence, it is a superior approach to preserve the revenues from fuel taxes and use them to subsidize public transport and the food and electricity of distressed households. The basic principle is that subsidies must address poverty and income inequality. Given the scarcity of revenues, subsidies have to be well-targeted, mainly benefiting the poor and vulnerable households.

Regarding the fear that targeted subsidies can become politicized and arbitrary, the evidence shows that the country has existing rule-based and transparent targeting systems (for example, 4Ps). Further, an increasing number of local government units are adopting better data infrastructure, what Action for Economic Reforms calls data-driven development.

For current subsidies and other expenditures to address the crisis will be enormous, and government will have to borrow. But to make borrowing credible and to have fiscal sustainability, the government likewise has to find ways to protect and even increase revenues. Even in times of economic crisis, some revenue measures that are technically sound and politically feasible can be pursued. Take for example taxes on wealth and luxurious consumption. Or taxes on harmful or unhealthy consumption like tobacco, electronic cigarettes, alcohol, and sweetened beverages. Taxes on sin products can also lead individuals to shift from purchasing harmful goods to using resources for essential goods.

The point here is that some policies can be seen as unpopular but are objectively necessary. Such policies avoid greater costs or harm and ultimately benefit the interests of the majority, both for the short term and the long term.

Thus, the collective action required to surmount the current crisis must be accompanied by clear, transparent, and coherent communications. Jurgen Habermas’ “communicative action” gains relevance. The main elements of communicative action in conjunction with collective action are people’s civic involvement, openness, consensus, and reasoning based on evidence.

Still, the challenge for collective action is overcoming the deep divisions in Philippine society and rebuilding the trust in institutions and leaders. We shall overcome.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

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