• Financial short-termism and the Philippines



    SHORT-TERMISM in economic terms is an excessive focus on the need for quick returns at the expense of long-term interests. The financial crisis of 2007-2009 could be blamed on short-termism; examples of short-term policies include the trading of subprime mortgages, derivatives and credit default swaps regardless of their real underlying value, and the ability to get the risks underwritten.

    It is economically irrational and counter to any concept of ethical investing. Let’s make as much money as we can as fast as we can, and that’s it!

    Investment in renewable energy is a victim of this same short-term approach, particularly in the Philippines. How to defend investment of, say P200 million, in pre-development activities for a small hydropower portfolio which may take 10 years to bring to commercial operation and require capital expenditure of P2 billion, but which will have a productive economic life of over 50 years, when for the same P200 million spent in research and preparation for hydro, or less, you could bring into commercial operation a diesel power plant of the same capacity as the hydropower which would have taken 10 years and P2.2 billion, but which will only have a 10- or 15-year life.

    The investor returns on the diesel power plant will be higher than those from the hydropower (at least they will in the way things work in the Philippine power sector) and they will be available much faster. So, from a purely financial perspective, the diesel power plant is a much more attractive investment, so who in their right mind would put their money into hydropower, which clearly requires much deeper pockets than investing in short-term diesel?

    A similar model applies to investment in industrialization. It takes time to analyze markets for products, and there is a major risk that the international market thought to be available for whatever products the facilities are set to manufacture may be taken by competitors before you get your own facilities into production.

    Worse, the markets may have been taken by some short-term technological development by somebody else, and the investor ends up having spent much time and money in developing facilities, including training a labor force, for which there is no market.

    The case for the rationality of developing and creating a long-term competitive position by improving customer satisfaction and developing enhancements to the original product line has been lost due to the imagined risk. Better to stick with the national market over which you can exercise control and just keep building condominiums and shopping malls and continue rent seeking.

    The need for short-term returns is driven by shareholders and the public markets themselves. The money follows the fastest, biggest and most assured returns. Instant gratification is the order of the day, and management bonuses tend to be set based on quarterly results rather than on the annual report in the unsurprising belief that this will produce financial results which will continue to attract the investment money.

    Fast money is in the driving seat, and long or even just longer-term financial investment, regardless of its necessity to build a robust economy—creating long-term decent jobs and career opportunity, increasing exports and minimizing imports and creating a real national asset base—is unattractive because such investments introduce risks and do not provide the sort of instant gratification that is demanded.

    The financial sector, the investors and the analysts in particular, need to open their minds and be convinced that economies require the right mix of short and long-term investment. Japan is a good example of an economy which has developed from the production of cheap shoddy goods in order to capture markets, into a long-term quality-based producer which, despite its relatively small population and a labor force of about 65 million, has grown to be the world’s third or fourth largest and its second biggest developed economy.

    China, whilst having the world’s biggest population and arguably its biggest economy, has got there thanks largely to production of large amounts of shoddy goods by cheap labor, and it is the government that has forced long-term infrastructural investment, not the private sector.

    So, for the Philippines to develop a real economic base rather than just playing with financial numbers and statistics of doubtful provenance, long-term investment needs to be encouraged and to be seen as worthwhile.

    It is unlikely that the private sector will do this unless it miraculously becomes enlightened, so it’s another job for government, and it will certainly not be achieved by giving out incentives—thinking investors do not invest because of incentives, they invest because the business environment and the opportunities are right.

    Mike can be contacted at mawootton@gmail.com.


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    1 Comment

    1. To enlarge the discussion slightly, particularly the issue of risk and risk management, you might mention the initiatives of the World Bank to promote long-term investments in hydroelectric power. The WB has begun a program to backup or guarantee long-term loans through the Local Government Unit Guarantee Corporation (LGU-GC) which promotes investments in energy infrastructure such as small-scale hydroelectric power. The loans themselves are provided by local banks such as BPI, etc. The WB guarantee lowers the risk to the private bank to encourage investments in long term, non-rent seeking projects.