• ‘Good faith’ does not absolve destructive incompetence

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    Ben D. Kritz

    Ben D. Kritz

    In October last year, I wrote two columns—one before and one after President BS Aquino 3rd’s unprecedented primetime TV address in which he tried to defend his condemned Disbursement Acceleration Program in eerily Nixonian terms (“I did not steal”)—and in those two columns, I attempted to explain why lump-sum budgeting and expenditure is an economically unsound practice. It seems now would be a good time to revisit that discussion.

    At the time, I pointed out two serious practical problems to programs like the now officially dead DAP and the scandal-ridden Priority Development Assistant Fund (PDAF), which has been in the grave a little longer.

    The first is that they are an inefficient distribution of resources. The Congressional PDAF was the worst example – giving each district an equal amount of funds led to great disparities in the resulting public welfare, simply because there are variances between the populations and geographical sizes of Congressional districts. The Senatorial version of the PDAF and the DAP, to the extent it was used as an extension of the PDAF, were a little more equitable because of the lack of Senatorial districts; funding, thus, tended to cluster in areas where the population was largest, making their distribution somewhat more uniform on a per capita basis, but creating almost the opposite problem caused by the Congressional PDAF—more sparsely-populated provinces and districts would be bypassed in the distribution of benefits.

    The inequity was, indeed, moderated a bit when the full package of PDAF distributed to both Houses of the legislature and the DAP was operative, but that leads to the second, larger problem: lump-sum financing is a retrograde process in which funds precede their application, rather than a need being developed and then being appropriately funded. This has two negative results: first, discretionary expenditures are selected on the basis of opportunity rather than on the basis of the greatest utility; second, because expenditure decisions are opportunity-based, there is no incentive to pursue least cost, and this creates a longer-term problem of artificially driving up prices. From the perspective of contractors and service providers, the market (the government in this case) has just clearly signaled it will bear much more than it would previously, and as a result the government will find it very hard to stop paying inflated prices even for “legitimate” projects.

    In essence, what lump-sum expenditure does is ask vendors, contractors, and providers “What will you sell us for X amount of money?” And that is—and really, it should not have to be pointed out—an incredibly stupid thing to do. Trying to claim “good faith” in aggressively pursuing a method of finance that is, according to the most elementary economic logic, grossly wasteful at best is, in fact, an attempt to use incompetence as a defense. That works for four-year-olds; it doesn’t work for an Administration with an entire battalion of accountants and attorneys at its disposal.

    The indicated remedy in that case would be to simply remove all those who thus admit incapability to carry out prudent, conventional budgeting methods, and replace those people with others who are competent to quickly reconfigure processes to function efficiently and recover as much as possible of the resources that were lost due to bad methodology. But the DAP controversy now appears not to be the well-meaning idiocy being claimed by Malacañang, but actual nefarious intent. As was reported earlier this week, documents have emerged showing a pattern of intentional underspending by the Administration beginning as far back as November 2010 in what looks like an attempt to create an artificial economic downturn that the Administration could then “solve” using a stimulus program funded by resources impounded from already-budgeted projects.

    The Palace will, of course, strenuously deny anything of the sort actually occurred, the existence of signed memos notwithstanding; at the time (late 2010 and early 2011), such spending suspensions as became known to the public were explained away as “budget realignments” or “under review for anomalies.” But here again is another situation in which the Administration has painted itself into a corner in which its only defense for doing something clearly harmful is to admit incompetence. However it came to pass, the significant drop in government spending—which corresponded to a precipitous decline in the rate of GDP growth in 2011—did occur. In 2009, the last full year of former President Arroyo’s economy, government spending as a percentage of GDP was 10.44 percent. In 2010, a year in which handling of the budget was divided between the Arroyo and Aquino governments, the figure dropped to an even 10 percent; by 2011, by which time the 7 percent growth rate of the previous year had been cut nearly in half, government spending’s contribution to GDP was a mere 9.85 percent.

    Granted, the mathematics involved are somewhat complex, given that they involve multiplication and division of large numbers with several decimal places, but it is possible to estimate with a reasonable degree of accuracy what effects a change in spending will have on national accounts (Protip: It’s called “what-if” or spreadsheet analysis, if any of the bright folks at Malacañang are wondering what on earth I’m talking about. Go to the Microsoft website; it has a tutorial). Maintaining GDP growth is a rather basic objective for any government. Naturally, that sometimes turns out to be impossible despite the government’s best efforts, but when the government’s best efforts are the cause of an alarming downturn, the only conclusion is that the government does not know what it is doing. The subsequent claim that the government is “increasing” spending to correct its earlier mistake is a shibboleth, too; all it is actually doing is returning spending to a normative level, not increasing it in any practical sense.

    And when the form of the spending increase is inefficient and inherently inequitable lump-sum expenditure, the opportunity to even reach a normative level is lost. When the normative level, which is not merely expressed in terms of volume (a common mistake of this government), but also in terms of application is not achieved, resource multipliers—the follow-on expenditures that create jobs, increase production and exports, and ultimately result in growth of real wages and the scope (again, not just volume) of consumption—are not activated.

    And so it comes down to an unpalatable but now completely unavoidable choice for President Aquino and his functionaries: Would they rather admit to being stupid, or to being malicious? Whichever it is, the country has been compelled to tolerate it for too long, and the calls for a drastic change are no longer just understandable, but completely justified.

    ben.kritz@manilatimes.net

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