The price of diplomatic ignorance

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Ben D. Kritz

DEMOCRATIC politics is an odd realm. In most other disciplines, willful ignorance is frowned upon; but in politics, it’s celebrated.

The widespread support for President Rodrigo Duterte’s policy – although lately, he’s blamed it on Finance Secretary Carlos Dominguez 3rd – to reject “conditional” aid from the European Union is an excellent example.

The decision revealed a deep and damaging ignorance of geopolitics and where the Philippines fits into the global economy, and yet it is hailed as a step forward for the country.

Obviously, it is not, and that will become clear as the consequences of Duterte’s stubbornness misanthropy develop. The most worrisome political implication of it is the tacit declaration that the Philippine government will no longer even attempt to acknowledge the issue of human rights. That may appeal to an increasingly bloodthirsty public here, but if the public and their adored leadership thinks that the rest of the world will sit back and accept it, they are in for a rude awakening sometime in the near future.


The bigger concern, however, is what the economic implications of Duterte’s ill-considered declaration may be. Although the Palace has backtracked to some degree over the past few days and said that rejection of aid would be “considered on a case-by-case basis,” the nature of aid is such that if Duterte intends to remain true to his word, almost none of what the EU grants the Philippines will be acceptable.

In direct terms, EU aid amounts to about $280 million (about P13.8 billion per year), which is roughly equivalent to this year’s combined budget for the Department of Energy, Department of Trade and Industry, Department of Tourism, Department of Information and Technology, Commission on Elections, and the Office of the Vice President. The government could probably compensate for all that, particularly if its draconian tax increase proposal passes in Congress, but the amount itself is not the biggest problem.

Loath as I am to agree with him, as Senator Frank Drilon pointed out over the weekend, the rejection of EU aid poses an immediate threat to the Philippines’ favored status under the EU’s GSP+ (Generalized System of Preferences) tariff exemption program, which would have a significantly negative impact on Philippine exports.

Under GSP+, the Philippines may export 6,274 products to the EU at zero tariff. The catch is that the country must ratify and implement 27 international conventions on human and labor rights, environment and governance principles. The additional eligibility requirement is that the country has sufficiently non-diversified exports. In other words, most of its export base consists of primary products, such as minerals or agricultural products – and has a low market share of the EU’s total imports, which the Philippines does, even though from the Philippine perspective the EU is the country’s fourth largest trading partner. Philippine exports to the EU amounted to about 5.7 billion euros in 2015, according to the DTI.

Even before Duterte took office, the Philippines was at risk of losing GSP+ eligibility, which it only gained in 2014, because of slow action to adopt the 27 international conventions. Duterte’s hooliganism has simply drawn more attention to the shortcoming, and probably guarantees the country’s eligibility will be withdrawn, because it is not an idle threat on the part of the EU: Sri Lanka was thrown out of the program for the very same reason in 2010.

Another aspect of the rejection of aid is that it could impact the Philippines’ credit ratings. The decision to reject the aid means the government must make a choice between either funding that which the aid previously paid for, or letting those programs and expenditures lapse. If the government chooses to fund those things itself, the debt-to-GDP ratio increases, as it is unlikely the funding can be entirely sourced from revenues, at least not in the first year. If the government chooses not to fund them, the economic situation of the ultimate beneficiaries of the aid deteriorates, which lowers per capita GDP.

In the case of just the EU aid, the negative effect would be incremental, but would be magnified very quickly if all “conditional” aid was included, and would be further compounded by the likely loss of the Philippines’ export advantage with the EU.

But Foreign Secretary Alan Peter Cayetano – a living example of the recommendation in the Despot’s Handbook to “never hire someone smarter than yourself” – asserted last week, countries like China and Japan do not attach conditions to their aid offers, so the Philippines will suffer no ill effects from telling the EU to keep their money.

That is, of course, completely wrong, and one of the most glaring examples of the willful ignorance that Duterte’s public supporters are completely wrong to champion. ALL aid is conditional – that’s the point. That’s why it’s “aid,” and not something a little more impersonal like a loan. Even humanitarian aid, such as in the wake of a natural disaster, is given with a few strings attached; at a minimum, the recipient country must spend the money for the purpose it is intended, and properly account for it.

Japan may attach comparatively fewer conditions to its development aid than other countries, but China has become notorious for practically weaponizing its aid; and so has Russia, who Duterte is toadying up to this week. The only difference between them and the EU or other Western governments, is that they are subtler about their expectations of utang na loob; the expectations are just as strong, however, and perhaps even more so.

No one should want the EU or any other foreign power to unduly influence Philippine affairs, but adopting a selectively antagonistic position to assert the country’s “independence” will ironically only make that unhelpful influence stronger and more likely to be felt.

ben.kritz@manilatimes.net

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