Inflation: It’s complicated
DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - October 24, 2018 - 12:00am

There are too many simplistic and misleading explanations going around about inflation, why it happened and what ought to be done. The problem is... government was in denial about the danger posed by inflation until it came around with a bang.

President Duterte blamed our lack of oil resources for inflation and he said that explains as well why our country had been overtaken by its Asian neighbors.

“We do not have oil. We do not have the buffer for supply and even the hedge in the economy,” he said in a recent speech. 

Duterte claimed that Indonesia, Malaysia, and Brunei are “awash with oil,” which fueled their progress.

“Every time there is an increase in oil prices, if it’s 60, it’s 60 (dollars) per barrel, we are in trouble…”

The President has been misinformed on many fronts. Japan and South Korea didn’t have oil… not a drop. We are even luckier we had a few small reserves which we exhausted soon enough.

Lack of domestic oil resources is not an insurmountable hindrance for economic progress. Japan and South Korea showed that.

Plenty of oil, as in the case of Indonesia, did not prevent it from having many of the same problems we have now. They have also used up quite a bit of their reserves such that they are now a net importer of oil.

I am familiar with the use of oil as an excuse for a lot of things. When it was my job to explain oil price increases for the then Ministry of Energy, I found it frustrating.

No one was willing to even look at our calculations showing that many merchants were using oil price increases as an excuse to increase their prices beyond oil’s true impact. Other than transportation and power, we had figures to show the cost of oil was a small component of the price build-up for most products and services.

I instinctively smiled when the DOF folks were straining their voices trying to explain that the increased tax on oil products only had a less than one percent impact on the inflation figure. They are probably right, but no one is willing to listen. It goes against basic populist psychology.

Before long other folks in government were blaming oil price increases in the international market to wash the administration’s hands of responsibility for the rising inflation. To the credit of DOF, they admitted that the rise in food price inflation, specifically rice, was the real culprit.

Food price inflation is a different story. This time, government has blood on its hands. Indeed, even the President must man up to his role in making the abrupt increase in rice prices happen. Three letters: NFA.

The NFA administrator showed some media people near empty warehouses. This was his way of getting back at the NFA chairman in their continuing argument over rice import policy.

Rice prices started to zoom up after this publicity stunt by the NFA administrator. In my book, the NFA administrator was guilty of economic sabotage by exposing government’s inability to influence rice prices because NFA had near empty warehouses.

It shouldn’t have come to this if the President didn’t side with the NFA administrator. It was a mystery why the NFA administrator  did this considering that the chairman of the NFA was a long time aide, a close friend and was correct. The President relieving him of the NFA chairmanship was a shocker.

All that was happening even as the economic managers of Mr. Duterte were vocally siding with the NFA chairman and the adoption of a policy of free importation of rice provided a tariff was paid. The bill to allow this to happen was languishing in Congress.

The rice tariffication bill is a good compromise. The price of imported rice was low enough so that even if a tariff was imposed, it could still be sold at lower than the prevailing market prices. The tariff proceeds can be given directly to rice farmers to help them.

Now, rice tariffication is already mentioned as part of the administration proposals to control inflation, but it is moving too slowly in Congress.

After a supposedly heated Cabinet discussion, Malacanang announced that the President has ordered a free importation of rice without all the red tape of getting NFA approval. The agriculture secretary quickly denied such an order was given and we are back to where we were.

Luckily, the price of rice was starting to go down after a series of raids of private warehouses suspected of hoarding rice. But the problem will persist unless government takes the bold moves the economic managers said they were ready to take.

Indeed, even allies of the administration, like Rep. Joey Salceda who was advising Speaker Arroyo on how to handle inflation, gave up in frustration. He said government could only blame itself for the abrupt rise in inflation.

Salceda said “mismanagement” led to quickening inflation. He said there was failure to foresee that inflation would accelerate to levels not seen in almost 10 years.

Salceda said that the prices of rice and fish sped up inflation.

While the Philippines was unlikely to achieve food self-sufficiency, Salceda said the government could have worked to ensure food security by importing rice and other commodities to keep prices stable.

Salceda also said that inflation would hit hardest those who are living below the poverty line, which he said was 21 percent of Filipino families.

Inflation is one difficult and complicated issue to explain. The only thing people know is that they feel it even if they don’t understand it.

The President may have been badly advised by people who do not understand economics, but are within his earshot. Unfortunately, the President may also have blinders about these people. Hopefully, the lesson has been learned.

Boo Chanco’s e-mail address is Follow him on Twitter @boochanco

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