Amid Barrage Of Hype, Reality Of Weak Economy Persists

The clearest signs of economic failure under the Arroyo administration are in the poor conditions of millions of Filipinos.

IBON Features – The administration has made much noise of its economic performance in 2007. Most of all it crows about rapid growth in gross domestic product (GDP), the peso’s appreciation against the dollar, and reining in the national government deficit. Unfortunately these are not the whole story. There is a barrage of hype but the reality is of a weak economy and, absent fundamental economic reforms, millions of Filipinos consigned to joblessness and poverty.

A more complete descent into economic turmoil was averted last year by record overseas remittances, debt-driven spending, an upsurge in “hot money”, the fortuitous weakening of the United States (US) dollar, and a US economy that had yet to fall into recession. There was also an unmatched privatization spree with the P91 billion worth of public assets sold equivalent to nearly as much as had been sold in the previous 15 years spanning three administrations. These conditions are unlikely to recur in 2008 and the downward pull of accumulated economic problems is unavoidable.

Crisis times

The clearest signs of economic failure are in the poor conditions of millions of Filipinos. The 11.3 percent average annual unemployment rate over the period 2001-2007 is the worst 7-year period recorded in the country’s history. There were 4.1 million jobless Filipinos and 6.8 million underemployed last year, or almost 11 million Filipinos looking for work.

The government uses statistical sleight of hand to give the illusion of an improved jobs situation. Its definition of unemployment since April 2005 cuts the number of jobless not by giving them jobs but by classifying long-discouraged jobseekers and those not available/willing to immediately take up work as “not in the labor force.” This had the effect of reducing the “official” unemployment by around 3.5% and the number of jobless by 1.4 million in 2007.

Yet job creation is far short of the targeted million jobs a year and also of poor quality. Despite supposedly record growth the 861,000 net additional jobs created in 2007 is only a 2.6% increase in employment from the year before and is the fourth slowest rate of job creation in the last seven years.

The sources of jobs also betray economic backwardness. The leading sector in job creation is domestic household help with an additional 142, 000 jobs, followed by 116,000 jobs in transport, storage and communication, and 111,000 jobs in wholesale and retail trade. These are among the lowest-paying, most temporary and insecure jobs in the country. In stark contrast only 72,000 agriculture jobs and 4,000 manufacturing jobs were added yet these sectors constitute the internal productive base of the national economy.

The latest Family Income and Expenditure Survey (FIES) noted average family income dropping between 2000 and 2006 with nominal incomes not keeping up with inflation. The incomes of the poorest four-fifths of Filipino families – or some 13.9 million families – fell between five and almost 13 percent. These 70 million or so Filipinos each struggle to survive on P110 or even much less a day.

Critical times

Things can only get worse in 2008 with the US recession and a generalized slowdown in the world economy. The domestic situation is made worse than it should be by internal weaknesses resulting from “globalization”, the erosion of domestic productive sectors and over-dependence on trade, foreign loans and capital.

As it is, manufacturing sector growth slowed to 3.3% in 2006 and its 23.1 percent share in GDP is as low as in the late 1950s. Agriculture grew at a faster 5.1% clip but then wide year-to-year variances are the norm for the sector and the its 18.4% share in GDP is the smallest in the country’s history. This internal domestic weakness makes the country unduly vulnerable.

The country has significant links to the US economy which remains our top investment and exports partner (accounting for 20 percent of the country’s respective totals). Drops in US consumption and investments will be deeply felt. This effect is magnified by “globalization” where much of Philippine exports to East Asian countries like China, South Korea, Taiwan and Malaysia are actually intra-firm trade with the US still the ultimate destination. Slower growth in third party countries that depend on US and which Philippines deals with will also cause problems.

Even the vaunted local information technology (IT)-enabled industry will likely be hit hard because of its considerable dependence on the US market, further aggravated by the continued peso appreciation. The US is an overwhelming presence in the business process outsourcing (BPO) sector and accounted for nearly nine-tenths of total BPO exports revenue and over two-thirds of foreign equity in 2005. Nearly nine-tenths of BPO service exports were to the US market. The impact will be most felt in the National Capital Region (NCR) where an estimated 80% of BPO employees are located.

There are also other sources of problems. Slow global growth could restrain OFW deployments and slow down remittances which will reduce domestic consumption. The administration’s inability to even let revenues keep up with nominal GDP growth, compounded by the dearth of remaining assets to sell, could lead to an uncontrolled intensification of its fiscal crisis in 2008.

The rumbling political instability stemming from unresolved issues of legitimacy, graft, corruption and political violence are also taking their toll. If these are amplified by a drop in local business sentiment then this year or the next might even see the beginning of a steep downward economic spiral.

All this highlights the folly of government economic strategies which unduly rely on external factors instead of creating jobs and producing goods by building domestic agriculture and industry. The country’s economic prospects are unfortunately made even worse by the crying need for credible leadership underpinned by a broad-based democracy. IBON Features

SPECULATION: A CLOSER LOOK AT OIL PRICE HIKES
(First of a series)

Skyrocketing oil prices have become a global concern and a source of much debate as to what really lies behind them

IBON Features– The market price of crude oil has more than doubled over the past year to reach record-high levels of over US$147 per barrel last July. And oil prices continue to fluctuate, with industry players blaming a number of factors, including jitters caused by the current financial crisis in the US. Skyrocketing oil prices have thus become a global concern and a source of much debate as to what really lies behind them.

Executives from the major oil companies who were recently grilled before the US Senate Judiciary Committee once again attributed record-high oil prices to “the fundamental laws of supply and demand.” But while such market factors are responsible to a certain extent for high prices, they do not take into account other factors, such as speculation. Crude oil, also known as petroleum, is the most actively traded commodity in the world, with the largest markets in New York, London and Singapore Exchanges. Prices commonly quoted are those in spot markets (Dubai for crude and MOPS for refined petroleum products).

In an article that appeared in BusinessWeek in May, Larry Chom, chief economist for Platts (the world’s leading provider of energy information), said that the actual costs in producing the most expensive barrel of oil is only around $70 or $80 a barrel, with the remainder the “market’s risk premium plus speculation.” This implies that the current price of US$147 a barrel is inflated by some $67 to $77 a barrel due to speculation.

Speculation artificially increases oil prices because most oil is not traded in spot or futures markets but through long-term supply contracts. Because of vertical integration, most oil traded is between TNCs divisions (intra-TNC transactions) and do not need a spot market, yet the amount or the volume of trading in the commodity markets has substantially influenced pricing.

It should be noted, however, that oil transnational corporations, while they may not be directly engaged in speculation, do benefit from it. At the Senate hearing, John Hofmeister, president of Shell Oil, the US arm of Royal Dutch Shell, admitted that his company could be successful with oil prices at $35 to $65 a barrel. A mid-2006 report released by the Bank of Kuwait said that in Saudi Arabia, the break-even point on a barrel of crude is US$33, while in Kuwait it is only US$17.

Thus, the current US crude-oil futures price represents record windfall profits for the oil companies. Exxon Mobil, the largest oil company, reported record 2007 profit of US$40.6 billion while Royal Dutch Shell reported the largest earnings of any company in Britain of some US$31 billion.

But speculation itself is not enough to explain high oil prices. For that, the structure of the global oil industry itself must be scrutinized. Historically, the global oil market has never enjoyed genuine free competition since it has constantly been dominated by a handful of American and European oil giants. The current term for these oil giants is “supermajors,” meaning vertically-integrated private-sector oil and gas companies engaged in all stages of the oil industry– exploration, production, refining, trading, marketing, and, sometimes, transportation.

The six “supermajors” are: ExxonMobil (US), Royal Dutch Shell (UK-Netherlands), British Petroleum (UK), Total (France), Chevron Texaco (US) and Conoco Philips (US). These six firms jointly account for US$1,482 billion in revenues and US$134 billion in profits as of 2006 according to Fortune magazine. They can also produce more than 80 million barrels per day of crude and refine more than 112 million barrels per day of various petroleum products.

The monopoly control the oil firms exert over the market allows them to manipulate prices. In 2006, for example, the US Commodity Futures Trading Commission filed a civil lawsuit against British Petroleum (BP) North America, alleging that BP traders– with the consent of senior management– “purchased enormous quantities of propane” to establish a dominant position in the market and then withhold fuel in order to drive prices higher.

It is also a myth that the Organization of Petroleum Exporting Countries (OPEC) dictates world oil prices. Although the OPEC member-countries account for two-thirds of the world’s oil reserves, and, as of March 2008, 35.6% of global oil production, the supermajors still control the infrastructure needed to transport and refine crude oil, and market and retail refined oil products. The supermajors in fact currently account for one-third of global refining capacity.

Meanwhile, Big Oil has also been blaming state-owned oil firms such as Gazprom (Russia) and the National Iranian Oil Company (Iran) for high prices by claiming these firms deliberately maintain low production in the same way OPEC does. In fact, the largest state owned oil firms have been lumped together by analysts as the “New Seven Sisters,” a reference to the seven largest oil firms that controlled the industry in the mid-20th Century. State-owned oil monopolies reportedly account for more than 90% of the world’s oil reserves.

But these claims may only be a ploy to pressure these oil monopolies to allow more investments by the supermajors. Mexico’s constitution since the 1930s has prohibited any foreign investment in the local oil sector. Venezuela, Russia and Ecuador closely collaborated with Western firms in the 1990s but recently started seizing their assets through a series of privatizations. Peter Robertson, vice chairman of Chevron Corp., has said if major oil companies had access to the vast resources of these countries, they would be using their ample profits to pump more oil at cheaper prices.

Locally, the Big Oil TNCs use their monopoly position to manipulate prices. Since oil firms’ purchases are actually under contract arrangements, this provides room for the local subsidiaries of Big Oil to generate more profits by jacking up pump prices whenever the spot market prices goes up, even if their oil prices have been negotiated long before with lower prices. This explains the weekly oil price hikes that have followed in the wake of upward movements in the oil spot market.

Locally under a deregulated environment, consumers are left with no choice but to bear the brunt of the increases in domestic pump prices caused by speculation and wild price hikes in the global oil market. Meanwhile, speculators and the giant oil companies rake in billion of dollars in profits.

While it is true that the Philippine government cannot control the activities of the speculators and the giant oil corporations, it can intervene at least in the local oil industry to protect the Filipino consumers. Unfortunately, amid the hardship that Filipinos face because of high oil prices, government continues to waive its authority to regulate the local oil industry.

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