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Wednesday, July 28, 2010

The Politics of Banking in the Philippines: Questions on Reform

Concerned depositors crowd a bank lobby in an October 1968 bank run. Photo credit: From the Lopez Museum collection. Taken from the book

If you want to properly understand the history of banking in the Philippines, it would do you good to realize that in this country "business is born, and flourishes or fails, not so much in the market place as in the halls of the legislature or in the administrative offices of the government."

That quote is perhaps the most memorable from Booty Capitalism: The Politics of Banking in the Philippines by Paul HutchcroftI just finished my whirlwind reading of the book and I highly, highly recommend it, especially to bankers, if you want to get a big picture of your field. Just skip the first few chapters if theory bores you. But I expect that you'll be surprised, just as I had been, to discover that banking here has a colorful history of scandal and conflict. It's not clean; it's not a field devoid of politics.

I summarize in bullet points my major takeaways:
  • One thing is consistent: our banking sector is and has always been dominated by major families. Families went into banking, not so much for profit and productive enterprise, but to fund their business interests (look up DOSRI loans). The loan portfolios of many banks were milked excessively by their owners. This led to the major bank failures (and bank runs) of the 60's, 70's, and 80's.
  • Government regulation by the Central Bank is influenced by personal, familial connections. Owners of banks which failed but had ties with the administration were bailed out, even if the state of the bank was hopeless, costing millions and then billions in taxpayers money. They took our money and ran. This is true pre, during, and post martial law years.
  • Government regulation of the sector is weak. Central Bank officers can be sued personally for duties done officially. So whenever some anomaly was discovered by bank regulators, the strategy was to sue their asses off, intimidate with lawsuits. Now I'm not sure if I read it in this book or some other, but I remember reading about how the Central Bank never won a case. If that's true, it's incredible.
  • Consumer banking remains an incredibly protected industry, with the top 5-ish banks essentially forming a cartel. I just confirmed with a friend yesterday that foreign banks are not allowed to establish more than 6 branches. You can confirm this by experience - have you ever seen a lot of Citibank branches? Hutchcroft contends that this is the reason why real interest rates for savings deposits by major banks are so low while they are able to charge high lending rates. (No wonder my peso accounts do not yield me as much as my dollar ones abroad!)
In the end, the book has urged me to reflect seriously about banking reform in the Philippines. What should be its scope? Ramos tried to break up the cartel by attempting liberalizing the banking sector just as he had successfully done in telecommunications (now we have a more efficient PLDT and BayanTel) and in the airline industry (hurray for Cebu Pacific competing with Philippine Airlines). Should this administration push for the same kind of liberalization and see if it succeeds where Ramos failed?

What can be done to strengthen bank supervision? Incidentally, there is this bill in consideration that provides immunity to BSP officials from charges arising from shutting down errant banks. But I am not sure if this is the right way to proceed. Perhaps we should also revisit bank secrecy laws that protect DOSRI loans.

You did not hear at all about banking reform during Monday's SONA, and it's probably safe to say it is not in this administration's agenda. The priority appears to lie in infrastructure, social development programs, and corruption. Perhaps, rightly so. But the financial sector plays such a key part in all of this, in development - indeed, it almost seems like a prerequisite - that I think this should also be reviewed.

Sunday, July 25, 2010

The Cold War (1945-1998) in 10 mins.

The video depicts the number of nuclear explosions conducted in various parts of the globe from 1954-1998. After watching this, I wonder why anyone would want to spend hours reading any 300+ page book on the history of the Cold War. In around 10 minutes, the data reveals quite a lot.

If I were a history professor, I'd ask my students to write a 3-page term paper about the Cold War by just using this infographic.

Video by Isao Hashimoto. Hat tip to @m_clem

Thursday, July 22, 2010

On Kindness and Cleverness

At that age, I'd take any excuse to make estimates and do minor arithmetic... I'd been hearing an ad campaign about smoking. I can't remember the details, but basically the ad said, every puff of a cigarette takes some number of minutes off of your life: I think it might have been two minutes per puff. At any rate, I decided to do the math for my grandmother. I estimated the number of cigarettes per days, estimated the number of puffs per cigarette and so on. When I was satisfied that I'd come up with a reasonable number, I poked my head into the front of the car, tapped my grandmother on the shoulder, and proudly proclaimed, "At two minutes per puff, you've taken nine years off your life!"
I have a vivid memory of what happened, and it was not what I expected. I expected to be applauded for my cleverness and arithmetic skills. "Jeff, you're so smart. You had to have made some tricky estimates, figure out the number of minutes in a year and do some division." That's not what happened. Instead, my grandmother burst into tears. I sat in the backseat and did not know what to do. While my grandmother sat crying, my grandfather, who had been driving in silence, pulled over onto the shoulder of the highway. He got out of the car and came around and opened my door and waited for me to follow. ... We stopped beside the trailer. My grandfather looked at me, and after a bit of silence, he gently and calmly said, "Jeff, one day you'll understand that it's harder to be kind than clever.
By Jeff Bezos speaking at the 2010 Princeton baccalaureate remarks (HT: James Choi of The .Plan)

What Malacanang Should Disclose to the Public

Through Jeff Smith, I came across this White House report listing all the salaries of White House employees. This reinforces my view that, more than anything else, what astonishes me most about Mr. Obama's presidency is his commitment to transparency. But it must feel weird for these employees to know what their colleagues are paid.

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I am dismayed to learn that all these people were paid more than I did during the time I worked in DC. But there are three people paid $0 per year. What? Didn't know there that many people who were such Obama fanatics to do work pro bono.

And the top paid employees are...

Love, Timothy P.
Hash, Michael M.

who are deputy and policy directors respectfully paid $179,000 per year. Larry Summers gets $172,000. Good to know what economists are paid.

I wonder what Malacanang people are paid.

UPDATE: And just to flex my statistical muscles a bit, here's a graph of the salary distribution across employees. The mean salary is around $83,000 per annum with a distribution that is positively skewed, as expected.

What's Bugging Me About "Too Many Abads"

I write this as an attempt to clear my mind and be objective. The Abads, after all, are good friends. Luis was my classmate and good friend in HS and College. I have visited the family's home and have interacted with them many times. I can personally vouch for their goodness.

What has been bugging me lately is, after reading more about "Too many Abads" in the news, is the thought that some of the criticism might be valid and worth pondering upon. Much of course is grossly exaggerated -- you can expect the media to do that. This article yesterday by Bulatlat, comparing the family to the Arroyos is hilarious as it goes over the top, calling out fire where there is yet none.

The question of course is not whether the Abads are competent to receive those government posts. This is an argument that Pres. Aquino easily wins. Luis graduated summa cum laude of Ateneo while Julia, if I am not mistaken, graduated from the Kennedy School (not to say of course that education is the only thing that factors into competence). The question is whether it is right for any one family, no matter how good they are, to hold key positions at the same time.

And here is where my thoughts are divided. To those who do not know the Abads, there is some reason to be uncomfortable with them holding key posts. Just ask yourselves: does it apply to the general case? If another family, some family you do not know, would have done the same in six years time, by chance or by intention, would you be fine with it? The answer for most would be no.

There is some validity to the concern that congresswoman Dina Abad is vice chair of the appropriations committee, Sec. Butch Abad is head of disbursing the funds laid out by that committee, while Julia will be in charge of the President's pork barrel. The validity of the concern rests on how you can prove these three positions lead to conflicts of interests. My suspicion is that these posts were bestowed upon them in a purely coincidental matter and so it is unfortunate that it turned out this way. These are really great people.

But then again the other side of me thinks that leaving behind good institutions are more important than the best that our leaders can offer. That is, this event leaves a bad precedent for other families to argue the same when it's their turn in power.

George Washington was a heck of leader during his time as president and people wanted him, were persuading him, to rule for more than 8 years. But he knew that if he did not step down it would create a bad precedent for other presidents to follow. And so he stepped down, which was what paved the way for Congress to set term limits to power later on during FDRs time. I am told one of the most poignant places in DC is an empty crypt of Washington below the national capitol building. It is a symbol of this simple act which transformed a monument to him to a monument to democracy.

I am not saying that the Abads should step down. I believe the appointments were made separately and in good faith. But the concern voiced out by some is probably not as stupid as it is sometimes phrased.

Wednesday, July 21, 2010

So much for consistency

By a 4-2-1 vote, COMELEC declared that Mikey Arroyo can represent the Ang Galing Pinoy party-list. The majority held that the nominee him or herself need not be a security guard, or marginalized.
Curiously, the nominated representative of another party-list, Ang Kasangga, was disqualified by COMELEC because he himself was not a micro-entrepreneur, the group represented by the party-list.
So much for consistency.
That's my good friend (and future bar topnotcher?), Glenn Tuazon, on the news of today. Incidentally, I make the point just last time that corruption is most pernicious when it is highly variable and decisions are markedly different from case to case.

Monday, July 12, 2010

The Next Best Alternative to Stamping Out Corruption: Make It Calculable

Some very good sentences from Booty Capitalism: The Politics of Banking in the Philippines,
What is striking about many patrimonial states, Weber reminds us, is not the prevalence of corruption per se, but the great variability of corruption. Bribery and corruption have "the least serious effect" when they are calculable, and become the most onerous when fees are "highly variable" and "settled from case to case with every individual official."
This reminded me of a recent conversation with a friend and current government official, who suggested that some civil servants accepted payments to "push and rush paperwork"

I have an idea then. If we cannot rid the bureaucracy of this kind of behavior, why not legalize it? For a standardized extra fee, let us allow companies to have their papers rushed. The fee should be large enough so that not all companies avail of it but small enough so as to deter bribery. I suspect this would reduce under-the-table agreements. And at least we would know who pays. Because if people are doing it anyway, and we cannot beat them, price discriminate.

The same applies to petty corruption done by motorists and the MMDA. Drivers in Manila know that the best thing to do when caught in a traffic violation is to pay up. I mean, why wouldn't you? The "costs" of not doing so is enormous. One has to go to the office, subject oneself to an incredibly long and variable administrative process, and pay fees. My understanding is that it's not so much that people want to do evil in this way but people would just rather avoid this strenuous process. So, why not have the MMDA accept payments for violations and have them issue official receipts?

Of course, I agree that this does not do anything to get at the roots of the problem. I have yet to think about the unintended consequences of such a solution. But this is a creative solution. And I have yet to hear another plausible solution aside from moral persuasion.