When politicians make economic policy

ZOOMING IN

Rudy Romero

11/09/2009

Acomedian was once heard to say that the making of economic policy is too important an activity to be left to politicians. He was joking, of course, for economic policymaking is not part of the job description of a politician. But in the light of the big fuss over the issuance of Executive Order (EO) 839, the comedian might just as well have been telling the truth.

EO 839, which was issued last week, freezes the prices of petroleum products sold in Luzon at their Oct. 15 levels. Needless to say, the EO immediately unleashed the forces supportive of, and opposed to, the government’s price-freezing action. The forces supportive of the EO consist of the transport groups — the bus, jeepney, taxi and tricycle associations — and the consumer groups. On the other side of the price divide are the petroleum refining industry — the Big Three (Petron, Pilipinas Shell and Chevron) and the smaller distributors — the business associations and the members of the economic profession.

Ironically, the EO was signed by Gloria Arroyo, who has received training in economics. She could have approached the issue of post-typhoon petroleum products pricing wearing the hat of an economist or the hat of a politician. She chose the latter option.

Clearly, Gloria Arroyo was out to pacify a populace reeling from the devastation occasioned by a pair of typhoons — “Ondoy” and “Pepeng” — and to appease groups of people who believed that the raising of gasoline, diesel and other petroleum products could not be justified, under any circumstances, in the wake of occurrences like the two typhoons. She was not out to uphold the principles of sound policymaking that she learned in economics school. In the face of the fierce public clamor against the post-Ondoy price-raising actions of the petroleum refining companies, Ms. Arroyo clearly concluded that sound economic principles had to give way to practical — and safe — political considerations.

From time to time, calls have been made for a review, if not the outright scrapping, of the Oil Industry Deregulation Act of 1995. The expression of support for EO 839 has been accompanied by a renewal of the call for the abolition of the 1995 law. In the ongoing tussle over the EO, the arguments heard in the deregulation debate are being heard all over again. It is perhaps worthwhile to revisit that debate at this time.

The arguments that were adduced in 1995 in favor of the deregulation of petroleum products prices were as valid 14 years ago as they are today. Essentially, the arguments for government regulation of petroleum products prices revolve around the issues of (1) politicization of the pricing process, (2) distortion of the process and (3) efficiency in the effectuation of market signals.

I do not believe that a truly honest person will argue that government intervention in the market is free from the interplay of political motivations and partisan considerations. Memories of this country’s experience with the pre-1995 oil price stabilization fund (OPSF) system cannot have dimmed to the extent that the politically motivated wranglings and posturings have been completely forgotten. A return to the OPSF is surely the last thing that a sensible Filipino wants.

Man is nothing if not an economic being, and in his constant quest for economic gain, he will find ways to profit from situations in which such non-market mechanisms as embargoes, bans and market segmentations are operative. When such advantage-seeking takes hold, market distortion results. In the wake of EO 839 there is already talk of the petroleum industry players’ diverting more of their supplies to the Visayas and Mindanao, which are not covered by EO 839. Price regulation and market distortion are first cousins.

Finally, there is the issue of the transmission and effectuation of market signals. Under the OPSF system price changes in the world oil market were never speedily transmitted to, and given due course by, the Philippine market. Consumer Oil and Price Watch claims, not entirely without reason, that lags take place in movements of domestic petroleum products prices, but there is no gainsaying that pump and refilling-station prices follow fairly closely changes in world market prices. The absence of the deadening hand of political and bureaucratic intervention makes all the difference.

Summing up, the making of economic policy — including policy on petroleum products prices — is, and always will be, best left to economists. It is, after all, part of an economist’s job description.

(My e-mail address is rudy_v_romero@yahoo.com)

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