It's NOT More Fun Discussing Business and Economics in the Philippines

 

It's September and the -ber months are here. It's already known that the Philippines has the longest Christmas celebration in the world. Christmas can be the most expensive time of the year. In the Philippines, Christmas decorations tend to be out earlier. With Christmas in mind, the keywords and key phrases that come to my mind are "overspending", "last-minute shopping", "buried in debt", "spending beyond your means", "feasting over finances", "just add sugar if it's bitter"--just to name a few of the many financial stupidities during Christmas. Such phrases can be linked to the Filipino's typical lack of financial literacy. That's why discussing business and economics isn't more fun in the Philippines! It's not just because of financial illiteracy but also due to economic illiteracy. Even worse, some people still adhere to what the late Lee Kuan Yew would call a third-world mentality.

Such people ignore basic accounting in favor of #SahodItaasPresyoIbaba economics (which is, to increase salaries while lowering the prices of goods)

A lot of arguments are made by idiots both in person and on social media--lack accounting sense! I may be no accountant but I know basic accounting concepts. What I'm going to discuss right now focuses on arguments that don't make any accounting sense. Accounting and finance are important because one must know the profit and loss statement of the company. I didn't excel in my first two accounting subjects. However, I found cost accounting and management accounting to be fun subjects. I was also glad that I was under a very strict accounting professor!

How do several people in the Philippines define profit? It's pretty much operating on the merkado (marketplace) or sari-sari store mindset. One of the many things worth noting is how such people define the profits. Typically, somebody says, "My sales for the day is PHP 10,000 so my profit is PHP 10,000." It's a problem when people equate sales with profits. Never mind that in accounting, Investopedia gives this definition of the different types of profits:

Gross, Operating, and Net Profit

The first level of profitability is gross profit, which is sales minus the cost of goods sold. Sales are the first line item on the income statement, and the cost of goods sold (COGS) is generally listed just below it:

Gross Profit = Revenues - COGS

For example, if Company A has $100,000 in sales and a COGS of $60,000, it means the gross profit is $40,000, or $100,000 minus $60,000. Divide gross profit by sales for the gross profit margin, which is 40%, or $40,000 divided by $100,000.

Operating profit removes operating expenses like overhead and other indirect costs as well as accounting costs like depreciation and amortization. It is sometimes referred to as earnings before interest and taxes, or EBIT.

Operating Profit = Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation & Amortization

Net profit furthermore removes the costs of interest and taxes paid by the business. Because it falls at the bottom of the income statement, it is sometimes referred to as the firm's "bottom line."

Net Profit = EBIT - Interest Expense - Taxes

The bottom line tells a company how profitable it was during a period and how much it has available for dividends and retained earnings. What's retained can be used to pay off debts, fund projects, or reinvest in the company.

Image by Sabrina Jiang © Investopedia 2020

In short, believing in #SahodItaasPresyoIbaba economics is plain stupid. If we take a look at the sample income statement--the revenue isn't the profit. Instead, we have to deduct it from the COGS. After that, we have to deduct from all expenses which includes salaries. In short, the cost includes the salaries. If they insist that #SahodItaasPresyoIbaba works, they must be confusing revenues with profits. That's why I wrote two articles namely (1) opening #SahodItaasPresyoIbabaStores and (2) why the #SahodItaasPresyoIbaba business model is destined for failure.

Let's talk about plain common sense. Let's say somebody opens a business that sells eggs at PHP 10.00 per piece and rice at PHP 20.00 per kilo. The same establishment gives a salary of PHP 750.00 per day to their customers. Chances are that they might even put in air conditioners (which causes the electricity to go up), buy MacPROs when they could purchase "working class" laptops, open 24 hours a day, etc. without considering the cost. It reminds me that Tealive at Ayala Central Bloc had some increase in prices. After all, the establishment is now open 24/7 meaning that the operations costs have increased. Coffee shops sell at a higher price because of their operating costs and raw materials costs. For them, they want to introduce that "price advantage"--never mind they can't recover the costs at that rate! 

Let's say that one sack of rice (worth 50 kilos) is PHP 2,930.00 since it's Ganador. Let's divide the price by 50 kilos to get the price per kilo is PHP 58.60. If they sell the Ganador at PHP 20.00 per kilo--they're selling at a loss of PHP 38.60. If they sold 500 kilos of Ganador (for that day) at that price--they may get a revenue of PHP 10,000.00. However, they suffer a loss of PHP 19,300.00. They should've been selling their rice at the Suggested Retail Price (SRP) of PHP 64.00. They may not get 500 kilos sold for that day. However, it will accumulate revenue over time. This is just one product. This hasn't accounted for the other products, which are sold at ridiculously low prices. That's why the amount of customers may not always be the best indicator of profits. People may prefer a cheaper price. However, some people are willing to pay more for quality.

Graph taken from CFI

It also means that a sudden wage increase isn't advisable. Such people will mockingly say on Facebook, "Muh supply and demand conspiracy theory!" However, we can't change the laws of supply and demand. That's why we must look into the supply and demand in the job market (read here). If we look at the graph above, we must understand that even salaries are subject to supply and demand. If there's too little demand for labor and too much supply of labor--why would salaries go up? Salaries are part of the whole cost accounting procedure. If there are too few customers for companies--can they really even afford to increase the wages? By refusing to take into account that profits aren't revenues, fools will continue to think that wage increase is "magic". Unfortunately, any sudden wage increase only leads to sudden inflation. For the nth time, salaries can't be separated from the operating costs, which add to the overall value of the finished product!

Their poor understanding of profits, company share ownership, and the word "investment" when it comes to talking about FDI

Decades of the Filipino First Policy (or what I alternatively call Pinoy Pride Economics) is prevalent in the Philippines. I want to recall those times in schools where Filipino First Policy was taught in character building. People tend to have the mentality that we "learn everything in school". Guess what? I didn't learn to invest in the stock market using equity funds in school. Instead, I learned it through self-study during the pandemic. Right now, I even wonder if I should still be proud of my MBA degree. These days, I feel like I don't even feel like teaching at all in any school because of how the Philippine education system is really that terrible. 

We have people who believe in the likes of Atty. Neri Colmenares and Atty Teodoro A. Casiño of Bayan Muna. One of the dumbest things that Casiño wrote on Rappler was this:

Without definite limits on foreign ownership and with no preference for Filipino citizens and corporations, the Constitutional provisions on the national economy and patrimony would become a tabula rasa. It would now be up to the Federal Assembly to determine policies on foreign equity sharing and just about anything there is about the economy and our natural resources. This, of course, creates an entirely new window for corporate lobbying, putting small, underfunded Filipino citizens and corporations at a great disadvantage.

Worse, by totally removing the State’s role in developing an industrialized, self-reliant economy, in implementing agrarian reform, in promoting and protecting Filipino enterprises and producers, and in reserving our natural resources for Filipinos, Duterte’s Cha-Cha will leave small enterprises, workers and farmers having to fend for themselves from the onslaught of even more globalization.

These amendments are the culmination of 3 decades of “economic reforms” toward a totally free market, neoliberal economy. Combined with the existing policies of economic liberalization, deregulation and privatization, the amendments remove the last impediments to the total domination, control and plunder of our economy and natural resources by foreign corporations and banks.

It was written during the term of former president Atty. Rodrigo R. Duterte. Colmenares even opposed ASEAN integration, claiming that letting FDIs into the Philippines, means destroying the local industries. The claim is baloney at its finest. If I'm not wrong, Casiño even claimed that Singapore only opened to FDI because of its lack of natural resources. Others claim that Singapore only opened to FDIs after it became a first-world country. However, reading the book From Third World to First disproved their claims. However, some people still dismiss it presumably because of sentimentalism with the late Flor Contemplacion (read here). That's why I even suspect that the uploading of The Flor Contemplacion Story movie on YouTube is an anti-reform move (read here). That would be ironic if they were actually using Apple devices to write such content! Of course, I expect them to say that they have "no choice" because foreigners unfairly own the means of producing equipment (read here).

Their claim can be like, "Of course, we need 60-40 for security reasons." However, I wrote a refute against such a ridiculous claim. If we look into the details, 60-40 is nothing more than overpriced rent (read here) or trying to earn a fast buck. Money that's easy come is easy go. Let's talk about two types of auto repair shops. One cheats on their customers by sabotaging. The other gives honest services. Sure, the one who sabotages can get fast money, for now. However, when customers discover the sabotage, they would quit and go to an honest auto repair shop. One may make a quick buck but it's not sustainable. The life of Charles Ponzi should prove that. Ponzi schemes may get one rich fast but they're not sustainable. An easy buck is nothing compared to revenue built on trust and treating employees right. 

Malaya Business Insight

This goes back to basic accounting. When they say, "But all the investment goes to the foreign investors, none for the Philippines! Boo hoo!" The statement is made out of ignorance. First, FDIs get rich based on net income after taxes (read here). The caricature made by the late Neil Doloricon (from the IBON Foundation, which I can't really rely on due to its protectionist views) reeks of economic ignorance. Based on the example of accounting, the Philippines must collect taxable income per month. Companies must deduct their revenues from the costs. It goes from the gross profit to the net profit before taxes. Deductibles include all sorts of operating costs, both direct and indirect. There would still be accounts payable to deduct. In taxation, these are called deductibles for tax avoidance. If these people knew the definition of profits--it's anything after taxes. FDIs will have to pay their taxes if they expect to keep their profits. One must question if Doloricon understood basic accounting when he made that caricature!

Do people even understand what business ownership or equity means? Business equity is different from land ownership. Allowing FDIs to own 100% of their businesses is different from selling foreigners to the Philippines! Allowing FDIs to own 100% of their business means that they don't need to find a Filipino partner, only for them to own 40% (or even lower). Nobody would want to rent in my space if they had to part with 60% of their profit with me. It's one thing for the tenant to owe me the monthly rental. It's another thing if I demand 60% of their profit. Profits are meant for the businesses to keep. As said for the nth time, the net profit after taxes is what businesses keep! Profits and revenues aren't the same thing! Why would an MNC want to part 60% of its net profits after taxes to a local partner? That's different from an MNC paying monthly rentals to the Filipino landowner and required taxes to the Philippine government!

Ad Homimens and credentials fallacy prove why it's not more fun to discuss economics in the Philippines

Some time ago, I remember reading about the poor Filipino logic. It's no surprise since the majority of Filipinos have terrible reading comprehension! That's probably why they mistake profits for revenues or they mistake 100% share ownership with land ownership! When it comes to poor reading comprehension--I can't expect a mind that knows a lot! Some of these people even enjoy high-cholesterol food. If the heart can't work well then the brain can't work well. It means that the brain can't work properly. That may explain why that fat guy I dubbed Porky Madugo (I believe he blocked me already) thinks the way he thinks. Porky writes one crazy claim after the other, such as the workers owning the profit and the means of production. If the guy knew basic accounting--the workers own the salaries, not the profit. There's a difference between profits and salaries. I try to discuss it and all he does is insult me--proving he's got nothing to back his arguments!

If one thinks about it-- Ad Homimen is often mixed with the credentialist fallacy. I try to speak against the IBON Foundation. They are quick to tell me, "Shut up! You're not an economist!" They will raise up that Jose Enrique Africa is a graduate of the London School of Economics (LSE). Take note that Ferdinand Alexander A. Marcos is also a graduate of that same school--the same guy who blamed the U.S. dollar as to why the Philippine peso is weaker! They may say that Rosario Bella Guzman is a graduate of Ateneo De Manila University (ADMU) but I'm not. They may also fire out more and more credentialist fallacies like naming the Monsod couple and Atty. Hilario G. Davide Jr. I respect the credentials of the Monsods or Davide. Unfortunately, other people with credentials can easily dismiss what they have to say. I can cite other people with better credentials as my source. I can only expect them to say I'm "too stupid" to understand it. Never mind that being intellectually stupid is different from foolishness! I can have a room temperature IQ and be right. A person can be a summa cum laude and be dead wrong. 

When I name my sources, of course, they will still fire insults at me. I can go ahead and mention the names of people like Kishore Mahbubani, to counter Davide's arguments. I may even quote former Malaysian prime minister Mahathir Mohamad. They may fire comments like, "Why are you favoring the foreigner over the Filipino. Why won't you listen to your fellow Filipino?" When I ask for evidence of success, they start hurling insults instead of the evidence I demand. It reminds me of how some people who insisted in the Marcos Years "parliament" preferred to call me crazy or foolish when I requested their evidence. I even present evidence as to why it can't be a parliamentary system. Instead of listening, they choose to hurl insults. The same is true when I cite credible sources that they don't want to listen to. Hypocritically, there are times they go for foreign validation from organizations like the International Criminal Court (ICC), Human Rights Watch (HRW), European Union (EU), etc. I wonder how they'll respond if these same organizations will say, "Sorry but your economy is too restrictive." Chances are they'll declare persona non-grata to the exact same organizations. 

Overall, it's nothing more than a cognitive dissonance. It means that people get uncomfortable when they're faced with something that contradicts their cherished beliefs. Some people will still believe that certain innocent people are the ones who did the crime because it was what was "established as fact". That means not even new evidence such as the wrongly accused's impossibility of doing the crime can convince them. Some are still convinced that Francisco Juan G. Larrañaga and Hubert Jeffry P. Webb were the ones who did the crime--never mind the pieces of evidence that refute such claims! Some people even refuse to examine the evidence, deciding it was "surely tampered with" without having it examined. There's always some discomfort when one's cherished beliefs are challenged. Business and economics are no different in that field!