#KilusangMayoUno's Roadmap Transforms the Philippines into Asia's Venezuela

Manila Bulletin

Today is Labor Day, and it's a non-working holiday. Since it's May 1, it's easy for me to think of the Kilusang Mayo Uno movement. The same slogan still shows up almost every rally, "Raise the national wage to PHP 1,200.00 per day." It "doesn't help" that I do get the Tu Quoque argument or "You too!" fallacy. It may look like "I haven't done much" compared to KMU, but I would like to address truths that would never change. It's all about that one fact, "Economics doesn't care about how many times you insult it. It never bends just to silence the insults." However, it looks like KMU thinks that if they insult economics enough, economics will bend to their whims. However, history has proven them wrong and will still prove them wrong.

This time, I'm going to raise an extreme example. KMU is in the situation of, "You may want it when you don't get it. You may no longer want it when you get it." In other words, be careful for what you wish for. In this case, I'd like ot say that giving KMU exactly what they want can turn the Philippines into another Venezuela. This reminds me that I actually wrote an article addressing Venezuela's pride and protectionism in 2022. After that, I wrote an article addressing Venezuela as a cautionary tale of #SahodItaasPresyoIbaba economics. This time, I'd like to address how KMU's policies can turn the Philippines into another Venezuela.

KMU may be ignoring that any wage increase must correlate with labor supply/demand

It's easy to say, "The capitalists are just greedy. I'm sure they can afford to pay PHP 1,200.00 per day." However, this may stem from treating revenues as if they were profits. It's because when we think of accounting cycles, we need to think about this basic cycle:

Image by Sabrina Jiang © Investopedia 2020

It's common sense that when we increase salaries, we are actually increasing overall expenses. For example, if everyone started working at PHP 1,200.00 per day, the company would have to increase the product or service costs. A cost increase is necessary to continue paying everyone a minimum of PHP 1,200.00, and then increasing depending on rank. The problem is that increasing minimum wages can only worsen inflation. 

Deposed Venezuelan president, Nicolas Maduro, tried to do the minimum wage trick and failed. Here's what BBC News said about how raising the minimum wage at a whim is actually inflationary:

Mr Maduro said he was raising the monthly minimum wage to 40,000 bolivars, about $60 (£49) at the official exchange rate, or $12 on the black market.

It is the fifth increase in one year. The measure would benefit public workers, the armed forces and pensioners, he said.

"In times of economic war and mafia attacks... we must protect employment and workers' income," he said on his weekly television and radio programme.

Venezuela's inflation rate, the highest in the world, has gutted the value of the bolivar.

The country has been hit by low oil prices, its key export. It has also faced severe shortages of food, medicine and basic goods.

Opponents say the president's incompetence and 17 years of failed socialist policies are behind the crisis. They call for the removal of Mr Maduro, who was elected in 2013 for a six-year term after his predecessor Hugo Chavez's death.

But the president accuses the country's elite of sabotaging the economy for political ends.

The main business association in Venezuela said the wage increase was announced without consultation and could result in layoffs and force small businesses to close.

Sure, the KMU might want to accuse America, accuse China, etc. But KMU can never get rid of the basic laws of business and economics. We need to think that increasing minimum wages without considering supply and demand is stupid. 

To explain, we need to look at this:

Graph taken from CFI

If we must look into the fundamentals, the Corporate Finance Institute writes this about how supply and demand for labor affects minimum wage:

Supply and Demand in the Job Market

Similar to the markets of goods and services, job markets also follow the supply-demand mechanism. When the quantity of workers demanded is equal to the labor force available (the quantity of supply), the job market reaches its equilibrium point, and wages can be determined.

The wage level rises when the demand is greater than the supply and lowers when the supply exceeds the demand for workers. However,wages cannot always move freely. There is often a floor determined by the government, which is known as the minimum wage.

When the equilibrium wage is above the minimum wage level, introducing a minimum wage will not lead to a major impact on the job market. When a minimum wage is established at a level higher than the equilibrium wage, the quantity of demand will fall as businesses will instead try to control their labor costs by reducing the number of employees.

The quantity of supply increases as there are more active job seekers motivated by the higher wage level. It forms a gap between supply and demand and thus, leads to unemployment. Despite this drawback, the minimum wage policy can provide both economic and social benefits. By increasing the wages of low-income workers, the government can reduce its spending on social programs to support these individuals and relieve the economic inequality at the same time.

In short, whenever the KMU goes against FDI in the name of Pinoy Pride Economics, they are actually restricting what would eventually increase the demand for labor. If the demand for labor goes up, it's only natural that companies will start to compete with each other for who can pay higher wages, which in turn can influence the minimum wage policy.

Legislating price caps, subsidies, and the nationalization of utilities will only destroy the economy

It's easy for wisecrackers to say, "You capitalists are just greedy. The solution is price caps. Once everybody gets PHP 1,200.00 per day, we must set price caps to destroy the greed." However, this is again a misunderstanding of the difference between revenues and profits. Venezuela tried the price caps, with or without the U.S. sanctions; it was already destined to fail. 

The Economics Observatory writes this unfortunate truth that some may continue to blame on American imperialism:

Before the collapse (1999 to 2013): bad macroeconomic policy

Presidents Hugo Chavez (1999-2013) and Nicolas Maduro (2013-present) implemented exactly the wrong kind of macroeconomic policy during the 2000s and early 2010s when Venezuela’s economy was booming due to the global commodity ‘supercycle’ – a prolonged period of high and rising prices of grain, metal, oil and gas.

Government spending was deeply pro-cyclical. Instead of saving at least some money for bad times during the good times – as Norway, Saudi Arabia and virtually all other oil exporters have done – the Venezuelan government ran double-digit fiscal deficits as the economy boomed. Government spending far outpaced income from taxes and other revenues.

To finance these unnecessary shortfalls, they raised the external debt sixfold by saddling the state-owned oil company and government with over $100 billion in obligations.

The country also became increasingly reliant on the central bank printing money after gutting its independence, a dangerous monetary policy. A central bank printing money to finance government deficits is highly inflationary. It works as a tax on savings and wages via higher consumer prices, disproportionately affecting the poor.

Government spending during the oil boom was extremely inefficient. Subsidised gasoline in Venezuela was not just the cheapest in the world but often virtually free. This led to an estimated 100,000 barrels of petrol worth over $10 billion per year being smuggled across the border to Brazil and Colombia each day, where it could be resold at a profit.

Electricity subsidies were also vast, leading to losses and underinvestment in the sector. In total, subsidies are estimated to have cost over 10% of GDP in some years, accounting for over half of the fiscal deficits.

At the same time, the all-important oil industry was starved of investment funds and badly mismanaged as technical experts were replaced with political allies. Oil production in fields with high-quality crudes operated by the national oil company, Petróleos de Venezuela, S.A. (PDVSA), fell rapidly.

These losses were masked by production gains in lower-quality fields operated by joint ventures with foreign oil companies. As such, the profits and sustainability of the country’s largest export were undermined, with overall production falling from around three million barrels per day (mbpd) at the turn of the century to 2.3 mbpd before the crisis began in 2014.

Before the collapse (1999 to 2013): bad microeconomic policy

Presidents Chavez and Maduro also championed extremely destructive microeconomic policies. Their governments asserted heavy-handed control over the economy and were overtly hostile to private markets and private property. Government intervention was meant to spread prosperity and lower living costs, but instead it crippled the domestic non-oil economy.

From 1999 onwards, the government expropriated broad swathes of the economy, often without compensation and on national TV broadcasts, crushing business confidence and investment.

Over a thousand firms and several million hectares of land were nationalised in the agriculture, banking, cement, iron, oil, manufacturing, retail and telecommunications sectors. Most of these businesses have closed and those that haven’t closed operate at fractions of their peak output. 

In 2003, Venezuela also imposed capital controls and a byzantine system for foreign currency purchases. There were one or more official exchange rates where the government subsidised dollar purchases and demand vastly outstripped supply, as well as a black market with its own free-floating exchange rate determined by market forces. 

The system was deeply distortionary. An entire industry of non-productive ghost companies cropped up to lobby the government for subsidised dollars (to resell them on the black market for an immediate profit).

At the same time, legitimate value-adding businesses were unable to get reliable access to the foreign currency needed to operate. Many genuine businesses also specialised away from productive activities towards securing cheap dollars. 

Worse yet, the government set prices for thousands of retail goods by decree: from rice and chicken to soap and toilet paper. Price caps were often too low, so producers could not cover their costs, leading to shortages, smuggling and bankruptcies.

The government also capped profits in 2011 and enforced the caps with draconian inventory seizures and jail time for workers and executives. Punitive labour regulations also made firing employees extremely risky, costly and time consuming.

Taken together, this web of anti-market measures hamstrung domestic production, making the country extremely reliant on imports, even for products that Venezuela had previously exported, such as rice. The country also lost an estimated $300 billion to corruption through its foreign currency system and other schemes, which it could have instead saved for periods of lower oil prices. 

Once again, it's ignoring supply and demand. You can laugh and insult the law of supply and demand, call economists every demeaning name possible, but you are still going to get the same bad result. We need to consider that these can happen to the Philippines when KMU gets what it wants:

1. The local businesses, because they have to pay PHP 1,200.00/day, would mean that SMEs would eventually die out. Small and medium businesses would die out because everyone had to be paid PHP 1,200.00/day, which most of them couldn't afford! For example, those who are running a sari-sari store, a vendor's stall, or a medium-sized restaurant may not be able to afford the mandated legislative wage hike!
2. If businesses have to pay PHP 1,200.00 per day, but there are price caps, we would end up having to deal with no profit. How can you expect to continue selling rice that was bought at PHP 2,200.00 - PHP 2,720.00 per sack and then sell it at PHP 20.00/kilo (when the costs are actually PHP 53.00 to PHP 62.00), regardless of how much it costs? That's a financial black hole, even if the whole village decided to buy this "wonder rice".
3. When the government begins to nationalize almost everything or even everything, it can end up like Venezuela because of the supply and demand. They can say, "The government must make it cheap." However, Venezuela's subsidy of gasoline was cheap but inefficient. Sometimes, you need to pay extra to get better results. You can't expect a dish that tastes like a PHP 750.00 steak meal if you're only paying PHP 100.00. It's because PHP 750.00 covers the cost of the ingredients that PHP 100.00 couldn't. The government will eventually have no choice but to increase the costs (and in turn, raise taxes to unbelievable levels) to continue the nationalization program. 

A business that sells at #SahodItaasPresyoIbaba might make people happy, but it's only a short-term happiness, like a short-term gain in cryptocurrency. It's because without profits, how can the businesses truly sustain themselves to do basic stuff like:

1. Improving the supply chain management.
2. Get better suppliers and service providers to provide customers with better services.
3. Improve the facilities to give everyone a better experience.
4. Pay its bills like electricity or water. Take note that air conditioner usage consumes tons of electricity. 
5. Increase the salaries and give bonuses to the employees.
6. Depreciation expenses, such as repairs and maintenance. These cost a lot of money, too.
   
7. In the case of shopping malls, they have even bigger expenses (which in turn justifies the mall rates) due to stuff like:
• Centralized air conditioning is just one.
• Janitorial services fall under the mall's responsibility, even if tenants are required to keep their places clean at all times.
• Centralized generators that operate beyond eight hours/day.
• Transportation machinery like escalators and elevators.
• The mall security isn't cheap as they require extra sharp perceptions.

As we look into it, when businesses don't have profits, they would just be breaking even and gaining losses. In the long term, if a business has no profit, then there will be no more taxes for the nation to collect from. In fact, printing more money isn't the solution as it's inflationary. It's because there's too much money, making the money's value depreciate all the more. 

Whenever KMU goes against FDIs (with 100% FDI shares ownership) as a key to national industrialization, they are actually ignoring the following:

1. When FDIs are involved, they will help increase the supply of goods and services. It's again tied to the rules of supply and demand. For example, the reason why utilities in the Philippines are of poor service and high cost is because of the bottleneck. You can't expect a small number of companies to cater to an entire archipelago full of Filipinos. Honestly, that's why the Philippine Internet is so slow. How can a small number of telecommunications providers provide for so many Filipinos? 
2. The use of FDIs to increase the supply of goods and services has these benefits:
• Cheaper utilities mean cheaper operating costs. That means some costs will naturally go down.
• Cheaper costs of basic goods because factories are built in the Philippines would mean avoiding both profiteering and predatory pricing. People would be discouraged from selling too high, hoping to make a quick profit. All the while, no one should be stupid enough to sell too low that the business becomes unsustainable.
• If ever some things are still somewhat costly, you are paying more because it's worth every cent. It's just like if I paid PHP 545.00 for a delicious grilled chicken cooked with delicious turmeric rice, it was worth every cent because the meal was filling and delicious. It's not always being expensive that's the problem but if it was worth every cent. 
3. Whenever there are more FDIs, there will be more taxes to cover any subsidies or ayuda that the government may need to execute in the future. Why overtax the locally rich (short-term gain) when we can first lower taxes to a reasonable rate, and when there are more businesses, there will be more revenues per month to finance the government? 

Closing words

Unfortunately, KMU has been focused on emotionalism over facts. Emotions don't care about facts. Economics doesn't care about emotions either. I don't care about the feelings of KMU because neither does economics. The laws of economics will never change. The whole Philippines can vote that the Law of Supply and Demand is just a myth, but that never changes anything! You can't vote away the consequences like shortages and hyperinflation. 

Venezuela ignored it and look what happened. You definitely don't want what happened to Venezuela to happen to the Philippines, now do you?