Thursday, January 25, 2007

Reprint of StreetStrategist's (Thads Bentulan's article) WHY FILIPINOS ARE NOT RICH

Why Filipinos Are Not Rich by the StreetStrategist aka Thads Bentulan

The Street Strategist has arrived at the conclusion that the poor Filipinos are not rich because they do not have money.

This is a very simple concept but it takes a genius to appreciate its simplicity.

You may notice that I am trying to explain "why Filipinos are not rich" in contrast to "why Filipinos are poor." Is there a difference? Yes, there is.

In asking "Why Filipinos are not rich," the implication is that the normal state of events should be that Filipinos are rich and we have to explain if ever they are not in the normal state, that is, we have to explain why Filipinos are not rich when supposedly they should be rich.

Diminishing circle Anyway, let us proceed. The Street Strategist has arrived at the conclusion that the poor Filipinos are not rich because they do not have money.

The Filipinos have no money because the country's wealth is inequitably distributed in favor of a few rich.

Wealth is inequitably distributed because the labor sector does not have a bigger share of the wealth.

Labor does not have a bigger share because they are mispriced and undervalued.

Labor is undervalued because they do not have an equal footing to enter into a fair contract with the rich employers.

To gain a stronger footing, the government should step in and prescribe a higher minimum wage.

But the government does not want a higher wage because they are afraid the businesses would have lower revenues as a result of higher labor wages.

The businesses cannot maintain their revenues in the faces of higher costs because the demand for their goods and services do not increase.

The demand for goods and services do not increase because the labor class are not rich, therefore they have lesser disposable money.

The people have no money because the wealth is inequitably in the hands of a few rich.

Thus, we are locked in an ever diminishing circle.

Community of inequality Let's view this from another perspective.

According to a World Bank study, 1/3 of the wealth of the Philippines is owned by only 5% of the Filipinos. This is a huge disparity. This is an egregious distribution of wealth. In economics, the Gini coefficient is the measure the gap between the rich and the poor.

What does this statistic mean?

Try to visualize a community of 100 of your friends.

For every PhP100 spent within this community, after all is said and done, these expenditures and incomes will eventually settle as asset or wealth distributions.

Of every PhP100 in asset, PhP33.3 goes to only 5 of your friends (PhP6.7 per pax). The balance of P66.6 is distributed among the reminding 95 friends (PhP0.70 per pax). Can you imagine how inequitable that is? That's a ratio of 9.5 to 1, or 950%.

And did you forget something? Those 5 friends of yours were actually not doing any work at all. They were playing golf all day, while your other 95 friends were the ones toiling under the hot sun, fighting against each other, backstabbing each other, and knocking on doors at night to sell products. Is that fair?

What is really callous is that your rich 5 friends have billions of money that they could not possibly consumed in ten lifetimes. Single solution And yet you ridicule me for proposing a single solitary action, that is, a legislated minimum wage of P20,000 ($400 at $1=PhP50)?

Please remember, I am advocating communism, socialism, or confiscation of property. I am only advocating the correct valuation of labor, the world market price for labor. Why can't our teachers be paid like the teachers in Singapore? And Singapore has zero natural resources to rely on unlike the Philippines?

Squander Myth: The Filipinos are poor because they squander money.

I heard so many upper class people say this. I even heard on radio somebody who cited their rich neighbor whose children squandered their inheritance.

But many Filipinos are fortunate enough to inherit wealth? A few thousands? We have about 35 million workers, and that's the majority. They have nothing to squander. Job search Myth: The Filipinos don't look for jobs.

I find this too simplistic. Filipinos are looking for jobs so much so that millions of Filipinos in search of work worldwide.

Maybe there are too few jobs here in the country. I have repeated many times why are there a few jobs around. That is why I wrote several chapters on the topic of job creation as a result of the Hyperwage Theory.

Maybe the jobs are not paying well enough. If the actually wages are lower than the threshold reservation wage (the point at which the worker is indifferent if he has a job or not), then maybe that's the reason they do not apply for jobs.

Remember if you work in the US for one year that is equivalent to 10 years in the Philippines.

Lazy Myth: The Filipinos are lazy.

You must be kidding me. Give each one a minimum wage of PhP20,000 and you'll see. Currently, among the best workers abroad are Filipinos. And you and I both know that.

Unsaving Myth: The Filipinos don't save.

Of course, the savings rate in this country is low. Of course, the Filipinos don't save. We have half of the country living below the poverty line and you expect savings? But the top 5%, yes, they do save. Save for what? Should that money be shaved off a little bit and shared back to the workers in form of higher wages that will be used to buy the goods and services owned the same top 5%? It will all go back to the businessmen anyway.

Why Filipinos Are Not Rich (Part 2 of 2)

Naturally rich The Filipinos are naturally rich. If we monetize the value of our entire natural resources nationwide we would have a higher per capita wealth than Hong Kong, Taiwan, or Singapore.

But why is it that these city-states have a higher per capita income than the Philippines given that fact that they have no natural resources? Simple. They put a value to their intellectual capital and human capital.

In Hong Kong, if you can't afford to pay about PhP25,000 for a domestic helper, then don't have one. If you can't afford to pay PhP30,000 for a sales clerk, then don't be in business. But do you know that happened? Businesses flourished. And they have domestic helpers who are nurses or principal teachers from the Philippines. Hong Kong is the 4th or 5th largest financial center in the world and it is only about 1/5 the size of Cebu province and it have zero natural resources. It imports water from China, can you imagine that? Singapore imports vegetables from Indonesia or Malaysia.

Why aren't the Filipinos rich when in fact they should be? It is because the minimum wage workers are paid slavery wages, very far from the world market price for labor with is the US price. Since they have slavery wages, they have little purchasing power. With little purchasing power, there is little domestic market. When there is little domestic market there are few businesses. When there are few businesses, then there are fewer employees, and since there are fewer employees, there is little purchasing power. And if there is little purchasing power there is little domestic market and so on and so forth.

Few rich, thin middle class The Philippines has a very thin middle class, as with any other Third World country. It is the middle class who provide entrepreneurship, the small businesses that is 95% of the number of establishments. Again, this thin middle class is due to the egregious concentration of wealth in the top 5% of the population. How do we then solve the inequitable distribution of wealth? With only one stroke. A legislated minimum wage of about P20,000 ($400) probably staggered over five years.

I am tempted but would not discuss here all the economic benefits and non-economic benefits of Hyperwage Theory because I had done that in my 33-chapter book.

Before anyone criticizes Hyperwage Theory, it would do justice if you read it first. In the same manner that I read as much economic textbooks and journals before I finally set into writing my idea of Hyperwage. What I am saying is this: The Filipinos are not rich but that is not what is supposed to be. We have the natural resources that should have given us the power of the purse, the power of wealth. The Filipinos are supposed to be rich. And there is one solution to correct this anomaly. Give labor its true value.

Suppose the businesses give back PhP100 billion in wages back to the people. Assuming a propensity to consume of 80%, the economic multiplier is theoretically 5 times, and the entire nationwide economy will be richer by PhP500 billion. This is the beauty of Hyperwage Theory. Instead of business annihilation, there would be economic redemption. Again, I have discussed this fully in my book on Hyperwage.

I hope I can meet my Henry Dennison, the multi-millionaire that Harvard economist John Kenneth Galbraith called crazy but who eventually caused the latter to reverse his economic thought. If you recall in my Hyperwage book, Dennison argued that the rich few like himself have a bigger share of the income stream which sucks the economic wealth away from the economic system. Dennison argued that the income stream to the poor should be increased. Who will be my Dennison who would believe the Street Strategist's Hyperwage Theory and become its advocate?

And who will be my Galbraith? As I narrated previously, the famous Galbraith was once a Harvard professor who flipped his economic thought and reversed his ideas and finally adopted the very radical, ridiculed, and controversial ideas of John Maynard Keynes.

Asymptotic hyperinflation

Will there be hyperinflation under Hyperwage Theory? I have discussed this fully and the answer is that there will asymptotic hyperinflation, that is a hyperinflation with a ceiling, and that ceiling is the world market price.

Let's take a look at this illustration. This is a simple one but if we analyze common products (vegetables, cooking oil, paper, newspapers, etc.) in this manner, we will have a clear idea of what asymptotic hyperinflation is.

Assume a person eats half a kilo of rice a day. With a domestic helper's wages of P2,000 per month, then a person earns PhP76.90 daily. Assuming the current price of rice is PhP30/kg then he will consume PhP15 of rice daily. He will have a net on only PhP61.90 per day.

On the other hand, under Hyperwage, is monthly rate is PhP20,000 and his daily rate is PhP769. What will be the price of rice under Hyperwage? About PhP50/kg? Where did we get this price? We assume a comparable quality of rice in the expensive city of Hong Kong which is priced about PhP50/kg. Surely, we could not be above Hong Kong' price under our Hyperwage Theory. Thus, after spending for a half kilo of rice, the helper obtains a net of PhP744.

So which is better, a net of PhP46.90 under our current low wage regime or a net of PhP744 under Hyperwage Theory? What if rice surges up to PhP100/kg? This means our rice will be higher than that in the US or Singapore or Hong Kong? That's seems impossible. We could not be above these expensive cities, could we? Even assuming it is PhP100/kg, but how much rice can one eat? Still half a kilo so that will cost him PhP50 daily, and his net is PhP719 daily.

Monthly Wages

(PhP) Daily

(PhP) Rice/kg

(PhP) Daily rice consumption/pax (PhP Net)


2,000 76.90 30 15* 61.90

20,000 769.00 50** 25 744.00

20,000 769.00 100*** 50 719.50

* Assumes a person consumes ½ kg rice daily

** Comparable rice per kg in Hong Kong (we cannot possibly be more expensive than HKG) ***

Can rice really surge to PhP100 or any amount higher than US or HKG? Now, apply the same to a can of Coke, a kilo of cabbage, an IBM Laptop, an Ericsson cellphone or a Sony TV. How do we know what will be the prices when we adopt Hyperwage? Simple, call the US or Singapore prices, and you can use these prices as your reference prices. Do you really think the price of an IBM laptop will rise 100% once minimum wages are raised 1,000%? No way. It may rise by 5% to 15% but never by 100% because the world market price for an IBM laptop is our reference point. If laptops are being sold in this country at P100,000 each, do you really think it would be sold at P200,000 because the minimum wage is now P20,000? Why should we pay double than US prices?

See my point?

At any rate, I have discussed all these issues in my 33-week discourse on Hyperwage Theory in 2005. Human capital

There are several factors of production in an economic system. Our economic theories emphasize the benefits of using the market price of each of these factors. Our theories frown upon subsidies because they distort the allocation and efficiency of capital. Yet, there is one factor that is not merely an inanimate factor of production, a factor that cannot be made to wait for market forces to determine its price. This is human capital. In the Third World countries, if we wait for market forces to determine the market price for labor, such time may never come in our lifetimes. Why? Because a hungry stomach cannot wait for market forces. If First World countries value labor at $7.50 per hour, without government intervention, do you think human capital in Third World countries will stop working unless paid the market price of labor? They cannot survive half a day without food. They will accept anything to survive. Why aren't Filipinos rich?

What makes a country or its people rich?

Education? We have a literacy rate that is one of the highest in the world at 95% or more, yet we are belong to the poorest of nations. Can we econometrically say that education is what makes a country rich? Statistics says no.

Natural resources? We have one of the richest natural resources in the world, yet we belong to the Third World. Surely, natural resources is not what makes a nation rich, is it? Statistics says no.

English? We are the third largest English speaking country in the world, but we wallow in poverty not wealth. Is English what makes a country rich? Japan, Korea, Taiwan, and Hong Kong don't have half of our English skills, yet why are we mere domestic helpers to them, rather than being their rich employers? Or is there a possibility that English is not such a relevant factor we think it is?

I admit the BPO industry has employed hundreds of thousands but do you really expect us to become a First World country with this? This is Third World mentality. To attract call centers to the Philippines, we need to slave our college graduates as phone operators? Isn't it possible that we will perpetuate our status as Third World workers for First World businesses?

Low wages? For the last hundred years our strategy has always been low wages but why are we poor? Maintaining low wages means that you want the people to earn less than their US counterparts and therefore keep the people in check under the strategy of poverty. Yet, how come low cost of labor did not help our businesses become world-class players like Nokia or Intel or Samsung? Isn't it obvious that maintaining low wages has kept us in Third World status? Can you economically argue that low wages are what makes a country rich?

Statistics says no.

Low purchasing power? Low wages means low purchasing power. Answer me this: Does SM or Ayala go to Maasin Leyte because of low wages? No. The big businesses go to places where the people have purchasing power. Purchasing power is due to high wages of the people. Isn't it obvious that Jollibee goes to the US because of the high purchasing power despite the high labor cost? Why is SMC in Australia? Why is ABS-CBN in Saudi Arabia? Economically, what makes a country richer, low purchasing power or high purchasing power?

Yes, indeed, why aren't Filipinos rich? Why is there a huge gap between the rich and the poor? Why is management paid 100 times higher than the lowest employee in this country while in some countries it is only 10 times? What is your solution to correct this situation?

As I have pointed out, it is not high education, it is not natural resources, it is not command of English, and it is not low salary that makes a country rich. It is how you value the poorest of the poor. It is how you value least of the least. It is how you value human capital. It is giving labor its true world-market value. It is Hyperwage.


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