Friday, September 10, 2010

Good vs bad debt: How Filipinos plan to spend $400 million

There is good debt and there is bad debt. Like, say, a loan taken out to buy property or start a business, good debt is used to fund appreciating assets. The cost of the borrowed funds (the interest the borrower pays on the principal disbursed to him) is offset by the returns that are yielded by the asset purchased using said borrowed funds. Those yields could come in the form of (1) income generated by the assets -- such as rent or earnings from the funded property or business, and (2) capital gain -- such as when you sell the property or business for more than its value at the time it was acquired -- also taking into account the cost of funding (interest expenses) and cost of ownership.

This brings us to bad debt. Quite simply, bad debt is everything that is NOT described in the above paragraph. It is the increase in the amount of bad debt that should be raising alarm bells. The interest paid on bad debt is not offset by anything. Debt is bad when it is used to fund non-durable stuff, stuff that loses value (depreciates) over time, or stuff that incurs on-going expenses for its owner (on top of the interest one pays on the loan used to buy said stuff!).

Measuring the amount of debt owed by the Philippines should be put in the context of how much of our national debt (our liabilities) funds productive assets.

Consider then the $400 million in "development" loans awarded by the Asian Development Bank to the Pantawid Pamilyang Pilipino Program of the Department of Social Welfare and Development (DSWD). A significant component of that is fundamentally no more than a cash dole-out to poor Filipino families as blogger Ben Kritz observes...
The program provides cash grants to poor families with the stated intention of helping these families keep their elementary-aged children in school. Each family that qualifies for the program receives Php 500 per month, plus an addition Php 300 per month for each of up to three children per family, with monthly and annual limits set at Php 1,400 and Php 15,000, respectively.

Kritz also cites a few specifics on the circumstances surrounding the approach to disbursing the funds and the overarching administration of its application to the economy. The systemic risk of the planned approach he summed up quite pointedly...
[...] if there are irregularities in the handling of the funds, they will only be discovered once the funds are already gone.

To that I shall add the following question:

What is the productive asset that will be the outcome of the disposal of these funds?

In short, what is it specifically that we plan to have to show for after all these funds are gone? What will we have added to our society's capital base?

Given the way Filipinos tend to spend the hard-earned remittances of their OFW kin, I doubt if this new source of easy cash that the DSWD plans to throw into "Da Pinoy Poverty Problem" will go into building anything new and sustainable in our society.

3 comments:

  1. This might be a clue as to why the country continually creates these bone-headed problems for itself. Here's a comment someone just made on my blog post about this topic:

    Illustrado-Joe
    6:17 pm on September 10th, 2010

    "One of the few relatively well thought through welfare policies and then Ben Kritz comes and bad mouthes it. It was created in Mexico to do away with the food subsidies, which are a major source of tong.

    It provides some assistance for families who live in Barangays without electricity, water systems, road connection, etc. From your home in Manila it is easy to forget that. The approach is less tong prone as DSWD independantly hands it out and assesses eligiblility via surveys.

    How about not taking out a loan for it and finance it from the infrastructure funds, which anyway are a major source of tong."

    Huh? This was my reply:

    Ben Kritz
    6:39 pm on September 10th, 2010

    "@IJ,

    You realize what you’re saying makes no damned sense at all, right? Explain the logic to me of using infrastructure funds to provide assistance to “families who live in Barangays without electricity, water systems, road connection, etc.” instead of actually cleaning up the handling of the infrastructure funds and providing those things, as the funds are intended to do?"

    Am I missing something here?

    ReplyDelete
  2. Welcome to the twilight zone of the human intellectual landscape, Ben: Filipino thinking. To the Pinoy mind, a bucket of money is something one throws into the wind for a few minutes of thrill or relief. Perhaps it is the lack of seasons in the islands. The relative constantness of the climate all year round may have failed to induce an ethic of planning and conscious delay of gratification. I dunno what it is.

    IJ's comment is a mini-treatise on Da Pinoy's approach of stumbling from one crisis to another. The thinking cannot seem to go any further than getting around symptomatic obstacles and fails to address systemic issues and risk.

    Result is a constant supply of these uniquely-Pinoy "bone-headed problems".

    ReplyDelete
  3. Another major problem is that those who come up with these types of bad debt loans are either (1) incompetent dreamers who have a loose grasp of reality and don't want to be educated by facts, or (2) outright crooks who want to steal money that the rest of the country will have pay for.

    I wonder if 1 and 2 could be combined into just one person or group. Now that's scary!

    Even if the previous GMA administration had some members belonging to Group 2, as the Yellow Horde contends, they still didn't include anybody belonging to Group 1 because the GMA camp were full of hard-nosed realists and strategists.

    Unfortunately, the new N/A P-Noy administration has just proven that they have lots of members from Group 1. Most likely, it will also get infiltrated by some members from Group 2 (because sweet-smelling garbage always attracts flies).

    Some amount of corruption, say 15-20%, can be tolerated (it can't be fully suppressed) as long as the rest of the national economy is growing and sustaining itself. Unfortunately, even a 1-5% level of corruption is intolerable if the entire economy is floundering and being flushed down the tubes because the national administration just doesn't know enough how to develop and run a growing national economy.

    ReplyDelete

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