What might Milton Friedman make of the Philippines today?
The Nobel economist popularized the theory that inflation is "always and everywhere a monetary phenomenon." Since the 1960s, his argument that demand for money controlled all prices won converts from London to Tokyo.
Look no further than the Bank of Japan's deflation battle and you see the American's outsized influence 12 years after his death.
But events in Manila show that even the great man was not always right.
Last month, President Rodrigo Duterte's team demanded that the Manila central bank explain why the nation suffers the highest inflation in Southeast Asia. Though price pressures cooled in late 2018, the 5.2% annualized rate far exceeded the 2.9% gain in 2017.
The response from the Bangko Sentral ng Pilipinas was to say to Duterte's team, in effect, -- look at yourselves in the mirror.
Under the leadership of Governor Nestor Espenilla, BSP hiked rates five times in 2018. Those moves stabilized a plunging peso and helped bring consumer prices down from a near 10-year high of 6.7%. But, as the BSP explained in its response to Duterte, made public last week, "supply-side factors drove inflation in 2018."
In other words, it is really the government's fault.
The reference here is to supply bottlenecks that warp the flow of goods and services. In Manila's case, that means poor infrastructure that distorts costs of key commodities like oil. It means antiquated cooling and storage networks that push up the cost of meat, fish and vegetables. It means excise tax increases that Duterte's team implemented clumsily. It also means a "Build, Build, Build" program that necessitates importing huge amounts of construction goods with a weaker peso.
The bad news is that, despite the central bank's efforts, election-year wrangling could exacerbate these problems and reignite inflation.
Manila's dueling political machines, notorious for sudden budget-busting spending binges, are gearing up for midterm polls on May 13 in Southeast Asia's fifth-biggest economy.
With 18,000 national and local positions up for grabs, expect loads of pork. The last 12 months give incumbents a bigger-than-usual incentive to open municipal wallets: the weakest gross domestic product growth since 2015.
The 6.2% GDP growth rate in 2018 is respectable relative to peers. But for Duterte and his ruling PDP-Laban party, it leaves much explaining to do with voters. Duterte was elected in 2016 to accelerate reforms unleashed by predecessor Benigno Aquino.
Aquino strengthened national finances, increased transparency and cleaned up customs and procurement processes. That won Manila its first investment-grade ratings. The 7.6% economic growth Aquino's reforms were producing by 2010 were the fastest since 1976.
Duterte was elected to accelerate Aquino's upgrades. His tough-on-crime 22-year tenure as mayor of the southern Davao City earned Duterte national celebrity. Mayor Duterte often produced faster growth and lower levels of graft than national leaders. The hope was that he would unleash those skills nationally and bring order to a chaotic economy.
Instead, Duterte pivoted to a deadly war on drugs. With more than 5,000 body bags so far filled (or 12,000 according to Human Rights Watch), the Philippines's global image has suffered a blow.
So has the president's economic record. Tax increases on everything from fuel to beverages were phased in haphazardly, fanning inflation. The speed with which Manila implemented Duterte's infrastructure boom gave little heed to inefficiencies and graft that pad import prices and, ultimately, retail prices. Bad news for an economy that gets 70% of growth from consumption.
Manila's poverty challenge exacerbates these side effects. In 2018, the United Nations estimated that roughly 40% of Filipinos live on less than $2 per day. Any surge in food and energy staples can put tens of millions of people on the edge, threatening both their livelihoods and long-term prospects.
The costs of too few Filipinos experiencing the fruits of growth can be counted at the nation's airports. Roughly 10% of the nation's 105 million people work abroad and send money back home.
Upcoming elections could make life even harder for those struggling with rising prices. Five polls in the last 14 years generated a surge in growth as dueling candidates lavished funds on transportation, food, drinks, mobile phones and assorted other inducements for voters, a recent Bloomberg study found.
In a less anarchic system, the central bank would simply squeeze money out of the financial system. But the trouble is, the Philippines is not plagued by "demand-pull" inflation, when demand outstrips supply. Its struggle is with "cost-push" pressures, which flow from rigidities in distribution systems that have nothing to do with interest-rate levels.
The short-termism that feeds that dysfunction is currently on display. On Feb. 8, Manila finally ratified its 2019 budget after a monthlong impasse. Finance Secretary Carlos Dominguez reckons the delay cost about $10 million per day. With the budget in flux, government agencies have fewer funds to support rural areas. Not devastating for a $314 billion economy, but that cash would come in handy to alleviate poverty.
Think of it as Manila's version of the recent U.S. government shutdown. The last time such a budget delay mess occurred was before Aquino's tenure. Such squabbles were common in the days of President Gloria Macapagal Arroyo (in the 2004 and 2007 elections). Perhaps it is just a coincidence, but Arroyo is back in power. She reinvented herself from disgraced former president under house arrest to speaker of the House of Representatives.
As Duterte and Arroyo slug it out in Manila, the forces shackling the Philippines to Southeast Asia's worst inflation remain unaddressed. Debates about attacking corruption, raising productivity or increasing competitiveness are pushed aside. As a result, any success Manila has getting GDP back above 7% may just boost inflation.
Could the BSP raise today's 4.75% benchmark rate? Sure, but then any resulting economic slowdown might push the GDP rate below the inflation rate, a shift that often scares foreign investors. In late 2016, I asked then-BSP Governor Amando Tetangco what made the Philippines different from peers. "Well," he quipped, "this is not a place Milton Friedman would understand."
That is truer now than ever. Only be modernizing the nation's distribution system can the Philippines create a more conventional economy. And only then would the central bank have the sway to get inflation under wraps and keep the Philippines rolling in the right direction.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.