Is the economy getting any better?
In an e-mail, Roger Lim, chief executive officer of Cebu Power, asked me, “As an economics professor, what do you think? Is the economy getting any better? Is it better than in the previous years or administrations? Is there hope within the next two to three years?”
If we look into the macroeconomic fundamentals, there is no doubt that the economy is getting better than in the past. Our only problem is that our ability to grow “now” is hindered by what is happening abroad particularly the fiscal problems in the Eurozone that drag many of its economies down and the sluggishness of the United States growth that still leaves many of its people out of work.
These, together with the slowing down of China and the continued inability of Japan to wake up from its long stupor since the bursting of their real estate and stock bubble in the ’90s, will continue to limit our ability to export and attract foreign direct investments. The last item is even more problematic because whatever foreign direct investment (FDI) comes to Asia mostly by-passes the Philippines for many reasons. Rapid expansion in exports and investment (including from domestic investors) were prominent features of Japan and the Newly Industrializing countries in Asia (South Korea, Taiwan, Hong Kong and Singapore) when they were enjoying rapid growth in their gross domestic products.
Of course, the slowdown in global trade and investments also affects our neighbors in Asia but fortunately, we have many factors in our favor that provide us with a window of opportunity to grow faster this time than in the past:
(1) Philippine debt is just about 50 percent of GDP now from a high of 80 percent before the last Great Recession. This lowers our annual debt repayment burden and thus leaving us with more resources now for productive endeavors.
(2) Our fiscal deficit (up to 3 percent of GDP at its highest) is now trending down—not so much because of the inability of the present administrations to use on time the approved budget but also by the improvement in revenue collection, including the perceived increase in the efficiency of the use of these funds as corruption is minimized.
(3) Our gross international reserves (more than $70 billion) is already many times bigger than the required healthy reserves level of at least four times the size of our monthly imports.
(4) Thanks to our judicious Bangko Sentral ng Pilipinas, the country’s inflation and interest rates are low also which augurs well for both our consumers and domestic investors.
(5) Our infrastructure still needs a lot of fixing but much of them will soon be corrected once the public-private partnerships will go rolling. With much of the funds coming from the private sector for big ticket projects in the PPP (sorry still mostly at National Capital Region, Region 3 and 4), this now leaves the government also with more funds to tackle smaller projects in the different parts of the country like here in Cebu.
(6) More importantly, we have a leader now sitting in Malacañang who is finally giving more time and effort to fight corruption and improve governance. In the World Economic Forum’s Global Competiveness Index we fared badly in the category of institution which speaks volumes of the way this country was governed in the past.
(7) After the impeachment of former Chief Justice Renato Corona, the judiciary down to the lowest might have been jolted now to act more responsibly – make decisions fast and fairly and make the rule of law prevail.
Truly, the window of opportunity is much wider now before us. It is up for us to sieze this.
In the past, the economy was driven by the rapid growth in consumption expenditures from the demand side. This is good in the short run especially when investments and exports are not doing well to support the economy but this is not healthy in the long run. What we need is more investments in private productive ventures and government building of more infrastructures, education and health, not investments in stocks, real estate, currencies and other speculative instruments. The past years saw our investment-to-GDP ratio also falling which actually meant that our ability to produce more and raise our GDP in the long run is also compromised. What can our surplus labor do if investments are not there?
From the supply side we also boast of our strong service sector. I have nothing against the service industry but from what I know about development, service expansion should follow only once we have completed our industrialization phase. Industries give more salaries and wages to our workers than agriculture and services, and thus raising the overall size of our GDP and per capita income that our people can use later on to support a more vibrant services sector.
So much is said about the country needing to have into inclusive growth. This is right because if only few benefit from whatever growth we get, the rest of the people are poor and cannot be relied upon to support a sustained increase in demand for what business can produce.
Meanwhile, because many of our people are poor under our present system of “exclusive” growth, we also find the government diverting much of its funds to support them, like the Conditional Cash Transfer Program (4-Ps) that costs about P20 billion this year. Poor families also tend to be bigger in size and grow faster. This means more government headaches: more public schools and hospitals to build, more teachers, doctors and other personnel to hire, etc.
In their book, “Why Nations Fail,” Daren Acemoglu and James Robinson said it is not the lay of the land, geography, culture, or ignorance that makes nations fail but the kind of institutions that they build. If the institutions that we have, like the government, is captured by the powerful with vested interests (their own, not the people’s), that is a sure fire formula for the nation not to grow rapidly in a sustained and inclusive manner.