ADB doubts RP can sustain economic growth
Warns of exodus of skilled workers
By Doris Dumlao
Philippine Daily Inquirer
First Posted 23:47:00 03/06/2008
Filed Under: Economy, Business & Finance
MANILA, Philippines -- The Asian Development Bank on Thursday cast doubts on whether the Philippine economy could sustain the high-growth momentum seen last year and warned that the large cash remittances in exchange for the exodus of Filipino workers may be causing more disparity between the rich and poor.
In a press briefing, ADB chief economist Ifzal Ali presented the bank's new diagnostic study -- “Philippines: Critical Development Constraints”-- which indicated that the country had fallen way behind its East and Southeast Asian neighbors over the past five decades and thus must do much more to boost growth and reduce poverty.
Ali added that the ADB had started a separate and “very important” new piece of research tracking the flow of overseas Filipino worker (OFW) remittances which now equaled about 12 percent of the country's gross domestic product (GDP), or the total amount of goods and services produced by the domestic economy.
“What we looked at is where the remittances go. It goes to the relatively better off. In fact, if you look at the rural poor, their remittances are from the NCR (National Capital Region),” Ali said.
“It increases income as well as expenditure inequality.... We found this to be a very significant finding -- that the foreign remittances don't really go to the poor; they go to the next tier,” he said.
The economist said the ADB will release to the public the results of the new study once completed. But the diagnostic study unveiled Thursday, he said, already addressed the underlying issues behind the OFW phenomenon -- the need to create opportunities at home and to enhance the capability of the populace to benefit from these opportunities -- in order to result in “progressive prosperity” for the nation.
“What's happening is that migration particularly among the skilled workers is high. The country is losing not only human capital but it is also losing a lot of the investment made in educating these workers,” Ali said, explaining his skeptical view on any economic model that relies on overseas remittances.
The study released Thursday cited the urgent need for the Philippines to raise revenues, improve infrastructure, strengthen governance to build investor confidence, expand its industrial base and improve access to employment and development opportunities.
The three-decade-high 7.3 percent growth in gross domestic product achieved last year versus the 4.67 percent average from 2001 to 2006, Ali said, was largely due to the government's pump-priming in the first half of the year associated with election spending.
For such a growth momentum to be sustained for many years, Ali said, investment levels much higher than what's seen in the Philippines now were greatly needed.
“If you look at what's happening in the neighboring countries, they're always 10 percentage points higher (in terms of investment ratio to GDP). This is the reason why we feel that the 7.3 percent that we witnessed in 2007 is not a start of a spurt in growth rate over time which can be sustained for many years,” Ali said.
The chief ADB economist cited the need to boost investments in physical infrastructure and human capabilities as well as to make more efficient use of both existing stock of capital and labor.
“Only then can the higher rates of growth be sustained; otherwise it will just be a flash in the pan,” he said.
The ADB study lamented the slow pace of poverty reduction and “stubbornly high” income inequality in the country. Based on the latest government data, 26.9 percent of Filipino households in 2006 were below the official poverty threshold, up from 24.4 percent in 2003.
The Gini coefficient of per capita income, a key measure of income inequality, was slightly above 0.45 -- the highest among Southeast Asian economies.
The ADB report identified a number of critical constraints to growth and the fight against poverty in the next five to eight years.
First, the study said the fiscal situation remained tight despite the government making good progress to reduce deficits and to balance the cash budget this year, noting that much of the reduction in fiscal deficit was driven by deep cuts in spending on social and economic services as well as sale of government assets.
Secondly, it said declining public and private sector investments in infrastructure had led to inadequate and poor infrastructure and bottlenecks, raising the cost of doing business and eroding the competitiveness and attractiveness to both foreign and local investors.
Third, it said the poor performance on key governance aspects, in particular control of corruption and political stability, had eroded investor confidence.
The report argued that the government's inability to address market failures of various kinds had also hampered the expansion and diversification of its industrial base. It cited the need for the government to play a more proactive role in overcoming coordination and information failures that could lead to under-investment in knowledge and innovation, discourage entrepreneurship and constrain diversification.
It also looked at other constraints like low domestic savings, the efficiency of domestic financial intermediation and cost of borrowing and human capital issues, but found them to be less critical for now.
But Ali said the ADB's recommendations would require five to eight years of implementation and could not be achieved overnight.
Asked whether poor governance was a major factor behind the country's failure to take off, Ali said it could be a confluence of many factors.
“It could be caused by external shocks, for example, a downturn in the electronics cycle as the Philippines is so dependent on electronic exports. It could happen from not addressing some of the macroeconomic instability which leads to lack of confidence in terms of private investors and it could happen as a result of natural disasters. It could be political instability. It could be a whole gamut of factors that are at play,” Ali said.
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