Slow growth, high population

In 2000 the estimated population of the country was 94 million. This makes the Philippines the 12th biggest country in the world in population size. In the same year the Philippine gross domestic product was measured at US $199.6 billion but this makes the Philippines only number 46 in terms of the size of its economy.

By dividing our GDP with our population, we get national per capita income or per capita GDP which in 2010 reached only $2,123. At this level we ranked number 123 in the world in material wealth  measured in GDP per capita. This is not fun when in the same year Indonesia had $2,974; China, $4,382; Thailand, $4,992 and Malaysia, $8,423. We bested India and Vietnam which had $1,371 and $1,174 in per capita GDP in the same year but they will soon surpass us given that their per capita GDP was growing in the last decade or two at much higher rates than ours.

What makes our GDP per capita so low  compared with that of our neighbors? There are many possible reasons but the most obvious I see is our slow GDP growth through the years coupled with our high population growth. From the ’50s up to the end of the last decade, the Philippine economy grew on average by less than 2 percent annually while our neighbors grew at 3 percent or higher.

In the same period most of our neighbors also succeeded in bringing down their population growth to below 2 percent or 1 percent. We did manage to bring down  population growth from 3 percent in the ’60s to around 2 percent now but this is still one of the highest in Asia. I may not say that our rapid growth in population is the one causing our GDP to grow slowly but it is easy to see that had we brought down our population growth to say 1 percent or 1.5 percent a year, our per capita income would have been higher than it is today.

Macroeconomics is concerned not only with how the economy operates but also how to stabilize the economy when it swings wildly in the short run or to grow it to improve the well-being of  people in the long run. In macroeconomics, there are s monetary and policy tools that the government can use to cool down an  economy that overheats or reenervate one that is receding. In a recession, for example, the government can increase government expenditures to pump prime the economy or expand  money supply to bring down the interest rate and encourage more investments. What is needed to grow the economy?

Whether they are aware or not, most government policy makers follow the Solow growth model which points to growth in savings and investments and improvement in technology to grow the economy. The model shows that countries with higher savings and investment rates tends to exhibit higher per capita output per worker which naturally translates to higher per capita income. This happens because higher savings and investments result in higher capital that each worker can work with. Given a certain number of workers, the higher the capital available per worker, the higher the output per worker. The policy implication is that countries that want to increase their output per worker or income per person must also aim for higher savings and investment rates. On this, the Philippines again scored badly in the past when compared with our neighbors.

On average we saved and invested about 20 percent or less of our GDP. Many of our neighbors saved 30 percent or higher. China in fact saved and invested up to 50 percent or more of its GDP and this surely is one reason why China’s GDP had been growing at 10 percent or higher in the last three decades.

There is, of course, a limit to what investments can do to grow the economy. When the country is accumulating more capital through higher investment rates (in factories and infrastructures, for example), the amount of depreciation of capital it will incur also grows. When the level of investment just matches depreciation, growth of output per worker stops and will even turn negative when depreciation exceeds investments. Moreover, saving and investing at higher rates may be also bad for the present generation when it leaves them with very little to consume in the same way that is also wrong for the present generation to consume at higher rates at the expense of investments because less investment today also means lower output per capita and consumption in the future.

I do not know exactly how much we must save and invest of our GDP to achieve a more  respectable rate of economic growth and realistic balance of present and future consumption. But this I know: Presently we are not saving and investing enough to grow our economy, the reason many of our people wallow in poverty.

Many countries today, especially the developed ones, rely on technology improvement to grow their economy. The Solow growth model says that given capital, the higher the level of technology used, the higher the output per worker. Can using modern technology in the country help us grow? Yes, but only if we are ready to learn and adapt to modern technology, which is available for the taking. The trouble comes when we are not educated or trained enough to understand and use modern technology. This is where we also need to raise the level of our education. We do have many high school and college graduates and we might say that we therefore have no problem learning and using modern technology. Unfortunately, the quality of our education is very low, not to mention the fact that we really lack science, math and engineering graduates that can easily learn and use modern technology.