GDP growth lower in the second half

The country’s Gross Domestic Product (GDP) growth slowed down to 4 percent in the first half of the year from around 8 percent in the same period last year. Another global recession is looming as the United States unemployment rate remains high at 9 percent and the Euro zone is restrained from recovering fast due to the fiscal woes of Greece and other highly indebted Euro governments. Now we see the P-Noy government adjusting its target down to 4.5 percent to 5.5 percent GDP growth for 2011 and 5.0 percent to 6.0 percent in 2012. These numbers were presented during the last Philippine Economic Forum organized by the government at Radisson Blu Hotel last Friday. I see these new growth targets, however, to be too low to matter much in our drive to cut down poverty, which affects up to a third of our people.

In the new Philippine Medium term Development Plan (MTPDP) 2011-2016, the mantra is to achieve rapid, sustained and inclusive economic growth to make it possible for many people to be lifted out of poverty. It aims for the GDP to grow by 7 percent or higher annually. After adjusting for our population growth, which averages 2.0 percent annually, this 7 percent annual GDP growth will leave a net 5 percent annual increase in our per capita income.

Based on the International Monetary Fund April 2010 estimate, the Philippines had a nominal per capita GDP of US $2,123. A sustained 5 percent annual increase will allow our per capita income to double in 14 years to US $4,246. Not bad except that this will still be lower than the 2010 per capita GDP of China, which was estimated at $4,382, or Thailand’s $4,992. Never mind comparing ourselves with Malaysia, which had US $8,379, or South Korea, Hong Kong and Singapore, which have long moved already to the First World. A country needs a per capita GDP of US $12,000 or higher to be among the developed or First World economies.

We are still better off than India with $1,371 per capita GDP, of course, or Vietnam’s $1,174. Let us be mindful, though, that these two countries had been growing much faster than the Philippines in the last decade. It will not be long before they overtake us, hence the need for the Philippines to grow faster.
Trained in economics, the President is not ignorant of this. Thus, his new Medium Term Philippine Development Plan 2011-2016 sets the GDP growth higher at 7 percent annually. The rationale for this, according to the plan, was that in the past, particularly during the time of Arroyo, a 4 percent to 5 percent percent annual GDP growth did not help bring down poverty at all.

It is different in China. When Mao Tse Tung died, he succeeded in wiping out inequality but at the expense of making all Chinese in the mainland also equally poor. When Deng Xiao Ping came to power after Mao’s death, he turned China into a capitalist economy by starting to privatize some of the government-owned and -controlled business enterprises and allowing foreign investments into the newly established economic zones in China’s southern coastal cities. In the rural areas, he allowed the farmers to plant part of the government-controlled farmlands with whatever crops they want and to market them for profit. This allowed the Chinese economy to boom which since the 1980s had grown by at least 10 percent yearly or close to it. Growing at this rate it took only 20 years for China to equal and then overtake our per capita income. Now it has doubled our per capita income, which also allows many of its people to rise out of poverty.

One of the reasons usually cited for the lower-than-expected GDP growth in the first half of the year was the much constricted level of government expenditures because the P-Noy government not only spent less than what was budgeted for the first half of the year but also that of the actual government expenditures in the same period last year despite this year’s much larger budget. The government says it is slowing government expenditures because it wants more scrutiny and transparency in the use of public funds. Good  without necessarily forgetting that slowing down government expenditures can also hamper economic growth.

Or is not the object of slowing down government expenditures merely to cut down the government deficit to show that it is more fiscally responsible than the previous administration to raise the sovereign rating? But is not the level of government deficit for the year already set in the approved budget at much lower level than last year? Why cut it farther down? And so, perhaps after realizing its folly, the P-Noy government just announced a P70-billion-plus stimulus fund from its so-called savings to be spent before the end of the year. But this also does not make sense when it could not even spend all that is already in the budget.

The fact is that even if the government succeeds in spending all the money that has already been budgeted for the year, coming as they are only in the last two months of the year, it may not help much to raise the GDP growth this year because the multiplier effect of this will be felt only next year. Furthermore, the very slow recovery in the US and fiscal problems of many governments in the Euro zone created more fear of another global recession to come. With this, investments also slowed down everywhere, including the Philippines. And that is another reason for our GDP growth in the second half to be slower, too.

Which means that overall, the 2011 GDP growth may just be in the lower half of the currently adjusted 4.5 percent to 5.5 percent target, not more. I called this in the Philippine Economic Forum last Friday, when I spoke during the open forum, “back-to-normal,” a.k.a. the same high unemployment rate, poverty and hunger as before.