The Philippine economy today and what can further strengthen it

Statement delivered at the “Pandesal Forum” of Kamuning Bakery Café in Quezon City on July 19, 2019

By DR. GERARDO P. SICAT

***Emeritus Professor of Economics, University of the Philippines (U.P.), School of Economics

***Education: Bachelor of Science in Foreign Service (cum laude honors) & Bachelor of Arts  (cum laude), then masters degree in economics, University of the Philippines; then Ph. D. at Massacusetts Institute of Technology in Cambridge, Massachusetts;

***He was the first Director-General of the Philippines’ National Economic Development Authority (NEDA) and concurrent Economic Planning Minister, also serving earlier as former chairman of the NEDA’s predecessor the National Economic Council;

***Considered the father of the Philippine Institute for Development Studies (PIDS), Dr. Sicat suggested the founding of the Institute in 1977 as a research arm of the government that would assist decision-makers in analyzing policy issues and in promoting freer debate of socio-economic concerns.

“Long-term growth.” The Philippine economy has been on a long-run uninterrupted growth for a period of two decades now, at a pace of 5 percent per year growth of GDP.

In recent years that average growth rate has gained traction at 6 percent per year. Over time, the country’s macroeconomic position gradually improved as a result of propitious factors that have sustained themselves.

“Macro-fundamentals.” Specifically, several important factors working together have made this possible.

(1) sustained growth of OFW remittances which raised the overall consumption demand of families dependent on such income;

(2) growth of exports, especially from semi-conductors end electronics industries;

(3) from the middle of 2000s with the growth of call centers and back office operations; and

(4) the growth of a rising tourism sector.

The overall expansion of expenditure on the GDP over this long period has grown within the limits of these fundamentals. Private consumption, domestic investments and government expenditures have grown along with the economy’s innate capacity to sustain these demands.

When, at times, the threat of inflation through rising fiscal deficits was felt, the government undertook to raise the required change in revenue position through tax reforms that improved tax revenues. This meant that the fiscal balance would be restored to the desired levels (with allowance for an affordable level of fiscal deficit).

“Duterte economic reforms.” Under the Rodrigo Duterte administration which took power in mid-2016, the level of growth had taken a more pronounced investment-driven process. As a result, there is both a change in composition of the growth process. While still being stimulated by the normal rise of consumption within the economy, the rapid rise of public investment projects through the “Build-Build-Build” projects will help remove many structural inefficiencies that have plagued the economy once these projects are finished.

(Infrastructure improvements however are only part of some of the problems of future growth directions. Important economic reforms are needed to complement the attention being given to infrastructure provisions. Many more on this, below.)

More important than the infrastructure projects is the fact that the Duterte government has already achieved a major tax reform program which has made the investment-driven public investment programs more feasible. By the second year of it being in office, the government succeeded in passing the first package of the tax reform program it calls TRAIN.

TRAIN I has restructured the main sources of revenues. It reduced the rates of the personal income tax but raised excise taxes on energy and on sin taxes (on alcohol and tobacco), following the pattern of other simple tax systems more suitable for high-growth emerging economies. This has made revenues more responsive to the growth of the economy.

The additional revenues from TRAIN I has made it possible for the country to finance a lot more public infrastructure projects. This works well through “leverage.” By raising revenues, the government actually strengthens the capacity to raise larger amounts of financing for investment projects with long life. Access to borrowed funds, including economic development assistance, becomes easier because there is sufficient revenue-backup.

In this sense, new TRAIN revenues are a kind of multiplier for higher access to development financing.

TRAIN has also made possible more spending for support of government expenditure to help certain groups in society, especially the poor and in some cases help to the middle class. TRAIN I makes it possible to support a higher level of income transfers to the poor (the targeted 4P, or Pantawid program: the conditional cash grants to poor families), more public spending on education, including tertiary free tuition for enrollees; the financing of salary increases for the bureaucracy, including policemen, soldiers and government bureaucrats.

The prospects of other parts of TRAIN being adopted are high in the remaining three years in the term of President Duterte. If he accomplishes to put in place the overall TRAIN reform agenda – all its five components – he will be able to lay the foundation for a more modern fiscal system to support the demands of sustained high economic growth of the country’s future development.

One major accomplishment of the Duterte government is the law that allows the importation of rice under a tarified basis. This gets rid of the NFA monopoly on importing decisions. This move gives the growing Philippine economy more access to inexpensive rice for Philippine consumers and will reduce the pressure to contain labor restiveness for wage demands. This law enables the country to access ASEAN sources of inexpensive food that local rice growing cannot attain and opens the country to improve its agricultural advantage in other high valued agricultural crops.

(The high price of rice in the country was due to the limited importations of rice, in part to protect Philippine rice farmers who are much higher cost compared due to comparative advantage reasons [land area, topography, water resources, and other reasons]. While this reform in rice trading might hurt part of the domestic rice producing regions, the government now has basis to help the rice growing industries with more productivity-raising investments to improve infrastructure such as improved irrigation and transport and other modern support.)

“Important reforms to raise the quality of growth.” Even as the prospects of sustained economic growth are being strengthened by current economic efforts, including the economic reforms that have so far been accomplished, there is much that needs to be done to make the economy improve more.

One aspect of this is to improve the quality of growth, to make the growth felt much faster by the large amount of poor people still suffering from poor economic conditions. The high Philippine population growth continues to hamper our efforts to create better conditions for the country’s citizenry.

In all of our high-performing economic neighbors in East and Southeast Asia – let’s name them all that were as poor as we were at the end of the Second World War: South Korea, China, including Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, Thailand, and Vietnam – a one percent growth of their GDP today benefits more of their citizens than the same percent does for us.

The reason for this is that there are more dependents to support in our case who cannot yet contribute to any growth of that GDP – new babies and school-dependent youth, far more poor people employed only in the low income informal markets and in very poor agricultural and backward areas not reached yet by our modern economic sectors and the unemployed and physically impaired.

We must make that modern economic sector grow more rapidly by an improvement of investments in industry, agriculture, commerce and other services. For many decades, our economic policies have been insular in favoring only domestic businessmen. This insular character of our growth even as we have adopted more far-reaching efforts to open industry and trade in the economy since the 1970s and, more so, by the 1990s when we joined the world’s open trading community under the WTO.

It is now time to embrace greater openness toward more foreign direct investments in our economy. In part, many of our businessmen are much more capable now to deal with more competition. Secondly, even if some do fear foreign competition, they can work with an injection of sound foreign investment partnerships to improve their markets and their production and business technologies. There are more capable local businessmen who need foreign partners for their future success in our economy today.

Let’s also put it another way. We are importing so many goods today that we can almost buy any foreign produced items here in the country because of our open economy. (Knowledgeable balikbayans who know this do not bring anymore that big box of goodies and travel much lighter because they can buy most of what they give away as pasalubongs in our department stores and groceries!)

If we can invite many of these foreign companies to set up their production facilities in the country, they will enlarge our country as a production base for the world markets. This is what all the successful countries I have mentioned have done to enable themselves to earn a large part the world’s export markets to be based in their home territories. And this has made them conquer poverty and extend the benefits of economic growth toward more of their citizens.

In our case, much of our advantage had been dissipated by the departure of our human skills to work abroad because our country is barring – through many restrictive economic policies against foreign capital – some critical FDIs from coming in and there are few good-paying jobs to have around. The result is that more of our human capital resources earn their incomes from work abroad. Although it will be useful for Filipinos to  earn good income from their work – and to be an OFW should always be an option for economic liberty – Filipino skilled and even unskilled labor should have a fair chance to find good at home if we open the economy to more FDIs.

So, there is probably better understanding of the need to allow much greater foreign participation in the national economy. This will speed up our development. It will open the economy toward a larger participation in

A complementary policy toward improving our policies to open the economy toward more FDIs is to focus on employment policies in our laws. In the 1970s when then labor secretary Blas Ople wanted to rename the Department of Labor into what it is now, DOLE – with emphasis on the “and Employment” part, I welcomed it. I thought that would change the mindset.

Unfortunately, it did not. In fact, instead of holding back on modernizing our labor laws to look like those dominantly in effect in industrial Europe and America, the DOLE has continued to be a mouthpiece for pushing for labor laws to be close to their Euro-American image. Our neighbors have been more sensible. By being pragmatic on these issues, they have made their laborers richer, more comfortable, and more highly respected within the world’s labor movements, because they have achieved high productivity through hard work. This is what our DOLE and our labor leaders must learn to inculcate in their advocacies.

I have more reforms in mind. Let me briefly touch on a few of these. (1) There is need for the government to support and reorganize the tertiary public educational system (we have too many universities and colleges in name only). (2) More important in education is to invest in our teachers and schools as a matter of economic survival. (3) Another is to harness our capacity to save from wage incomes to enlarge the capacity of our housing program to modernize housing for the wage earners in the country. (4) Another is to put a limit to our objectives in land reform. In other countries, they focused on limited land area and sector focus and closed the process as soon as the objectives were achieved. In our case, we have achieved a lot already if we judge it by areas of lands and land reform beneficiaries already benefited through converted and transferred lands. But actually we overdid it by extending the coverage of land reform toward an unsustainable large land areas.

 

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July 19, 2019

Note: Pandesal Forum is a non-partisan, issues-focused and tertulia-inspired forum where leaders and newsmakers dialogue with media and intellectuals on broad range of Philippine and global issues at the 80-year-old Kamuning Bakery Café in Quezon City and moderated by writer Wilson Lee Flores.

 

Wilson Lee Flores

Pandesal Forum moderator

09178481818, 09188077777

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