“Freeze & Reboot” COVID19 economic recovery plan

PUBLiCUS Asia, Inc. published over the weekend a four-phase “Freeze and Reboot” plan to address the pressing concerns of the Philippine economy under COVID-19, framing the unprecedented pandemic as a “unique opportunity” to address structural weaknesses in the economy and put the country on a path towards more inclusive prosperity moving forward.

Freeze and Reboot
A Strategy for Economic Rebirth Amid COVID-19

Ma. Lourdes N. Tiquia MPA, MA
Dr. David Barua Yap II PhD
Aureli C. Sinsuat

18 April 2020

INTRODUCTION

The COVID-19 pandemic has precipitated the greatest economic crisis of the 21st Century. Economic analysts across the world offer grim forecasts, positing that a worldwide recession is imminent given the manner in which the pandemic is forcing economies across the globe into hibernation. Implementing inadequate economic policy responses as the pandemic curve rises and eventually flattens as would cause severe and long-lasting socioeconomic fallout. Thus, there is thus a primordial need to develop unprecedented solutions to this unprecedented crisis before millions of individuals and businesses meet economic ruin.

Apart from threatening to wipe out the economic gains made by the Philippines over the past decade and a half, it can be argued that the COVID-19 outbreak will soon expose several of the structural weaknesses of the Philippine economy. In particular, the Philippines’ heavy reliance on imports, underdeveloped telecommunications infrastructure system, decrepit transportation substructure, ailing agriculture sector, overemphasis on low value-added activities, and uneven development patterns will likely deepen the coming recession and hamstring private and public efforts geared towards inducing a recovery. These constraints have to be recognized and promptly addressed.

Amid the understandable alarm and panic during the COVID-19 outbreak, however, lies a sui generis opportunity to dramatically restructure and reorient the Philippine economy. The current government can use the unique circumstances of this crisis to put the Philippine economy on a path toward greater resiliency, inclusivity, diversity, and competitiveness. Through strategic interventions comprised of targeted social safety nets as well as bold macroeconomic policies, the Duterte administration can preserve and perhaps even improve the poverty reduction gains made over the past five years. In essence, the Philippine government must go beyond merely navigating through the current crisis and look towards the opportunities in its aftermath.

While the Philippines faces significant challenges during this crisis as a developing country, it is not without advantages. Sound fiscal and monetary policies cultivated over the past several years have given the incumbent administration a bit of breathing room with which to enact substantial stimulus and relief packages. Moreover, the demand-driven nature of the Philippine economy lends itself easily to recovery – provided that the proper interventions are swiftly implemented.

RISKS AND CHALLENGES

Highly Uneven Economy

Figure 1 provides a visual overview of 2018 gross regional domestic product statistics as generated by the Philippine Statistics Authority (PSA). The figure provides a clear illustration of the primacy within the Philippine economy of Metropolitan Manila (NCR), Central Luzon (REGION III), and CALABARZON (REGION-IV A), the three of which form the Greater Metro Manila Area (GMMA). NCR alone is responsible for over a third of the Philippine GDP (~38%); put together, these three regions account for approximately 62%. Each of the other regions save for Central Visayas account for less than 5% of the total GDP. These numbers amount into a clear pattern of highly imbalanced socioeconomic development among the regions.

Figure 1: Gross Regional Domestic Product by Region 2018

(In Trillion PHP, Current Prices)

Source of Data: PSA
Mapping by PUBLiCUS

 

The preceding observation implies that any major disruption in economic activity within GMMA would have massive spillover effects on the Philippine economy. In the absence of any interventions, the slowdown brought about by the Enhanced Community Quarantine will drastically reduce the growth prospects of the Philippine economy in the coming quarters – likely resulting in a deep recession. It is thus imperative to formulate and implement a massive economic stimulus package.

The intense concentration of economic activity in GMMA and its importance to the overall economy imply the following:

  • The bulk of the economic stimulus package has to be poured into the GMMA in recognition of its importance as the driving force behind growth in the national economy.
  • The eventual success or failure of the stimulus package will hinge on how quickly and effectively it revitalizes the GMMA economy.

            The observed imbalance of the Philippine economy can be viewed as a function of the primacy of NCR, the challenges presented by the country’s geographical configuration, and the failure of successive administrations, past and present, to overcome these geographical challenges. Economic development among the regions is uneven partly because connectivity between certain regions and provinces is poor. The benefits of increased trade and economic activity do not spillover to neighboring provinces because of this lack of connectivity. An argument can also be made that food security and affordability are tied to connectivity. It should be noted that ensuring food from Mindanao (and to a lesser extent Visayas) can reach Luzon to shore up aggregate food security.

Figure 2 provides a graphical overview of selected employment statistics from the NCR:

Figure 2: Regional GDP (2018) vs Employment Share for NCR (2019)

Source of Data: PSA
Mapping by PUBLiCUS

The dashed horizontal line separates sub-industries with more than 10% employment shares and those with less than 10%. The dashed vertical line represents the one trillion peso GDP threshold. The color red denotes sectors that can be viewed to have been hard hit by the Luzon-wide Enhanced Community Quarantine, such as those that cannot adapt to work-from-home arrangements.

Figure 2 suggests that many of the hardest-hit sectors are also the sectors that employ the most number of people. Especially worrisome is the potential impact of COVID-19 and the ECQ on trade and repair. It is thus worthwhile to again emphasize that the stimulus must be cognizant of the contours of the NCR economy in order for it to effect its desired outcomes in the coming quarters.

Another complication that the Philippine economy has to contend with is the likely contraction of remittances from Overseas Filipino Workers (OFWs) in the following quarters due to the impact of COVID-19 on developed economies that serve as their primary bases of deployment. In 2019 OFWs remitted approximately 33.46 billion USD or 1.67 trillion PHP. Even abstracting from its implicit multiplier effect, that amount corresponds to an immense chunk of aggregate domestic consumer demand. This, in turn, further emphasizes the need for demand side interventions to compensate for the likely loss of consumer demand.

The impact of the pandemic on manufacturing can be gauged from the Purchasing Managers Index (PMI) which consists of new orders, output, employment, delivery times, and stocks / inventories. This index dropped from 52.3 in February to 39.7 in March, with further decreases expected in April due to the extension of the ECQ.

Highly Uneven Sectoral Distribution

Figure 3 provides a graphical overview of the distributions of the overall GDP in 2017, 2018, and 2019:

FIGURE 3: GDP Breakdown by Origin 2017, 2018, 2019

(In Trillion PHP, Current Prices)

Source of Data: PSA
Mapping by PUBLiCUS

 

Both charts make it clear that the Philippine economy relies heavily on its services sector. Perhaps more importantly, the numbers indicate that the Philippine agricultural sector is the weakest pillar of the Philippine economy. The agricultural sector the smallest sub-sector of the economy. Rather than registering any significant growth or expansion, its size relative to the other sectors is actually shrinking.

The weakness of the agricultural sector can prove extremely problematic in the coming quarters given the predicted global recession, a contraction of global trade openness, and the onset of typhoon season in the Philippines. In particular, food security would be threatened if importation is decreased and/or the domestic harvest is diminished by a typhoon. It may prove useful to start securing import contracts for critical food commodities such as rice, wheat, and meats.

The preceding point further emphasizes the need to address inter-regional transportation problems throughout the country. Costs of basic food products throughout the country can be pushed downward with greatly improved inter-regional transportation. Agricultural products from Mindanao, for example, should reach Luzon without massive markups. A series of hub-and-spoke-based systems lends itself easily to the current configuration due to the primacy of highly urbanized centers with seaports such as NCR, Cebu City, Davao. These metropolitan areas can be leveraged as aggregation and forwarding centers to facilitate speedy movement of produce throughout the country.

It should also be noted that the industrial sector will be adversely affected by the impending contraction of global trade. Export oriented industries could fail should global demand decrease substantially. Import reliant industries may find it difficult to continue operations should global input supplies dwindle. As such, support for major industries should be considered in the stimulus package.

Meanwhile, the ECQ has severely impacted Philippine services sector given the primacy of retail trade, and to a lesser extent the transportation sub-sector, in the services sector and the manner in which the ECQ constricts activities surrounding these sub-sectors. The stimulus package must thus conform to the contours laid out by the structure of the Philippine economy. More specifically, the stimulus package must be designed in such a way that it can significantly bolster aggregate consumer demand swiftly. Household consumption must be expanded after the quarantine in order to stave off a recession. The failure to resuscitate flagging aggregate demand would likely guarantee a recession in the coming years.

A complementary Industries Reform and Relief (IRR) package can be used as a means to dramatically restructure and reorganize the Philippine economy. Through proper planning and calibration, the IRR package can be used to infuse critical industries with the needed capital (i.e. loans with generous repayment options) to survive and thrive in a post-COVID economy. For example, the IRR package could be used to enhance overall food security, develop manufacturing value chains, encourage the growth of industrial corridors in presently underdeveloped regions, and reduce our perennial reliance on the services sector.

MOVING FORWARD: FOUR-PHASE FREEZE AND REBOOT (F&R) STRATEGY

Based on the foregoing discussion, this paper proposes a multi-phase Freeze and Reboot (F&R) strategy to minimize the adverse economic consequences of COVID-19 and jump-start the economy again moving forward. The phases of the F&R Plan are, in order: Freeze, Restructure, Reboot, and Rebound.

The Freeze phase coincides with the second quarter of 2020. It entails a sober recognition of the economic slowdown that is a natural consequence of the COVID-19 pandemic and the restrictive lockdowns it has necessitated. Identifying the Freeze phase is important because the government must endeavor to collect as much data as possible to measure the actual economic impact of the slowdown. Alternatively, we can consider the Freeze as putting the breaks on the economy to stop the hemorrhage and assess its impact. The primary focus of government in terms of economic policy during the Freeze will be to help families and small businesses weather the storm in the short-term.

After the Freeze, the Restructure phase in Q3 2020 is centered around the Industries Reform and Relief package. Restructure sets the stage for the Reboot phase in Q4 2020. Government will serve as the enabler and mobilizer through demand-side interventions. The General Appropriations Act of 2021 that will be approved by Congress and enacted into law during that quarter should empower the government to use infrastructure spending under Build, Build, Build (BBB) as the linchpin of growth. The last phase, Rebound, should see the economic on a clear pathway towards recovery by the first quarter of 2021.

The F&R strategy employs five synergized economic policy interventions to be implemented throughout its various phases:

  1. Bolster Aggregate Demand
  2. Restructure the Public Transportation System and Telecommuting
  3. Develop Framework for Big Data Interventions
  4. Rehabilitate Weak Industries
  5. Expand Disaster Risk Portfolio

Bolster Aggregate Demand

The ECQ has forced the GMMA and, as a consequence, the Philippine economy into hibernation. Given that the Philippine economy derives most of its vigor from consumer demand, it is imperative to formulate interventions that would invariably bolster the consumption of households. Failure to do so would further increase the likelihood of a recession and hamper economic recovery efforts through fiscal and monetary policies moving forward.

Direct cash transfers to all affected households should be considered as a major component of any stimulus package. It is strongly advisable to go beyond transfers that focus specifically on those deemed by the government as the poorest of the poor. While the poor are, in fact, likely the most adversely affected by the current crisis, they only comprise a fraction of aggregate demand. Middle income households, while less numerous than the low income households, are responsible for a sizeable bulk of consumer spending. Excluding them from consideration would diminish the capacity of direct transfers to stimulate the economy. Put differently, the stimulus should not be viewed merely as an expansion of existing social protections. Rather, it should be viewed as a means to resuscitate the Philippine economy, stave off a deep recession, and accelerate the return to some semblance of normalcy for all.

The imposition any new taxes in the wake of the crisis is strongly discouraged. Increasing tax rates would further constrict economic activity by reducing the disposable income of households and businesses. Raising taxes would be counterproductive to any effort to increase economic activity, in effect reducing the disposable income of households. In fact, it is advisable to go even further and provide taxpayers with tax holidays or tax rebates in order to bolster their spending power.

Another way for the government to bolster aggregate demand is to give government employees their salaries for April through September in advance. This strategy would dramatically expand household consumption rapidly in the coming months without the government having to establish an additional layer of bureaucracy with which to distribute cash transfers.

Substantially increased hazard pay for frontline services is yet another way through which the government can increase aggregate demand and, at the same time, provide incentives for individuals engaged in critical work during this crisis. Moreover, given that the crisis will likely last for several more months, it is imperative to ensure that frontline workers can, in fact, easily afford both their basic needs and the requirements of their work (personal protective equipment, cleansing agents, etc.) throughout the full duration of the crisis.

Allowing the gradual relaxation of the ECQ for critical industries in the coming months is also advisable in order to keep the economy from slumping too deeply. Food production and processing, manufacturing of key inputs, and, to some extent, retail and wholesale trade should be allowed to operate within a regulated or controlled framework. The movement and volume of workers would still be subject to strict social distancing and quarantine protocols. It would not be advisable to insist on a return to normalcy in the near future given that the virus has demonstrated its resilience and potential for resurgence in other countries.

Restructure the Public Transport System and Telecommuting

The crisis presents the national government with the perfect opportunity to dramatically restructure the public transport system in the Greater Metro Manila Area. In particular, the national government can leverage the ECQ rules in order to implement an integrated bus transit system – wherein commuters are required to queue in designated bus terminals and are given strict bus schedules. This strategy allows the government to control the movement of the public, provide a reliable means of transportation during the crisis, and lay the foundation for a more organized transportation system once the crisis has passed.

The creation of designated bus terminals also affords the national government with opportunities to collect data to adjust bus schedules, plan new routes, and generate detailed statistics on commuter volume and demographics. The buses themselves can be fitted with GPS systems that provide information for real-time mapping of traffic throughout the major thoroughfares of the GMA. This allows the government to deploy big data analytics to manage traffic flow. Ancillary benefits include reduced traffic congestion due to reckless driving, increased safety of passengers, reduced vulnerability to transport strikes, improved cleanliness of vehicles, improved capability to deploy buses during crises, and enhanced control over urban traffic flow. An integrated public transport system also has implications for socioeconomic development. A fully integrated transport system has the potential to significantly enhance inter-city and intra-city mobility – allowing freer movement of labor and closer matching of skills with jobs.

The ECQ has also demonstrated the viability of telecommuting for some industries – particularly knowledge-based industries. The availability of a broad range of internet-based conferencing technologies has allowed these industries to continue their operations even during the ECQ. The wide scale strategic adoption of telecommuting best practices in a post-COVID NCR thus has the potential to ease traffic congestion. The government and big businesses can lead the way in the adoption and full integration of telecommuting technologies into their respective workflows. Strategic investments in telecommuting technologies offers both the public and private sectors massive upsides in terms of productivity.

Develop Framework for Big Data Interventions

The United States federal government, in cooperation with big tech companies, leveraged big data analytical techniques to guide their COVID-19 policymaking. They formulated data-driven targeting systems to identify viral epicenters, algorithms to determine infection risk factors among individuals, detailed maps and network models, and released massive datasets for use by the general public. Even smaller app development companies contributed to the national effort by piggybacking surveys on their services.

The success of Taiwan in containing the spread of COVID-19 can also be attributed in part to the big data interventions they deployed at the onset of the pandemic. Taiwan integrated its health insurance database and customs databases in order to simultaneously track the travel and symptom histories of their citizens. Moreover, foreign citizens allowed into the country were kept under close scrutiny through a mobile phone and QR-code based tracking system. All of the data collected through these various interventions were then processed by teams of data analysts with various specializations, ranging from epidemiology to economics.

Big data interventions in the Philippines can equip national and local government agencies with insights and analyses that would help them make informed decisions during times of crisis. Big data can guide policymakers towards the most effective and cost-effective solutions.

The adoption of big data interventions in the Philippines requires substantial strategic investments in the data collection, transmission, and processing capabilities of national and local government agencies. Additionally, an appreciation – not just a passing curiosity, for the value of data has to be cultivated among government employees. Efforts to bring about a paradigmatic shift towards big data would be wasted if government employees are bereft of any appreciation of the value of data in policymaking.

The preceding points place emphasis on the value of fast-tracking the implementation of the National ID system. A national registry with geo-tagged information can be leveraged to provide ample information that can, in turn, guide (truly) targeted household-level interventions. It can also provide instructive baselines for provincial-level or regional-level macroeconomic strategies.

Rehabilitate Weak Industries

The weakness of the Philippine agriculture industry is a major concern, especially given the imminent hibernation of the global economy and the weakening of international trade. There is a risk that Philippine food security will be compromised should the volume of international trade contract for a protracted period of time. Fears over the Philippines’ food security cannot be dismissed at this point given that Vietnam has begun enforcing restrictions on its rice exports. There is a need, then, for the national government to aggressively pursue trade deals in order to strengthen domestic food security. The failure to do so could result in widespread food shortages throughout the country.

The crisis also underlines the need to rethink and reinvigorate the Philippine agricultural sector. For example, the Philippines can shift away from a land reform paradigm and towards a productivity paradigm – wherein investments into the agricultural sector as well as the overall direction of the agricultural sector are guided by profit margins and a competitive economy. In particular, emphasis has to be placed on what the sector can produce cheaply and what it can sell profitably.

In a similar vein, the reliance of the Philippines on imported coal (coupled with the imminent depletion of Malampaya natural gas reserves) places national energy security at risk. The government must move to secure contracts to ensure that we have sufficient coal inventories for the coming quarters. Beyond that, it has to look towards diversifying the national energy portfolio – and wean the industry somewhat from coal.

The crisis has also brought to light the glaring weaknesses of the Philippine healthcare system. Even at only 2,000 confirmed cases, reports indicate that major hospitals in GMMA are already operating at full capacity and are unable to accommodate new patients. This underlines an urgent need to bolster investments into the Philippine healthcare industry.

Additionally, the current crisis emphasizes the need to redouble efforts in developing the the Philippine research and development industry. The expansion of the research base of the Philippines would bolster its overall preparedness in future pandemics and allow for the greater expansion of the Philippine labor market into knowledge-intensive industries.

Expand Disaster Risk Reduction Portfolio

Scientists and analysts suggest that the COVID-19 is not just virulent but also resilient. Evidence collected about the virus suggests that there is a high likelihood that COVID-19 outbreaks can occur in cyclical or seasonal patterns. Put more bluntly, the health crisis we are facing now may be repeated again, to some extent, in the near future.

In the absence of a widely available vaccine or cure, it stands to reason that both the private and public sectors have to adjust to the changes brought about by the emergence of COVID-19. In this regard, it is critical to adopt a hardier, more pragmatic, and more strategic crisis preparedness mindset. Recommended strategies to achieve this would include:

  • Increasing stockpiles of essential goods (food, medicine, protective equipment, etc.) on both the national level and the household level.
  • Formulating comprehensive yet easy-to-understand pandemic crisis protocols for households, businesses, and government agencies. Essentially, these would be sets of rules that would be put into place to circumvent the need for lengthy deliberations and debates during the crisis.
  • Increase savings and money market liquidity in order to weather lockdowns as well as the economic downturns that often accompany them.

Local communities can also practice germ or viral emergency drills (i.e. thematically similar to earthquake and fire drills) wherein they test and hone their responsiveness to pandemics. In particular, they can simulate the conversion of public spaces into quarantine zones, high-volume patient intake scenarios, movement through emergency routes for medical personnel, and distribution of relief goods to local residents. These exercises would serve to remind people of the possibility of another outbreak and, hopefully, impress upon them the importance of being vigilant and prepared.

END NOTE

The COVID-19 crisis presents the Philippines with a unique opportunity to correct several of its systemic weaknesses. The enactment of bold, decisive, and strategic policies in the coming months can put the Philippine economy not just on the path to economic recovery but also a path to sustainable and inclusive prosperity. Seizing this opportunity could shift the macroeconomic growth trajectory upwards, enhance the overall resilience of the Philippine economy, and provide more opportunities for a greater number of Filipinos – both now and in the future. The authors sincerely hope that the national government and local governments units will adopt forward-looking policies to make this happen.

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