Core
Business World, 5 February 2013
Gross domestic product (GDP), the sum of the economy’s total output, grew by 6.6% in 2012. That’s strong growth compared to the country’s long-run growth potential, which I estimate to be slightly less than 5%. The country’s long-run growth used to be around 3% during the time of President Cory Aquino.
But is the 6.6% growth sustainable and inclusive? The answer is maybe and no, respectively. We’ve seen this kind of strong growth before, but in all cases, growth was not sustained.
In the 1960s, the Philippines grew impressively. It was the second most successful country in Asia, second to Japan. We’re ready for take-off, experts predicted. But the Philippine economy crashed instead.
And in recent years, we’ve seen the same, even stronger, growth. In 1998 during the term of President Cory the economy grew by 6.8%. During Mrs. Arroyo’s watch, the economy expanded by 6.7% in 2004 and 7.6% in 2010. Yet, in all three cases, growth was not sustained.
During the final years of the first Aquino administration, the economy contracted by 0.6% in 1991 and was practically unchanged in 1992. In 2011, following a strong economic rebound in 2010, the economy slowed to 3.9% growth.
With the power crisis looming in the horizon, Mr. Aquino should have little time to celebrate. Much remains to be done to make growth sustainable.
The 2012 economic rise is exclusive, rather than inclusive, since growth was not accompanied by job creation. Every year, some 1.1 million workers join the labor force; yet, in October 2012, close to a million jobs disappeared. So the recent economic expansion maybe dubbed appropriately as “job-losing” growth.
A 6.6% GDP growth, does not mean that the economic well-being of all 100 million Filipinos improved by the same rate. Some benefited from the strong growth more than the others. Those who “played” in the stock markets benefited — on average, by more than 30%. Those who remained employed but with limited pay increases probably benefited slightly; but if the pay increases is less than the rate of inflation, they’re losers too. And those who lost their jobs because of weak exports and overall economic dislocations were worse off; the effect of the 6.6% GDP growth on them is negative.
Many workers, those who lost their jobs and those who were unable to find gainful employment, were left behind in the growth process. According to the October 2012 labor survey results, some 882,000 jobs disappeared, mostly in agriculture and services sector. Those who lost their jobs fell through the cracks of poverty.
Manufacturing grew by 5.6% in 2012, yet some 35,000 factory jobs were lost. They, too, were left behind.
There are three major contributors to GDP growth in 2012: consumer spending, government spending, and, surprisingly, net exports, contributing 4.3%, 1.1% and 2.0%, respectively.
Economic growth in this country is largely consumption-led. But in order to make growth sustainable, an increasing share of economic output should be invested in public infrastructure and expansion of private businesses.
Personal consumption depended heavily on remittances of overseas Filipino workers. And the continuing appreciation of the peso has been and will be the single biggest threat to the expansion of consumer spending. In order to sustain consumption, the Bangko Sentral has to adopt bolder measures to stem the peso appreciation. Right now, BSP is way behind the curve.
Government spending cannot expand at the present rate, and aspire for a deficit-to-GDP level of 2%, without mobilizing more resources. It has to beef up its revenue-generating capacity. The recently approved “sin” taxes would bring in additional revenues equivalent to 0.3% of GDP. But that’s not enough. I even consider this estimate to be slightly optimistic.
The government has to reform the tax system. Tax effort, or taxes as percent of GDP, has to increase to 17 %, or by about four percentage points, so the government can sustain spending in education, health and public infrastructure. The government might consider raising consumption tax accompanied by reducing personal income tax. It should introduce increase wealth tax, rationalize fiscal incentives accompanied by reducing the corporate income tax rates to more competitive level.
The National Statistics Coordination Board boasts about the “remarkable performance of the external trade.” This means exports growth exceeded imports growth significantly. I find this claim laughable. The reality is that exports performance in 2012 was unspectacular, while imports was grossly understated. The sustainability of the strong contribution of external trade (Exports minus Imports) to growth is suspect.
Since imports enter the national income accounts as a negative, slower imports growth means faster economic growth. While there exist no hard data on illicit trade, it is an open secret that smuggling of oil products, steel, rice, cars, and other commodities (mostly from China) had been going on in the past, and continues up to the present. If so, were imports properly measured?
Here’s one hard question for public authorities: How can the economy grow by 6.8% while imports have grown by a measly 2.6%? Strong economic expansion is usually accompanied by strong imports growth, and economic downturn is accompanied by weak or negative imports growth. For example, in 2010 as the economy grew by 7.6%, imports increased by an amazingly high 22.5%. And in 2009, as the economy slowed to 1.1% growth, imports contracted by 8.1%.
And here’s an equally hard question: How can construction expand by 14.4% while imports of iron and steel, a necessary input to public and private construction, remain practically unchanged (0.3% growth) in 2012?
Seriously, the 6.6% GDP growth rate in 2012 does not guarantee sustained, strong, and inclusive growth that the Aquino administration, or any administration, should be aiming at. The pattern of growth that we’ve seen last year was far from inclusive. And sustaining it requires more reforms, more focus, higher spending for public infrastructure, and faster implementation of government programs and projects.
