Introspective
Business World, 10 February 2014
The Philippine economy grew at 6.6% in Q4 2013 despite the ravages of Yolanda, and the overall growth for the year averaged a rapid 7% for 2013. While this is a reason for celebration, I wanted to look beyond “rapid”, having in the past celebrated episodes of rapid growth which promptly collapsed. The one constant of the Philippine development odyssey in the last 40 years was its fragility. We labelled this inability to stay on the high growth course “boom and bust.” When the long-run average growth of the Philippines is tallied, it settles around a forlorn 4%.
The concern for fragility is heightened by the concurrent setbacks experienced by the erstwhile high flying emerging markets such as India, Argentina, and Turkey. Fortunately, the problems plaguing these emerging economies — namely, current account deficits, fiscal imbalances and inflation — are conspicuously absent from the Philippine economy. Stable macroeconomy remains the by-word about the Philippine economy. Indeed, the current emerging markets turmoil posits an opportunity but also a danger for the Philippines as global capital seeks safer havens. The danger is that a new wave of portfolio flow fleeing other emerging markets will again force the peso to appreciate. The January inflation blip is, however, due to a one-off Yolanda effect which warrants no rise in policy rate. The opportunity is that the perceived stable macroeconomic position will steer additional direct foreign investment our way. This seems to be precursored by the recently announced 250% spike in investment approved by the Philippine Economic Zone Authority (PEZA) for January 2013.
The salient point about the PEZA investment surge is that it is predominantly Manufacturing. And this brings me back to the 2013 growth. What drove the growth? The simplest breakdown is by industry of origin. In 2013, both the Industry and Manufacturing sectors grew (9.5% and 10.5%, respectively) faster than the Service sector (7.1%). This contrasts with the growth breakdown of 2012 (6.8 and 5.4%, respectively, versus 7.6%). In the whole decade from 2001 to 2010, only in three years (2001, 2008 and 2010) did the former occur and largely in connection with a rebound from the previous recession. None was ever sustained. During economic downturns, Manufacturing stumbles the most and drags down the Industry sector, while the Service sector’s retreat is largely muted. In other words, the Service sector is less volatile than the Manufacturing and Industry sectors. The business of hospitals and universities, for example, is almost immune from cyclical downturns, which explains the rush by business groups into these spaces. In the subsequent rebound, the Manufacturing sector grows fastest but with normality, the Service sector once more takes over as the principal growth driver. Over decades, the Service sector share bloats (now 57% in 2013) while Manufacturing and Industry retreats (now 19% and 26% respectively). When this happens in a country with a low per capita income (<$10,000), we call it development progeria: a poor country exhibiting the structural share dynamics of a rich country and its poor country footprint of spasmodic growth. The surge of the Service sector and the retreat of the Manufacturing (more accurately, the Tradable goods sector) is a canonical pattern among rich Organisation for Economic Cooperation and Development (OECD) countries. Development progeria is the scourge of Philippine growth of the last 25 years.
Which is why 2013 is of some interest. Are we at the dawn of the rupture of the hegemony of development progeria on our economic history? The answer hangs on whether — and for how long — we sustain the 2013 type growth. There are still eloquent witnesses to the contrary. Our investment rate (Capital formation over GDP) still stands at about 19% in 2013 in a region where 30% is normal. Our government capital outlay still stands at 2.6% of GDP while it is about 5-8% in the East Asian neighbourhood. Electricity prices are still prohibitively high. Growth has yet to become inclusive. But there are also hopeful signs. The finance department has announced its intention to raise Government Capital Outlay to 5% of GDP. Our central bank is now way smarter than before; its decisions, to date, suggest that it puts more weight on the critical role of the exchange rate on the composition of output, especially on the Tradable sectors. While past central bankers would have dug in at P42/$, this central bank allowed the peso to gradually weaken to +P45/$, reducing its forex reserve losses and without sparking inflation. There are, at the moment, no palpable internal threats to domestic macroeconomic stability. And the global environment looks overall more congenial than threatening. We are, however, up against our own history.
If the 2013 growth pattern with the Tradable sector leading the way is sustained — say, for five years — it will make growth inclusive. A rapidly growing Tradable sector is more job creating and conducive to the growth of the middle class, which — as Professor E. de Dios observed — is the lynchpin of growth. The reason our historical growth has failed to be inclusive is that it has been spasmodic. Development progeria equates with spasmodia and, thus, non-inclusivity. The challenge is to put in place the environment that sustains the green shoots of 2013. The features of that environment will be tackled in a later column.
