Core
Business World, 22 April 2014
Before the Lenten weekend, the Aquino administration released to the media its revised Philippine Development Plan (PDP). It promises higher infrastructure spending as a way of creating more jobs and easing poverty. Nice. But is the Aquino administration capable of transforming itself from a slow to a fast-moving one? This appears to be the core of the matter.
The revision of the PDP is an implicit admission by Mr. Aquino and his Cabinet that the old PDP was not clicking. Despite the economic growth of 6.8% in 2012 and 7.2% in 2013, the island republic’s unemployment rate continued to rise and more Filipinos became poor.
In comparison with its ASEAN-6 neighbors, the Philippines has the highest unemployment rate and poverty incidence. It is losing the war against poverty: it will be the only country among the ASEAN-6 bloc that will miss the Millennium Development Goal of halving poverty by 2015. By contrast, its ASEAN counterparts have achieved theirs way ahead of schedule.
“Simply stated, the gains have yet to materialize into actual, tangible improvements in the lives of the majority of the people,” the report admitted.
Under the revised plan, the economy is expected to grow 6.5% to 7.5% this year, 7% to 8% next year and 7.5% to 8.5% in 2016.
But in order to create jobs and reduce poverty, the revised PDP calls for an increase in infrastructure spending to 5% of gross domestic product (GDP) by 2016.
I agree with the need to boost public spending for public infrastructure. Foreign investors, international financial institutions, and economists have long cited the country’s poor infrastructure as the most serious constraint to growth.
LOW INFRASTRUCTURE BUDGET; BUT EVEN LOWER BUDGET SPENDING
But based on its perennially poor track record in moving infrastructure spending during the last three years and a half, the revised goal of higher spending for public infrastructure does not appear feasible.
In the past, the Aquino administration had very low public infrastructure spending goals. Worse, what little money had been proposed and authorized cannot even be implemented fully by its infrastructure departments — the Departments of Transportation and Communications, Public Works and Highways, and Energy.
In 2011, of the planned infrastructure budget of P170 billion (1.9% of GDP), only P152.1 billion (1.6% of GDP) was disbursed. In 2012, of the planned infrastructure budget of P215.2 billion (2.0% of GDP), only P186 billion (1.6% of GDP) was actually spent.
In 2013, with a slightly higher planned infrastructure budget of P265.7 billion (2.2 % of GDP), it is estimated that only P222.5 billion (1.9% of GDP) was actually disbursed.
It would be a considerable leap of faith to assume that the Aquino administration will be able to transform itself from a slow to a fast-moving machine overnight. During the last three years, the Aquino administration has not spent more than the equivalent of 2% of GDP. More than doubling its ability to initiate, bid, and complete projects in its final two years is highly improbable.
HIGHER SPENDING MEANS HIGHER BUDGET DEFICIT; BUT WILL DOF APPROVE?
First, there is the issue of financing. Where is the Aquino administration going to get the money to finance the much higher public infrastructure budget? I know Mr. Aquino has already abandoned his previous goal of balancing the budget by 2016, and has adopted a more accommodative deficit-to-GDP target of 2%.
But would the Department of Finance (DOF) agree to a breach in the revised deficit target if the tax effort (tax-to-GDP ratio) continues to stagnate? Put differently, if there is a conflict between spending the equivalent of 5% of GDP for public infrastructure and keeping the deficit-to-GDP ratio at 2%, which one will be sacrificed? Will the government cut public spending or breach the deficit target?
A commitment to ramp up spending for essential public infrastructure during the last two years of the Aquino administration should be supported by a willingness to breach the budget deficit limit to say up to 3% of GDP. A one-percentage point increase in the planned budget deficit could translate into another P125 billion to P150 billion additional infrastructure spending. In brief, the issue of financing higher public infrastructure spending will be less of a problem if the administration is willing to increase the budget deficit.
Second, the administration may have to change the composition of the public infrastructure budget. If more aggressive spending for capital projects were to make a big dent on joblessness and poverty, the composition of the public infrastructure budget should change too.
There has to be a shift from predominantly urban-based, capital-intensive projects to more rural and agriculture-based (farm-to-market roads, communal irrigation, rural water supply, rural electrification, and so on) and labor-intensive projects.
Remember: it is easier and cheaper to create jobs in agriculture than in services, and that most of the poor live in the countryside.
Third, though not part of the public infrastructure budget, Mr. Aquino’s much-touted public-private partnership (PPP) initiative has to take off in a big way during the waning years of his presidency. But if the slow implementation of the much-touted PPP initiative were any indication, the updated PDP’s contribution to growth, employment generation, and poverty reduction would continue to be sluggish.
The revised PDP may or may not guarantee a glimmer of hope for the jobless and the poor. If implemented by the same officials, using the same methodology, motivated by the same narrow political interests, and operated under the same policy environment, the revised PDP doesn’t hold much promise.
