Business World, 21 August 2017


Understandable relief greeted last week’s news that GDP had grown 6.5% in the second quarter. The immediate reason, of course, was that the administration avoided having egg on its face for being unable to meet its own growth targets in its first year in office. Instead, we are assured, the economy “is on track to meeting its full year-on-year growth of 6.5% to 7.5%” — never mind that it’s now the lower end of the range we’re talking about.

Taking the long view and beyond scoring political points, however, if GDP does grow by 6-6.5% this year, then the Philippines would qualify as a clear case of “growth acceleration” under the criteria defined by Hausmann, Pritchett, and Rodrik [2005]. Those three criteria are: (1) eight consecutive years during which average per capita GDP growth is at least 3.5% per annum; (2) a bump in per capita output growth of more than two percentage points compared to previous periods; and (3) per capita output at the end of the episode that is higher than any ever previously attained. (Among others, the latter precludes cases where rapid growth is simply the result of recovery from bad recessions.)

In our present circumstances, per capita GDP over the last eight years (2010-2017) will have grown by an average of 4.5% per year (Criterion 1) — though admittedly mostly under PNoy. This throws shade on the average per capita growth of only 1.8% over the previous three decades (Criterion 2). In fact, this will be the only episode of growth acceleration in post-war Philippine history. (No, not even the Golden Age of authoritarian Marcos rule measured up.) The only other period that could possibly compare is the 1950s, but even that is questionable, since we are not sure pre-war incomes had been regained by the time the growth spurt ended in 1958 (remembering Criterion 3).

All right, so maybe we should be allowed to pop some corks. But after we’re done congratulating ourselves, the question to confront is whether the episode can be sustained. After all, Hausmann et al. find that growth accelerations are not as rare as one might think: they count 83 episodes in all for the period 1957-1992, which they reckon means there is a 25% chance that a random country might experience a growth spurt (as they define it) in any decade. Over the period studied, for example, Thailand had two episodes of growth acceleration (1957, 1986), as did Indonesia (1967, 1987), Malaysia (1970, 1988), South Korea (1962, 1984), and China (1978, 1990). With a longer time series, maybe China could add a few more, and an early one could probably be booked for Vietnam as well (1989). The Philippines is an outlier in that it took almost seventy years before it experienced the current — and only — one.

Less common than growth-acceleration episodes themselves, however, are cases where they were sustained, i.e., where per capita incomes continued to grow at least 2% annually even after the growth spurt ended. Of 83 growth episodes in their original article, Hausmann et al. found only 37 were sustained. The majority of cases actually ended in a collapse. For the current Philippine episode to be “sustained” in this formal sense, all that Messrs. Dominguez, Diokno, and Pernia must do is to ensure that GDP grows by at least 4% per annum over the next six years before handing things off to their successors. This by itself is a low (and very academic) bar and does not seem too difficult — if only one could rule out foreign or self-inflicted disasters on the scale of the political and financial collapse of 1984-1985, the power crisis of 1990, the Asian financial crisis of 1998, and the Great Recession of 2009.

So the real question is whether the current direction of “Dutertenomics” protects the economy against a possible collapse or renders it more vulnerable.

That’s where the picture becomes decidedly mixed — or one might say, clearly murky. Even as we mark a completed growth-acceleration episode, the “change that is coming” in its wake is unsettling.

Until recently, a current-account surplus — even in the face of rapid growth — used to distinguish us from neighbors like Vietnam, Indonesia, and even India. Now however the country is about to experience its first current-account deficit in 15 years and anticipates a balance of payments deficit to boot. No surprise, therefore, that the peso has depreciated to its lowest level in more than a decade, well out of line with its peers and global trends.

But this trend has been encouraged by the administration’s own fiscal signals. (Remember the twin-deficit formula.) It has clearly announced its willingness to widen the fiscal deficit to as much as 5% of GDP. At the same time, it seeks to convince Congress to raise new taxes to support an ambitious infrastructure plan — which is itself bogged down in “absorptive capacity” problems (Gerry Sicat) alias “execution problems” (Boo Chanco) involving procurement, right of way, and inadequate planning and design skills in government. Let’s see, so on the one hand, the Dutertenomists have indicated their willingness to loosen the purse strings, even as they signal (no, demand) that new funds shall be forthcoming. Meanwhile, it is common knowledge that actual infrastructure spending will inevitably fall short of what is planned. The predictable effect is to encourage populist proposals in aid of election or patronage: free irrigation, free college tuition (et tu, Bam Aquino!), increased retirement pensions, new rice subsidies to 4P beneficiaries and to uniformed personnel and so on — not to mention fat unaudited intelligence funds to reward those incorruptible and human rights-loving police. The unintended priority may just be government consumption, not public investment. In the meantime, just how deeply depreciation, inflation, and the proposed indirect-tax program will cut into household consumption — by far the largest component of spending — remains unknown.

To be sure, none of these events or doubts is likely to be fatal in a single year. But can or will these directions be sustained over six to eight more years? One cannot help wondering then if Dutertenomics has not started out on the wrong foot.

What if the Dutertenomists had focused instead on improving the investment climate, particularly direct foreign investment? What if, rather than antagonizing the US, the EU, and the UN, the administration had instead simply reaffirmed its traditional economic and political partnerships, even as it vigorously encouraged trade and investment deals with new actors like China and Russia? What if, rather than bother with issues like federalism and impeachment, the president’s immense political capital had been directed instead to change laws (not the constitution) that would allow foreign ownership in public utilities, permit foreign firms to participate more easily in PPPs, and bid for government public works contracts? What if prior to (or at worst during) its campaign for new taxes, the Dutertenomists had first worked to reform cumbersome and corruption-prone procurement rules, bolstered the technical skills of public personnel in crucial departments, and worked with the courts (rather than try to impeach their chief justice) to minimize judicial obstacles to the completion of public projects? And finally, what if — rather than pursue the “war on drugs” — they had immediately resumed and championed the Bangsamoro peace process and ratified the Bangsamoro basic law?

Would we then have seen a stronger, more varied wave of foreign direct investments that could have covered the incipient deficits in the current account and the BoP? Could the peso slide have been averted and inflation restrained? Would the infrastructure drive have been more credible and expeditious? Could the penchant for populism have been moderated? Would the private sector have participated more vigorously in PPPs and reduced the prospective need for deficit spending? Would we have been looking confidently instead at GDP growth of 8-10% as Thailand and China did, rather than a barely there 6.5%? Could the war in Marawi have been avoided? Could the lives of Kian delos Santos, Althea Barbon, Danica May Garcia, Hideyoshi Kawata, Oman Manaois, Rowena Tiamson, Lauren Kristel Rosales, her brother JR, and countless others have been saved? Could we have lived better with ourselves, knowing that growth was not built on the backs of the weak and defenseless?

Any further down this road and we may well discover that the most wretched human mood is the subjunctive: “coulda, woulda, shoulda.”