Business World
Introspective
Last April 14, I was privileged to moderate a distinguished panel of economists in the 9th Ayala Corporation-UP School of Economics Lecture Series. The panel members were Dr. Philip Medalla, former Economic Planning secretary, Dr. Ben Diokno, former Budget secretary, Dr Arsi Balisacan, former undersecretary of Agriculture, and Dr Raul Fabella, former dean of the UP School of Economics. As our invitation said: most of them had to grapple with hard economic questions, not only as academics but as senior economic managers in four administrations, dealing in real time with difficult policy trade-offs, often against strong vested interests and working through weak, sometimes even compromised institutions.
Below are my introductory remarks intended to frame the discussion. Subsequent columns will cover what they said.
I met with them a week before, and agreed, on a common set of assumptions, like good economists, that will frame the discussion.
The key one is that by end of June, we will have a credibly elected president with the Congress and the public more or less behind him. Why this is something we need to state explicitly is perhaps best illustrated by a text I got this morning.
The Social Weather Stations says President Arroyo's net satisfaction rating is down a negative 53 percent - an all-time low. Because of the 'F' or failing grade she received from Filipinos, Mrs. Arroyo, a former student of the UP School of Economics, says this. 'I am more than willing to repeat'.
Proceeding further on our assumptions:
1. He has adequate skill set and incentive to govern well which are aligned with the nation's. He will have alter-egos/teams which are similarly placed. 2. The new president needs to set a tone for his administration in the first 100 days, and perhaps success or failure during the first two years will define the rest of his term. Needs to make a mark, score victories supported by the public, and build confidence within this period, using powers at his disposal, in most cases without new legislation.
3. Key question for the administration, and the country. How to achieve that which has eluded the Philippines for many years-inclusive, sustainable growth.
4. For our discussion flow, we framed/try to break up this question into four areas and assigned a panel member to take the lead in discussing these issues: These are - a) on the overall strategy, how to restore growth after the crisis, b) the fiscal challenges of finding the resources to raise investment and social spending, c) government interventions in imperfect and/or important markets, and d) how do we reduce poverty and make growth more inclusive.
A. Overall Strategy: How to restore growth after the crisis (both global and as one panelist said - Glorial.)?
1. Intro: From what has been one of the two most promising countries in the 1950s (together with Burma), the Philippines has become one of the laggards in our region. The lack of faster growth in the Philippines has been traced by the World Bank to low investment and slow structural transformation from low-productivity to high productivity activities, especially in the last decade. This manifests itself in agriculture and manufacturing stagnating, and services sector, primarily driven by remittances from overseas, and more recently BPO employment, generating what there is of growth, and job creation. Recent diagnostic studies point to key constraints as the culprits - a) a vulnerable fiscal situation, b) inadequate infrastructure, c) weak investment climate due largely to governance concerns.
2. Questions:
a. What should be the next president's development vision for the country, given the global environment, our resource endowments, and limitations? Should we still look at the East Asian models, relying more on manufacturing as the big driver. Or is India a more relevant model, i.e., very focused on services, or even Caribbean, i.e., remittances and tourism? Other models?
b. Broadly, what can be done to overcome these binding constraints identified above of fiscal situation, inadequate infra, and weak investments?
c. Why is corruption in the Philippines seen to be such a grave disincentive to investment and doing business and a deadly drag to growth (even as we see corruption in other countries with vibrant private sector investment taking place)? What can a serious new administration do to limit corruption and/or its most pernicious consequences? To be more specific, how can an incoming administration establish credibility in this area, which we all know will take a long time to fix?
d. Is there a case for more activist policies like production subsidies and incentives to promote faster industrialization as advocated by some economists?
e. Or keeping the exchange rate undervalued as China seems to be doing, as seems to have been recently suggested in Introspective columns in BusinessWorld.?
marginally positive, respectively, instead of what could have been at least the historic level of 4%. Even if we assume that the losses were confined only to those two years, putting aside losses from the fruits of lost investment and reputation damage, every 1% of growth forgone each year translates to P70 billion, $1.5 billion, the same price of as two Bataan Nuclear Power plants. Multiply this by 8 for the two years- that's what it cost the economy- that's P560 billion down a dark pit, lost forever. Presented this way, the losses of inaction for under provision of other important infrastructure - water, roads, mass transport, though perhaps not as staggering can be quite compelling.
2. Questions:
a. We are already seeing an increase in frequency and duration of power outages, perhaps driven by combination of factors - weather, inadequate reserves, breakdowns - what can the next administration do to prevent power crisis of the magnitude of the early '90s which is consistent with the EPIRA architecture and law? Or does the EPIRA need change?
b. In the other areas of water, mass transport, roads, how can government improve the investment climate for more public-private partnerships to augment its constrained budget for public works? Does the Philippines also need broader competition policy so that infra services become cheaper, for example in transport or power?
c. Is there a role for government providing fiscal incentives or production subsidies for particular industries or activities (say, SME financing, R and D, training) on a temporary basis until they can be competitive? What are the pitfalls to this strategy advocated by some?
D. Poverty Reduction: How can government make growth more inclusive?
1. Introduction: The Philippines now has one of the highest incidences of poverty counting over 20% of its population as having incomes below one dollar per day, higher than Vietnam, Indonesia, China. This is explained by limited dynamism of economic growth, which moreover has not translated to poverty reduction. There is likewise evidence of deterioration in the distribution of income. Factors identified by the World Bank as contributing to this deterioration include unequal, inadequate access to social services and social protection, leading to unequal sectoral and regional distribution of growth and barriers to factor mobility.
2. Questions:
a. What are the roots of poverty in the Philippines?
b. How might some of the barriers in factor mobility help reduce poverty, i.e., policy bias like legislated wages against low-skill employment, or biases vs. more efficient use of land due to agrarian reform? Too sensitive to embark on? Are there political feasible actions possible in these areas?
c. What improvements in social services and social protection are feasible, e.g., redeployment of NFA subsidies toward conditional cash transfers? What could be the possible political road map for doing this without raising obstacles on ground of food security, etc?
d. What are the other kinds of interventions should government embark in the areas of education and health, including reproductive health, that addresses the requirements of the poor that are politically feasible early on?
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