BUSINESS WORLD
Posted on March 08, 2015 10:47:00 PM
This was part of the lecture series sponsored by the Ayala Corporation in support of the outstanding policy research at the School. In the words of Jaime Augusto Zobel de Ayala, “the rigor of the thinking and the clarity of the logic” mark the economic policy studies from the School. This partnership then aims to provide a vehicle to communicate the economic policy studies of the School to the general public.
Earlier lecture speakers in this second series were Dr. Raul Fabella (“Comprehensive Agrarian Reform Program: Time to Let Go”), Dr. Philip Medalla/Dr. Johanna Dee Chua (“Philippines -- Will Financial Stability be at Risk?”), Dr. Ramon Clarete (“Going Regional: Which Mega Trade Deals Should the Philippines Join?”) and Dr. Stella Quimbo (“Should We Re-Think Income Taxation in the Philippines?”). You can access their papers at http://www.econ.upd.edu.ph/ayala-upse/?page_id=71.
The lecture by Secretary Balisacan was on the state of the Philippine economy. Below were my two cents as a reactor:
WE LEARNED of last year’s Gross Domestic Product (GDP) outcome recently. I was most happy that the fourth quarter jumped to boost the growth rate for the year to 6.1%. As some of you may know, Ciel and I have a very well-publicized bet. Our (GlobalSource) forecast early last year on record was actually exactly 6.1%. (We were also pretty much on the mark in 2013, when we forecast 7%, early in the year.)
I am often asked, how sophisticated is our econometric forecasting model given our excellent batting average? My answer: We actually have a crude one -- a single equation, but with amazing predictive power. The equation goes...the National Economic and Development Authority (NEDA) estimate times 0.9%.
Seriously, my bet with Ciel this time around was one I would have much wanted to lose (i.e. had we grown at 7%). Indeed, I do agree with him, as I do now with Secretary Arsi Balisacan and Dr. Karl Chua, that the Philippine economy has the fundamental underpinnings to go beyond its historical 4% over the past two decades, to a much higher level. We at Global Source believe 6% is now our baseline growth rate. It can be higher or lower depending on whether investments will take place, both government (for infrastructure) and the private sector (especially for manufacturing, agriculture/agribusiness).
Allow me to show some figures on how poorly we do in the investment department. Incidentally, it is also investment in these sectors that can employ the non-college educated entrants to the labor force that will spell the difference for future growth to be more inclusive, and for the unemployment/underemployment rate and poverty rates to decline from the unacceptable 25% currently.
Graph 2: Savings vs. Investment -- this makes me cry. We have the domestic resources to put in investments, but instead are going out of the country. The mirror image of the positive current account over a decade that Sec. Arsi showed is high surplus savings for an economy that is starved of public and private investments. The obstacles to such have been well studied.
Graph 3: Likewise, on net Foreign Direct Investment (FDI) inflows, there’s a slight uptick but a lot of catching up to do vis-à-vis our ASEAN neighbours.
These should be seen not as constraints, but as opportunities.
What are the areas where reform can focus on for maximum oomph for the buck?
• Infrastructure. This creates immediate growth impact, and relieves constraints for long-term growth. There are now binding constraints on power, airport, cargo, road network and mass transport. Can we grow at 7% without courting power outage and giant gridlocks in roads, airports, piers?
• Agriculture. I don’t think Sec. Arsi will disagree too much if I said that the depressingly low productivity of this sector and lack of investments are on account of government failure over decades. We will need to see action on two areas: (1) Clarity in land ownership post-CARP (Comprehensive Agrarian Reform Program); and (2) reform in rice support policy/the National Food Authority.
Reforms here will help achieve a number of things -- bring down the cost of food which impacts directly poverty and wage competitiveness, release huge amounts of wasted fiscal resources, and attract investments from the private sector into agriculture and agribusiness.
• Manufacturing. Focus on reviving the manufacturing sector by adopting policies that favour job creation. There are a number of initiatives that have been started, and hopefully can be brought to fruition: Rationalization of fiscal incentives so that these are directed to areas with highest linkage/benefits and are performance-based, industry road maps that better coordinate efforts of government units and the private sector, and cutting red tape for setting up of businesses.
Additionally, labor laws and regulations can be made more investment friendly -- the World Bank shows we have high minimum wages vs. peers. It is in this segment where we need to create employment that benefits most the poor and unskilled.
Indeed, there is still much room to grow, maybe 7-8%, if we are able to build on the current growth drivers of remittances and business process outsourcing (BPO), and a young population and structural current account surpluses, with another leg: investments.
There are, moreover, upsides outside our shores in the horizon. Oil prices have halved to what they were, and from all indications will stay low, driven as it is more by supply forces rather than demand (vs. what happened in 2009). The raw numbers are that for every $10 drop in oil price, we save around a billion. This goes directly to the current account, adding another $5-6 billion. Oxford economics estimated as much as 1.8 percentage points GDP gain for the Philippines. This will translate into higher consumption growth numbers as the lower prices cascade to a lower consumer price index. This also means interest rates can stay low longer, with all the beneficial effects that this has on the economy. The global economy likewise benefits from this -- including important Philippine export markets.
Another upside is opportunities created by the ASEAN Economic Community (AEC), which makes the region a single market. The Philippines is seen as competitive in the services sector. Even in manufacturing, I am aware of local groups well positioned to manufacture for a multi-ASEAN country market; they just need a supportive government environment.
The AEC may also be the impetus that will drive reforms for further opening, competition and efficiency in the domestic market. We have seen that, with the Bangko Sentral recently successfully pushing for the liberalization of investments in the banking sector.
There are also downside risks. The drop in oil prices may contribute to the acceleration of Saudization policy (increasing the required Saudi nationals as percent of workforce). A quarter of our overseas workers are in Saudi Arabia. Heightened uncertainty in the regulatory and local government regimes for key infrastructures -- power, water, road and cargo handling -- is another source of downsides for public-private partnerships and long term growth.
Sec. Arsi mentioned also natural disasters as historically imposing downside surprises. Allow me to mention the man-made kind.
The boom-bust of the recent past mentioned by Sec. Arsi in part mirrors political turbulence and compromised leadership. This can happen again in 2016 if the elected leader is not credible, or if elections are not credible. We sadly saw examples of each case in 1998 and 2004. Let us do our best to make sure neither happens again.
Romeo Bernardo is Philippine GlobalSource advisor and is a Board Director of the Institute for Development and Econometric Analysis.
romeo.lopez.bernardo@gmail.com
