Tragedy as opportunity

BUSINESS WORLDIntrospective

I HAVE just listened to Bank of the Philippine Islands (BPI) President Cezar Consing speak before the 51st Annual Meeting of the Philippine Economics Society. Far from the dry financial statistics-filled presentation expected of a banker addressing economists, he gave a stirring talk on how this national crisis can serve as an opportunity. I am pleased to share his remarks:

"So if the macro numbers can withstand Yolanda, what should we as economists be worried about? One only need watch the tragedy unfold on television, and be aware of our own gut response to what we see and hear, to know the answer. Our affected countrymen’s desperate search for food, water and medical supplies, the throng of people in the airport looking for a way out of Tacloban, the looting of public establishments, the almost complete absence of public utilities, is threatening to destroy the growing confidence that we as a people had begun to feel -- a result of the newly earned investment grade rating, the national government’s campaign against graft and corruption, and the exploits of Manny Pacquiao, Gilas Pilipinas, the Askals and Megan Young.

"As a banker, I keep an eye on two macro numbers. First, is our GDP per capita. I note that at $2,600 it is about a quarter of the average GDP per capita of countries with credit ratings equal to ours. Second, is our ratio of bank loans to GDP. I note that it is somewhere between 35% to 40%, about the same as Indonesia, but half of India’s and certainly much lower than most of the more developed Asian countries that have bank debt to GDP ratios well in excess of 100%. 
Amen!



"Two years ago, BPI Foundation, working in partnership with WWF (World Wildlife Fund) -Philippines, commissioned a project called the Climate Risk Adaptation Project to study the effects on key cities of extreme climate events. The study, completed in late 2011 but yet to be released, has proven to be remarkably prescient. The calamity that has befallen Tacloban proves that sometimes the academics get it right.

"So what does the tragedy that is Tacloban have to do with sustainable and inclusive growth? Everything I am afraid.

"Our country has demonstrated its ability to weather global economic storms -- note the 1998 Asian crisis, the 2008 Lehman crisis, and the 2013 Emerging Markets volatility brought about by the prospect of tapering. But I wonder whether we will be able to as successfully weather the crisis brought about by bad weather.

"Surely, from the standpoint of macroeconomic performance, the tragedy in Eastern Visayas is manageable. The region accounts for only 2% of GDP. With the budget deficit at only 2.3% of GDP, the government has the wherewithal to step up spending. In fact, while Secretary Purisima has indicated that the GDP growth rate in 2014 can be reduced by 1% as a result of the calamity, our economists in the bank think that 6.5% to 7% growth in 2014 is still very achievable. Even Yolanda’s inflation impact should be muted. Eastern 
Visayas accounts for only 3.5% of sugarcane production, and the rice reportedly lost is less than a hundredth of the country’s total annual production, principally because most of the rice had already been harvested. Finally, and ironically, rebuilding efforts should provide a GDP boost in 2014.

"If there is one theme underlying the haunting post-typhoon images of Tacloban, it is the severe lack of, or shortcomings in, public goods in all its forms -- power, water, roads, bridges, airports, hospitals, military transport vehicles. In fact, we should probably marvel at what has been accomplished in the aftermath of the typhoon despite the dearth of public goods, and for this the private sector deserves much kudos.

"As all of us intuitively understand, sustainable growth requires an ample supply of public goods. There are limits to privatization. Indeed, if profits were the sole objective of economic behavior, very little by way of public goods would be supplied. But provide a strong base of public goods, and the private sector will follow the money to provide the "oomph" that every healthy economy needs.

"Inclusive growth is probably even more dependent on public goods. The poor have less ability to pay as they go. A good baseline of public goods does more to improve the relative situation of the poorest amongst us than the richest amongst us. Indeed, the countries with the best public infrastructures tend to be the most economically inclusive.

"Tacloban has highlighted the importance of public goods, of hard and soft infrastructure, much more vividly than any economics textbook ever can. Tacloban is frightening because it could be any place in our beloved country. Tacloban is depressing because it reveals a chink in our armor, and rips away at our growing confidence that, as a nation, we are about to join the more developed countries in the region. Tacloban is infuriating because, by bringing to the fore the dearth of public infrastructure, it exemplifies the true cost of graft, corruption, and tax evasion.
"So having spent several minutes bemoaning our fate, what can we do to be constructive?

The conclusion one draws by looking at these two numbers is pretty straightforward. That is, as a country we are still quite poor and, as a result, most of our countrymen are not creditworthy by conventional banking standards. Indeed, 80% of Filipinos are still unbanked.

But if we as a people become a little more prosperous, if we can achieve a per capita income closer to, say, $4,000, a much larger percentage of us become bankable. This per capita target is achievable if we continue to grow at, say, 7% or more per annum and control our procreative impulses. And how do we sustain this growth rate? Given our growth trajectory, the answer must be infrastructure. Indeed, many economists cite infrastructure bottlenecks as potentially slowing down our current pace of growth.

"So it is our bank’s objective to participate in the PPPs (Public-Private Partnerships), assuming they can be structured and governed to justify the significant level of resources that must be allocated to almost every project. This caveat is critical and reveals the limitation of private sector infrastructure financing. There is no escaping the need for an appropriate financial return on private capital. Indeed, the private sector is a poor supplier of true public goods. These only the government can supply.

"Tacloban need not be an absolute disaster, its handling need not be a national shame. Tacloban need not derail our growing confidence that our country’s economic prosperity is attainable in our lifetimes. But if we are to regain our mojo, we must step up. Government must do more to provide the public goods that will be supportive of sustainable and inclusive economic growth. As a people, we have to learn to accept, and in fact champion, rigorous, unflinching campaigns to curb tax evasion, graft and corruption, and administrative incompetence, for how else can we afford what we have to afford? As banks, we have to get bigger, since only by getting bigger can we be truly supportive of the long term capital formation needs of our nation. If we can find it in ourselves to each do our part, we can use this tragedy, one of Biblical proportions, to step up as Filipinos, in firm control of what we can control, and on the path of sustainable and inclusive growth."

(Romeo Bernardo sits as board director of the Institute of Development and Econometric Analysis, Inc. and the Bank of the Philippine Islands.)