ANALYSIS

What are the Philippine economic and development prospects on the basis of current performance?

To answer this sufficiently and satisfactorily, we review the basic indicators.

The Philippine economy (measured in terms of gross domestic product or GDP) has been growing at a rate of 6.5% since 2012. (The growth rate was spectacular at 7.63% in 2010 but was dismal in 2011 at 3.66%.)

The growth rate for the whole of 2018 will miss the original lower bound target of seven percent, which is disappointing in terms of expectations. That target was revised downward in October to 6.5-6.9%. But the growth rate by the end of the year will be in the vicinity of 6.5%. (See Figure 1, which tracks GDP growth since 2010.)

If seen from a historical perspective, what may seem to be a so-so performance in 2018 is nothing to be ashamed of.

In the late 1980s and in the 1990s, more than a generation ago, the economists calculated that a sustained growth rate of more than six percent was necessary for the Philippines to catch up with the level of development of newly industrializing Asian economies like Malaysia and Thailand. Then, the Philippines could manage to squeeze a growth rate of six percent or higher but could not sustain it. Once the economy reached a peak of say 6.5%, it began to slow down or decelerate.

The economy then was compared to a Sisyphus. Sisyphus would exert great effort to move a giant boulder up a steep hill. Once he succeeded in having the boulder reach the top, it would roll down. And this became an everlasting act.

Another idiom used to describe the economy was boom and bust. The challenge thus was to break away from the boomand-bust cycle that happened in different administrations.

Since 2012, we have seen a burst of uninterrupted high growth, averaging 6.5%.

Now, the indicators show that the economy is out of the rut, that the boom and bust is a thing of the past. In fact, we are seeing, in the main, a restructuring of the economy, even in the face of persisting binding constraints and failed policies. Consider the following:

1. The high average growth rate of 6.5% since 2012 has been accompanied by a significant contribution of investments in accounting for growth. This is in contrast to the previous pattern of growth that was skewed towards consumption. In the same vein, manufacturing growth has even outpaced GDP growth. Before, growth was dependent on consumption. (See Figures 2 and 3.) Manufacturing performance is a bellwether of industrialization. A solid manufacturing base is also a necessary condition to move from low middle-income status to the category of high middle-income country.

2. The main thorn is the bad performance of agriculture. In 2016, agriculture growth was negative; in 2017, it increased by a mere 3.95%. What ails agriculture is the dominance of vested interests and captured politicians hiding behind the rhetoric of being pro-poor. They are more concerned over accumulating the private gains through rent seeking that the rice, sugar, coconut, and tobacco industries provide. They foist on the public a distorted interpretation of social justice, which violates the economic freedom of farmers and which stifles them from becoming efficient and productive. The end result is that the farmers are not liberated from poverty.

Further, the current spike in inflation is attributable to a failed food and agriculture policy. The evidence is clear that food prices specially the price of rice accounted for the unexpected higher inflation rate in 2018 (more on this later).

3. The high growth has been accompanied by an improvement in the quality of employment. The rise of manufacturing has led to an increase in the number of wage and salary workers. Based on the preliminary data obtained from the latest Labor Force Survey (October 2018), the age of wage and salary workers increased from 62.3% in October 2017 to 64.4% in October 2018. The data from the Family Income and Expenditure Survey suggest that among sources of income, the wages or salaries of workers have the biggest impact on poverty reduction.

4. The conventional wisdom is that high growth leads to poverty reduction (although it can also be said that reducing poverty is also good for growth). To illustrate, poverty incidence among the population dropped from 25.2% in 2012 to 21.6% in 2016. During this period, the growth rate averaged close to 6.5%.

We can expect a further dent in poverty reduction in the succeeding years. Despite the absence of a more recent official household survey since 2015. We make an inference from other indicators. Per capita income (adjusted to inflation) grew by more than 5% in 2016 and 2017, and more importantly, the bottom 20% of households had a higher rate of income growth than the average household (Annual Poverty Indicators Survey).

5. Even though the debt stock has risen to finance growth and development programs, what matters is the ability to pay. In this regard, the debt indicators are sound. For example, the debt-to-GDP ratio was 42.09% in 2017. Government’s estimate is that the ratio will settle at 42.9% by the end of the term of Rodrigo Duterte. The current as well as projected Philippine debt-to-GDP ratio is comfortably below the stability threshold of 60% (and this is a stringent, conservative ratio applied to highincome countries like members of the European Union).

Similarly the debt service ratio (principal and interest payments as a percentage of exports of goods and receipts from services and primary income) was 6.2% in end-2017 and stood at 6.5% for January-August 2018, compared to 6.1% for the same period in 2017. The benchmark is 25%. (At the height of the debt crisis in the 1980s, the demand of the Freedom from Debt Coalition was to reduce the debt service payments to 20% of export receipts.) The Philippine credit rating is maintained at a notch above investment grade.

6. The current account deficit has widened and will likely overshoot the government target of limiting it to 0.9% of GDP. But the context of the widening current account deficit is a surge in imports consisting of capital goods and raw materials. Infrastructure spending, which is essential to removing the bottlenecks that impede further growth and investments, is import intensive. In other words, the imports are productive and serve long-term growth.

The wider current account deficit has translated into deeper depreciation. Again context matters here. The peso depreciation, although it contributes to higher prices of imports like oil, is unavoidable, even necessary, to keep the nominal exchange rate aligned to the real rate. Defending the peso (or preventing it from depreciating) and making it overvalued will be more damaging to the real sector of the economy — both to import substitutes and exports.

Meantime, export growth has been mediocre, growing by 3.3% (year on year) in October 2018. Partly this can be explained by a weakening of global trade amid the trade war between US and China, the retreat by mature countries like the US and UK from multilateral rules, and China’s growth that has been below expectations.

7. Also stymying export growth is the uncertainty created by the inaction on the proposed legislation to rationalize fiscal incentives. The bill opponents want to scare the public and the business community, declaring that the reforms will drive away investors. On the contrary, the fiscal incentive rationalization intends to modernize the rules by providing the menu of appropriate incentives that investors can avail themselves of. At the same time, the reform aims to remove redundant incentives (activities that readily generate markets and profits do not need tax incentives) and check abuses by making incentives time-bound, performance-bound and transparent.

Sadly, in 2018, we see the drop by more than half in the number of potential investors and the amount of pledged investments at the Philippine Economic Zone Authority (PEZA). But this is not because the investors are afraid of the reform. Rather, investors are holding back because of the uncertainty caused by the delay in resolving the new rules. In this case, the PEZA, for opposing the bill, and the gutless senators are the ones responsible for the setback in the PEZA investments.

8. The fiscal incentive rationalization is one of several packages that make up the comprehensive tax reform program also known as Tax Reform for Acceleration and Inclusion (TRAIN). TRAIN itself has become controversial, and has been used as a political weapon. TRAIN should have been done many years ago. The tax system has long needed an overhaul to make it equitable and efficient. Thus: Adjust specific taxes on fuel to inflation; correct the low excise rates for automobile; lower personal income tax rates to address the bracket creep, lift the many unjustified value-added tax (VAT) exemptions, etc.

At the same time, the country needs to generate additional resources for AmBisyon 2040, the goal of which is to eliminate absolute poverty and make the Philippines become a high middle-income country.

Although the binding constraint of a narrow fiscal space was resolved by the Benigno S.C. Aquino III administration, it was not able to achieve its target on tax effort, the amount of taxes as a percentage of GDP. By the end of Mr. Aquino’s term, tax effort was below the desired ratio of 17%. (See Table 1.)

9. In the political arena, opponents have accused TRAIN of being the cause of the rise of the inflation rate to 5.2% (the 11-month

This brings us back to our earlier discussion regarding the serious problems of the agriculture sector. The failed policies and institutions pertaining to agriculture — most stark is the disastrous rice policy, deceptively called “self-sufficiency in rice” — is the main cause of the persistence of poverty. Furthermore these failures have impeded production and have diminished consumer welfare.

11. But a good has come out from a bad thing. The rise in inflation hurts, but the unintended effect was to force the Executive to remove the quantitative restriction on rice and adopt a rice tariff policy in its place. The revenue from the tariff will then serve to fund safety nets for the rice farmers. The positive effect on food prices by the increased rice importation and the removal of non-tariff barriers on imported food commodities is immediate. Food prices and over-all inflation have begun to stabilize.

What any President — even Rodrigo R. Duterte — could not do in the past (because of a populist mindset or a political economy calculation) has finally been done.

12. The new rice policy is now embodied in a law, and this will have a long-term effect not only on Philippine agriculture but also on over-all development. The law can shift behavior of institutions from being oriented towards narrow sectoral interests towards enabling the whole of agriculture to contribute to all-round, inclusive growth. In so doing, agriculture will raise the welfare and standard of living of both Filipino producers and consumers.

But competent leadership is necessary. The current Agriculture secretary, Emmanuel F. Piñol, is a throwback to the old, failed agriculture regime.

In summary, we are now seeing growth that can be sustained for the medium term.

And despite bumps along the way, the current growth path is transforming the Philippine economy.

What accounts for this? It cannot be just luck.

I take off from the evident observation that the economic turnaround began in 2012. (2010 could have been a reference year, but economic performance in 2011 was dismal because of deliberate government under-spending.)

This suggests policy continuity. Finance Secretary Carlos G. Dominguez III has several times acknowledged how the present gains are an offshoot of the reforms from the previous administration.