Structural deficits and disasters
I GAVE a presentation to a group I am independent director of and was going to frankly leave it to them. Boo Chanco quoted some of it and approvingly, which I thank him for, in his column last Friday. My emphasis and some points are quite different from his.
He also left many of my observations and analysis out. Boo is perfectly entitled to his take and what statistics and facts he quoted and referred to were accurate. However, so readers understand my points, the arch and most important, the overall theme of my presentation, I am writing this article which summarizes what I presented.
Our dismal economic underperformance is structural and decades-old and getting worse. This is regardless of who is president, what government system we have, and economic incentives we provide. Unless we meaningfully and comprehensively address our multiple structural deficits, we are doomed to consistent underperformance. In my lifetime, I have seen the following neighbors surpass us in GDP per capita — Malaysia, Thailand, Indonesia and now Vietnam. The gap is so big that we probably cannot catch up with even Indonesia as the wonders of compound growth makes even one decade after exceeding us a big gap that can longer be caught up to. Vietnam? Give them less than a decade and they will be out of reach. Why?
Three reasons why
Our structural deficit, among other possible points are due to three facts — our inadequate, expensive and backward-looking infrastructure (power, roads and transportation that fill a bottleneck or need rather than be developmental and anticipatory), our dearth of manufacturing (not competitive if you have more expensive power, toll roads, transportation costs and have poor infrastructure for that higher cost), and a demographic disaster where we have had Malthusian growth in population. Even our recent “good” news of two straight quarters is misleading. All countries’ growth rates declined or at most had a minor contraction during the pandemic. We declined close to 10 percent. That is very different from slower growth of our neighbors and was the worst in Asia. Why? Services and malls were shut down or severely curtailed in all countries, but their manufacturing kept going and was a huge part of their economies versus our malls, BPO and OFW-driven economy. We showed 7+ percent growth in the last two quarters. Malaysia, which unlike us, did not decline, showed 11+ percent growth in the last two quarters with the reopening of its economy. Still impressed by the 7 percent?
I used statistics I previously quoted in the prior column for my presentation and am using some of them again. Manufacturing, apart from food processing, is a waste land here. Proof is power demand. In a mall or office building, power demand is secondary. In heavy manufacturing, power is 40-60 percent of cost. A steel mill that turns iron ore to a finished product has power as over 40 percent of its operating cost. Here are simple facts.
Add to that our Malthusian growth in population.
Demographic dividend nonsense
Then look at my prior column for the statistics on population density. Without being a single land mass, our population density is close to India and Japan and way higher than Thailand, Indonesia, or the US. We have less land per person to support agriculture and housing, among everything else. Yet we must feed, house, educate and find jobs for 600 percent more people and find jobs for the over 1.5 million who join and soon over 2 million who will join the workforce every year. If China did not have their draconian one child policy and grew like us, there would now be over 3 billion people in China. Still, I read about this so-called demographic dividend given our increasing source of working age population and consumers being added versus countries like Japan and China whose declining population growth will lead to more retirees needing more support from a declining number of workers. Frankly, this is nonsense as far as the Philippines and completely unjustified in our context. I consider it more akin to religiously driven arguments rather than cogent economics. Want proof? Let us look at what our exploding Malthusian population growth has brought up versus those population controlling countries for growth in GDP. After all, we have had this supposed demographic dividend for at least 20 years since World War 2.
What do we need to do? First, deal with our Malthusian population growth. We do not have a demographic dividend but a demographic disaster. The only presidents who tried to do meaningful population management were the first President Marcos and Ramos. Demographic dividend of a growing working age population supporting a smaller number of retirees is true only when you already have full employment like in Japan and the West. Not when you are struggling to feed, house, educate and employ your burgeoning population. With our 12 million people, we have 1.4 million workers in BPO. Hardly more than 1 percent of the total population. We have about 15 million OFWs. Clearly, we must resort to exporting our people and separate them from their families and homes to keep them and their families from starvation and destitution. Yet BPOs and OFWs are far from sufficient engines for economic growth. That is a demographic dividend? The argument is laughable if it wasn’t so tragic.
I have also heard the wellmeaning but specious argument that with BPOs we have graduated from an agricultural to service economy without the need for manufacturing. The only country that successfully did that is Ireland when they became the back office to American insurance and health care companies starting in the late 1980s. They had a population of 5 million. There are more people of Irish descent in the US than in Ireland. That is fine if your population is 1/3 of Metro Manila, not over 100 million. If that was the case, why are we exporting people to not exactly cushy lives and only employing 1 percent of our population in the BPO sector?
Manufacturing the only way
Manufacturing is the only way. To begin that we must start where we already have an input advantage and that would be mining and agriculture. Integrating to finished products there like Indonesia has done for nickel and copper and Thailand and Vietnam for agriculture is imperative. Versus the endless drumbeat of we are not competitive, so let’s just import more. First, it is not safe to assume there will be imports all the time. Even if it is hard, it is necessary. Then add others like tourism, renewable energy, steel and the like.
That needs anticipatory and low-cost infrastructure. Not our wait for a bottleneck and crisis then build remedial infrastructure to address a need rather than spur development. To do that you need to abandon the passé and inappropriate Washington Consensus mentality. I am not a fan of big governments and bureaucracies, but small government does not mean bad and unimaginative government. It also does not mean reactive rather than developmental government.
That is true for education as well. Education is my personal charitable advocacy. When I was funding scholarships at Ateneo, I was told they partner with some public high schools in Marikina and Quezon City as without tutoring and supplemental education, even the best students at those public schools wouldn’t pass Ateneo’s entrance exam. This with even our top universities ranking quite low among many of our Asian peers. Other countries prioritize education quality and comprehension, especially STEM (science, technology, engineering and math) while teaching in their language. We argue about teaching bilingual and bringing back ROTC. They have long understood what we fail to: comprehension is what matters, not being able to speak passable English while understanding little. Then teach English as a second language intelligently.
That is why I have been asking for a discussion on our economic thinking and priorities. The Washington Consensus and its minimalist government and leave-it-tothe-private-sector mentality may have been fine for us in 1982. It is 2022. The challenges and needs are different. It is like we are still basing our economic thinking with a Betamax mindset when others have moved to laser disc, then DVD and now streaming. The more progressive countries have moved that way and frankly never bought the Washington Consensus gospel anyway. And when it was their turn, Washington and the West in 2008 completely repudiated the Washington Consensus they had been preaching to us when dealing with their financial and economic crisis. Practice what they do, which has been successful and not what they preach, which we have blindly done. We don’t need big government and I am no fan of government services in the Philippines as delivered over my lifetime, but we need effective and forward-looking government and policies. Otherwise, no development, just reaction. And an exploding population that we cannot feed, educate, house, or find jobs for.