A banner year liable to exclude the rural sector

2007 is likely to be a banner year for the economy. After last year’s respectable 5.4 percent, gross domestic product (GDP) should grow by between 6.9 percent and 7.3 percent—a 20-year record. The surge should continue in 2008 (6.4 percent to 6.7 percent) and peak in 2009, when Citigroup projects GDP to expand by as much as 7.6 percent.

Growth is apparently being driven by infrastructure building, both public and consumer spending, and a robust farm sector. Individual firms, too, are investing in both manufacturing and commercial agriculture.

Already, officials trumpet the surge as the start of self-sustaining growth. But similar episodes in the past have not endured. The University of the Philippines economist Emmanuel de Dios in fact perceives cycles of boom-and-bust coinciding roughly with presidential election years. His colleague Arsenio Balisacan—whose field is poverty studies—notes, “The main reason for [our] relatively low growth is primarily the short duration of growth and the slowness of this growth.”

Our split-level economy

The Ateneo’s Cielito Habito famously describes our economy’s growth as “narrow, shallow, and hollow.”

Narrow because more than half of domestic output and income is generated by Metro Manila and its satellite regions, Cental Luzon and Southern Tagalog.

Shallow because 70 percent of exports (electronics and garments) depend heavily on imported raw materials and intermediate inputs. The thin slice of value added on to these products (16 percent in electronics) is accounted for almost entirely by labor.

Hollow—because episodes of growth have actually been accompanied by increased joblessness, higher poverty incidence, and sharper income inequality.

Unlike neighbor-economies, whose growth has been both higher and sustained longer, ours still hasn’t expanded enough to bridge the gap between the two sectors of our “dual economy.” An artifact of colonialism, the dual economy is characterized by a relatively modern sector alongside a (usually larger) traditional sector that is itself dominated by subsistence agriculture.

We have one of the highest industrial concentrations in the world. So that while the centers of modernization may be generating “spread effects” in neighboring regions, those regions more distant may be experiencing “backwash,” as the modern economy sucks away their capital and their most talented inhabitants.

Ordinary people not feeling growth

By proceeding with capital-intensive import-substitution while our neighbors switched to labor-intensive exports, we reduced the linkages between agriculture and industry, constricted job opportunities, and concentrated the benefits of development on the landowning, industrial, and professional elite.

While agriculture still employs over a third of all our workers, it contributes less than a 10th of yearly growth. Manufacturing, trading, transport, communications, and storage provide 60 percent of the growth but only 35.4 percent of the jobs.

Our biggest problem is how to employ 2.8 million undereducated and largely rural young people unable to fill the jobs the modern economy generates. “Call centers” hire no more than 5 percent of all the applicants they interview.

Not only are lower-income Filipinos missing the perks of growth. They’re also bearing the larger share of the expanded e-VAT that has boosted government spending. Meanwhile, close to 900,000 overseas Filipino worker families are being devastated by the rising peso. And, judging from higher credit-card and car-loan defaults, even the city middleclass may be hurting.

Can growth be kept up?

Can we keep up this level—and this kind—of growth? State finances have been stabilized somewhat, and Congress is at last re-examining the lavish incentive system for favored investors.

But the tax effort is declining, and government will run out of assets to sell off. The tax take for January to September was only 14.4 percent of GDP. At its height, in 1997, it had ranged close to 18 percent. (The leakage from corporate taxpayers the Finance department puts at nearly P82 billion.)

Manufacturing—on which our early modernizers placed their hopes of jobs and development—is in secular decline. Production volume is dropping. Our investment rate is well below those of our neighbors. Philippine investors are actually exporting their capital, where they’re not locking it up in real-estate speculation. (From January to June, they invested $1.8 billion abroad.)

Protectionism—enshrined in successive Constitutions since 1934—still chokes off foreign investment. And the interventionism it requires of the weak State gives crony capitalists many chances to bend the rules. Aviation, shipping, ports and energy are in the hands of monopolists. The World Bank says “hidden barriers and unofficial payments” are reducing Philippine trade by as much as 25 percent.

Fortunately a Supreme Court decision has opened up mining to multinationals.

So what are we to do? We must unify our dual economy by shifting the emphasis of public investment from the modern to the traditional sector. Raising the poor from poverty also incorporates them into the modern economy.

We must also stimulate the modern labor-intensive industries that offer the only jobs suitable to our school dropouts. The Chinese have indexed their military budget to their economy’s growth. We should do the same for our education and health budgets—because public investments in these two sectors give the highest social return.

Notes and Comment appears fortnightly.–Juan T. Gatbonton, Editorial Consultant, Manila Times