‘Mixed’ macroeconomic record

9 years of Arroyo: A review

A few hits here, a few misses there

(Editor’s Note: On the occasion of the ostensibly final State of the Nation Address of President Gloria Macapagal-Arroyo on July 27, the Philippine Daily Inquirer presents this review of her governance which runs into its ninth year by the time she steps down from office next year, the longest-serving Filipino leader next to Ferdinand Marcos.

The judgment of history is still out. So, call the Inquirer series—which covers the economy, peace and order, human rights, justice system, education, health and environment—the first draft of that history.)

MANILA, Philippines — The macroeconomic record of the Arroyo administration can probably be best described as “mixed.” A few hits here, a few misses there.

The following article must be taken as a summary that one hopes could serve as synopsis for the next administration.

The best claim the administration could make for the last eight years would be the faster growth of output (the gross domestic product).

From a compounded annual average of 2.45 percent in the 1990s, the growth rate has increased to an average of 4.28 percent.

There are issues about the actual level of this growth—where it came from and how much government policies were responsible for its emergence.

Nevertheless, the general impression over the past few years is still that the Philippines is now on a higher growth track.

A systematic search for the causes of this higher growth rate reveals the critical importance of the remittances of overseas Filipino workers (OFWs).

Examining the sectors that grew and considering the absence of complementary growth in some of the most likely sources of growth like investment and exports lead to the conclusion that the growth over the past decade has primarily been service-oriented and consumption-led.

Looking further for the source of the underlying support for this consumption leads us to remittances as the ultimate cause of the economy’s growth and resilience during this period.

However, there’s the glaring absence of investments and exports—the traditional engines of economic takeoff.

In contrast to the almost unexpected rise in OFW remittances, the emergence of these two impulses for economic growth would have been traceable to strategic and pivotal government policies and programs. Unfortunately, this has been largely missing.

Low saving rate

The lack of investments may also help explain the rather low saving rate in the country. This has averaged 20 percent, which compares unfavorably with those of our neighbors—over 30 percent for Thailand and 40 percent plus for Singapore.

Still one must take the good that comes with the increase in OFW remittances.

The government can take credit for the complementary policies that have been able to exploit the opportunities for favorable use of Filipino employment abroad and the structures that broadly assist OFW deployment.

Budget deficit

Complementary to the higher output growth during the period has been the better fiscal balance during the latter part of the first decade of the millennium.

The national government’s budget deficit ranged from P12.441 billion to P68.117 billion in 2006-2008, which is significantly lower than the figures in 1999-2005.

There were some missteps during the early part, such as when electricity rates were lowered contrary to recommendations that these be raised in order to recoup increasing costs.

This action brought about such a drastic deterioration in expectations about the budget deficit that serious doubts about the sustainability of the fiscal program were raised, including among other things, the paper written by most of the faculty of the University of the Philippines’ School of Economics, which warned that the fiscal picture was getting out of control.

The government recovered and passed a fiscal reform program, including value-added taxes and a temporary increase in corporate income.

This stabilized revenues to the extent that government finances were more easily controlled over the succeeding four years.

This recently came under scrutiny as the government undertook a stimulus package to counter the global crisis.

Taming inflation

Still another favorable development over the past decade has been the taming of inflation.

Except for extraordinary episodes such as the rice crisis last year, the trend in inflation has been a gradual but monotonic downward direction in recent years.

Inflation has so far averaged 5.5 percent during the Arroyo administration. This compares with 7.5 percent in the Ramos administration and 7.1 percent in the Estrada administration.

Inflation even dipped to a low 2.8 percent in 2007. This has not been an unmitigated benefit as one of the underlying reasons may have been the strengthening of the peso (reducing the price competitiveness of our exports), which has been beneficial for a net importing country.

One other source of declining inflation has been the well-behaved fiscal sector mentioned above.

Currency picture

Because of the favorable macroeconomic picture presented by the foregoing developments, the currency situation has been mostly quiescent in the past few years.

If any, it has been too much of a good thing as the ensuing confidence in the country’s ability to service its foreign debt (owing in no small way to the surging inflow of OFW earnings) has shifted the expectation from that of peso depreciation to appreciation.

This has made life for our monetary authorities considerably easier and has allowed them much more leeway in domestic monetary policy.

(Another too-much-of-a-good-thing development is the more difficult task of controlling money supply and the resulting inflation as a result of the surge in remittances).

Unfortunately, governance and related issues have probably prevented easier credit and access to foreign resources from burgeoning into much-higher investments.

Weak investment growth and a relatively weak export record have hobbled the country’s growth.

This is doubly a pity because the easier availability of foreign currency afforded by remittances provides the opportunity to rebuild and strengthen our manufacturing capacity and related infrastructure.

This could have, in turn, provided the investment and export push needed for takeoff. Such a missed opportunity can be expensive deficiencies in the long run if repeated too often.

Employment

Perhaps, the areas where government could have shown better results would be in employment and poverty.

The 2004 State of the Nation Address (SONA) included job creation—livelihood for 10 million Filipinos by 2010.

In the 2007 SONA, there was a mention of 1 million jobs to be created every year. According to data gathered by the National Statistics Office (NSO), there were 31.74 million employed Filipinos during October of 2004.

By October 2005, the number rose to 32.875 million and 33.185 million by October 2006. In October 2007, it went down to 32.672 million. The employment rate went up from 92.5 percent in October 2005 to 92.6 percent in October 2006 and then to 93.7 in October 2007.

An increase of more than a million jobs occurred twice—in 2004-2005 and in 2007-2008. So from October 2004 to October 2008, however, the total number of the employed increased only by 2.759 million.

This can probably be partly explained by the continuing globalization of industry and services, and the increased competition in the product market.

While the phenomenon has allowed more Filipinos to work abroad, our traditional and mature industries have had to contend with newer competitors and products and, unfortunately, our investment growth implies that new industries have not been as fast to grow as expected.

The presence of work abroad has also raised expectations of the domestic labor force and quite a few may have opted to wait for overseas jobs rather than settle for domestic employment that provides lower pay.

Poverty

On the other hand, poverty incidence among families dropped in 2003 to 24.4 percent from 33.7 percent in 2000. However, it increased to 26.9 percent in 2006.

In aggregate terms, 32.9 percent of Filipinos in 2006 were living below the poverty line.

This reflects the inability of the lower-income classes to participate in the opportunities accorded by the opening up of markets such as overseas employment and the burgeoning business process outsourcing and related industries.

This calls for remedial social programs such as intensified education and training as well as enhanced nutrition and health programs.

Otherwise, we will spawn a disadvantaged underclass that will be rich grounds for agitation and social turmoil.

The succeeding administration would best pay special attention to this increasing gap in opportunities and expectations.

Continued stabilization

As mentioned at the start, the economic record of the Arroyo administration is mixed.

While it does not show the strong imprint of rehabilitation and reform of the Aquino and Ramos administrations (the Estrada administration was too short-lived to characterize), the Arroyo administration manifests areas of improving indicators such as growth and the external picture.

The Arroyo administration has, of course, benefited from the reforms of previous administrations, but the improved fiscal picture shows that it has been able to exploit its opportunities.

The continued stabilization of the economy has happened under its watch and could provide the jump-off point for the next administration. With the collaboration of Kristine Canales, macroeconomic director, Institute of Development and Econometric Analysis. –Cayetano Paderanga Jr., Philippine Daily Inquirer

(Cayetano Paderanga Jr. served as Monetary Board member and socioeconomic planning chief under the Aquino administration. He was educated at Stanford University. He is the chair of the Institute for Development and Econometric Analysis Inc., a nonstock, nonprofit and nonpartisan foundation dedicated to economic research, instruction and communication. He teaches economics at the University of the Philippines-Diliman.–Eds)