Modest 2009 growth can boost momentum in 2010

From here to 2010: A view of the Philippine economy

I. Perspective Ondoy and Pepeng devastated many sectors in our economy, aggravating the destruction already brought about by the global recession. The recession brought down the 7.2-percent growth rate of Philippine GDP in 2007 to 3.8 percent in 2008 and threatened to do even worse in 2009. Could not the two natural calamities bring the Philippine economy down to its knees, so to speak, shrink its growth rate to negative territory, as the recession has already done to our Asean neighbors?

Thanks to our people, undaunted in their productive work by adverse circumstances, and to our government, carrying out appropriate economic measures even at the risk of its political popularity, the answer is in the negative. Our economy will not enjoy rapid growth as though nothing adverse has happened but it will expand at a modest rate in 2009. In 2010, as the recession eases, the devastation of the storms fades into distant memory, and the various sectors of our economy assert their robustness, the growth rate of our economy, still way below potential, will be better.

II. The Economy in 2009

All sectors of the Philippine economy were set back by the global recession. The export sector suddenly lost a large part of its markets as foreign peoples saw their incomes evaporate and their ability to absorb products frustrated. This meant that all sectors selling products abroad, including manufacturing and agriculture, suffered in their sales and were placed under pressure to reduce production and downsize work forces, among other things. Loss of employment for people obviously spelled loss of income and impairment of the ability to spend.

Fortunately for us, several factors in our political economy worked in our favor.

First, our government launched a stimulus package that made up for losses in consumption by distributing short-run and medium-run employment and relief packages and reviving and accelerating public works. Whatever their leakages, their impact on the affected sectors was positive.

Second, as every Juan and Juana now knows, remittances from overseas Filipino workers (OFWs) not only have not declined but have increased making up for the recession-induced losses in the export sector.

And, third, the built-in features of our economy for overcoming imbalances swung into action. In the current situation, the manufacturing and construction sectors jumped into high gear of production to meet emergency needs for food and building materials when the agriculture sector faltered under the onslaught of bad weather.

Bucking the recessionary trend

On the supply side, there are small but significant developments that counteract bad fortune. This refers to the BPO subsector, the government’s foreign citizens retirement program, and the tourism industry as a whole. These subsectors continue to buck the recessionary trend and persist in growing, creating several hundred thousand jobs for people and generating incomes for them. The retirement program, in addition, is easing the pressure on many of our young professionals to go overseas in pursuit of their dreams of a bright future, by opening up earning opportunities for them right here at home.

The impacts of these developments, needlessly reiterated, have been favorable to the economy in
general and to the balance on current account in particular.

All this will not be enough to return our economy to the path of rapid growth. The residual impacts of the disasters will continue to be felt but will not be as bad as will appear on the surface.

In a nutshell, the Philippine gross domestic product (GDP) will expand in 2009 but by less than initial projections. A growth of 2 percent, not 2.5 percent to 3.0 percent, with GDP reaching P7.90 trillion in current prices, will be the probable outcome.

As companion features, the employment rate will be unaffected at 92.3 percent of the labor force (i.e., the unemployment rate will remain at 7.7 percent) throughout 2009. The inflation rate will be 3.5 percent for 2009.

With an estimated population of 92 million in 2009, our per capita GDP for 2009 will be some P85,000.

III. 2010: Through a Glass Darkly

The salutary developments of 2009 can be expected to persist through the near- and medium-term and can provide a boost to the growth momentum in 2010. But there are two problems that are rearing their ugly heads that must be addressed the sooner the better so that they do not dim the growth prospects for the oncoming year.

Two serious problems

One, the decline in foreign direct investments (FDI) from the average of some P150 billion in the 2005 to 2008 period to some P50 billion in 2009. However reckoned, this is very bad for our economy. And, two, the growth of the budget deficit, speeded up by the stimulus package, now reaching some 4.4 percent of GDP, that is, a deficit of P380 billion against a (projected) GDP in current prices of some P8.6 trillion for 2009.

There is no scientific way for determining what rate of deficit is “too low” or “too high” for an economy. But any rate that undermines investment prospects and price stability is “too high” because it endangers the growth and stability of the economy itself. In that case, the deficit must be brought down.

The pace at which we can eliminate a deficit, as common sense would suggest, will depend on how fast we can expand government revenues and how fast we can compress expenditures. Either recourse will not be easy. At this time, however, we’ll just have to pursue either one or both if we do not want to undermine our own development efforts.

On the FDI side, we will have to improve our Philippine investment climate, there is no escaping this. For an opener, we can begin getting rid of the red tape in our administrative processes. Do we know that implementing rules and regulations are often 10 times longer than the law that is being implemented?

We can also begin getting rid of graft and corruption in our governmental system, the bane of domestic and foreign investors. And we can also learn to support the foreign travels of our president but rigorously prepare these as investment-promotion campaign sorties. For the longer term, we can begin dismantling some of the foreign investment restrictions in our Constitution.

Election spending

The approaching national elections will have a salutary effect on the economy. Assuming the candidates for the various positions spend at customary levels, we can expect something like P30 billion to directly augment the national consumption basket in 2010. The impact multiplier, at 1.5, will generate one and a half twice that amount in added production all around in 2010.

Perhaps the best time to accelerate the initiation and completion of infrastructure projects would be 2010, partly to replace the stimulus package that would be winding down, secondly to enhance the investment climate if only to attract foreign investors, and lastly to prepare for the expanded demands of business and commerce as the economies of the world emerge from the global recession.

In similar measure, we must explore and expand new markets for our exports. It was time we paid attention to Europe, as our European friends have been reminding us. But it was also time that we begun exploring the vast markets of emergent China, India, and Brazil. This is surely one way not just of overcoming the limitations of a one-country-based export program but of expanding our exports to levels we have not imagined.

Fearless forecast for 2010

As the positive and negative factors mentioned above are appropriately dealt with, Philippine GDP would grow by 4.5 percent to reach some P8.60 trillion; open unemployment would remain at 7.7 percent; the inflation rate would go down to 2.5 percent.

With our population at 93 million, our per capita GDP would be P92,750 in 2010.

IV. On the National Welfare

If our per capita GDP is P85,000 in 2009 and P92,750 in 2010, are we becoming better off? To answer correctly, we must express the 2010 GDP figure in the same prices of the 2009 GDP figure. Doing this reduces the GDP figure of 2010 to P8.30 trillion. In consequence, the per capita GDP figures are now P89,250 for 2010 as against P85,000 for 2009. Yes we are becoming better-off.

The answer is a conceptual one, based on a numerical average. Is the statement true at the concrete real life level? Sadly, it is not. In reality some of us are earning more than the average, some are earning just the average, and some are earning below the average. Among those who are earning below the average, exceedingly many are poor.

Despite the salutary development some of the poor remain in poverty.

The growth of production will cure much of poverty, as it gives jobs and incomes to people, including the very poor ones, but it cannot eradicate economic inequality. Fiscal action—by making taxation progressive and expenditures regressive—can mitigate the inequality but cannot eliminate it. Economic inequality can be eradicated only by reforming the social structure, an entirely different matter from developing the economy. But that will require a discussion beyond the purview of the present report.

Formerly of the School of Economics, University of the Philippines, Dr. Gonzalo M. Jurado is currently vice president for Finance and Development and concurrently Professor of Economics, Kalayaan College. –Gonzalo M. Jurado, Ph. D., Manila Times