25% Investment rate crucial to RP

Published by rudy Date posted on April 15, 2010

IN order for the next president to get the Philippines back on track to achieving sustained and inclusive economic growth, the domestic investment rate must be increased to an annual rate of 25 percent from the current 15 percent, which is the lowest among its neighbor states.

This is just one of the recommendations of Dr. Raul Fabella, Dr. Benjamin Diokno, Dr. Felipe Medalla and Dr. Arsenio Balisacan, economists from the University of the Philippines, at the “Elections 2010: The Morning After,” the 9th Ayala Corp.-UP School of Economics (UPSE) Economic Forum in Makati City on Wednesday.

Fabella said the next president must set “ambitious but doable” targets that could influence the first few years of the succeeding administration, to achieve a 6-percent average annual gross domestic product (GDP) growth between 2010 and 2020.

This GDP growth should be accompanied with an annual investment rate of around 25 percent for the country to reduce poverty incidence to 10 percent by 2020. He added the country’s investment is  the lowest among its neighbor—Indonesia has a rate of 25 percent; Thailand, 28 percent; Singapore, 22 percent; and Vietnam, 38 percent.

“We have been on a secular downslide for some time now to irrelevance and the next decade is very, very crucial for reversing this,” said Fabella in his talk.

“We need to grow rapidly in the next decade in order to stem this slide and in numbers, this translates into a 6-percent annual average growth rate of real GDP from 2010 to 2020. Doable? Perhaps. I consider this to be doable. And for inclusiveness, our poverty incidence [must be] standing at 10 percent in 2020; it now stands at around 30 percent or 33 percent, so that is quite a [problem],” he added.

Fabella said that in order to increase the country’s investment rate, the next President must find a cure for the country’s own “Dutch disease” in a remittance-driven economy, address the costs of doing business like power, peace, and the like, as well as address the country’s serious infrastructure deficit.

Dutch disease, simplified, is the appreciation of a less developed but resource-rich country’s currency because of the increased export of its resources such as grain or ores, leading to increased earnings that lead to more expensive local currency vis-à-vis foreign currencies, that in turn lead to its exports becoming more expensive. A vicious economic circle, in short.

He said the country has not been investing enough in infrastructure as can be seen from government capital outlay remaining around 2.5 percent of GDP. Neighbor states are investing more —Indonesia, Vietnam and Malaysia invest around 8.5 percent, 8.2 percent, and 6.5 percent of their GDP on capital outlay, respectively.

The infrastructure deficit, Medalla said, can be addressed by implementing various projects like one large power plant in Luzon, which should begin construction this year or next year to avoid a power crisis; award build-operate-transfer contract for more toll-road projects; and increase public transport like extending the LRT Line 2 to Cogeo and Line 1 to Bacoor.

However, Medalla said subsidies for these transport systems must be reduced by increasing fares to allow them to better maintain the system.  

To finance the infrastructure deficit, Diokno recommended difficult financial reforms such as reforming the tax system by reducing corporate income tax to 18 percent, and reducing personal income tax rates to a flat rate of 18 percent.

The revenue losses from such measures, including removing the tax on insurance premiums, Diokno said, would be addressed by increasing the value-added tax (VAT) rate to 15 percent, rationalizing fiscal incentives, imposing an ad valorem excise tax system on cigarettes and liquor, and imposing a 10-percent tax on all “passive income.”

“A fiscal adjustment of between 3 percent and 5 percent” of GDP may be needed to keep the economy on a modest to high growth path. But with large underspending in public infrastructure and social services in the past, a large part of the adjustment has to come from raising taxes. I find the present plan of balancing the budget by 2013 as too severe. The next President may want to reduce the deficit-to-GDP ratio to about 2 percent by 2013 and balance the budget by 2016,” said Diokno.

He said these measures are necessary as the next administration will inherit “a fiscal position that is teetering on fiscal collapse.” He cited the weak tax to GDP ratio of 12.7 percent, compared to the 15 to 17 percent average in the region.

Diokno said the next government will also inherit a debt to GDP ratio of 57 percent, way above the 35-45 percent level of neighbors. “[The next President will also inherit] crumbling infrastructure and large backlogs in power, water, highways, and mass transit projects [as well as] an educational system that is dismal being one of those in the cellar.”  –Cai Ordinario / Reporter, Businessmirror

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