Growing beyond the elections

AS in past election years, the Philippine economy surged in the first quarter of this year with a 7.3-percent growth, driven by the massive spending that accompanies every election, whether from government or otherwise. Also a factor but to a lesser extent has been the general recovery in rich economies from the global financial crisis, although this remains threatened by a possible domino effect of the Greek crisis in Europe. The global recovery has translated into a 43-percent jump in dollar export earnings in the first three months of the year, the fastest growth reportedly seen since 1991. But the real push came from investment and government spending, which grew 24.3 and 18.9 percent, respectively. Meanwhile, consumption growth has also gone back to normal, almost doubling its subdued 3-percent growth rate last year, a time when the global crisis induced people to hold back on spending.

If growth was largely election-induced, what can we expect for the rest of the year?

Private investment

There is good reason to feel bullish about the economy’s first-quarter growth performance. It is genuinely good news that the numbers reflect renewed investment spending by the private sector. This jibes with the business confidence surveys of the Bangko Sentral ng Pilipinas (BSP) showing rising optimism by the business sector, in seeming anticipation of better times after the impending change in government. The best evidence of this was the 25-percent surge in durable equipment purchases, the fastest seen since 1994. The further breakdown shows that firms invested heavily in vehicles (which jumped 82.7 percent), telecommunications and audio equipment (27.4 percent), pumps and compressors (58.7 percent), and other industrial machinery (25.6 percent). To some extent, this turnaround was inevitable, as there was need to replenish worn out equipment after years of an apparent holding back on equipment purchases. Note that there were some declines as well, such as in other electrical machinery (-63 percent), textile machinery (-11 percent), and air-conditioning and refrigeration equipment (-10.8 percent). Still, the overall investment picture looks good.

The real goal

What makes this healthy private investment turnaround particularly welcome is that it comes after generally sluggish overall investment growth since 2000. The numbers clearly show that the rest of our neighbors passed us by in recent years in the way they have put in place greater capacity for growth through investments. In our case, the investment slack was taken up by consumption, now making up almost four-fifths (78 percent) of gross domestic product (GDP). In contrast, investment propels a much larger part of our neighbors’ economies, where consumption comprises an average of only 60 percent of gross domestic product (GDP). Overseas remittances play a prominent role in our consumption spending, and the continuing challenge has been how to channel more of it to productive investment that would help sustain growth in the years ahead.

Growth itself is not the goal, of course. We want sustained faster growth because we want to make significant headway against poverty, which the National Statistical Coordination Board says has not improved since 2006, when it had worsened from 2003 levels. And experience elsewhere shows that faster growth is a necessary (but not sufficient) condition to bring down poverty. In our case, there is wide consensus that we need to keep growing at least 7 percent annually to do this.

Beyond the election

On the production side, our first quarter growth was driven by a surprising surge in manufacturing, which jumped 20.7 percent, reversing a 7.6 decline last year. Seemingly too good to be true, what dominated manufacturing growth were petroleum refining (65.9-percent growth), electrical machinery, which includes electronics exports (54.9 percent), and food manufactures (10.6 percent). In services, campaign ads did the trick. This showed up in the dramatic surge in “Recreational services” (31.4-percent growth against last year’s only 1.3 percent), which includes the broadcast media. The bad news is that with the El Niño, agriculture went negative, dropping by 2.5 percent, suggesting that much of the rural population—among whom are the bulk of the country’s poor—must have missed out on the good news of the first quarter.

Now that elections are over, what can we expect? Most analysts expect growth to moderate somewhat, especially with the renewed external threats from Europe’s difficulties. But given the recent surge in investment growth, sustained growth in remittances, and renewed optimism in a new government likely to receive wider trust from the general public, it is time to revise forecasts upward a bit. Whereas early projections expected around 3-percent growth this year, it now looks like 5 percent is doable—and I consider that still on the conservative side. But more than raising the growth number itself, the new government ought to turn its sights on making that growth permeate to those who have been left out of it so far, most especially the poor in the countryside. That will be the harder part of the work. –Cielito Habito
Philippine Daily Inquirer

(Comments welcome at chabito@ateneo.edu)