The Philippine economy, 1998 to 2010: What the national income accounts tell us

During 1998 to 2010 the economy underwent sustained but moderate expansion. However, structural changes affirmed the relative decline of industry and agriculture and the increasing domination of the economy by the services sector. Large unemployment in the labor sector typifies the problem of declining industries, especially manufacturing.

These conclusions can be read from a close analysis of the national income accounts data. Recently, the government issued the rebased national income data for this whole period just mentioned. A clear view emerges as to where the economy is headed. The future is not encouraging but it is possible of correction.

“Growing economy in terms of total output and per capita output….” The best measure of domestic output is the GDP or the gross domestic product. (Throughout this discussion, we refer only to real output, that is, the effects of prices are taken out and all values are related to the GDP in constant 2000 prices. The data are all from the rebased national income accounts.)

The economy of 2010 is so much larger than that of 1998. The real GDP in 1998 was 58 percent of the GDP of 2010. The output of 2000 was, correspondingly, 64.8 percent of that of 2010.

During 1998 to 2010, the population grew. In 1998, the population was 75.2 million; in 2000, it was 78 million; and in 2010 it was 94 million. Output (or GDP) per head in 1998 was P44,264. In 2000, real output per head was P46,829 in 2000. In 2010, output per head rose to P46,880.

The size of the total economic pie per head rose. But high unemployment and underemployment persists among the poor people. Not all receive the benefits of growth.

“But growth is moderate.” By the standards of East Asian neighbors, the national economy expanded moderately. The growth rates per year or real output grew from 3.08 percent in 1998-1999 to 7.63 percent in 2010. This produced an average growth of 4.16 percent per year.

The high growth rate in 2010 was not typical. It did not reflect the underlying strength of the economy but demonstrated only a pattern of growth that is tied with the country’s presidential election cycle. During such periods, a high degree of spending by candidates and by the government that is politically motivated tends to prop up income and output. The economy grew high 2004 at 6.7 percent, and that was another presidential election period.

The typical performance of the economy in normal years was generally below five percent per year. In fact, throughout the whole period of 1998 and 2010, population growth rate was between 2.16 percent per year (in 1998) to 1.96 percent (in 2010). Given that the average economic growth rate of output per year was 4.16 percent, then the growth of output per head was just a tiny fraction above two percent per year. East Asian neighbors have had far better records.

“Composition of output.” Three major sectors of the economy account for the composition of output. In 1998, agriculture was 13.3 percent of real GDP; industry 35.3 percent; and services already high at 51.4 percent. The composition of output was tilted toward the growth of the services sector.

In 2010, agriculture shrank in output contribution by almost 2 percentage points to account now only for 11.6 percent of real output. Industry reduced its contribution to output by almost 4 percentage points drop in its contribution to total GDP. From 35.3 percent, it is now 32.6 percent of total output. The services sector by 2010 grew further to 56.8 percent of real GDP, accounting therefore for an increase of 4.3 percentage points of contribution to total GDP.

“Relative decline of industry and manufacturing.” Among the sectors comprising industry, mining has remained a small contribution to total output despite the country’s mineral wealth. But a favorable Supreme Court decision in 2005 on the full participation of foreign direct investments in mineral mining operations promises to change the sector’s small contribution. Construction and utilities had practically retained their shares of total real GDP during this period.

The relative decline of manufacturing happened over time. Manufacturing accounted for 24.5 percent of GDP in 1998. As a significant part of the industrial sector, manufacturing accounted for about 70 percent of total industrial output. In turn, industry in 1998 was 36.3 percent of GDP contribution of industry. But by 2010, manufacturing accounted only about 22.2 percent of GDP.

Philippine manufacturing suffered from the opening of the economy to greater trade. High costs derived from high tariff protection, high import dependence, and high electricity costs combined with the problem of a highly regulated labor market. With competing imports available at cheaper prices, locally manufactured goods suffered on the competitive end.

Philippine authorities tried to improve the country’s competitive position. There is a huge lag in adjusting to the new circumstances of global and regional industrial competition. The result has been labor displacements in the economy caused by the migration of foreign capital to other shores rather than to the country.

This phenomenon was less true of the manufacturing sector that had found its niche as an operation for exports. These are the many firms that were, from the beginning, established to locate in the country because of its advantageous features for export manufacturing. Many of these companies are located in the export and industrial processing zones.

Those industries that require a high level of skills are less affected by the regulated labor costs. The information technology back-office operations – in the services sector – have progressed even though the workers in these offices start at salaries that are outside the sphere of the minimum wage issue. The workers are skilled, are educated graduates with good speaking skills, and participate in a rising wage in a competitive sub-labor market. The economy has found a way to create heavy demand for those skills.

Industrial operations that require a lower level of skills have moved to China and to Vietnam in the course of the 1990s and the first decade of the 21st century. By choice and by insistence, labor market policies have remained unreformed to accommodate more employment. Hence, a lot of less skilled and unskilled workers are excluded from getting good jobs.

This explains why the Philippine manufacturing sector, especially in the electronics industry, has remained robust. Workers are more skilled. However, it could have remained much stronger if labor market regulations were to be improved and some of the lower end processing dependent on low cost labor had not moved to Vietnam, China, and other countries because of high labor costs. –Gerardo P. Sicat (The Philippine Star)

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