Outlier

In the 1950s, the Philippines was way ahead of its original ASEAN-5 counterparts — Malaysia, Indonesia, Thailand and Singapore. The Philippines then had the second highest per capita GDP in Asia. Today, all its ASEAN-5 neighbors have surpassed the Philippines; Singapore has assumed first-world status. The latter has been replaced by emerging Vietnam in the ASEAN-5 group of countries. But by now, ASEAN-5’s newest member should have an economic status approximately equal to, or may even be slightly better than, the Philippines.

I’m amazed at how Filipino leaders, businessmen and analysts associate the Philippines with fast-growing Asia. The Philippines is part of the fastest growing region in the world, they love to say, as if that will guarantee rapid growth for the country. Alas, such reasoning is both misleading and illusory. The harsh truth is that the Philippines is an outlier. In the land of the tigers, the Philippines is a slow-moving turtle.

Forget about China and India — these two rapidly growing giants are a class in itself. Focus on ASEAN-5 economies. But even these countries — Malaysia, Indonesia, Thailand and Vietnam — have surged ahead and are now described as high-performing economies. They are targeting first-world status. By contrast, the Philippines is operating in a low-growth trajectory.

What went wrong? What factors explain why the Philippines has lagged behind its surging ASEAN-5 neighbors? What should the Philippines government do to catch up?

These questions were answered in a recent IMF Working Paper, prepared by Willa Boots J. Tolo entitled, “The Determinants of Economic Growth in the Philippines: A New Look” (WP/11/288, December 2001).

The paper has two objectives: first, to identify the factors behind the slower growth of the Philippines by contrasting its experience with other emerging economies in Asia and from other regions; and second, to recommend possible policy measures to address these factors.

The paper, using a panel data of 23 emerging economies for the period 1965-2008, looked at the determinants of per capita GDP growth in the Philippines. The study finds the following conclusions. First, the Philippines is an outlier in terms of agricultural exports, investment, research and development, population growth and political uncertainty. Second, these factors, along with the deficit, inflation, trade openness, the current account balance, and the frequency of crisis episodes are significant determinants to growth. Third, a growth index confirms that these determinants also capture the absolute and relative performance of each country over time and suggests that the Philippines has lacked a sustained period of relatively strong economic reforms.

The IMF study compared the Philippines to three sets of emerging markets, grouped by their cumulative GDP growth rates, in order to see the differences in growth. Twenty-two other emerging markets are used for comparison, eight of which are in Asia. The countries are ranked according to their cumulative growth rates during 1984-2008:

• Top performing (Chile, China, India, Indonesia, Malaysia, Sri Lanka, Thailand, and Vietnam);

• Moderately growing (Egypt, Mongolia, Morocco, Pakistan, Tunisia, Turkey, and Uruguay); and

• Slower growing (Argentina, Brazil, Colombia, Jordan, Mexico, Peru, and South Africa).

The “top-performing” group consists mostly of Asian economies; Chile is the only Latin American economy in this group. Except for Uruguay, all other Latin American economies belong to the third or “slower-growing” group together with the Philippines, which is ranked 20th. GDP growth on average rose rapidly in the period 1984-2008 compared to 1965-1983. The exception is the Philippines, where growth declined.

CHARACTERIZING PHILIPPINE SPENDING PRIORITIES

Indicators of fiscal policy in the Philippines are, by and large, comparable with other emerging economies, except for the rising public debt. The latter may be reflective of stagnating revenue growth. Public and private investment shrunk, in stark contrast with increasing trends in other emerging markets. Government investment in percent of tax revenue has also contracted since 1997, suggesting that this component was sacrificed during the fiscal adjustment after the Asian financial crisis. By contrast, governments of the top-performing group have invested almost thrice as much as the Philippine ratio.

Public spending on education was low compared to the other emerging economies. While government spending in percent of GDP has grown, it remained lower than the group averages. The numbers on spending per student show that averages across countries have declined. The deficiency in public education spending is most serious in the tertiary level, compared to other emerging markets.

The Philippines government’s spending on research and development and transportation was dismal. Public spending in research and development in percent of GDP is low compared to the group averages. Paved roads in percent of total roads continue to lag behind the group averages; in recent years, this ratio has further deteriorated. On the other hand, the ICT expenditures in percent of GDP is one of the highest among emerging markets in 2003 and 2006. This is evident in the upsurge of cellular technology and high-technology exports (i.e., semiconductors) in the Philippines in recent years.

NEW METHODS, SAME RESULTS

New methods were used to identify which factors have caused the Philippines’s growth rate to lag behind its neighbors. A panel of 23 emerging markets for the period 1965-2008 was split into three groups: top- performing, moderately growing, and slower-growing countries.

The analysis reveals that the Philippines is an outlier in terms of agricultural exports, investment, research and development, population growth and political uncertainty. Panel regressions reveal that these factors, along with the deficit, inflation, trade openness, the current account balance, and the frequency of crisis episodes are significant determinants of growth. Separate regressions show considerable heterogeneity among the growth determinants in a group of top-performing countries relative to moderately growing and slower-growing countries.

A growth index is constructed that confirms that the determinants found in the panel regressions are also key for both the absolute and relative performance of each emerging market over time. The index shows that the regression is a good fit for the Philippines both in terms of its absolute and relative performance over time. In addition, it accurately dates the turning point (post-Aquino assassination and pre-EDSA 1) when the Philippines started to lag behind.

The growth index suggests that the Philippines lacked sustained periods of improvement in the key growth determinants, which suggests the lack of a strong and persistent period of economic reforms.

What should the Philippine government do to catch up with its East Asian neighbors? The prescriptions are fairly well known: maintain macroeconomic stability, expand its fiscal space, and redirect public spending to agriculture, infrastructure, and research and development.

But expanding the fiscal space can’t be done by compressing spending which was what happened during the last 18 months. The challenge is how to mobilize more public resources in order to scale up spending on agriculture, infrastructure, and research and development. The study recommends: “raising tax revenue through both administrative and selective tax policy measures. This would include strengthening tax administration, reform in excise taxes, rationalization of fiscal incentives, and addressing exemptions in value-added taxation.” I agree but I think a bold, more comprehensive tax reform is needed (see my previous column, “Politics of Tax Reform”).

The study recommends investment in agriculture: “better irrigation, access to fertilizers, farm-to-market roads, and storage facilities could support development in the agricultural sector.”

The study also recommends focus on public-private partnerships (PPP) for traditional and nontraditional infrastructure investments.

Finally, it recommends strengthening the focus of education on the sciences in all levels, as a way of encouraging future researchers and scientists who would be instrumental in nation building. Not simply higher budget for education but focus on the sciences in all levels.

The IMF study took a new look and used new methods in understanding the sources of growth in the Philippines. The results reaffirmed old findings and policy prescriptions.

The gap that the Philippines has to cover to catch up with its surging ASEAN-5 counterparts is widening, not shrinking. Going into its third year in Malacañang, the Aquino III administration should heed the political and economic lessons from the past half century. Do something! Carpe Diem! –Benjamin E. Diokno, Businessworld