Our broken economy and what caused it

by Andrew J. Masigan (The Philippine Star), 23 Jun 2021

I spent the better part of last week conferring with fellow economists from the University of the Philippines and De La Salle University. We discussed the state of the economy and the decisions that led to four quarters of economic contractions. We agreed that: 1. Our situation today is just as serious as the economic crisis of 1984 and 1985 in that many industries are now permanently broken or severely damaged. 2. But unlike 1985, we are not facing a currency crisis or a debt crunch. This is our silver lining. 3. We recognize that the economic consequences of the pandemic could have been minimized if it were better managed.

We already know that the economy contracted by of 9.6 percent in 2020 and 4.2 percent in the first quarter of 2021. Ours was the worst economic reversal in the region. What are the implications of this?

Our people are poorer – personal incomes of our countrymen have contracted by an average of P23,000 per year. Industrial output plunged by 13.1 percent and services by 9.1 percent last year. This is why private businesses have had to lay-off some 743,000 employees just to stay afloat. As of last April, 3.44 million of our countrymen were without jobs and this does not count the unemployed in the underground economy. Household consumption, which accounts for 70 percent of the economy, contracted by 5.7 percent (or roughly P2.8 billion a day). This explains why restaurants, retailers and service providers continue to experience depressed sales and mounting losses. 72 percent of all MSMEs have either closed permanently or significantly downsized. Around 250,000 MSMEs have succumbed to bankruptcy.

Global think tanks validate the Philippine economic wreckage. Swiss-based Institute for Management Development (IMD) reported that the Philippines dropped by a massive seven notches in economic competitiveness, from 45th to 52nd place, out of 64 countries. Among the Asian economies rated, the Philippines was only ahead of Mongolia.

The International Monetary Fund announced that it had downgraded the country’s growth prospect for 2021 to just 5.4 percent. With this, the Philippines will only attain 2019 levels of GDP by the second semester of 2022, at best. In contrast, Vietnam’s growth was uninterrupted while Singapore, Malaysia, Indonesia and Thailand are all due to recover fully this year.

All these mean that the Philippines will lag further behind in the region’s development race. We have been overtaken by Vietnam in per capita income, while Cambodia is fast catching up.

Where did it all go wrong?

It all went wrong when Malacañang failed to consider the economic ramifications of its long protracted militaristic lockdown last year. Palace insiders bear out that during the early days of the pandemic, the voice of the economic team was not heard in the IATF meetings. Thus, the IATF prescription, which was to subject the country to the world’s longest and strictest lockdown, failed to balance economic interest with contagion containment. This resulted in a lockdown so severe that it crippled supply chains across industries and stifled consumption.

The Asian Development Bank published a study that quantified the level of lockdown stringencies among countries. Within ASEAN, the stringency quotient of the Philippines was the highest at 83.33 points. Malaysia was a far second at 59.93, Thailand was at 59.26, Indonesia was at 54.17, Singapore was at 53.7 and Vietnam was at 51.85. Malacañang was overkill, but was only marginally effective due to the lack of a science-based testing and tracing backbone.

Which industries were the hardest hit? As of last September, NEDA statistics show that air transport was the most affected with revenues plummeting by a 93.8 percent. This was followed by water transport at 72.8 percent; hotels and accommodation services at 73.4 percent; land transport at 65.6 percent; restaurants and food service at 64.9 percent; sports, entertainment and recreation at 63.2 percent; construction at 33.5 percent and real estate at 20.1 percent.

Governments around the world swiftly arranged stimulus packages to ease the plight of their citizens, cushion their industries from wreckage and foster a quicker recovery. The Philippines, despite being the most economically affected, appropriated the region’s smallest package. By way of Bayanihan 1 and 2, our stimulus war chest amounted to only 5.88 percent of GDP. In comparison, Singapore’s stimulus package was 26 percent of GDP. It was 22 percent for Malaysia, 18 percent for Indonesia, 16 percent for Thailand and 10 percent for Vietnam.

Government attributes its paltry stimulus package to fiscal prudence. Prudence dictates not jeopardizing the country’s investment-grade status by bloating debt levels, they said.

We think this reason holds water in normal circumstances – but not at a time when our countrymen are suffering and the economy is on its knees. Now is the time to exhaust all means to get out of this crisis as soon as possible. We were fortunate to have entered the crisis with manageable debt levels (39 percent debt-to-GDP ratio in 2019, ballooned to 58.7 percent today) – we should use this to mend the economy. Being overly concerned about debt ratings reek of political considerations and/or vanity. Besides, debt rating agencies have allowed higher tolerances for increased debt levels in consideration of the extraordinary circumstances.

Bayanihan 3 was proposed but NEDA’s Karl Chua gave it a thumbs down. According to Chua, Bayanihan 2 has not even been fully disbursed. This only confirms that government efficiency in cascading Bayanihan aid is painfully inefficient.

Making matters worse is that the lion’s share of Bayanihan 1 and 2 was appropriated to the supply side of the economy (eg. beefing up health care capacity, etc.), not on the demand side. While we concede that the supply side needs funding, what was not considered is that two-thirds of the economy is consumer driven. The bulk of funds should have been channeled to financial aid so that people can consume goods and services again. This would have had a greater impact in reviving our consumer-lead economy.

Government borrowed some $14.77 billion over the last 14 months. Yet, financial lifelines towards MSMEs were a mere token while financial aid to the indigent was insufficient. Neither did the state extend aid to economically strategic companies like Philippine Airlines. The Senate is right to demand an accounting of pandemic-related debt proceeds. So should we.

Our once thriving economy is now the sick man of Asia all over again. The tragedy of it all is that it could have been avoided.