The Philippine economy, 1998 to 2010: (Part II)

The two major components of total demand in any economy are consumption and investment. The rebased national income accounts using prices in year 2000 provides us with revised data to assess the real economic performance of the Philippine economy.

“Consumption expenditure.” Consumption of households is the biggest item of final expenditure in the economy. In 1998, consumption of households was equal to 71 percent of real gross domestic product (GDP). In 2000, consumption was 73 percent of GDP. And in 2010, it was 69 percent of GDP.

Rates of growth of consumption and of GDP provide relative information about these magnitudes. For the whole period of 1998 to 2010, real consumption measured in 2000 prices grew at 4.4 percent per year, while GDP expanded by 4.6 percent. Earlier from 1998 to 2002, consumption increased 4.6 percent per year, higher in magnitude than the GDP growth of 3.5 percent. From 2003 to 2010, consumption grew at 4.3 percent while GDP 5.2 percent annually.

For every one percent growth of real output during the 1998 to 2010, consumption expenditure rose by 0.95 percent. During the early period of 1998 to 2002 when growth of GDP was lower, consumption grew higher. But when output growth improved, as in the period of 2003 to 2010, every one percent of GDP growth brought an increase of consumption by 0.83 percent.

These numbers tell us that consumption tend to remain at a fairly stable level especially during short hard times of short duration. For instance, food consumption accounts for 54 percent of household consumption and households tend to keep to these patterns. The other expenditures are on housing, transport, clothing, etc. and they resist any fall in standards for as long as possible.

Most Philippine households derive their incomes from employment in the domestic economy. But in recent times, high levels of remittances from earnings abroad of Filipino workers have supplemented the household consumption of their families in the country. “Net factor incomes” (which constitute for the most part remittances from Philippine labor incomes earned abroad) supplement domestic consumption expenditures greatly. This explains the vibrancy of local shopping malls across the country. Many Filipino have families spread across the archipelago.

“Government expenditure.” In 1998, government spending was 12.8 percent of GDP. In 2000, real government spending was down to 11.4 percent of GDP. This was 1.4 percentage points below the level of real government spending in 1998. During the interim years, it was less even than 10 percent of GDP. And in 2010, it was 10 percent of GDP – this was the year of transition from one president (Macapagal Arroyo) to the new one (Aquino).

During 1998 to 2010, real government expenditure grew annually at the average rate of 2.5 percent even as the real GDP was 4.6 percent. This meant that government expenditure during the entire period had a contractionary impact on total output.

The main problem was the constrained budgetary picture and the volatile political environment that did not contribute toward expanding government revenue capacity. On the political front, the first two years of this period were political convulsions that led to the removal of the sitting president (Joseph Estrada) by people revolt (EDSA II). Government spending fell from 1998 to 2002 as a percent of GDP.

The presidential succession (Gloria Macapagal Arroyo) had an auspicious beginning as real government expenditure began to catch up with the growth rate of GDP. From 2003 to 2010, government consumption grew almost at the real growth of GDP: a one percent growth of real GDP led to 0.98 growth of government expenditure.

Major privatization of government assets just before 1998 earned the government large additional revenues so that by 1998 (about the time of the Asian financial crisis), there were sufficient resources to maintain a high level of government spending. Some changes in important excise taxes (during Estrada’s presidency) that shifted the base of tax away for percentage value to specific units that caused a reduction of revenues.

Programs in education, public health and nutrition suffered from having to compete with the demand for public money to keep peace and order to keep at bay the Mindanao conflict and the long standing communist insurgency.

“Investment or capital formation.” Gross capital formation represents the accumulation of the stock of productive capital in the economy (machinery, productive facilities and wealth). In 1998, capital formation was 22.5 percent of GDP. In 2000, real investment fell to 18.4 percent of GDP. Investment recovered and rose in 2002 to 2003, to 24.7 percent and 23.4percent, respectively, of GDP. Real capital formation fell as a percent of GDP from 2006 and continued this low level until 2009 a hairline below 20 percent of GDP. It was only in 2010 when real investment rose back to 20.8 percent of GDP.

The investment picture improves when gross capital formation is viewed in terms of its components. Fixed capital formation is principally composed of construction activities in the economy and investments in durable equipment. Real fixed investments during 1998 to 2010 grew at an annual rate of 4.0 percent. During 2003 to 2010, fixed investment increased at the annual rate of 5.3 percent. Real investment in durable equipment over the whole period grew by 6.1 percent and, in the latter period from 2003 to 2010, real investment grew by 6.6 percent per year on average.

These numbers summarize the relationship between new investments corresponding to the growth of new GDP. It took real fixed investment of 0.87 percent to produce a one percent increase of real GDP per year from 1998 to 2010. From 2003 to 2010, it took 1.03 percent of new fixed investment to derive a one percent increase in real GDP.

“Private and public investments.” The income accounts do not distinguish private from public investments. The government target for the level of public investment is often made at 5 to 6 percent of GDP. If we take the 2010 level of gross capital formation to be at 20 percent of GDP, then, on an optimistic estimate of 6 percent of GDP for public investment as having been achieved, private gross investment in the economy could be in the vicinity of 14 percent of GDP. –Gerardo P. Sicat (The Philippine Star

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