‘Domestic output is less than national income!’ (Part IV) The Philippine economy, 1998 to 2010

For almost two decades now, Philippine domestic output has been moving forward but has been behind the growth of total income. In 2010, national income was 1.33 times the size of real domestic output! Thus, more income gets into the economy but real production is considerably less than income by almost a third of income. The recently revised national income accounts in constant 2000 prices from 1998 to 2010 give this information.

What can be said about this state of economic affairs?

The good news is that the income earned is a bonanza even though Filipinos do not earn a substantial part of it in their own country. The bad news is that this situation is not sustainable for the long run. The government must – by way of economic reforms – undertake steps to make domestic output catch up with income. Otherwise, the additional income will simply dissipate as demand for the products of other countries.

Because of the high level of domestic unemployment and the high incidence of poverty in the country, domestic production needs to catch up with income flows in order to produce more domestic output to absorb that income. That is the sure way to make Filipinos enjoy a higher standard of living.

“Differences in concepts: income, output, and net primary income. First, the cobwebs of gobbledegooks must be removed by distinguishing from each other gross domestic product (GDP), gross national product (GNP) and net primary income.

GDP, or gross domestic product, is the total output produced within the country. GNP, or gross national product, is the total income earned by all Philippine factors of production –labor, capital and land. The earnings of foreign factors are netted out. Thus, GNI, or gross domestic income, is now WHAT statisticians want to call the old GNP.

“Net primary income” used to be known as “net factor income.” Technically, “net factor income” comprises the earnings of all domestic nationals working all over the world over and above the earnings of all foreign nationals contributing to domestic output. Both terms are identical just like GNP and GNI also are interchangeable concepts.

In simple arithmetical relations, we simply have: GNP = GDP plus Net Primary Income.

“Magnitudes of total output and total income in the national economy.” Real net primary income rose by 12.9 per cent per year over 1998 to 2010. By contrast, real domestic output or GDP grew only at 4.6 percent per year for the same period. From 2003 to 2010, the rise in the net primary income was higher, at 13.1 percent per year compared to 4.4 percent per year for real GDP.

The difference in yearly growth rates accounts for the acceleration of the real income (GNI, or if some still prefer, GNP) over the GDP. Recasting this in terms of their actual levels, real income exceeded domestic output in 1998 by 14 percentage points. By 2010, real income was one-third higher, or 33 percentage points higher than domestic production.

It is customary to say that the foreign exchange earnings that are remitted by OFWs account for this difference in levels between real income and production. This is substantially correct but it is not the whole story.

OFW incomes that are remitted to the country represent net labor earnings sent by Filipino workers abroad that are sent home. But net primary income must account also for capital and entrepreneurial incomes that arise from successful activities of Philippine factors operating abroad.

“More than OFW labor income is involved.” The basis of the national income consists of all incomes earned domestically and those that are remitted to the country. Remittances data are in the aggregate and are not broken down or classified by type. Although the dominant source of remittances is from current earnings of OFWs, some of these constitute past earnings by Filipino labor working abroad now actively earning pensions in the country.

A case can be said that the reason for the stable nature of their rise over time is due in part to the existence of pension remittances. Yet the size of this component among the remittances is not known. The income accounts are estimated from totals derived from net remittances.

Philippine seamen, managers. engineers, doctors and nurses, international civil service members, and other workers who might have returned home might be continuing recipients of pension incomes that are remitted to them on a regular basis by the institutions administering their pension plans.

And then, there is a relatively small amount of entrepreneurial income and capital income that might be included. The Philippines is a heavy net capital importer but there are aspects of inflows that come from Philippine capital working in foreign lands. Philippine companies like San Miguel Corporation, ICTSI (a Filipino firm winning contracts in portworks administration), and various companies owned by business taipans in the country have operations in parts of Southeast Asia and East Asia that bring in net profits however small in terms of the larger reckoning.

“Gains from incomes outrunning domestic production.” There are benefits from a situation of income outrunning domestic output. (a) The economy is flush with new money from abroad and his creates an aura of economic prosperity – even a false sense of economic success.

(b) Domestic households receiving net foreign transfers can support more consumption expenditure than the whole economy can afford from incomes earned from producing goods at home. (c) The net effect of large inflows of foreign money creates balance of payments surpluses and helps to raise the country’s overall saving rate, increases the country’s international reserves, and assists in improving macroeconomic performance.

(d) The government realizes more taxes from the operation of sales taxes and other taxes since consumption based spending rises. (e) Both (c) and (d) improves the government’s capacity to raise domestic investment out of the saving generated from the additional income in the economy. In short, the availability of domestically sourced funds to fund investments from savings generated by the high income could help make the economy stay afloat and abundant for future investment projects.

Despite these benefits, these same benefits might help to create policy blindness. This is a false sense of satisfaction that things are doing well. Such blindness or myopia make government leaders think that reforms that could really mean great difference for raising the country’s economic performance could be ignored or postponed.

The fact that the government does not have a strong legislative program focused on economic policy reforms is an indication of this policy myopia. –Gerardo P. Sicat (The Philippine Star)

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