Imperatives for the Philippine economy in the next six years

On the economy, the President said in his first State of the Nation Address (Sona) to hand over an economy that is much stronger, characterized by solid growth, low and stable inflation . . . and robust fiscal position. He would like to achieve this by continuing and maintaining the macroeconomic policies, and even do better, of the previous administration. That is, through prudent fiscal and monetary policies that can translate high growth into more and better job creation and poverty reduction.

To me, this is what, so far, would amount to the President’s vision and strategy as far as our economy is concerned. Scarce things were said, however, about why this is so and the broad outline of what need to be done if his vision were to mean anything at all to our people by giving them more jobs and reducing their poverty.

On the economy, I would like to say that the most needed thing to be done is to move it faster than we have done so far in the years since the sixties when we suffered the first devaluation of the peso from the previous high that we enjoyed the post war decade or so. GDP data from the Philippine Statistics Authority shows that from 1949 to 1960, Philippine economic growth averaged 6.5 percent annually. That was considered high enough to make us the envy of many nations in Asia, including South Korea. Such was our standing that the ADB decided to locate it’s headquarter in Manila instead of Iran, which at that time was leading the development in the Middle East.

It was unfortunate that we failed to sustain our economic success in the post war period in the following four decades, which ended in 2000. During those years, our economic growth recorded only a measly 3.9 percent annually, which when factored with our rapid population growth only did very little to improve the well-being of our masses. In the first ten years of the new millennium, our economic performance improved a little, to 4.8 percent annually, but that was not enough to make a dent on our high unemployment rate and poverty incidence. This was followed by 5.8 percent annual growth rate from 2001 to 2016. But again that was not good enough to really cut down our high unemployment and poverty rates or catch up with our neighbors, which did well in the last fifty years.

So by 2014, we ranked 12th in population size (around 100 million) but only 39th in nominal GDP (US$284.9B) and 129th in per capita income (US$2,865)

What was wrong? What do we need to do?

We found that rapid growth in the early post war period was powered by reconstructions work to put back in proper order our infrastructures and the economy that were damaged by the last war. It helped that the government also pursued some amount of industrialization by encouraging local entrepreneurs to go into the manufacturing what we were once importing. This was done through various incentives, including protecting our local industries from foreign competition through high tariffs and other related measures.

For a poor country wanting to develop, there was nothing wrong with this import substituting industrialization strategy to develop our country. Japan did the same thing in the beginning of its development and so did South Korea, Taiwan and other countries in Asia that followed after them. What was wrong in our part was the failure to remove the protection early enough to force our industries to become independent, efficient, and competitive to be able to conquer the world market. Relying on the small domestic market would not make our domestic industries realize economies of scale and earn enough revenues for more reinvestment. Weighted with high unit cost and poor quality products, many of our local industries would even lose in their own turf when faced with foreign competition.

The first truth was that our rapid economic growth in the early post-war period was powered by the coming of new industries and investments. But this stopped when our industries failed to grow or expand into new products for exports like what our neighbors did.

The second truth was that the remarkable resurgence of our economic growth in the last five years was also powered by the industry sector, along with investments, growing much faster that the rest of the economy.

The third truth was that in the country, while it only engaged 15.4 percent of the labor force, the industry sector contributed up to 31.2 percent of the GDP in 2012 with an average productivity twice (2.03) that of the national average. Agriculture engaged up to 32.2 percent of our labor force but contributed 11.8 percent only of our GDP. Its labor productivity was a third (0.37) only of the national average. The services sector contributed up to 56.9 percent of the GDP but it needed to engage up to 51.4 percent of the labor force to do this, with labor productivity only a little higher (1.11) than the national average. It is clear then were we should focus our efforts if we were to sustain our rapid growth in the next six years or even improved it if we could as what President Rody Duterte is hoping to do this time.

The final truth is that while growing fast economically does not guarantee inclusive growth or the improvement of the life of everyone in poverty now, it sure is even harder to do it with slower economic growth.