Dec 5, 2012

Philippines - From economic growth to development

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The Philippine government's announcement last week that the economy, as measured by the gross domestic product (GDP), expanded by 7.1 per cent in the third quarter was indeed a pleasant surprise. The expectation of local and foreign economists and analysts was actually lower: anywhere between 3.9 and 5.4 per cent.

The third-quarter figure brought economic growth in the first nine months of the year to 6.5 per cent, much better than the dismal 3.9 per cent in the same period last year. In 2010, GDP, or the total value of goods produced and services rendered for a given period, expanded by 7.3 per cent—the fastest in decades.

President Aquino and his economic officials have reason to brag about the third-quarter growth, considering the harsh global environment that had been weakened and threatened by the lingering debt crisis in Europe and the fragile US economy. The government itself is to be credited for part of the GDP expansion.

The economic weakness in 2011 was traced to the inability of the Aquino administration to spend enough on vital infrastructure projects mainly due to its anticorruption campaign, which led every agency to scrutinise every expenditure item, eventually causing implementation delays. Government expenditures grew a measly 1 per cent in 2011.

In contrast, the government boosted its spending by 24 per cent in the first quarter, 6 per cent in the second, and 12 per cent in the third.

The other factors that contributed to the third-quarter performance were the 4.1-per cent expansion in agriculture (up from 2.7 per cent in 2011 and 1 per cent in the first six months of this year), the 8-per cent increase in industrial production, and the 7-per cent growth in the service sector. This last component is worth mentioning because it accounts for more than half of the country’s GDP.

There is nothing wrong with consumer spending (mainly by beneficiaries of OFW remittances and BPO workers) driving the economy. It’s just that what is more essential—and with more lasting effects—is economic growth driven by investments in factories, airports, roads and other infrastructure. Investment grew by only 4.3 per cent in the third quarter, slower than the previous quarter’s 7.3 per cent. Investments fell 20 per cent in the first quarter of 2012.

But amid the euphoria generated by the surprising GDP growth, it is imperative for the Aquino administration to now focus its attention on generating investments in the so-called brick-and-mortar businesses that generate jobs. It can start by addressing the obstacles. Private businessmen have complained about a lot of things, but three major issues always stand out: very steep electricity rates, changing rules on investments, and lack of basic infrastructure.

Electricity rates will remain high in the next few years, or until the various additional baseload power plants and facilities running on renewable energy come on stream. The Aquino administration is also neglecting to address the constantly changing investment rules (its recent issuance of new guidelines on mining is a case in point).

The only bright spot we see so far is on government spending on basic infrastructure. Only last week, the board of the National Economic and Development Authority chaired by President Aquino approved 105 billion peso (US$2.5 billion) worth of roads, bridges, classrooms and power plant projects for implementation in 2013.

The government’s promise to finally speed up its flagship PPP (public-private partnership) programme is also moving in the right direction.

Also last week, Transportation Secretary Joseph Emilio Abaya ordered the tapping of private lawyers to expedite the bidding process for billions of pesos worth of public transportation and communications projects to be done through the PPP.

A study by global financial giant Citi Group rightly indicated that public infrastructure spending could be the medium-term “game changer” for the Philippines, predicting that the massive flood works programme alone of the Department of Public Works and Highways worth 325 billion pesos can potentially lift per capita income to $3,500 within five years.

A year of spectacular growth will not lift the Philippines to the ranks of First World nations, nor will it wipe out poverty. But it is a good starting point for the government to shift focus from economic growth to economic development, and to work on making the Philippines a prosperous nation with ample economic opportunities that can eventually lure Filipinos overseas to come home, for good.

*US$1=40.9 pesos

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