It is remarkable that the Philippine economy has been showing dynamism
this year so far, even with a sluggish world economy.
This implies that the energy
driving our economic growth lately is coming from within. Indeed it is internal
demand—that is, we Filipinos ourselves purchasing our goods and services—that
has provided the current impetus for heightened economic activity, thereby
providing increased jobs and incomes for Filipinos. I will explain some of the
evidence on this below.
In basic economics, we are taught
that the products and services produced in the economy are bought by four major
sectors: private consumers for their consumption needs; businesses and firms
for their real investment requirements such as structures, equipment and
materials; government for public infrastructure and services, and for its own
consumption requirements like office supplies and equipment; and foreigners who
buy our products and services as we export them abroad, or buy them here as
tourists.
Growth in spending by any or all
of these would propel growth in the economy as a whole, as increased demand for
goods and services would certainly draw a response of greater production on the
part of the economy’s producers.
What’s more, any rise in spending
by any of these four sectors of the economy provokes a multiplier effect that
leads to even more growth in economic activity. This is because any new
spending leads to a chain reaction of new incomes and consequent new spending.
If a company spends 100 million pesos (US$2.4 million) on a new factory, this
turns into 100 million pesos in total incomes received by contractors,
engineers, construction workers, suppliers of equipment and construction
materials and others.
But that’s not the end of it.
Those various people now have more money to spend or save as they choose. If
people save 20 pesos out of every additional 100-peso income they receive on
the average, then the original 100 million pesos of investment spending turns
into a new round of 80 million pesos in spending on various things such as
food, clothing, appliances, etc. that those construction people normally spend
their incomes on. And since anyone’s spending turns into someone else’s income,
that second-round 80 million pesos in incomes turns into a third round of
spending amounting to 64 million pesos. This becomes yet another round of
incomes spurring yet another round of spending, and so on down the line.
Ultimately, the 100 million pesos
originally spent by the investing firm will actually create five times as much
(500 million pesos) total production and incomes. The mathematically inclined
can figure out that if the saving rate is 20 per cent or 0.2, the multiplier
works out to be one divided by that, or five.
So if people tend to save less,
say 10 per cent, every spending gets multiplied by even more (that is, 10) and
generates 10 times more production and incomes in the economy. And even more so
if those savings are kept within the country, so that the banks receiving them
could further put that money to work within our domestic economy, say by
lending the savings to a company that would invest it in a new factory—thereby
repeating the same story above.
Official data suggest that there
is indeed more domestic spending by consumers, investors and government lately,
even as foreign purchases of our products (especially in Europe) had slowed
down due to their own homegrown difficulties. In particular, government
spending for both its consumption requirements and for public construction has
dramatically swung around from a negative performance last year. In the first
half of the year, government consumption spending grew 12.3 per cent, a
dramatic turnaround against the 4.6-per cent drop in the same period last year.
Government construction spending
jumped 55.4 per cent after falling 51.1 per cent last year. The government,
stung by criticisms that it directly dragged down the economy last year with
reduced spending as it worked to plug corruption loopholes, has now come back
with a vengeance. And this time, having done what it did last year, it has
greater confidence that the money it spends goes (mostly?) to the intended
purposes, rather than be siphoned off to bank accounts abroad and killing the
usual multiplier effect. (Remember the question on why a neighbouring country
that appears to have as much corruption as we do manages to have its economy
grow faster than ours? The explanation offered has been that their corrupt
officials keep the money at home, while ours stash the money abroad.)
The data show that firms’
investment spending on durable equipment, breeding stock and orchard
development and on intellectual property products have likewise sped up
significantly from last year’s pace.
Private consumption growth is
similarly brisk at 5.7 per cent. Interestingly, among the strongest sources of
growth in people’s spending are communication (with our continuing fascination
for ever more sophisticated smart phones), restaurants and hotels, and
recreation and culture. These suggest to me that domestic tourism has been a
particularly important driver of our growth. One only needs to experience the
now common flight delays and overcrowded airports to be convinced that
Filipinos are travelling a lot more—and perking up the economy in the process.
The good news is that spending by
foreigners on our products—i.e., our exports—has lately resumed growth after
contracting last year.
Even then, the latest figures
suggest that the export turnaround may be tentative. But I wouldn’t lose sleep
over this one. After all, our economy is now speeding along on its own steam,
through the Filipinos’ own spending, multiplier effect and all.
*US$=41.3 pesos
Cielito F. Habito
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