FEW PEOPLE PROBABLY KNOW that the latest Nobel Prize winner for Economics announced last week, Paul Krugman, actually wrote a book on the Philippines. That’s not what won him the Nobel Prize, of course, but the work should be more interesting to Filipinos than his awarded writings on international trade and economic geography.
It was my Neda predecessor Dr. Cayetano Paderanga Jr. who, back in early 1992 as the country was preparing for a new president, decided to invite Krugman—then already a young superstar economist—to take a closer look at our economy. He led a team of three other US-based economists, including Filipino Eli M. Remolona of the US Federal Reserve Bank, Susan Collins of Harvard University, and James Alm of the University of Colorado, in examining the challenges then confronting the Philippine economy. As deputy to Paderanga then, I had discussions with Krugman and his team both in Manila and in New York as they developed their analysis that became the book “Transforming the Philippine Economy,” published by Neda with UNDP support.
Then and now
There were certain parallels between the Philippine economic situation then and now. Krugman came at a time when the economy was in the midst of a mild recession, battered by a succession of man-made shocks (i.e. repeated coup attempts against the Aquino administration) and natural disasters (earthquake and the Mt. Pinatubo eruption). Even without these shocks, however, the economy was fast approaching a crisis, Krugman noted. He wrote: “The essential structure of the Philippine economy is still Latin American rather than Asian: a highly inefficient manufacturing sector (whose productivity actually declined in the 1980s) sheltered behind high protective walls and uses excessively capital-intensive techniques.” He further observed: “The rapidly growing labor force is absorbed not into industrial jobs, but into subsistence agriculture and marginal service-sector employment.”
The latter sounds mighty familiar: Sixteen years later, exactly the same can still be said about our domestic labor and employment situation. Recent statistics show that the bulk of our new job generation is in agriculture, construction, private household employment, transport, and trade (translation: people are mostly getting jobs as part-time farm workers, construction laborers, domestic helpers, tricycle and jeepney drivers, and vendors). And yet in those 16 years, millions of Filipino workers had since gone overseas to seek their fortunes, in the process sending back tremendous sums of foreign exchange—all seemingly for naught.
Unsustainable growth
Krugman readily saw that the somewhat euphoric recovery of the Philippine economy in 1986-89 was impossible to sustain given its structure then. The most important weakness of that economic recovery, he noted, was its reliance on rapid growth of imports without correspondingly rapid export growth.
An economy exports so that it can import. Put another way, the economy can only import to the extent that it can export. But when imports far outstripped exports in 1986-89, what made it all possible was foreign exchange coming from overseas workers, loans from official external sources like the World Bank and IMF, and inflows of foreign direct investment. Krugman noted that these sources could not be expected to continue growing at rates that would have allowed the short-lived growth spurt to resume. In short, the only way to achieve long term sustainable growth was to have much higher export growth, by attaining export competitiveness that had long eluded the country’s highly sheltered economy. The essential policy change required, he wrote, “is a removal of the incentives that channel scarce resources into capital-intensive, inward-oriented production.” Fidel V. Ramos, one of the first officials to read the Krugman Report as he began to emerge as winner of the presidential election in May 1992, took careful note of Krugman’s prescriptions. And so came about one of the twin themes of the subsequent Ramos Medium-Term Philippine Development Plan, namely, international competitiveness (along with people empowerment).
Fiscal weakness
The other glaring similarity between the Philippine economy Krugman saw then and that same economy now is the low level of government revenues relative to GDP. Krugman was alarmed to see that our total revenues were only 12.9 percent of GDP in 1987, when our Asean neighbors had 16.2 to 26.3 percent. Krugman wrote then: “The greatest problems of the Philippine tax system lie not in its legal structure but in its administration. The central problem, to put it bluntly, is the extent of tax evasion.” Not that we did not make progress through those 16 years since Krugman came to town. Ramos managed to bring the revenue/GDP ratio to nearly 20 percent. But the figure slid down again continuously after he left, and the downslide was only arrested with the imposition of the controversial EVAT in 2005. But even this didn’t last; government itself projects the revenue/GDP ratio to fall again in 2008. Krugman saw that the obvious way to change this was to identify and penalize tax evaders—and yet lamented that in 1989, the number of investigations of new tax fraud cases and of criminal and civil cases filed were actually lower than in earlier years.
In my now-prized personal autographed copy of the book that came out of their work, Paul Krugman penned: “Dear Ciel -- May the good guys always win!” He clearly knew, even then, what has been fundamentally wrong with the Philippine economy.
(Comments welcome at chabito@ateneo.edu)
