No Free Lunch
Driving growth from within
By Cielito Habito
Philippine Daily Inquirer
First Posted 20:23:00 11/02/2008
Filed Under: Macro Economics, world financial crisis
MANILA, Philippines--As we look to the remainder of the year and beyond, what might we expect of the economy in light of the current turmoil in the financial markets? A good way to answer this would be to examine what might be the drivers of (and drags on) our economy's growth in the near term.
For this, we need to look at the four basic sources of demand for the goods and services produced by the economy.
These are private consumers (via personal consumption expenditures), domestic farms and firms (via their investment expenditures), government (via consumption and public investment expenditures) and foreigners (via our export sales to them and their direct investments in our country).
Consumer spending
For obvious reasons, we cannot expect much stimulus from exports and foreign investments at this time. Thus, our natural recourse for now is to rely on domestic demand, i.e., how purchases by households, by domestic farms and firms, and by government can be kept strong enough to sustain growth in the economy.
Private consumption expenditures (PCE) are the biggest source (up to 70 percent) of domestic demand. Unfortunately, this has lately undergone a contraction that we haven't seen in many years. For the first time since the early 1990s, PCE actually fell between the first and second quarters of this year. The culprit? The rapid overall increase in prices at a rate we also hadn't seen since 1991, spurred by the oil and food price surges in past months, leading people to cut back on their purchases, especially of nonessentials.
Can continuing growth in OFW remittances offset this drop in people's purchases? It's hard to tell. Unfortunately, there is little we can do here at home to influence this factor either. The general fear is that the economic difficulties abroad may lead many overseas Filipinos to lose their jobs, and thus reduce remittances in general.
Optimists argue that much of our remittances come mostly from OFWs, who are in jobs that are "immune" from the ongoing economic slowdown, such as in the health industry. But many are also seafarers, construction engineers and workers, entertainers, domestic helpers, and in other jobs that an economic slowdown may well endanger.
From within the country, the most that can be done to protect consumer spending would be to cushion the impact of rising prices via outright government subsidies to the most affected groups. But this presupposes that government has the financial resources to put in the hands of these consumers.
Gov't pump-priming
The government can, of course, fill the spending gap by boosting its own direct spending, especially for essential services and long-term public investments such as infrastructure. This is the rationale behind current announced intentions of the government to mobilize P100 billion to "pump prime" the economy through infrastructure spending.
Its ability to do this is obviously subject to the financial resources at its disposal. But the overall economic slowdown precisely has the effect of lowering government's revenue collections; less economic activity means fewer transactions to tax.
While the peso depreciation may be helping boost customs collections through higher peso values of imports, this is offset by the lower volume of imports that the economic slowdown induces.
Are higher government revenues really necessary? John Maynard Keynes showed during the Great Depression of the 1930s that hiking government spending to stimulate the economy need not be supported by revenues. That is, spending that raises the government deficit can be worthwhile. But that prescription was not made when public debt was high and debt service already took a substantial part of the government budget.
Investment spending
This is what limits our own government's capability to do a Keynesian-style pump-priming program. So yes, higher government revenues are really necessary, at least for us now. And we need government to suddenly (and uncharacteristically) improve its tax collection efficiency if we are to achieve this.
How might we get domestic investment spending to fill the slack? Lately, in fact, this has been some kind of a saving grace as private domestic investments grew fast enough to more than make up for falling foreign direct investments and government investments. It appears, though, that this has so far been primarily motivated by the need to replace worn-out plant and equipment, rather than expand capacity.
With the world economy providing little basis for confidence to expand, what we need are confidence boosters from the government on the domestic economic outlook. We need to see policy reforms that convince business that government means business--and by that I mean government will turn away from policies that favor a few at the expense of the many.
And if the government itself could make direct investments and provide subsidies, I'd say put it in low-income housing, because housing has a strong multiplier effect on the rest of the domestic economy, and at the same time induces lasting and far-reaching improvement in the lives of the poor.
Comments welcome at chabito@ateneo.edu.
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