IT SURPRISED MANY, INCLUDING government itself, that the economy still posted a respectable aggregate growth rate of 4.5 percent in the last quarter of last year. With the much larger industrialized economies including the US, Japan and Germany already shrinking in recent quarters, it seemed rather unlikely that much smaller economies like ours could continue growing, more so at the rate it did. Singapore, with an aggregate GDP roughly the same as ours but which is shared by only 1/20th as many people--and therefore a much larger economy than ours in relative terms--has also suffered a shrinking economy in recent quarters.

It would seem that we’re now in a situation where smaller is better, and largeness is a liability that brings greater vulnerability to the financial meltdown. Is it primarily our smallness that helps us withstand the repercussions of the financial collapse that began in Wall Street? To what can we trace our economy’s recent growth?

Underdevelopment

It’s actually not so much smallness per se, but the underdevelopment of our economy that has, ironically, become a saving grace for us in the current crisis. There are two aspects to this underdevelopment. First, we still do not export as much of our production as our erstwhile more dynamic neighbors have been doing. The numbers tell the story: Our total exports were 42 percent of total GDP in 2007, but this same ratio was 231 percent in Singapore, 110 percent in Malaysia, and 73 percent in Thailand. Only Indonesia (at 29 percent) had a smaller export/GDP ratio than the Philippines among the Asean-5.

But note this: If we subtract imports to get net exports, the ratio to GDP was 29 percent in Singapore, 20 percent in Malaysia, 7.6 percent in Thailand, and 4 percent in Indonesia, whereas in the Philippines, the ratio was a miniscule 0.46 percent! That is, while our total export sales as a percentage of GDP exceeded that of Indonesia, their exports had much higher domestic content (i.e., lower import content) than ours, and thus must have produced more jobs for Indonesians per dollar worth of exports.

What this all tells us is that compared to our Asean-5 neighbors, a much smaller part of our production has been affected by the drop in demand coming from foreigners hit by the financial meltdown. A bigger part of Philippine production is bought by Filipinos themselves, whether private households, government, or firms--and because Filipinos’ own spending continues to grow (we explain why further below), so does our economy.

Underfinanced

The other aspect of our underdevelopment that has been a blessing in disguise at this time is the underdevelopment of our financial capital markets. In more developed and vibrant economies, formal financial institutions and market mechanisms permeate the economy and propel most of the transactions in the so-called ‘real economy’ (i.e. the market for real goods and services) for large and small enterprises alike. And so, when the financial markets fail as has happened in the US and other large economies, the real economy grinds to a halt.

Not so in the Philippines. In the survey of Philippine enterprises done for the Global Entrepreneurship Monitor in 2006, one of the striking findings was that only one out of three (34 percent) Philippine enterprises make use of the banking system, whether for maintaining deposits or borrowing capital. In fact, only 5 percent of the surveyed firms sourced any financing from a bank, with the bulk preferring to use borrowings from friends and relatives (46 percent) and personal savings (41 percent) to run their business. With the bulk of Filipino productive enterprises having no dealings with the formal financial sector, it follows that problems in the latter will not have much impact on the former. And so, the financial sector may run into all sorts of difficulties with the Wall Street meltdown, but life will go on for the bulk of Philippine firms.

Local spending

We have been able to sell less of our products and services to foreigners through exports, but how could it be that Filipinos have still been spending more in the past year? There are three parts to this: household spending, investment spending, and government spending.

Aggregate household consumption spending continued to grow at a robust 4.5 percent because remittances continued to grow briskly at double-digit rates. This in itself has surprised many, as jobs of Filipinos abroad are widely expected to be imperiled by economic slowdown in their host countries. Growth in investment spending was boosted mainly by the 11.4-percent growth in construction (investment in equipment fell 7.4 percent, in fact), in turn fueled by brisk growth in real estate. We have explained before that as saving in financial instruments like stocks, trust accounts and mutual funds has become rather risky with the financial meltdown, people have rushed to put their money in tangibles, especially real property, thereby explaining the continuing double-digit growth in this industry. As for growth in government consumption, this was deliberate, with government bent on pump-priming the economy with its own spending stimulus.

The big question now is how long each such impetus for increased spending by Filipinos could last. Go figure.

Comments welcome at chabito@ateneo.edu