Virus-battered PH facing the ‘doom loop’
The central and most pressing challenge to the economy during the pandemic is: avoiding the so-called “doom loop.”
The doom loop occurs when consumer demand craters, then businesses face losses from the reduced demand and resort to mass layoffs; consumer demand falls further, thus leading to even more layoffs—it’s a negative feedback loop of reinforcing negative mechanisms.
The doom loop isn’t just an economic problem. It’s a social and even public health problem. The end state could be economic depression, food riots, opportunistic acts from the enemies of the state and widespread hunger and deaths.
Arresting the doom loop is therefore of prime national importance.
Timing is also key, because once it gets underway, when people are out of work and businesses have been shuttered, it’s very hard to reverse the process.
The government is implementing a social amelioration fund of P200 billion under the Bayanihan to Heal as One Act to cover 18 million households.
I’m afraid that it may not be enough and not without administrative delays.
First, the government lacks a master list of the 18 million households. It does have a conditional cash transfer (CCT) list of 4 million households, but also 6 million not currently covered by the CCT program.
Second, how will the money reach the recipients?
I understand the Department of Social Welfare and Development will download the money to LGUs. That could lead to patronage favoritism. Also, crowds might gather when money is distributed, violating the social distancing guidelines needed to quell the new coronavirus.
In terms of magnitude, P200 billion looks paltry. It’s only about 1.1 percent of our gross domestic product (GDP) and has to be followed up by a bigger package that includes support for micro, small and medium enterprises (MSMEs).
In the UK, the government is setting aside 10 percent of its GDP to guarantee that businesses continue to pay 80 percent of the salaries of workers. In the US, Congress approved a $2-trillion package or nearly 10 percent of its economic output to provide direct assistance to the majority of Americans. The US Congress is even contemplating following it up with additional measures, including a massive infrastructure spending bill.
France is even more aggressive than the US. It is giving a lifeline to businesses so they won’t lay off workers.
The idea is just to push the “pause” button during the crisis so that the economy can resume quickly once the issue is over.
The shock factor
The lesson from past crises is “go big and go fast.”
If the economy has experienced a shock, you need to inject a recovery plan that’s big enough and quick enough to prevent the doom loop from taking over.
The Philippines has the fiscal space to adopt this strategy. Its external debt to GDP ratio is 42 percent, which is also going down thanks to fiscal reforms instituted the past few years. International interest rates are near zero and the country has the credit worthiness to borrow.
Oil prices are at historic lows, therefore the risk of high inflation is low. Demand induced inflation is nonexistent because of a sharp fall in demand worldwide, with many countries on extended lockdowns.
Go big and go fast is the strategy. However, the devil is in the details.
The absence of a national ID in the Philippines presents a lot of practical problems.
The ID problem
Although Congress passed a National ID law, it’s voluntary and not mandatory. And because the government chose not to do the public private partnership route for this project, it has not been rolled out yet.
The other deficiency of the National ID law is that it only covers natural persons, not juridical persons like corporations, proprietorships, partnerships and nonprofit organizations. Therefore, there’s no reliable and universal database to work with in giving out assistance to these organizations.
It has also been suggested that since most Filipinos have cellphones, the assistance be given in the form of phone credits that can be encashed in outlets that are prevalent across the country, such as 7-Eleven, Cebuana, Palawan Pawnshop, M. Lhulier, etc. They can even be located using their respective phones’ GPS data.
However, since the telcos resisted the registration of prepaid phones, these are anonymized data. Phone numbers still have to be matched against a list of names and addresses.
Aside from financial assistance to individuals, MSMEs need economic relief. They face a liquidity crunch and even solvency crunch.
During the lockdown period, cash flows from revenues have disappeared while they must pay for salaries, rent and interest.
From the neighborhood carinderia to the beauty parlor, from the hardware store to the regional food producer, MSMEs have taken a hit. They need to be assisted because they provide the bulk of employment.
In some countries, banks are encouraged to lend to MSMEs with government guaranteeing 80 percent of the payment to the banks provided the small businesses maintain payroll.
The Bayanihan Act merely instructs banks to waive interest on interest and penalties. It doesn’t address the liquidity problems of MSMEs nor the need to bridge finance them until the situation normalizes.
Certain industries may also take a long time to recover.
Airlines, travel and tourism may have to be bailed out or given financial assistance, although some are probably unsalvageable due to altered consumer behavior.
In addition to the collapse in demand due to the lockdown, there’s the synchronized curtailment in demand worldwide due to the pandemic. In other words, exporters will see a dramatic fall in demand.
Fortunately, exports as a percentage of our GDP is still quite small. However, the global impact would be millions of OFWs losing their jobs, returning home and thus stopping remittances.
Just the fall in oil prices will force Saudi Arabia to send droves of Filipino OFWs home. There are about a million OFWs in Saudi Arabia. Seamen and cruise line staff will similarly lose their jobs.
Worse, the contraction in demand may be prolonged. Even if the lockdown is lifted and the spread of the virus checked, the psychological damage will linger.
People will start cutting back on non-essential spending and save more. Consumption spending has been the driving force of Philippine economic growth. It means government and private investment spending has to take up the slack, lest the economy fall into prolonged doldrums.
The Build, Build, Build program won’t prop up the economy. Its effects would be too little and too late.
It should be part of a post-economic relief plan, together with reforms to enhance the investment climate. Investment spending has to rise dramatically to compensate for the expected collapse in consumer spending.
What’s clear is that huge investment spending for public health infrastructure should be part of the Build, Build, Build program—more hospitals to public disinfection stations. Massive investment in public health infrastructure can also help assuage the fears and anxieties of a wary public.
The scale and negative impact of the coronavirus are unprecedented. Government response should be unprecedented as well. Its urgent task now is to avoid the doom loop.
“Helicopter money” is needed, i.e. put money outright in people’s pockets. Detailed and operational plans for avoiding the doom loop, however, could be problematic as our institutions and mechanisms are unprepared to handle the magnitude of the problem.
There’s much talk about saving human lives during this crisis. However, there will be an unimaginable toll in terms of suffering if the lockdown persists and the doom loop isn’t arrested fast.
The medicine of going big and going fast has to be administered, lest the economy go into a death spiral.
Calixto “Toti” Chikiamco is a political economist, writer and internet entrepreneur. He’s a co-author, together with
National Scientist Dr. Raul Fabella, Dr. Emmanuel de Dios, Romeo Bernardo, and the late Dr. Cayetano Paderanga
of the book, “Momentum: Reforms for Sustaining Economic Growth.” He’s also the president of the Foundation for Economic Freedom.