Economic lessons from 2011

MANILA, Philippines—The Philippines slipped into another economic downturn in 2011. Adverse global trends are a factor with the world economy three years into what is going to be a protracted global depression. More significant however is the absence of bold domestic economic policy initiatives that tackle the country’s internal weaknesses and, in so doing, also reduce its vulnerability to external shocks.

The past year gives at least three insights to inform economic policy-making not just in 2012 but in the coming period of great challenges for Philippine growth and real development.

First, the Philippines cannot overly rely on the world economy and old globalization policies to drive economic growth and development. Economic growth drastically slowed to just 3.6% growth in gross domestic product (GDP) in the first three quarters of 2011 which is less than half the 8.2% clip in the same period last year. This is substantially less than the target 7%-8% growth per year for the period 2011-2016 according to the administration’s Philippine Development Plan (PDP). The 3.2% third quarter growth was also slower than in Indonesia (6.5%), Vietnam (6.1%), Singapore (6.1%), Malaysia (5.8%) and Thailand (3.5%).

Some problems are certainly due to the on-going global crisis. The national income accounts reported a 3.7% contraction in exports of goods and services in the first three quarters of 2011 from the same period last year. The balance of payments in turn recorded foreign direct investment (FDI) falling 9.7% in the first seven months of 2011, or to US$805 million from US$891 million in the same period in 2010. Remittances from overseas Filipinos to the country still grew in the first ten months of 2011 from the same period last year, to US$16.5billion, but at a slower 7% rate compared to 7.9% in 2010; however the compensation that overseas Filipinos received however actually fell 3.1%, in peso terms, according to the national income accounts (also due to an appreciating peso).

Global conditions will clearly continue to be unfavorable for some time. Yet in 2011 the Aquino administration still took steps towards a free trade agreement (FTA) with the European Union (EU) as well as actively sought to join the United States (US)-dominated Trans-Pacific Partnership (TPP). These two free trade deals involve large countries that are trying to overcome their respective domestic crises through exports and investments to weaker economies. The administration also entered into a so-called Partnership for Growth (PfG) with the US which allows that troubled superpower to even more directly influence Philippine economic policymaking in its self-interest.

A regional arrangement between less unequal Southeast Asian countries is potentially useful. However this is pre-empted by how even ASEAN trade deals are conceived as facilitating regional production chains dominated by American, European and Japanese capital. On the contrary, there has to be much greater attention to domestic-oriented growth and addressing the internal problems of the economy. The disproportionate attention to foreign investors and exporters has to be replaced by a policy bias of removing structural impediments to growth.

Second, the economy will not create enough decent paying jobs without real Filipino industry. Over the long-term, genuine Filipino manufacturing industry can create a solid foundation of jobs, technology and capital that will far surpass anything that low value-added manufacturing and services can offer. As it is, the lack of economic opportunities is already being felt with growth in capital formation, or investments, slowing in the first three quarters of 2011 from the same period last year – to just 18.1% growth in 2011 from 34.9% in the same period in 2010.

The total number of unemployed and underemployed Filipinos still rose by 343,000 from last year to reach 11.5 million in 2011 – composed of 4.3 million unemployed (IBON estimate seeking to adjust for the government’s underestimation since 2005) and 7.2 million underemployed Filipinos. This means nearly three out often (28%) people in the labor force are jobless or looking for more work.

The official unemployment rate for the whole of 2011 is still among the worst in Asia and higher for instance than in other major Southeast Asian countries, according to latest available data collated by the Bangko Sentral ng Pilipinas (BSP): Indonesia (6.8%), Vietnam (4.4%), Malaysia (3.2%), Singapore (1.9%) and Thailand (0.6%). Globally, according to International Labor Organization (ILO) data, the Philippines also counts among the worst one-fourth of the world in terms of unemployment rates.

The hollow manufacturing sector still fails to generate enough jobs. There was only a 49,000 increase in manufacturing employment in 2011 to 3.1 million – which is just 8.3% of total employment, slightly lower than the 8.4% share in 2010, and continues the decline from the9.6% share in 2001a decade ago.

This year has also seen prices rising ever faster. Monthly inflation rates in 2011 have risen steadily from 3.6% in January to 5.3% in October – the highest in over 30 months – although easing slightly to 4.7% in November. This continued to erode the real value of the minimum wage which, despite a Php22 additional cost-of-living allowance in NCR for instance, is still far below the family living wage. Inflation has already reduced the real value of the NCR minimum wage in November 2011 to less than its value in July 2011 at the start of the Aquino administration. Cash dole-outs are helpful for a few but quality jobs and higher real wages will benefit the whole economy.

The lack of decent paying jobs will continue to be a problem as long as the government conceives industrial policy as about encouraging foreign capital even if in just low value-added assembly operations. The economy instead needs an industrialization program that builds Filipino-owned industries with continually rising local value-added over the long-term.

This year also exposed the limits of the government’s mining thrust and mining industry hype. The mining subsector is set to be one of the fastest growing in 2011 with a 7.1% growth rate in the first three quarters that outpaced manufacturing, construction, utilities, agriculture and all the services subsectors except for finance. Yet there was only a 12,000 increase in mining jobs to 211,000 which is a miniscule 0.6% of total employment. These few jobs and some government revenues were at the expense of finite Filipino mineral resources being extracted and exported for other countries, rather than the Philippines, to use and fully benefit from.

Third, fiscal austerity just to get favorable credit ratings is counterproductive. The Aquino administration pursued fiscal austerity this year. The government spent 2.1% less in the first 11 months of 2011 (Php1.35 trillion) than it did in the same period last year. Coupled with a 13.1% increase in revenues it was able to reduce the 11-month national government (NG) deficit to Php96.3 billion which is only a little over a third (36%) of the Php269.8 billion deficit over the same period last year. The NG deficit has correspondingly gone down from 4.6% of GDP in the first three quarters of 2010 to 0.4% in 2011.

International credit rating agencies Standard and Poor’s, Moody’s and Fitch responded with upgrades in the country’s credit ratings or improvements in its ratings outlooks or both. But the supposed gains in terms of reduced cost of borrowing come at a high price. In 2011 the government cut back particularly on economic services, including infrastructure, but also did not fill in long-standing backlogs in education, health and housing. In the national income accounts, for instance, public construction contracted 46.4% and government consumption contracted by 1.7% in the first three quarters of 2011 from the same period last year.

An exaggerated concern about credit agency ratings resulting in fiscal austerity is counterproductive – it reduces demand, depresses employment, contracts the economy and undermines future growth. Public expenditure and investment are vital to create the conditions for development. The proposed public private partnerships (PPPs) are also a poor substitute to the extent that they are driven by short-term commercial and profit-seeking considerations that are inconsistent with the needs for long-term social and economic development.

The Aquino presidency supposedly has high approval ratings from the public. If true, this can be political capital for the reforms that the country needs – that is, getting the support of the people not just on a populist anti-Arroyo or anti-corruption issue but for the necessary economic measures that are in the general public interest. The Aquino administration’s policy choices in 2011, such as giving greater weight to narrow foreign and domestic elite interests, unfortunately only underscores the challenge of pushing for real reform in 2012.