Gov't spending alone won't do it

DEMAND AND SUPPLY
Gov't spending alone won't do it
By Boo Chanco

Enough for now on the Corona impeachment! Before we get totally distracted from things that really matter, let us focus today on our economy. Some weeks ago, we learned that our GDP numbers are down and P-Noy is being blamed for it because he held back spending out of fear they don’t have enough safeguards in place to prevent corruption. I wish it was that simple.

There is a mistaken notion that all it takes for the economy to look good again is for government to increase its spending. An editorial of the newspaper Manila Standard lectured that “government spending generates jobs and adds to the consumers’ purchasing power. More importantly, it leads to the construction of more roads, air and sea ports and bridges, which have a long-term effect on the economy.”

True to a point. Building infrastructure will definitely improve our economy’s performance. But it is also not entirely true that just front loading, as the editorial suggested, “will create the right amount of multiplier effect that will accelerate economic growth.” While there is an element of truth to the editorial’s claim that “government underspending did the economy in this year,” it is also important for P-Noy and Butch Abad to minimize leakage due to corruption. It is also welcome news to hear from P-Noy that he will now “do the opposite” to help lift the economy from its lethargy.

But something more basically wrong with the Philippine economy is starting to manifest itself. Noel de Dios, the former Dean of the UP School of Economics debunks the simplistic view that government’s failure to spend is the most important reason why our GDP numbers floundered. What was exposed, Dr. De Dios pointed out in his Business World column, was “the strategic weaknesses and limits of an economy founded on remittances.”

The column of De Dios should be must reading for government’s economic policymakers and for those who want to express their opinion on what ails our economy. De Dios observed “the government’s measure in the interim has been to pick the low-hanging fruit, substituting its own for private spending, and highlighting sectors where structural obstacles and conflicting interests are less important, i.e., tourism, mining, and BPOs. It is not wrong to do this – it is just not sufficient.”

He explains: “Consumption, investment, and exports themselves are all heavily import-dependent with only weak links to the domestic economy. All this is fine as long as overseas deployment is rising and remittance-inflows are increasing… a high growth of consumption sustained by transfers from abroad is still likely to support some domestic growth and employment, especially in services such as domestic retail trade, transport and communications. Even the less import-dependent parts of investment may make a showing, especially construction related to malls, residential real estate, etc.

“This type of growth is supportable – up to a point – since the massive foreign-exchange inflows make the import-dependence possible to begin with. In what Philip Medalla, Raul Fabella, and I termed the ‘SM-economy,’ overseas workers come home, flip their dollars and riyals into pesos to spend on Chinese-made toys and clothes and Japanese cars and motorcycles. From a foreign exchange viewpoint, this is just a wash.

“But overseas workers’ families also sustain shopping malls, send their kids to local schools, amortize houses and condos, and take domestic trips – aside from making innumerable phone calls… The problem is that once deployment and remittances flag, the fuel for this type of growth also begins to run out and the engine sputters… Even consumption demand has somewhat slowed, a fact reflected in the sharp drop in value-added in retail and wholesale trade.”

It is important to note, De Dios pointed out, that compared to our neighbors, their sources of domestic demand are more varied than ours and the web between their domestic economies on the one hand and consumption and investment on the other is far denser. “A rise in agricultural incomes, say because of a commodity boom, is likely to be a more powerful stimulus to Indonesia’s domestic economy than a similar change in the Philippines, where a good part would probably leak out as imports of motorcycles and home gadgets…”

De Dios observed that because “agriculture in comparable countries is more diversified and less contentious, the structure of demand is simpler and more homespun; and manufacturing is capable of supplying a larger part of domestic requirements. Where the sources of domestic demand are richer and deeper, the field for potential investment also becomes wider. Investment need not stall simply because the narrow middle class of overseas workers’ families begins to penny-pinch. For there will remain the varied demand from farmers, workers from industry and services. Only then does one get ‘buoyancy’ in the midst of global crisis.”

De Dios concludes that “the remittances-led economy has served the country as a palliative for almost a decade now. But its limits are evident and it is time to move on… But removing the decades-old structural obstacles to investment in agriculture and industry is no easy task. How to finally end agrarian reform, promote massive agricultural research and extension, reform rigid labor laws, provide cheaper power, better infrastructure and logistics, promote commercial R&D-the list of to-do’s is endless.”

Thus, De Dios contends that “contrary to the flavor of the current debate, the problem is not simply one of macroeconomic stabilization, which is solvable through larger or smaller doses of public spending. The challenge is how to move away from a comfortable but now inadequate template and create productive internal nexuses that can serve as a basis for future growth. In this – as in many other things – time, past history, and current preoccupations are not on our side.”

And that’s the reality P-Noy and his economic managers must grapple with and do something about. Not easy at all, as De Dios admits, but it simply must be done. It may not all be done by the time 2016 comes along but it would be great if P-Noy gets the job started. Everything else we are doing now merely keeps us busy talking but contribute little towards the work that must be done.

Mar busy with politics?

For those of you who are wondering why nothing much seems to be moving at DOTC almost six months after Mar Roxas took over, I just got the information that aside from Mar’s meticulous attention to details, things are bogging down because Mar’s time is being taken up by politics. No, Mar isn’t exactly starting to campaign for the coming elections this early. He is spending a big amount of his time at the Palace advising the President on recent political decisions. Mar is after all, the President of the Liberal Party.

Nothing wrong with that except that the success or failure of this administration rests not just on good political decisions but actual accomplishments that everyone can see. In this area, Mar has a great responsibility because most of the big ticket infrastructure projects are in his shop. Nothing really significant is moving other than the announcement of a rehab of NAIA 1.

Speaking of NAIA, I don’t know if Mar is aware that P-Noy has already broken a promise he made on August 2010, after the state won its case in arbitration in Singapore. He bravely said then that NAIA 3 will be operational in December. He didn’t say what year so we should be reasonable and not assume he meant December 2010. But it is now December 2011 and nothing is happening there. I just used NAIA 3 in a recent Airphil Express flight to and from Singapore and I can say that we are wasting a facility we badly need.

If they cannot open it yet, Mar and his boys owe the public an explanation. The public deserves a regular update of what’s going on. Project timelines must be made public so there is some control on the bureaucratic temptation to nonchalantly push project deadlines back. I agree with Mar that haste makes waste but the current status of nothing happening is also pretty wasteful, as the underutilized NAIA 3 demonstrates.

I hope Mar decides not to run for the House or the Senate in the next election and just stick to his current job at DOTC. Nothing will ensure his election in 2016 better than solid infrastructure accomplishments. But his “teka teka” approach thus far isn’t likely to improve his chances even for dog catcher. Our question to Mar is simply this: kung hindi ngayon, kelan?

Disasters
Rosan Cruz sent this one.
Nobody really knows… when volcanos will erupt;
… tsunamis will arise… hurricanes will run amok;
And no one really knows how one will choose a wife…
Natural disasters just happen.

Boo Chanco’s e-mail address is bchanco@gmail.com. He is also on Twitter @boochanco