The Philippine Economy After the 2010 Elections: Challenges and Opportunities

1. The Philippine Economy After the 2010 Elections: Challenges and Opportunities

2. Outline I. Global Economic Conditions and How They affect the Philippines II. Governance, Politics and the Economy III. What can a “Good” Government do to make things better? IV. What can/will the Noynoy Administration do about it?

3. Bad News: Sluggish advanced economies still need fiscal stimulus but growing concerns about fiscal sustainability in some these economies impose severe constraints on the size and duration of the fiscal stimulus. • “The global recovery is proceeding, although at different speeds. In the advanced economies, the recovery is lukewarm, given high unemployment, rising public debt, and, in some countries, weak household balance sheets. Advanced economies are expected to expand by 2¼ percent in 2010, following a more than 3 percent decline in output in 2009.” • “Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term, and the fiscal stimulus planned for 2010 should be implemented fully. However, given growing concerns about fiscal sustainability, countries should also make progress in devising and communicating exit strategies.”

4. As a result, global liquidity is still high.

5. Good News For the Philippine Government : Low Cost of borrowing provided global bond markets think that the Philippines is not like Greece. (News item: 70% of “experts” surveyed think Greece will default.)

6. Moreover, because our BPO sector and workers’ remittances are not as sensitive as our exports and oil prices are to a fall in global economic growth, our economy is not very vulnerable to global economic slow downs.

7. The Philippines is not very good in producing tradable goods and has resorted exporting services and people. (Philippine economic ship is safe, because it never left the port.)

8. We had bad and deteriorating governance.

9. And a scandal-plagued president who was a captive of congress and the military.

10. Moreover, our police, bureaucracy and justice system were quite mediocre to begin with.

12. We have a very young population….

13. …and are not investing enough in them. For example, school attendance has declined to alarming levels

14. As a result, enrollment growth has lagged behind the growth of school-age population.

15. The under-investment in our youth starts before they are born.

16. Given that nearly half the babies come from mothers who have either not gone to school or have not reached or finished high school, it will be hard to improve school attendance without direct assistance to poor families that have school-aged children.

17. The Philippines has plenty of roads, but lots of them are bad roads.

18. Congressional Insertions and the DPWH Budget

19. In the private sector, there is a surplus of savings. But this is due to a bad investment climate which has resulted in low levels of capital formation (investment).

20. The bad investment climate is reflected in the balance sheets of banks as well.

21. Our government tries to help workers by passing laws that protect them. The Philippines has one of the highest ratios of minimum wage to GDP ratio among developing countries.

22. This has probably stunted employment growth in the organized sector and increased the size of the informal sector and underground economy. As a result, nearly half of Philippine workers make less than the minimum wage.

23. As a result of the foregoing, the Philippines has a narrow and declining export base.

24. And a small and declining manufacturing sector.

25. With a few exceptions, the manufacturing sector has been losing ground long before the global crisis.

26. Many industries such as semi-conductors, footwear and wearing apparel have lost competitiveness

27. The share of agriculture in total employment has declined, but it is the service sector, not the manufacturing sector that absorbed the workers that migrated from the rural to the urban areas.

28. Unfortunately, most of the jobs are created are in sectors such as “wholesale, retail and repair” and “transportation, storage and communications where most workers are “own-account” or “unpaid family” workers who make less than the minimum wage.

29. As a result, in spite of rapid urbanization and the rising share of NCR , Region III and Calabarzon in total population, the share of wage and salary employment in total employment has barely increased.

30. The new president is inheriting all these problems at a time the budget deficit is at an all time high.

31. The resurgence of the deficit is due to a fall in revenue and a decompression of government expenditures.

32. The fall in revenue is due to the decline in collections of both BIR and Customs

33. Government is currently borrowing not just to refinance maturing principal but interest expense as well.

34. But unlike the past, interest expense has not spiked.

35. Unlike what happened in the past, the growth in the budget deficit did not cause a spike in domestic interest rates.

36. Because of OFW remittance we have a BOP current account surplus and a large and growing international reserves.

37. This means that there is excess savings in the private sector and the government can continue running deficits provided (a) the money is well spent and (b) there is a credible medium term deficit reduction program.

38. Moreover, the government does not have to reduce its budget deficit to zero provided it can maintain macroeconomic stability (e.g., no spikes in interest, exchange and inflation rates). The economy can out-grow the debt even with modest deficits provided that off-budget deficits can be eliminated.

39. A big part of the increase in the public debt is not due to the national government ‘s budget deficit. The supervision of banks, the screening of BOT contracts and the monitoring and management of government corporations must be improved to prevent a repetition of what happened in the past.

40. While it is important to reduce corruption and to make public officials more accountable, it is also important to improve the regulatory environment. • The perception that government policies often change and that the changes are hard to predict discourages investment. (Ideally, politicians should appoint competent and honest regulators and let the regulators do their jobs.) • In the power sector, for instance, regulatory uncertainties might have created an environment (which if not improved) may delay investments in new plants until there is an obvious shortage. • In turn, even a successful anti-corruption program may not be enough to cancel out the negative effects of a power shortage in Luzon on the investment climate .

41. Tax administration must be improved. In spite of economic growth, government revenue, after adjusting for inflation, grew only slightly faster than population.

42. But improvements in tax admin, may not be enough. After adjusting for inflation, tax revenue from some sources actually had negative long-term growth rates.

43. Must appoint good people in BIR and Customs. But it may become necessary to impose new taxes or reduce the granting of tax incentives. • Increase sin taxes • Reduce BOI incentives • Increase VAT, fuel and real estate taxes but reduce the income taxes of wage and salary workers (who bear 95% of the individual income tax)?

44. Must improve the quality of government spending. Better Infrastructure (improve governance and prioritization in DPWH and DOTC, and use of BOT in key infrastructure projects like the additional MRT lines and the extension of SLEX to Lucena) Less graft-ridden and more cost-effective ways to help the poor (in much of Latin America, they have increased reliance on Conditional Cash Transfer Program and reduce many subsidies in kind).

45. Can Noynoy Hack it? The nation hopes that he can. If the Filipino people support him (e.g., versus a pork-barrel-driven congress), he could succeed. Sometimes, the enemy of the good is the perfect. For example, there is no such thing as a new taxes that hurt only rich tax evaders. Tax measures that hurt some but help many (e.g., if they finance good spending) may be superior to doing nothing. Moreover, if the corruption is reduced and the regulatory environment and public accountability are improved, investments may rise, increasing not just economic growth but quality of life as well. But our expectations should also be more realistic. Many of our problems have deep historical roots and the out-going president that has done a lot of things to make the job of her successor a very difficult one.