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Filomeno S. Sta. Ana III Coordinator Action for Economic Reforms 23 January 2013

The Implicit Philippine Growth Model: Can Internal Demand Really Compensate for Lower FDI and Trade to get to G20 Status ?. Filomeno S. Sta. Ana III Coordinator Action for Economic Reforms 23 January 2013. Is the title meant to provoke?.

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Filomeno S. Sta. Ana III Coordinator Action for Economic Reforms 23 January 2013

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  1. The Implicit Philippine Growth Model: Can Internal Demand Really Compensate for Lower FDI and Trade to get to G20 Status? Filomeno S. Sta. Ana III Coordinator Action for Economic Reforms 23 January 2013

  2. Is the title meant to provoke? • Philippine policy makers will not accept that the growth strategy is limited to internal demand. • But growth is driven by consumer demand, thanks to remittances of overseas Filipinos. • But per se, there is nothing wrong about stimulating internal demand, especially when global markets are weak. • And there is nothing wrong either about foreign direct investments (and trade) catering to the domestic market. • The key is developing and strengthening tradeables, be they for the export market or the domestic market (best, for both).

  3. Preferred growth model • “Theory, my friend, is gray, but green is the eternal tree of life.” (Lenin’s “Letters on Tactics” (1917), quoting Goethe. • Welcome heterodoxy. • Romy Bernardo can be the new poster boy for the heterodoxy. A member of Foundation for Economic Freedom (the term “economic freedom” suffers from its image associated with economic conservatism), Romy is now a strong advocate of bold capital controls to stem the peso appreciation.

  4. Growth model • Following Goethe’s piece of advice that “theory is gray but the golden tree of life springs ever green,” or Lenin’s “concrete analysis of concrete conditions,” or Communist China’s “cross the river by feeling the stones,” we adopt growth diagnostics and the binding constraints approach (from DaniRodrik).

  5. Binding constraints • Low revenues. Gains: Kim Henares’s tax administration reforms, passage of the sin tax law. • Rapid peso appreciation. To the credit of BangkoSentralngPilipinas, it recognizes the problem and has taken positive steps to address it. But bolder measures are needed (as suggested by Romy Bernardo). • Inadequate infrastructure and power especially in light of the growing demand. Market failure is evident and hence an active role for government in power and infra is necessary. • Policy uncertainty brought about by weaknesses in the judiciary, including Supreme Court decisions. Favorable development: recent ruling of the Securities and Exchange Commission that reaffirms the liberal interpretation of the 60%-40% ownership requirement.

  6. Perennial Question: How to sustain growth and create jobs? • Manufacturing is essential. • Strengthen and expand tradeables. Do not dichotomize between export-orientation and import substitution. • Tradeables being the key, the exchange rate matters. • The horizontal approach to revive manufacturing or tradeables is not enough (exchange rate, infrastructure, power, predictable and clean judiciary, etc.). • The vertical approach is necessary; provide the incentives to the economic activities that have high social returns (e.g. creation of decent, high-productivity jobs in the formal sector) but are hampered by different types of market failure.

  7. Industrial policy (IP) is alive. • IP encompasses the horizontal and especially the vertical approaches. It now comes in different labels: technology policy, industrial upgrading and diversification, revival of manufacturing. • Some fear that IP cannot work, given a weak state. But the weak state is endogenous, and the appropriate IP intervention can help ease or strengthen state capacity (e.g. rationalizing fiscal incentives). • Businesses will always be lobbying for their interests, regardless of IP. Thus, take the bull by its horns; at the same time reduce the risks. • IP is not just about “picking winners.” Equally important component of IP is putting in place the disciplining mechanisms to prevent abuse (again, the example of rationalizing fiscal incentives).

  8. Conclusion • Focus on the binding constraints: sustain the revenues, stem the peso appreciation, correct the market failures in infrastructure and power, remove the uncertainty brought about by judicial decisions or interventions. • Make the enforcement of reforms credible (e.g. sin tax), and prevent policy reversal. • Ensure that the reforms are institutionalized beyond the “daangmatuwid” regime. This entails political reforms, including access to information, political party building and a level playing field in the elections.

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