by Gico Dayanghirang
(The author, an economist who once served as member of the House of Representatives representing the the first district of Davao Oriental, has been requested to provide Edge Davao readers his brief analysis of the economic performance of the Philippines from the 3rd quarter of 2010 to the 2nd quarter of 2011.-The editor).
THERE has been good reason to expect that the country is on a roll on account of Gross Domestic Product (GDP) performance on the third and fourth quarters of 2010. But the surge has been short-lived and GDP performance has been on a downward trajectory beginning the first quarter of 2011.
Note that GDP (Gross Domestic Product) has largely been sustained by domestic economic activities (trade, real estate, services, finance, business activities, manufacturing and agriculture). Export has figured only in the 4th quarter of 2010. It has in fact dragged down GDP performance in second quarter of 2011.
The top ten export markets of the Philippines and their respective contribution to export revenues of the country in the year 2010 are Japan 15.2%, USA 14.7%, Singapore 14.2%, China 11.1%, Hongkong-China 8.4%, Germany 5.2%, Netherlands 4.7%, Republic of Korea 4.4% and Thailand 3.5%. Altogether these export markets comprise 81.4% of the total export revenues of the Philippines.
The decline in export revenues is of course a consequence of the ongoing global economic crisis particularly affecting Japan and USA which are the two largest export destinations of the Philippines. Further decline is expected if Japan continues to languish in recession and the recovery of the USA economy continues to be lackluster. Even more decline in export revenue is expected should the EU fail to resolve the financial crises affecting some of its member countries notably Greece, Italy, Spain and Portugal. The resulting contagion is expected to affect the other trading partners of the Philippines in the EU making export as a source of revenue even more remote.
The GDP decline in the 1st Quarter and 2nd Quarter of 2011 is due to under spending by government as the P-Noy administration has been preoccupied with putting together a new government. It has also withheld fund releases until contract prices of projects initiated by the GMA administration are reviewed suspecting that a substantial portion of them are overpriced. Indeed they are and to a large extent. The P-Noy administration has further sought to design and install safeguards to guard against corruption.
Although these prior events have slowed down the economy as a consequence, they now prove to be wise. More public funds are available for spending now and in the immediate future when they are most needed. Safeguards like standard costing, centralized procurement and cash-less transaction now promise to extend the utility public funds for economic pump priming. Department of Budget and Management Secretary Butch Abad promises more reforms forthcoming.
The P-Noy administration is aware of the looming danger to the Philippine economy of a further deterioration of its export markets. It is therefore preparing to pump-prime the domestic economy with more public spending. This is why P-Noy has vetoed the debt-cap provision inserted by the Senate in the 2011 national budget law. More borrowings may be necessary to sustain the domestic economy. Apparently, the Senate is clueless of the economic situation of the country.
Domestic pump-priming has its downside, particularly, if it is misplaced and misused. It can lead to severe budget deficits without the expected higher tax revenues from heightened domestic economic activity. Public spending must therefore be directed towards projects with the greatest multiplier effect such as public infrastructures in areas of the country where economic activity is low and poverty is more prevalent. Any extra liquidity directed towards these areas is almost wholly and immediately translated into consumption expenditure, greater economic activity and more tax collection. Moreover, improved local infrastructures lead to even more economic activity form otherwise moribund economic sectors of the country which multiplies the trickle-down effect even more.
Public spending must also be protected from graft and corruption. Otherwise, liquidity spread is likewise restricted with the same dampening effect on consumption expenditure, economic activity and tax collection. In more mature nations, graft and corruption is a mere anomaly. But in the Philippines, it is a norm afflicting almost every level of government. A significant portion of public spending is therefore lost as it flows down the government pipeline to its desired destination. This makes it a serious threat to the economy as it is to the moral fiber of society. Investing in good governance right at the onset now ensures that domestic pump priming may attain its intended economic multiplier effect and corresponding higher tax revenues.
The three most important considerations to reviving and sustaining GDP growth therefore is adequate pump priming, proper targeting of public spending and keeping leakage to a minimum. Should the P-Noy administration do well at the onset, foreign investments and financial transactions are expected to rise because of increasing confidence. Any turnaround in exports is unlikely but nonetheless welcome should it occur.
From a political-economy standpoint, it seems likely that P-Noy will succeed. Unlike the previous GMA administration where public spending is directed towards projects which promise the largest commission to decision makers, the P-Noy administration now seems dead serious about doing things well. In this regard, the Philippines indeed may be the country to watch in the East Asia Pacific region.
