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How has Rwanda managed to overtake many developing nations in the global race for competitiveness and transparency?
Landlocked, under-endowed, war-ravaged, Rwanda a nation of 10.5 million people has faced a number of challenges, not the least of which was the ethnic strife that led to genocide twenty years ago. And yet it in spite of all this, it has managed to regain stability and posted sustained economic growth averaging 7.4 per cent per annum that has led to improved social well-being over the past decade.
As an indication of its progress, Rwanda has successfully undertaken significant reforms in its regulatory environment. Just consider the following:
- The World Bank in 2014 has ranked Rwanda the 2nd best country in Africa to do business, after Mauritius, and before South Africa and Botswana.
- It only takes 2 days to set up a business, the 9th shortest time in the world.
- The country is ranked 49th with a score of 53/100 in Transparency International’s Corruption Perception Index, placing it in the same class as Malaysia and South Korea.
So how has a country which suffered many years of war and as much corruption as any other impoverished nation in the past, managed to turn things around?
Well the short answer is they did this through an accommodative political settlement and the help of both conventional and unorthodox institutions and economic strategies.
A troubled past
Rwanda has had a long history of ethnic violence between the two main rival tribes. From pre-colonial times up to 1959, the pastoralist Tutsis were the ascendant political class over the agriculturalist Hutus. Ethnic differences were exaggerated under colonial rule. In the lead up to independence in 1962, Belgian colonists transferred their support to Hutu elites. This led to mass killings of Tutsis many of whom fled the country.
Two Hutu regimes ruled the country from 1961-94. Having a single-party dominate politics for most of this period did not prevent the nation from succumbing to decentralised rent-seeking and clientelist behaviour. A group known as Akazu was at the apex of this system. It was related to but not controlled by the administration.
Tutsis sought to regain control of the country through an invading Rwanda Patriotic Army. This culminated in the genocide of 1994 by retreating Hutus. After consolidating their hold on the country, the Rwanda Patriotic Front (RPF) established a government of national unity incorporating moderate Hutus, one of whom led the country as its president.
A reformist regime
Although a certain amount of political repression in the guise of preventing a return of “ethnic ideology” has occurred, the coalition governments comprised of all legal parties in parliament being proportionately represented in cabinet (the ruling RPF holds no more than fifty per cent of the portfolios) has succeeded in keeping the nation stable. This inclusiveness along with its program of restorative justice known as gacaca has fostered reconciliation and allowed the country to experience improvements in social and human development not previously seen.
The intrusive intervention of government in everyday life at times borders on social engineering as the government has sought to follow the Singaporean model in both economic and social policy implementation. President Paul Kagame (elected in 2003 and then again in 2010) has been labelled the global elite’s favourite strongman for improvements to public service delivery, particularly in health and education.
Departmental line agencies have been managed through an institution of performance contracts known as imihigo which Tim Kelsall describes as “modern performance agreements supported by a significant component of moral pressure and neo-traditional gloss.” This combination of formal scientific management and homegrown practices has permeated down to the grassroots by roping in local officials and civil servants.
On the economic front, Rwanda has applied a hybrid approach to investment promotion. On the one hand, it has adopted policies and institutional arrangements considered best practice by the World Bank’s Doing Business surveys. Responsibility for managing this has been assigned to the Rwanda Development Board (RDB). But this works in parallel with a more activist approach in industrial policy with the RPF’s holding company, Tri-Star Investments getting involved in joint ventures and start-up companies.
The holding company has initiated many successful ventures with demonstration effects for the rest of the economy. Telecoms is one example. When Tri-Star sold part of its stake in Rwandatel in 2007, it got five to ten times its initial investment in the company.
Because profits from Tri-Star that are not ploughed back into its businesses revert to RPF, the party is financially independent. It uses this to fund its political campaigns without having to resort to political donors. Kelsall explains what this does:
The RPF’s financial solvency obviates the need for party officials to engage in election-related corruption, which in turn allows the party to take a very tough line on corruption among its leading supporters and in the bureaucracy.
Apart from Tri-Star the government has also orchestrated the formation of other funds, the Horizon Group belonging to the army, which undertakes socio-economic projects to produce productive enterprises, and the Rwanda Investment Group, a consortium led by domestic and diasporic elite.
The purpose of the second group is to raise capital other than through foreign borrowings to invest in high impact projects of strategic national importance. Without such an interventionist approach, much of the agricultural and industrial transformations currently underway in different sectors of the economy simply would not be happening.
The case of Rwanda demonstrates many similar traits to that of the Northeast Asian developmental states. The RPF led government faced existential threats from the opposition in exile and from a potentially hostile ethnic majority at home just as the South Korean and Taiwanese states did from North Korea and from mainland China.
These threats have kept the ruling RPF focused on improving social and economic well-being for its citizens to maintain its legitimacy and hold on power. The regime has exercised a capacity for long-range vision and forward planning contained in its Vision 2020 roadmap, free from the influence of rent-seeking, private interests. It has ruthlessly pursued its policies at times through heavy-handed regulations and enforcement of rules.
The low crime, low corruption, low red-tape environment this has fostered was not enough. The RPF has used its clout to address market failures and encourage the adoption of productivity enhancing new technology. Through its holding company and other private-led investment groups that it has brought into being, jobs have been found for talented managers and skilled workers that might have otherwise gone overseas.
The Rwandan experience demonstrates the capacity of poor nations to bring about a system of governance that is relatively competent and free from corruption within a short span of time using home-grown institutions, resources and talent. The extremely harsh and disadvantageous position it faced did not become a hindrance, but rather provided greater incentive for it to go down the road it has followed. Surely, any emerging economy seeking to do the same should take heed the lessons from Rwanda.
Lessons for the Philippines?
The Philippines may have already attained middle income country status, a milestone that Rwanda is still aiming to achieve by 2020, but there are certain elements in Rwanda’s development experience that it can learn from.
- Financially autonomous political parties:
We have seen how gaining financial solvency allowed the RPF to govern without fear or favour. This enabled it to take a long-term view in planning and executing its economic development strategy. It enabled it to rule with moral ascendancy and punish erring, corrupt officials, putting an end to the patrimonial, rent-seeking behaviour of its bureaucratic and business elite.
- Inclusive, participatory governance:
We have already seen how the RPF has shared power with other political parties. The proportion of cabinet appointments follows the same proportion of parties represented in the parliament. In the 2013 elections, an unprecedented 64 per cent of seats were won by women. This is the highest level of female participation in political office anywhere in the world. With this level of representation, laws that uphold women’s rights and promote women’s health and well-being are being enacted.
- Home-grown solutions:
Although a certain amount of repression of the press and political opposition has taken place, in the guise of preventing ethnic tensions from flaring up once again, such suppression it can be argued would have taken place anyway, given conditions prevailing in Rwanda. Rather than relying on foreign models of governance and economic development, Rwanda has charted its own path. It uses institutions like gacaca and imihigo to bring about restorative justice and better governance.
- Robust government role:
In promoting economic development, Rwanda didn’t follow the Washington Consensus that simply limits the role of government to creating a level playing field. It followed the example of East Asia, which meant addressing structural issues in its economy through interventionist industrial policy aimed at catalyzing investment in productive sectors in agriculture, industry and services to raise the standard of living of those residing at the base of the socio-economic pyramid. Ironically this has emboldened the private sector to take risks as well, to invest in the future of the country.
- Political succession.
Many commentators are wondering whether President Kagame intends to step down at the end of his second term in 2017. A third term is constitutionally prohibited. As early as 2012, the ruling party held a conference to tackle the issue of political succession at Kagame’s request. At this early stage, the RPF has begun to look for ways to bring about an orderly succession, but one that does not put in jeopardy the advances made already. It is seeking ways to institutionalise mechanisms for bringing this about.
It would not be right to recommend that the same set of policies be adopted in the Philippines. The message here is that countries need to chart their own developmental path based on the conditions they face. The universal prescriptions of the Washington Consensus are becoming less influential as the balance of economic power shifts to the East. While that may be true, certain key principles can be gleaned from the success of other countries.
Considering the way the RPF developed its Vision 2020, opened up participation of women, included its political opponents in a cabinet that advises the president, and managed the bureaucracy through formal and informal contracts, what changes could the ruling Liberal Party make that would improve the way it governs under President Aquino? More importantly, how could it ensure that the positive changes it makes continue beyond 2016 when he steps down?
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What’s better for economic growth?
In the debate over the economic provisions of the constitution, we often hear that it would be better for the Philippines to lift all restrictions on foreigners. These are what prevent investments from flooding into the country, its advocates say.
One way of arguing for full liberalisation is to point to our progressive regional neighbours and say that they are less restrictive towards foreign participation in their domestic markets. Since they are growing much faster through investments, what we ought to do is adopt their policies and completely liberalise all the sectors of our economy.
This notion is often repeated and reinforced by politicians, businessmen, think tanks and commentators in the media. They portray opposition to full investment liberalisation as either based on selfish interests or irrational xenophobia.
The problem with this stylised argument is that it may not necessarily be grounded on fact. It could be a situation where a lie repeated often enough can become true in the minds of the public.
To test the assumption that our regional neighbours are not restrictive towards foreign investments, I consulted the World Bank’s Invest Across Borders report which contains the most authoritative information on statutory rules and regulations that govern foreign investment in domestic economies around the world.
This allowed me to answer the question, which region in the world is the most open to foreign direct investments? Is it:
a. East Asia and the Pacific (EAP)
b. The Middle East and North Africa (MENA)
c. Latin America and the Caribbean (LATAM&C)
d. Eastern Europe and Central Asia (EECA)
e. South Asia (SA)
f. Sub-Saharan Africa (SSA)
g. High income OECD nations (OECD)
Most would rank the OECD nations as the least restrictive followed by East Asia and the Pacific. This is based on the notion that richer and more prosperous countries generally tend to be more open to investment from abroad. No other region in the world has bridged the gap between rich and poor like EAP with MENA coming in second.
So what does the data tell us? The rich OECD countries are definitely the most open to foreign investments. But among all these regions, the EAP region is astonishingly the most restrictive. The following table comes straight from the World Bank’s findings:
Ownership Limits for Foreign Investors by Sector
|Region/Economy||Mining, oil & gas||Agriculture & forestry||Light manufact-uring||Telecom||Electricity||Banking||Insurance||Transport||Media||Construction, tourism & retail||Health care & waste manage-ment|
|East Asia & Pacific||78.4||82.9||86.8||64.9||75.8||76.1||80.9||66||36.1||93.4||84.1|
|Middle East & North Africa||78.8||100||95||84||68.5||82||92||63.2||70||94.9||90|
|Latin America & Caribbean||91||96.4||100||94.5||82.5||96.4||96.4||80.8||73.1||100||96.4|
|Eastern Europe & Central Asia||96.2||97.5||98.5||96.2||96.4||100||94.9||84||73.1||100||100|
Source: World Bank (2010), Invest Across Borders.
Note: The table shows the average levels of ownership caps placed on foreign investors across eleven of the most regulated sectors (with a score of 100 indicating complete openness or full foreign ownership permitted). There were 87 countries in the sample.
For all but two of the eleven sectors featured, EAP is the most restrictive—and even in the case of those two sectors, electricity and transport, EAP came second only to MENA. The IAB report acknowledges this by saying,
East Asia and the Paciﬁc has more restrictions on foreign equity ownership in all sectors than any other region.
The caveat is that EAP also shows the greatest intraregional variance with less populated jurisdictions like Singapore and the Solomon Islands having fewer restrictions and highly populated ones like China and Indonesia imposing more in their service sectors.
When it comes to private ownership of land, the IAB report also shows EAP being the most restrictive to foreigners. The following is a screen grab. It shows that only 33 per cent of the EAP’s economies allow foreign ownership of land compared to 52 per cent for SSA, 80 per cent for MENA and SA, 95 per cent for EECE and 100 per cent for LATAM&C and OECD. Only three of the ten economies surveyed allow it. Most economies only lease land to foreigners and provide weak lease rights at that (the leases cannot be used as collateral for loans, subdivided or sublet).
When it comes to ownership rights, EAP scored 83.3 out of 100 coming in fifth after the OECD (100), LATAM&C (98.2), EECE (97.6) and SA (93.8), ahead of SSA (77.3) and MENA (68.8). This again runs counter to the prevailing view that EAP provides greater security to foreign investors over their property rights, more than other regions.
The ease of doing business, particularly the cost of entering a country is the last thing we will look at. The ease of establishment is measured by the number of steps and length of time needed for setting up a foreign business. The following table also comes from the IAB website:
Starting a Foreign Business
|Region/Economy||Procedures (number)||Time (days)||Ease of establishment index (0-100)|
|Middle East & North Africa||9||19||58.6|
|Eastern Europe & Central Asia||8||22||76.8|
|East Asia & Pacific||11||64||57.4|
|Latin America & Caribbean||14||74||62.|
Note: Ease of establishment index (0-100) evaluates the regulatory regime for business start-up.
MENA and the OECD are at the top of the league table with 19 and 21 days for each of them respectively to open a new business. LATAM&C and EAP are the worst performers in that order providing additional hurdles to them. It takes 64 days on average in EAP and 11 steps to open a new business. In China it takes 65 days on average and 18 steps, which is above the regional average. In the ease of establishment index which reflects the regulatory regime of regions, SSA and EAP are the worst performers in that order, meaning their regulatory regimes are the most difficult and least familiar to foreign firms.
Given its lack of openess, poor accessibility of industrial land, and larger regulatory burden, it is astonishing how the EAP experienced faster growth and pulled in larger investments compared to other emerging markets in the world as shown in the following charts.
These results will seem counterintuitive, especially for those who have been fed a steady staple of neoliberal ideology. It’s a case of empirical evidence contradicting normative beliefs: the most restrictive EAP region grew fastest and attracted the greatest value of foreign direct investments.
So why has the Philippines managed to lag behind its regional neighbours in terms of growth and development? What factors allowed them to take-off and overtake us? That is a subject for a much longer conversation and a later post. Suffice it to say that framing the problem around liberalisation in certain sectors, accessibility to land, ease of establishment or even property rights does not provide a convincing answer.
Let me conclude with what that this discussion demonstrates, and that is opening up our domestic market to foreign competitors is not a guaranteed way to bring about economic transformation. It is not a panacea. It does not necessarily follow that if you open up, you will attract more investments or grow much faster. There is a missing ingredient in all this, an “omitted variable”, as it were.
In part two of this series, I will discuss the various strategies employed by the East Asian tigers in their quest for economic prosperity and how the political and economic history of the region diverges from common public perceptions of what happened.
He came at the invitation of the Angara Centre for Law and Economics to present his ideas from the book Why Nations Fail which he co-authored with Daron Acemoglu. This pair along with Simon Johnson had originally published back in 2001 an article in the American Economic Review entitled The Colonial Origins of Comparative Development: An Empirical Investigation.
Their book could be seen as an essay expounding on the themes uncovered by their earlier research which credits economic development to the institution-building conducted during the colonial era between the fifteenth and nineteenth centuries. It begins by drawing our attention to the differences between Nogales, Arizona and Nogales, Sonora, towns on opposite sides of the US-Mexican border.
The basic thesis of the book is that nations with institutions that promote greater inclusion in both political and economic spheres prosper while those that foster extractive or predatory policies wind up becoming impoverished and backward. The seminal moment in history, according to the book, happened in England back in 1688 during the Glorious Revolution.
For those not familiar with this event, I provide a brief background here. The basic argument goes a little like this: security of ownership and property rights is essential to investor certainty; investor certainty is needed to foster capital markets, and a set of political checks and balances that guarantee this is best suited for capitalism to flourish.
These principles were essentially what The Glorious Revolution was supposedly fought on and why the Industrial Revolution subsequently took place first in Britain, rather than in Continental Europe. The rights and ideals that Englishmen fought for were transplanted to their American colonies and became the basis for the American declaration of Independence in 1776.
Acemoglu, Johnson and Robinson (AJR) sought to prove empirically that institutions mattered to development. Previously, it was argued that climate and geography had a lot to do with it, i.e. that the industrious, temperate, northern states of Europe were more prosperous than the sluggish states in the southern Mediterranean and the tropics.
AJR sought to dispel this using colonial history. Why was it that not all colonised countries developed along the path of the United States? The difference lay in institutions. Their article demonstrated that in places where diseases led to high mortality rates among early European settlers, and where consequently hardly any permanent settlements were planted, centuries later, the lack of institutional legacy was found to be significantly correlated with low development.
The main lesson was that geography was not destiny, and that even history was not destiny. Less developed nations could begin adopting the institutions that promoted greater inclusiveness and discard extractive policies that left them in squalor. This dove-tailed with the agenda promoted by Washington on good governance, as it searched for a way to rescue the failed Washington Consensus from repudiation.
What came about was the augmented consensus that said free markets and good governance promote economic growth and development. After decades of telling less developed countries to shrink the role and capacity of the state and let markets rip, they were now saying that government needed to be strengthened once again.
The liberal democratic states of the West act as an ideal to which other societies need to aspire to. No other path leads to sustainable economic growth other than this. Just as Calvinist preachers of old would proclaim that no one cometh to the Father, but by His Son, these economists present a case that no other path leads to economic Nirvana, but through the Market (with Institutions performing the role of the Holy Ghost).
This rather binary view of the world is actually contradicted if you go deeper into the colonial history of the Americas which is what John H. Elliott did in Empires of the Atlantic World: Britain and Spain in America 1492 to 1830.
Here he wrote that it was actually the exclusionary racial policies fostered by the English settlers that led to greater social cohesion among settlers around Enlightenment principles of individual rights and liberties, which in turn led to greater independence and prosperity.
Meanwhile in the Southern hemisphere, the Spanish settlers had an “organic conception of a divinely ordained society dedicated to the achievement of the common good” which was “more inclusive rather than exclusive in approach”. The granting of rights both economic and political to natives consisting of mestizos, creoles and freed slaves led to a mixed-race society prone to greater divisions than existed in the North.
The irony here is that a more inclusive colonial policy led to greater exclusivity as subsequent societies were stratified and organised into “pigmentocracies” which made it harder to achieve the egalitarian principles espoused by the Enlightenment. In the Philippines, the outpost of New Spain, the situation was worse in that apart from developing this multi-racial caste-like system, the facility of a common language was not provided as it was in the Americas.
This is the difficulty of using colonial history to prove or disprove that institutions matter in the way attempted by the authors of Why Nations Fail. They do matter, but in different ways, which is the point I highlighted previously in this column (see here).
Secondly, there is the anomaly of the benign dictators of East Asia and the desarollista states of Latin America. Robinson has taken the view that the East Asian growth formula, what is termed the BeST Consensus (BeST consisting of Beijing, Seoul and Tokyo), represent a unique moment in history that cannot really be duplicated or sustained.
Peter Evans disputes this saying that just because the East Asian miracle emerged from a unique blend created by the Cold War policy of the United States, it does not mean that we cannot distil a few basic principles and emulate them today. Just because these states were predominantly autocratic does not mean that weak democratic states cannot adopt the policies that made them succeed in fostering rapid industrialisation (see here for a deeper discussion).
What’s more is that both Germany and the United States, late industrialising Western nations after Britain and France, followed the same industrial policies a century earlier. It was just that after scaling the development wall, they felt the need to “kick the ladder” away to prevent others from following them up because not doing so would disadvantage them.
In Latin America, the record of developmental or desarrollista states of the 1970s and 1980s in Brazil and Mexico is more spotty than in Chile but nonetheless more successful than in Africa or South Asia as these countries made their way into middle income status ahead of countries like Malaysia, Indonesia and Thailand. This is the evidence that Robinson conveniently sidesteps.
Another point James Robinson makes in the book and in interviews is that collective action, which he equates to people power, is key to expanding opportunity for people if the system is closed. He cites the experience of the Philippines and of the Middle East a la Arab Spring to underscore his point. Again, the use of people power is problematic. Why?
Well as Elliott points out, people power features in Spanish colonial traditions as well because
(b)y the laws of medieval Castile the community could, in certain circumstances, take collective action against a ‘tyrannical’ monarch or minister.
Cortes in fact used this against governor Velasquez who ordered him to survey and not to invade the territory of Montezuma in the Yucatan peninsula. It was based on the notion of a social contract between the prince and his subjects which if broken gave the right of the governed to say, “I obey, but I do not comply” (se obedece pero no se cumple).
From time to time, commoners or comuneros resorted to acts of dissent bordering on revolution. But these were simply seen as a way to get the authorities to the bargaining table. Once their grievances were heard and the tyrannical laws or ministers were replaced, they would go back to living as loyal subjects of the monarch. Direct democracy rather than representative democracy ruled until very late in the piece, which left them with very little in terms of a genuine parliamentary tradition.
This swinging of the pendulum from uprising to dictatorship and then back again is exactly what we are witnessing in Egypt today. The problem with equating collective action, i.e. people power, with greater openness, is that the relationship does not always hold.
Finally, let me address the fallacy that only the Anglo-American form of capitalism works well. Francis Fukuyama is right to point out that this is not the only successful Western model that exists. Scandinavia demonstrated another path, which did not require revolts against oppressive monarchs. Theirs was more along the lines of an enlightened, benevolent monarch based on egalitarian religious rather than secular beliefs.
What I hope to point out through this discussion is that the world that we live in is more complex, more multifaceted than what Robinson tries to portray. While it is easy for him to be parachuted into the Philippines to spread his brand of institutional economics, we don’t necessarily have to buy into his whole message.
I agree that the Philippines needs greater openness and participation in political and the economic life, and that collective action to widen the sphere of participation probably needs to be organised, because elites won’t surrender their privileges willingly, but that is as far as I would go.
We don’t need a whole theory based on a faulty or perhaps selective reading of history to back this up. We have seen how people power can be hijacked or used for narrow political ends. We need to guard ourselves against simplistic arguments that say unseating this corrupt ruler here or that autocrat there is going to bring about nirvana for us. Institution-building is not accomplished by this alone, but through a sustained, deliberate, evolutionary process.
The social innovation of Oportunidades and Bolsa Familia more widely known as conditional cash transfers which have been credited with reducing poverty in Mexico and Brazil were not developed by the World Bank or the IMF.
They were experiments conceived by indigenous policy makers who were thinking ‘outside the box’. The East Asian industrial policies responsible for creating economic prosperity and convergence were pursued against the advice of international economists from the IMF and the West. Japan’s Ministry of International Trade and Industry sought to deceive their Western minders that they were complying when in fact they were doing their own thing.
Similarly if the Philippines were to find its way in the world, it will have to be by taking into account its own unique blend of ideas, capacities and institutions. It won’t be by applying some universal one size fits all formula promoted by a Western economist armed with some statistical regressions, a few case studies and a loose reading of history.
Since the era of Martial Law we have had technocrats sing from the same hymn sheet as their Western counterparts while ironically supporting a system that undermined the very principles they were espousing. We need to be smarter and wiser this time around.
We need to accept that the world is not a binary system, comprised of dummy variables that say you are either inclusive or exclusive, free or unfree, open or closed. We need to admit that we live in a multi-polar world, where things are not as clear cut, as some experts would have us believe, and that many paths lead to development. Ours in fact still needs to be found.
If anyone needed an explanation for the robust growth of the Philippine economy for the last nine years (two of which under the present dispensation), then the chart above would go a long way towards providing it. It shows monthly foreign remittances flowing from January 2003 to February 2012 into the country compared to that of some Latin American, Caribbean and South Asian countries of similar size or income to the Philippines.
In terms of its foreign remittances, the country is an absolute stand-out rising from about $600 million a month in early 2003 to about $1,500 million in early 2012. In the twelve months leading up to February 2012, the total inflows to the country was about $20.2 billion. If we convert that to pesos using the average exchange rate in 2011, that is roughly equivalent to PhP875 billion. In an economy of roughly PhP9.5 Trillion, that is about 9.2% of GDP. Given the multiplier effect that this income has, it would be safe to say that remittances contribute about double or about a fifth of the economy.
Unlike, Mexico which is dependent on its Northern neighbour the United States for providing a market for their cheap labour, the Philippine work force has its eggs in many baskets, not only in different countries, but many occupations, both high- and low-skilled. This is reflected in the data which shows that as the Great Recession unfolded in the US from September 2008, the growth in remittances to Mexico hit a ceiling, while that of the Philippines maintained its upward trajectory catching up with its North American counterpart towards the end of 2011.
As of October 2012, the nation’s gross international reserves reached a record high of $82 billion, 8% higher than it was a year ago at $75 billion. This would be enough to pay for close to a year’s worth of imports or settle half a year’s worth of debt resettlements. One can clearly see that without these foreign remittances, the gross international reserve position would be shrinking, not expanding. In fact, if you took away the growth in remittances which was 7.1% year-on-year from 2010 to 2011, then you probably wouldn’t have seen any growth in the Philippine economy during that time.
These dollar remittances inflows are roughly the size of the Philippine government’s tax and revenue intake for a year. They could finance the government’s annual deficit three times over. The recent upgrade to the country’s credit status to one notch below investment grade owes more to this phenomenon than to the government’s “fiscal consolidation” and “debt management program”.
In its recent report for the third quarter, the global investment monitor Thomas White has said
The Philippine economy is in a sweet spot mainly due to the high infrastructure spending the country has unleashed. Adding to this, strong remittance income from oversees Philippine workers, a fast-growing domestic services sector, and increasing confidence from foreign investors bolstered to the country’s buoyant economic outlook.
If you averaged out the growth for the last four quarters, you would find that it would be 4.85% , the same as its average growth for the last ten years. The confidence of foreign portfolio investors in the local stock market comes largely from the country’s ability to keep the economy chugging along as events from Europe have dampened the outlook for other countries. This was admitted to by a senior official of investment bank Goldman Sachs in a recent visit to Manila. The White report continues by saying
With the country’s government awarding $16 billion worth of contracts to build social infrastructure that included constructing thousands of classrooms, the outlook for the infrastructure industry has grown rosy. The construction sector posted a growth of 10% during the quarter up from the 7.6% registered during the first quarter. As public spending rose, employment outlook also improved during the quarter, boosting consumer demand. Household consumption jumped 1.4% during the quarter, up from the 0.9% during the first quarter.
Notice that they say it was the “outlook” on employment from the “infrastructure outlook” that boosted consumer demand. That is either a lot of faith placed on the outlook or it was a result of hard cash pouring in from Filipinos living and working overseas (UPDATE: note that the construction boom is happening because the property and realty sector is benefiting from remittances, and this has actually gotten some analysts worried about a possible housing bubble). The report concludes by saying
…Meanwhile, despite maintaining a record low interest rate of 3.75%, inflation in the country fell to a low of 3.6% in September from 3.8% in August. The central bank has targeted an inflation of 3% to 5% for 2013.
The BSP has in fact cut interest rates recently to temper the appreciation of the peso that has been hurting the competitiveness of our export industries. The situation has been described as reaching a breaking point by industry insiders. The power of the peso relative to the US dollar is what is behind the low inflation figures as imports become cheaper. The so-called “sweet spot” of high growth, better employment and low inflation can actually be explained by the continued growth of remittances rather than any privately-financed stimulus that has yet to be spent.
In his sponsorship speech of his version of the sin tax reform bill, Sen. Ralph Recto says that “a higher tax rate does not automatically result in higher collections” and will result in smuggling. Read more
In the discussion on inflation targeting, I agree that a less doctrinaire approach could look at longer-term inflation prospects, which are also dependent on exchange rate stability. Read more
there is an important link with other policy areas like capital account openness, due to the so-called impossible trinity. Read more
the levy on consumption is incorporated in a product’s price. Read more