What a one to two GDP percent point upgrade means for the country

Recently there have been a string of announcements by international multilateral agencies and the investor community with respect to the growth prospects of the country causing the political establishment to declare that the Philippines is back in business.

The president himself made this announcement as he marked his 100th day in office. Most analysts have revised the 2010 growth projects upwards by one to two percentage points from the previous 5-6% which were already revised from much lower figures to about 7-8%.

This has caused quite a stir as donor money (courtesy of the US State Department and the Millennium Challenge Corp), overseas remittances (courtesy of our long-suffering OFW community), and “hot money” (courtesy of foreign investment houses) all come flooding back in. The peso has appreciated and so has the stock market to an all-time high. The Bangko Sentral has indicated an easing of monetary policy as inflation subsides to the bottom of its targeted band. All this is the result of an expected growth in global trade as the world economy pulls itself out of recession.

But what does it all mean?

Given the size of our economy (8.8 trillion pesos according to the NSCB), a one to two percent point rise in our full year GNP would mean an extra 88 to 176 billion pesos flowing through or about 2-4 billion dollars. Given the size of our population of about 90 million, that amounts to an increase of nearly one to two thousand pesos per capita.

But then of course, that added income will not flow evenly throughout the population. Much of the growth will flow to the already rich sectors of the economy in the urban sectors. One might say, but then enough of it ought to “trickle down” to the lowly sectors in our rural communities as demand for their output would increase.

The record of wealth creation and poverty reduction in the country has been abysmal, so say the economists. From 1975 when the poverty incidence measured by a headcount ratio was 35%, poverty in the country declined to only 32% a decade later. It then subsided to 25% by 1995. Although this reflects at least a slow but steady decline, the poverty ratio in 2005 had returned to above 30%.

Meanwhile neighboring countries Malaysia and Thailand have almost reduced poverty to less than 5% based on the standard of a dollar a day as the minimum threshold. What accounts for this disparity? Well again, there the economists who love to whip out their regression models in order to identify “determining factors” will point to a slue of causes.

Anywhere from a lack of land and income equality, to poor access to the basic infrastructure that make rural economies productive (like irrigation), to the presence of political dynasties, and poor access to trade and world markets will be identified as the causes.

So shouldn’t the government step in and do something about it?

Well again, it will not be that easy. The government is already running deficits at close to its ceiling at over 3% of GDP. Recently, the Finance department had announced that collections were well below their target for where they ought to be. As a result, the government seems to have scaled back spending in order to keep its deficit figures in check.

If its taxation effort, the size of collections in proportion to the economy is maintained at between 12-14%, the jump in GDP would result in an extra 12-14 billion pesos worth of revenue for the government. That won’t be enough to bridge the fiscal gap of over 300 billion pesos, possibly not even the gap between what the government hopes to achieve and what it will achieve. On the upside, the appreciation of the peso does reduce the amount of interest the government has to pay for its borrowing. Suppose as a result of this, the government ends up more or less where it hopes to end up, that would just mean that it would be able to balance its books. Not much of an impact would be felt.

So the bottomline is: the revision of growth projections are always welcome, but let us not get carried away. Next year the global economy is expected to moderate somewhat from the expected recovery this year. One year of excellent performance won’t lift the masses from poverty. It will take consistent and competent governance to ensure that projects aimed at improving inclusion and access to public goods materialize. Let us hope the government is up to the challenge.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.