Defying Gravity

Faltering growth prospects for the economy and paralysis over how to kick-start big infrastructure projects do not seem to have dampened public support for the president.

Its economic managers remain fixated on ‘fiscal consolidation’ (a euphemism for shrinking public works expenditures to close the fiscal gap) as its roll-out of PPP (public-private partnerships) hits yet another snag with a new ‘review’ announced by the government. The confusion over how to proceed with its centerpiece program demonstrates how that it entered office armed only with platitudes and no real plan.

Yet even as punters from multilateral institutions, ratings agencies and think tanks alike place a down-side risk to the country’s growth prospects, the poll numbers of the president have headed upward. This strange phenomenon needs some explaining. How has P-Noy been able to defy gravity with his public approval ratings?

Some would point to his campaign against corruption as the source of such levitation. Yet, the same reason was given when his poll numbers were slipping early this year. The explanation was that as the public became familiar with so much corruption occuring in high places their faith in government collapsed. So why is the opposite happening now?

Perhaps it is because previously the pursuit of justice seemed to be going nowhere; whereas now, with the help of a few unexpected whistle-blowers, it seems to be heading in the right direction. That is one plausible explanation.

Another comes from the notion that growth and development do not necessarily go together and that despite sinking growth figures, the government has attended to the material needs of the populace through such programs as the CCT or conditional cash transfers.

Indeed one can characterize the government of P-Noy as following the script laid out by the Washington Consensus of promoting macroeconomic stability (to the detriment of growth) while providing social safety nets (to buy-off public support) and pursuing good governance (despite setbacks in providing public infrastructure).

In fact, some are pressing P-Noy to take advantage of his high popularity to pursue charter change and maximize the liberalization agenda by opening up the remaining sectors of the economy reserved for local participation and ownership. No less than the leaders of both the Senate and the House concur in this. As I pointed out in a previous post, the president is right to be a little wary of this move (although his reasons may differ from mine).

Others would have him go the other way and review the existing liberal trade and investment policies that have been in place for the last three decades as the country’s manufacturing and exports base suffers from a strong peso and seems highly concentrated within a few sectors, import dependent, and without much depth.

The PPP conundrum is emblematic of this confusion. P-Noy’s government started out with complete faith in private markets to ‘get prices right’, but it seems to be coming around to Sec Roxas’ belief that the public sector can do better. His proposal for the state to finance and build the projects itself, and then sell them off to the highest bidders to operate and manage would be a complete turnaround from the president’s previous position.

The idea behind Mr Roxas’ plan is that to get the ‘right price’ the government should use its access to cheap capital that is not available to private firms. That makes perfectly good sense, but the problem with his proposal is that government has not been known to be an efficient producer of public works projects. This could wind-up making the government penny-wise, pound foolish in the end.

A third way was actually proposed by me in another earlier post. The idea would be for the government to access cheap capital and create a fund that would either partner or loan these out to projects for either infrastructure or regional development needs. This would allow the cost of financing and construction to be lowered by leveraging the advantages of both public and private institutions achieving the best of both worlds.

This approach I must admit is hardly original. It was applied by South Korea in promoting industrial development through partnering with the private sector during its fast growth phase of development (see Alice Amsden’s book Asia’s Next Giant). The emergence of light and heavy import substituting industries which supplied export-oriented manufactures owed much to this strategy.

The economic bureaucracy there was a master at engaging in entrepreneurial self-discovery by importing licenses to operate foreign technology and then auctioning them off to private firms while at the same time providing them with sovereign guarantees and cheap project financing (I recommended a similar approach through an innovation fund which the government could create by borrowing some of the excess dollar reserves of the Bangko Sentral).

Indeed the government cannot live on macroeconomic stability and social insurance alone. For its growth trajectory to shift upwards, it will need to have a credible employment and industry strategy. Its PPP program was touted in P-Noy’s first state of the nation address as the vehicle for achieving this. In addition, the government will need to foster innovation and investment.

Let us hope that the administation finally gets to find a set of workable arrangements to get its pipeline of projects off the ground. Defying gravity with its poll numbers is one thing the government can do at the moment, but keeping developmental projects suspended in the air is something the nation simply cannot afford.

UPDATE:

DOTC Sec Roxas’ recent announcement of a five year plan involving 380 or 426 billion pesos (depending on which paper you read, the PDI or Business Mirror respectively) sheds more light on the new policy direction.

Essentially, a couple of things came out of the press release. The first is that aside from the PPP vehicle the government will be entertaining other conventional ways of financing infrastructure projects including overseas development assistance, foreign loans and items in the national budget. The second is that the Chinese contract to construct the NAIA to Pampanga rail line has now been superseded by a fast-rail project which will extend to Clark instead of Mabalacat.

These two moves by Mr Roxas clearly indicate a stronger more interventionist role for the state on offer from the one originally envisioned by the president. While P-Noy was only interested in handing infrastructure projects to the private sector, standing back and watching it work its magic, the DOTC secretary is willing to roll-up his sleeves and seek a better bargain or boot out in this case a poorly performing contractor to deliver a much better outcome.

His promise of a scorecard for his 5-year plan underscores the managerialist aspect of his approach to strategic projects in contrast to the laissez faire attitude of the president. The 90 billion a year average spend represents almost 1% of annual GDP. If he is able to roll this out on time, it will help provide a much needed stimulus to the economy at a time when the global economy goes through an adjustment to slower growth.

It makes me wonder what his rival Vice Pres Jojo Binay will now seek to do in order to outshine Mr Roxas. Will he adopt the proposal of Councilor Lagman of Quezon City and push for a 1% real property national tax as proposed by some fiscal experts to fund a national social housing program? Will he push for the creation of a housing department? Time will tell.

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.

  • This in a way is about the difficulties of proving a counter factual. We know what the GDP growth rate would have been had the government adhered to its own national expenditure program. But, can we prove there would have been corruption if it had? That seems to be the justification for withholding it according to the apologists. It in essence was a tacit admission that they could not control corruption and that they could only resort to “starving the Leviathan state”.

  • Joe America

    Every president’s poll numbers fade when the practical results of well-intended policy offend someone sometime. In on a halo, down on reality.

  • I believed this has nothing to do with gravity.  

    As long as government don’t pick the pocket of the people the people will let government do its job of governance peacefully and the people will do its own business of living peacefully and harmoniously with government. Simple as that.The Filipino people is an intelligent people, and tolerant to a certain limit. They will give the new government all the leeway and all the chances, and the time to prove itself.The people trusts Noynoy and Noynoy’s government. It is imperative that President Noynoy do not lose that trust. His credibility must remain impeccable or else he will lose that trust.

    • Anonymous

      In the last Presidential elections,  then Senator Aquino won by obtaining 54% of the votes.   I wonder if this “…the people trusts Noynoy and Noynoy’s government” mean he’ll still get the 54% if the elections were held today, especially after Noynoy’s performance with EO-1, the Buendia Avenue bombing and when there is sustained media-exposure that Noynoy admin cancelled flood-control contracts that probably would have lessened flooding deaths from Pedring.

      • If the election were held today?  And with opponents the likes of Villar, or Gibo, or Edcel Lagman, or Raul Lambino, or Angara, or Manny Pacquiao?

        Way, way higher!