Use your coconut: Of investment gaps and how to fill them

The coconut serves as a good analogy for our under investment problem.

The five year Philippine Development Plan (aka “the Plan”) released by the government of President Aquino earlier this year identifies a number of “structural defects” underpinning the country’s poor economic performance. Depicting the problem was easy enough. Without a significant uptick in investments, inclusive growth will remain elusive and poverty will continue to hound us, so the Plan says.

Using an analogy inspired by Robinson Crusoe to grasp this, imagine living on an island where the only resource is the coconut and inhabitants keep arriving. The only way to feed a growing population is to plant more coconut trees. “Investing” in more trees requires hiring more laborers to climb them in order to harvest the coconut. Some coconuts could be consumed, while others could be traded for products from other islands.

The Philippines has lagged behind its Asian neighbors in investing, which explains why it is so poor. Exhibit A as provided by the Philippine Development Plan is reproduced here (see below). Since peaking at 25% in 1997, the country’s investment-to-GDP ratio has been steadily declining, underperforming Indonesia, Malaysia and Thailand. A familiar story for Philippine-watchers–we have all heard or read about this before.

Chart 1. Investment-to-GDP Ratios of Selected Asian Countries: 1994-2010 (in percent)

So what is the reason for this underinvestment? The answer given to us is a lack of competitiveness. The country’s lagging infrastructure, its poor governance and inadequate skill base are increasing the cost of doing business in the country. On the island for instance, a lack of tools to harvest coconuts, a lack of laborers with the skill at converting coconuts into useful products and a lack of boats to transport them offshore is the problem. Now what? Well, according to this narrative, massive infrastructure spending, improved governance and human capital development is warranted.

So beginning next year, the government will be bidding out four initial infrastructure projects amounting to twenty five billion pesos to improve infrastructure in the country. After a year of delays, the amount is about a quarter of what was originally slated. The projects include the construction and maintenance of three airports in Cebu, Bohol and Misamis Oriental and the ticketing system for Manila’s three light railways.

The government has also been busy this year fixing the internal procurement systems within the public works, agriculture and education departments. Much of the budgeted expenditures for this year was held back (a little over half of infrastructure budget as of September has not been spent) due to these efforts, but beginning next year, we are told, they should proceed much more smoothly. The DepEd also has a plan to close the gap in school buildings within the next five years mainly through build, lease transfer agreements with the private sector.

Assuming all these projects go ahead without further delay, we should expect the nation’s problems to be fixed in five years, right? Well, not exactly. One needs to get a sense of the scale of the problem first. This is why I did some very rough back-of-the-envelope calculations to determine the overall size of the employment and investment gaps. Using our island analogy it is like asking the question, how many coconut trees need to be planted to provide enough work for its growing number of inhabitants?

Climbing the coconut tree

Using data from 2005 to 2010, I tried to compute how much additional investments would be needed in the next five years to bring unemployment down from where it is currently at 7.4% to a more manageable level of say 4%. The country has about three million unemployed workers out of a total labor force of thirty-nine million in 2010. Each year about seven hundred thousand new entrants are added to this pool, which means a workforce of about forty-three million by 2016.

So for the country to produce jobs for all of these new entrants and reduce the pool of unemployed workers down to about 1.7 million consistent with an unemployment rate of 4% by 2016, about one million net new jobs need to be created each year. This is consistent with the government’s employment target. There is nothing new there.

The reason why we haven’t seen unemployment decline is because the number of net new jobs created each year is usually slightly below the number of new entrants (see Chart 2 below). Thus, the number of those unemployed steadily rises each year in proportion to the growing work force leaving the unemployment rate relatively stable at around 7.5%. The question now is how much additional investments have to be raised to bring this down to 4%.

Chart 2. Supply and Demand of New Jobs in the Philippines: 2006 to 2010

If one compares the average investments over the past five years of about one-and-a-half trillion pesos per year  (roughly 15% of GDP as shown in Chart 1–see preceding section) with the average number of net new jobs created of about seven hundred thousand per year, one arrives at a figure of about four hundred and fifty new jobs for every one billion pesos spent.

The number of jobs created per peso invested has actually been declining. Back in 1994, a billion pesos in today’s prices would produce about four times as many new jobs. This means that part of the problem has been the increase in productivity particularly in the manufacturing sector where technological progress has reduced the amount of workers required for any given level of output to be produced. In other words, new tools have been created that make climbing the coconut tree a lot easier. As a result, fewer workers are needed.

Assuming that the ratio of new jobs created per peso invested remains steady for the next five years, the amount of investments required to bring unemployment down is about two trillion pesos per year (20-25% of GDP, roughly where we were in the mid- to late-90s). Compared with the average amount of investment spending cited above, this would mean an increase of more than half a trillion pesos (close to six hundred billion) a year or an increase of about forty percent from the current base.

Had the government stuck to its original plan and rolled out a hundred billion pesos worth of projects and assuming an investment multiplier of two (which means a one-for-one additional investment in complementary projects amounting to two hundred billion in total), we would end up filling about a third of the required level of additional investments. Given its planned roll-out is now about a quarter of the original, we will only be achieving close to ten percent of the investment gap. In short, the “solution” does not seem anywhere near the required amount.

“The coconut nut is not a nut”

Here is another problem with the Plan: the assumption that improved competitiveness will steadily increase investments seems straight-forward, but reading the Global Competitiveness Report produced by the World Economic Forum, I find a few anomalies. The chart below shows the various country rankings from 2005 since the Report first came out until 2011 (click the play button).

The Competitiveness Index is a composite score made up of twelve components. These “twelve pillars” that hold up an economy cover things like institutions, macroeconomic policy, infrastructure, health, education, innovation and regulation. The Plan says that the “structural defects” in these pillars as shown by our declining ranking is the chief cause for our declining economy as measured by our investments-to-GDP ratio.

Our ranking has declined alright, but only because of the addition of more countries in the league table in the intervening years. Our score (which you can see by hovering the cursor over the appropriate column) on the competitiveness scale actually rose from 3.71 to 4.08 out of six during the period covered just above Indonesia’s score of 4.05 back in 2005.

Refering back to the first chart, it is clear that in 2008 when our score was actually 4.09, our investment-to-GDP ratio did not climb to anywhere near the level of Indonesia back in 2005. This is like saying two students who scored the same on their tests, did not receive the same final grade. There is an anomaly here.

One might argue that it is our ranking and not our score that counts, so that relative to our neighbors, our score continued to lag and that explains the poorer investment-to-GDP ratio. Makes sense if the grading of students is not based on their absolute scores, but on their relative rankings within the class, right?

Well then, according to that argument, Malaysia which ranked first among its neighbors in terms of competitiveness should have outperformed them in terms of its investments, but the first chart actually shows it slipping steadily below Indonesia and Thailand since 2002 and coming dangerously close to parity with the Philippines. In fact, Indonesia which has consistently come in third in the ratings and rankings of the four neighbors has steadily risen to outclass the Malaysian and Thai investment ratios by 2009 and 2010.

So perhaps, achieving “global competitiveness” is not what it is all “cracked up” to be. It would seem that some other dynamic is driving investments. As one song goes, “the coconut nut is not a nut.” This should give you a lot to think about, which gives me a few days to conclude this. Until then, let me leave you with this tune to fuel your ruminations…

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.

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  • J_ag

    Now that the EU has now been fortified through the Berlin Consensus and we are still blindly following the Washington Consensus can we start formulating the Philippine Consensus mindful of the weaknesses of the Philippine State? 

    How do we move from creating more real employment and incomes?

    • Use a crowbar to end a social economy that values favors higher than aspiration and capability.

      • Anonymous

        How ???   There are many tools to use…. a crowbar… a jackhammmer…   a 4-wheeler to pull…   an OV-10 to firebomb away…

        question that plagues and confuses PresiNoynoy seems to be “How????”  Evidence lately — he withheld funds because of “daang matuwid” to undo the ways chosen by guMac-Arroyo  as he signs a P5Million-check on a guMac-initiative for MILF.

        • Anonymous

          How?  What programs would you recommend for this administration to do?  Broadband-internet?  Environment-cum-flood-control?  Teaching teachers how to teach?

          PresiNoynoy “heard” the call to be President so as to deny GuMacArroyo a second term, and then he won.  Apparently… or so far…  (despite a few slogans about his strong support for FOI,  “10%- –TAX– making corporations distribute 10%-of-profits to labor” and ReproHealth). apparently the GuMacArroyo-issue is all PresiNoynoy had.  Pinas really needs to put GuMacArroyo in jail  if only so PresiNoynoy can take foot off the brakes and the State can continue with governance with regards infrastructure-and-Keynes,  job-creation for Pinoys-in-Pinas,  arresting Pilipinas embarassing continued descent as Sick Man of Asia with issues of media-human-rights killings, Human-Development-Index  and Pilipinas unable to grow the number of middle-class-households, and not to forget other “pocket-interest-groups” asking for Broadband-Internet and the oft-repeated calls — more!! more teachers more classrooms/desks/books more buildings for elementary- and secondary-public schools  and that very cunning message about “We’re willing to pay more in taxes but only AFTER Pinas has plugged the leakages!!”.

      • How? Keep on writing. People are a lot wiser today than five years ago.

  • J_ag

    A lesson for the Philippines—

    Political brinkmanship on policy issues at its finest in Greece..  

    http://www.bloomberg.com/news/2011-11-04/papandreou-is-prepared-to-step-aside-if-he-wins-confidence-vote-in-greece.html

    Let us talk policy shall we? 

  • J_ag

    Is it lack of competitiveness or a lack of productivity. Which is the cause and which is the effect? 

    Modern societies must first have the capacity to be productive.  The essential items that are called public goods; credit, roads,schools,hospitals, ports, airports, utilities to include the digital highway are essential prerequisites. Before the delivery aspect of these public goods must come the country’s capacity to produce, build and install  them…

    Where is the State in all the equation?

  • J_ag

    This is off topic but has a lot of relevance of the Philippines… Bravo to the Greek government for finally getting the spine.  Let the people of Greece decide on whether they want out or continue to be part of the Eurozone. 

    They are after all using a foreign currency. The minute they default on their debt to the private sector their debt to the IMF and the ECB will also have to be discounted. 

    Will wonders never cease? How will  the people of Greece decide on two different types of austerity? One imposed from outside or one imposed by themselves. I think the latter would be better. 

    The country that brought us demos kratin is showing the world how to go about their business.  Politics by the people…  Bravo!!!!

    • ahahahahahahaha.  Leadership by the lowest common denominator. I vote for Germany acquiring Greece.

      • J_ag

        Fear is a great organizing tool. Watch out what comes next in Greece in the form of the new leader. The Germans have reverted true to form and in the long term will suffer for it. 

        Now it will be Spain and Italy’s turn and then eventually the contagion will reach France and Germany. The ECB itself will implode!!

    • Hehehehe, J_ag, looks like from the latest, the Greek government lost the spine again, :).

      • J_ag

        Looks like the Greek Prime Minister was playing chicken with his own party. He got the opposition party to declare that they will vote for the package. Now his party wants him replaced. 

        But the damage has been done… A core member of the Eurozone is now in the cross hairs of the markets. The common denominator for all EU economies is the rapidly shrinking growth rates for the EU. Cutting spending and raising taxes will make the sovereign debt situation worse.  In the end even Germany will be affected since its growth will shrink even more as its main market is still the EU.

        Sometimes countries like the Philippines are lucky to be underdeveloped and will not suffer much… 

  • Anonymous

    A particular metric has now gotten more press — the metric is “percent-middle-class”  number of households of total-middle-class-income divided by total number of households.    Now very quickly Pilipinas has been a sickening laggard with this index, too  (and the banana republics of Latin America have outclassed us).  

    This (percent-middle-class)  is a good index (in my opinion), is close to GINI,  and can be achieved either by a Pol Pot flattening the top or  by jobs-jobs-jobs ( less via OFW-ism) but by jobs-for-Pinoys-in-Pilipinas.

    “supra-heavy” jobs like CGI-programmers, arbitrageurs  or good-enough-to-be-a-West-End/London singer  will be welcome but for the next seven generations, Pilipinas cannot accomodate enough of them.  Easier to create, one would think, would be low-middle-class and middle-middle-class jobs, to include  road construction/ditch-digger jobs, barbers-hairdressers-tailors  shawarma-restaurant-owners  teachers komadronas etc.  Now, quick—- answer this one — have you ever seen a GuLorYa-Arroyo program then (or a Presi-Noynoy program now) that is targetting the creation of low-middle-class jobs?

    When most everybody works   —- woulnd’t it be nice?

  • The more relevant important questions would be: Are there enough coconut seedlings available and ready for planting? As we all know, it takes time for a coconut to sprout and be ready for planting as seedling. After planting the seedlings it will take much, much longer time for a coconut to be productive. So, back to the question: Where are the seedlings? Do we really expect the coconuts to be productive in Pres. Noynoy’s remaining five years sufficient enough and equal to the growth and needs of the population? I think not. 

  • GabbyD

    i really wonder about that global competitiveness index. there doesnt seem to be alot of change in a country’s score over time. the change in ranks over time seem to be due to additions in the number of countries.

    • cocoy

      I agree with President Aquino that there are structural defects, and agree with his plan to fix things regarding his anti corruption stance and his approach to beginning to fix philippine education.  

      That said, I also agree with Doy that we can’t stop there, and there should be investment in infrastructure.  And there is a HUGE absence in investing.  One notable absence and this I think will bite us in the behind years down the road is the lack of any coherent strategy with regard to Philippine Internet. There is 1) no PPP project that is engaging this front. 2) Government doesn’t seem to be interested in laying down policy for a Philippine Internet strategy. 

      • Yes, interesting point about the internet, which seems to be conceded to the Phone companies. It isn’t even looked at as critical infrastructure.

        Like, that’s also why my credit cards only work in 1 store out of 100. Low tech approach to high tech.

        I think too much investment goes to low value projects like farm to market roads, supporting the low-return subsistence farming industry and, of course, local elections.