The Philippine Growth Spurt: will it last?

Image credit: NSCB.gov.ph

The latest release of GDP growth figures showed an upward growth spurt for the country. From a growth of 6.8 per cent for 2012 (revised up from initial estimates) to an unexpected year-on-year growth of 7.8 per cent in the first quarter of 2013, the numbers seem to provide both a strong signal to the world that the country now is back in business and a platform for the government to claim that its policy of pursuing clean, honest governance is paying off.

Having outpaced the growth of countries like China (7.7 per cent), Indonesia (6 per cent), Thailand (5.3 per cent) and Vietnam (4.9 per cent), and having done so on the back of an expansion of manufacturing and construction, has led some commentators to claim that the country has turned a corner or reached a “tipping point” from where it would now be on solid footing on a higher growth path.

There are only three things to point out here.

The first is the blindingly obvious: one quarter’s performance does not make up a trend. We cannot make any projections regarding future prospects based on this single observation. I would argue, not even the performance of the last 18 months proves anything. Remember 1997 when we thought we were about to take off? For those who were old enough to recall, remember what happened next? The same thing can be said of today’s situation.

Second is for us not to downplay the effect of the recently concluded elections. Malacañang has stated that this was an unusual GDP growth result for a non-presidential election year. You would expect them to say that, but the problem with their argument is the automation of elections, which makes campaigns more expensive by all accounts as cheating can no longer be achieved centrally at the provincial or municipal levels, as was the case prior to automation, but has to be done at the retail, grass roots level through vote buying.

We cannot discount the fact, particularly in this election which was dominated by entrenched political families, that money might have flowed massively unlike previous midterm elections. This would have meant that provincial and municipal incumbents hit the pork barrel pretty hard in the opening months of the year in a bid to prove to constituents that they were hard at work.

Government spending and construction growth were consistent with this view, along with financial intermediation, which again could have been linked to this. That does not necessarily mean that all this spending went to waste. It just means that a large component of the first quarter growth was seasonal in nature: determined as it was by the political-business cycle.

The third and final point I would make is that the Philippines becoming the fastest growing economy in the region is more about China decelerating than it catching up to China. The two are interlinked though. Let me explain.

During the last decade, China was the workshop of the world. It basically drained the swamp for ASEAN sucking in much of the foreign direct investments in manufacturing. During this time, the Philippines suffered a hollowing out of its industrial base, what little of it that it had.


At some point in this period, China’s income per capita overtook the Philippines’. Demographically, China also started to face the consequences of their one child policy as labour started becoming scarce as investments in China’s interior slowed the migration of workers out to the prosperous coastal regions.

The newly installed Chinese president has also indicated that the government would not sacrifice the environment in pursuing economic growth. Much social unrest now stems from pollution. They are seeking to transition the country away from its dependence on exports and investment. China has basically lost its cost competitiveness and will now have to grapple with the challenges of being a middle income economy.

Early this year, it was reported that inward foreign investments into ASEAN have for the first time equalled that of China. A structural realignment is now taking place. Bangladesh, Vietnam, Myanmar and Cambodia are now the new Chinas. The Philippines could perhaps be benefiting from this trend as well. It probably has less to do with what the government is doing, and more to do with external factors, as I have just mentioned.

All this now puts the onus on government, however, not to “muck things up”. Recall how it inadvertently pulled down growth back in 2011 when it pursued a de facto austerity policy? Let me take the opposing view now and say that this could be the start of a trend, a structural break in economic parlance. In that scenario the one thing that could potentially derail it is the “noise” that we create. Happily for the administration, it won a rare majority in the Senate and kept control of the house (assuming its alliances hold).

The mystery now is what it plans to do with that majority. The ball is in its court. If this sudden growth spurt is to be maintained, then for the next three years, the Aquino government will have to work hard to unclog the investment pipeline in infrastructure, skills and energy that are needed to power its economy through.

Will things like charter change, the proposed Bangsamoro autonomous region, territorial disputes with our neighbours or some completely unexpected Black Swan event throw us off course? That I suppose is the burning question of the day.

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.

  • ricelander

    Oh, I forgot. The jump in Competitiveness Ranking deserve an applause.

    • ricelander

      But is it true, we had that same ranking back in 2000, the same year Erap Estrada was being impeached for corruption?

  • ricelander

    Construction is obviously the biggest contributor to growth. Manufacturing grew but only meagerly compared to construction, so…

    Looking at the data it seems to be powered mostly by the private sector construction. So, what are being built? Hopefully, this will not lead into a bubble.

    Government Investment on Infra is always good growth provided it is properly planned and integrated with future development plans. Bridges and highways to nowhere could also provide higher GDP figures.

    The growth in manufacturing is nevertheless most welcome. What sort of manufacturing is growing by the way.

    I sense an anomaly. Imports is slowing down. How? We are an import dependent economy. Growth should be accompanied by a growing imports. Sometime ago, a top gun in the industry, Ramon Ang, I think, was claiming that smuggling is at 35% of all imports. The figure is probably exaggerated but as you know, smuggling understates Imports and therefore overstates balance of trade…

  • UPnnGrd

    On China losing its cost-competitiveness…. Lost to whom? Is Pilipinas labor cost now lower than China?

    • Emmanuel Doy Santos

      In Shenzen the minimum monthly wage was roughly $245 in January 2013. In Shanghai, it is roughly $237. This is comparable to the minimum wage set by the DOLE for the NCR for non-aggie work.

      http://www.china-briefing.com/news/2013/01/04/china-initiates-new-round-of-minimum-wage-increases.html

      • UPnnGrd

        I now have 3 factories in Guangdong working on my project. “Pilipinas as being competitive” did not even come to mind. Reason is more basic —- Pilipinas does not have the manufacturing capabilities that I need.

        • Emmanuel Doy Santos

          The chart in this article shows the relative wages in manufacturing comparing China, Thailand, the Philippines, Indonesia, Vietnam and Cambodia (declining in that order). http://www.piie.com/blogs/china/?p=2677

          • UPnnGrd

            Thanks for the link, Doy. I know that Vietnam has tilted its school curriculum for new high school and college grads to have more English fluency. (By the way… Morocco, Tunisia, other North Africa countries are doing the same). So they are targetting the call-center industry as well.

            Pilipinas should also not be surprised of Vietnam plans to upgrade its broadband network.

  • Joe America

    What a bucket load of cold water you throw upon Philippine economic achievements. It is a TREND that the Philippine economy continued strong growth as the rest of the world was being drained of wealth. That global wealth is starting to flow again, and the only question for the Philippines is “how far is up and how fast do we get there?” To me, China is an economic train wreck waiting to happen. She is no longer the low-cost provider (thanks for the cool chart showing that), she is struggling with feeding her billions without poisoning them, and her attitude toward her customers (the rest of Asia) is belligerent. In American slang, we have a name to describe such a nation: “loser”.

    • Emmanuel Doy Santos

      Our GDP growth figures have become such an object of fetish for our countrymen that each time we see a 7 in front of the numbers, it arouses our collective imagination such that a bucket of cold water to help us snap out of our fantasizing is required, Joe.

      Secondly, I failed to mention that our exports slumped as global demand for our number one export, semiconductors crashed. Our ability to weather the Great Recession infecting Europe and the US is due mainly to overseas remittances, which I have previously shown continued to grow during this period.

      Thirdly, you seem happy with the third point I make about China. Time will tell if this nascent revival in manufacturing will continue. That is the crucial test of “will it last”. The durability of this rebound will determine if the growth we see in the future produces jobs. Although, as I have also shown in this space, the number of jobs created per dollar invested in the industrial sector has been shrinking over time. That means we too suffer from the middle income trap, as China does.

  • cocoy

    I agree with you. A blip is not a trend. Though this is a very much welcome statistic, there are clear indicators like Global Competitiveness Reports, and Network Readiness Reports that haven’t blipped in the three years of PNoy. I hope it is the _start_ of great things to come for us all.