Real Economic Growth

The halo effect

image courtesy of listverse.com

The halo effect is a cognitive bias first studied by Edward Thorndike in 1920 whereby the perception of one trait (i.e. a characteristic of a person or object) is influenced by the perception of another trait (or several traits) of that person or object. An example would be judging a good-looking person as more intelligent or believing a politician’s policies are good, just because the person appears good.

In the case of President Aquino and his high public satisfaction ratings, there seems to be a substantial amount of this effect taking place. The general impression of P-Noy is that he is honest. This comes from being who he is, the only son of two national heroes. This has translated into very positive sentiment towards the actions taken by the government under his watch.

Part of this has to do with the anti-GMA sentiment or the reverse halo effect. So pursuing cases against his predecessor is seen to be the legitimate thing to do, and rightly so, given the shenanigans that her administration was accused of. It also ties in with the president’s retraction and review of contracts and projects already approved for fear that they would somehow benefit her proxies within certain departments and sub-contracting firms.

But if you look at the outcome of these actions, it becomes immediately apparent, leaving our cognitive biases aside, that the positive evaluations given to P-Noy by the public are probably unjustified.

First of all, with respect to the way in which his justice department has gone after Mrs Arroyo, certain questionable legal manoeuvres have actually undermined the rule of law rather than upheld it. And secondly, with regards to the handling of the economy, the third quarter GDP figures clearly show that the overly cautious due diligence performed on public contracts undermined economic growth rather than encouraged it.

On the first point, I am referring to the use of a joint panel composed of the Department of Justice and the Commission on Elections that investigated allegations of vote rigging in the 2007 elections. This is said to have been anomalous in that a supposedly independent constitutional body such as the COMELEC is not meant to be seen as partial or collaborating with the administration in any way. Also, when their joint findings were published, it took a judge a few hours to read their eight ring-binder document and issue an indictment on Mrs Arroyo.

The undue haste with which such decisions were reached coming on the back of a temporary restraining order issued by the Supreme Court on the hold departure order issued by the DOJ on Mrs Arroyo that was “in effect” despite the dissenting opinion of some justices makes it highly likely that politics rather than due process was observed. This TRO was issued because the legality of the DOJ’s hold order was questionable to begin with.

Had these actions been undertaken by Mrs Arroyo while she was running the country, the protests from civil society regarding the “creeping authoritarian” nature of her government would have occupied public discourse. But because it was attempted by the meek and mild administration of the “benign one” there does not seem to be the same level of public indignation, although the result is the same—if upheld, it would grant vast powers to the state to curtail individual freedoms.

If we turn to the second point, on economic governance, the promised economic take-off billed as a public-private partnership by the president did not take place. Instead the economic deceleration has been rather remarkable in a region that is seeing quite robust growth despite the downturn in Europe and the US. The government which was prepared to take the credit for positive growth in agricultural output in the first half when early rains produced a bumper crop is now shifting the blame for poor production on storms both natural and man-made.

Public construction continued to show weakness despite the government’s promise to fast-track the roll-out of resources in response to the slump in the first half. Even with the announcement of a “stimulus” to deal with the effects of the EU debt crisis, there still appears to be little traction on this front. All hopes are pinned on the fourth quarter, but as the country’s chief statistician has pointed out, to attain even the lower end of the government’s modest growth target range for the full year, the economy would have to expand at a pace rarely seen.

In attributing the weak economic performance registered this year, there are certain factors that lie outside the government’s control (storms and financial crises overseas) which have to be acknowledged, but a portion of it definitely lies within its sphere of influence (public construction spending). It is clear that external factors did dampen growth, but the government’s action or inactions dampened it even further.

Again, had this occurred under Mrs Arroyo, the government would have been pummelled. Hounded by questions of legitimacy, it was her economic credentials that proved her only saving grace. Now that the government is run by someone whose electoral mandate is unquestioned, his now sullied economic credentials don’t seem to be much of a problem.

To counter the cognitive bias associated with the halo effect on the part of an evaluator, “blind-fold” tests or blind experiments are often administered where the person rates a product based on its actual attributes or performance, not on the subject’s perceived reputation. Respondents are often surprised with the results when they remove their blindfolds. I wonder what would happen if a poll was conducted that used the same principle in evaluating the performance of our presidents.

If faced only with the indicators of success and not the name of the person being rated, what marks would be given this president? What the government under him did this year countered its aims of fostering good government, rule of law and economic growth, but somehow its acts of commission and omission get glossed over and given a positive spin. Not only that, but the public by and large is willing to accept the message given them that all is well. So it seems the halo effect can cover a multitude of sins.

Towards a Strategic Development Road Map (Update)

The following is a matrix of the Strategies contained in the government’s Philippine Development Plan 2011-16  plotted against the five key results areas under the Cabinet Cluster system of the Aquino Cabinet.

The five themes include: 1) Good Governance and Anti-Corruption, 2) Human Development and Poverty Reduction, 3) Economic Development, 4) Security, Justice and Peace, and 5) Climate Change, Adaptation and Mitigation. This was contained in Executive Order 43: Pursuing our Social Contract with the Filipino People Through the Reorganization of the Cabinet Clusters.

The strategies under each theme were taken from the Philippine Development Plan 2011-16. In some cases, the actual targets were contained in it or some other announcement such as the renewable energy target. Some targets we are actually proposing here based on the intent of the PDP and other statements by the government. Some targets remain ambiguous or require quantification, but at least a measurement indicator is identified here.

This should form the basis for a periodic review of the government’s progress in meeting its official development plan and agenda. In the future, we will be revisiting these targets to hold this government to account. Comments on the construction of the matrix are quite welcome. Feel free to point out things that are missing or need to be revised.

Scorecard of Social Contract and Philippine Development Plan 2011-16 Targets

UPDATE:

Good governance targets

I chose to go with the World Bank’s Good Governance indicators because the government has adopted its whole philosophy of economic development from the Washington Consensus. It is only but fitting that it should benchmark itself against the indicators set by this Washington-based institution.

In setting the targets for the nation, I had to benchmark our rating with our East Asian neighbors. For instance under control of corruption, the Philippines and Indonesia were at 27.1 and 28.1 respectively, China and Vietnam were at 36.2 and 36.7, Thailand was at 51, and Malaysia was at 58.1 back in 2009. Hong Kong and Singapore were in the 90s.

It is only but fitting that we try to break into the range of Thailand and Malaysia. So I said we need to be achieving above 50%. I used a similar approach with the other indicators in this area.

Human Development and Poverty Reduction

Most of the targets found here were lifted from the government’s plan. The only target which I had to set on my own was the HDI target. To do this I simply projected the current trend from 2005 to 2010.  The target of reaching a 0.65 value for HDI means we would catch up to where Thailand and Sri Lanka were back in 2010.

All the other targets dealing with poverty reduction, literacy, land reform and distribution, Pantawid Pamilya recipients, housing and reaching the MDG targets were all based on official published documents by the government.

Economic Development

Most of the targets came from official published documents by the government. The only targets where I took the liberty of setting were the fiscal spending targets, but even there I took the policy pronouncements contained in the PDP into account.

For example, the PDP stated that its Medium Term Expenditure goal was to “substantially increase productive expenditures and catch up with the accumulated deficits in these areas.” It also noted that in 2007, the average expenditure on education among our Asian neighbors was 3.9% of GDP. To “catch-up” and make up for our accumulated deficits, we would need to at least match that spending, which is reflected in the target.

Aside from education, the PDP also made mention of our infrastructure spending which is woefully inadequate when compared with that of China, Vietnam, and Thailand which spent upwards of 7, 8 and 14% of GDP over the last decade. The 5% target was based on the World Bank’s recommended level for a middle income country such as ours. In other words, it was a modest but reasonable target in light of our regional peers’ spending.

The targets for achieving higher rankings in the World Economic Forum’s Global Competitiveness and World Bank’s Ease of Doing Business reports are self-explanatory. You can see by reading their most recent editions the countries in whose proximity we would be landing if we achieved the targets.

The consumer welfare and agricultural productivity targets are yet undefined and merit further discussion.

Security, Justice and Peace

The target for achieving political stability was arrived at similar to the other good governance targets already discussed above. The defense modernization target assumes that the government has a revised plan for this and will be working towards achieving 100% of it by the end of its term. Finally, the press freedom strategy and target, I had to personally add given the silence of the PDP on it. I based this on PNoy’s policy pronouncements at an AFP conference call. I further believe the Human Rights Commission should seek to publish official statistics in the area so that we can aim to bring that figure down.

Climate Change, Adaptation and Mitigation

The targets for reducing environmental damage and casualties are yet undefined but flow directly from the strategies outlined in the PDP. The rest of the targets contained here are from official published statements by the government, including the renewable energy target.

Why the Need for a Scorecard?

It has been nearly three months since the cabinet reorganization was announced, and yet it seems no further developments were made towards fleshing out the social contract in terms of major strategies and targets, which the EO that created it envisioned.

That is the reason why we have taken this bold step towards developing this strategic development road map. Of course, nothing would please us more than to see the government announce something similar. When it does, we will be sure to revise the document to reflect it.

The Propinoy Project began as an attempt to hold the government to account for its electoral promises. Now that the government has officially laid down its official policies and plan for its term, it is but fitting that we assess its future performance against its own targets with objective baselines and independent and reliable sources.

This matrix as detailed as it is cannot capture the complexities at the implementation or operational level. We leave that to the community service organizations who are partnered with various agencies to monitor. At least at the strategic level we can look at this scorecard to assess whether the government is doing the right things (and doing them right!) at the operational level to achieve its strategic goals.

How Sri Lanka Overtook the Philippines

It is a continuing expression of the financial market’s faith in the story of poor countries catching up with richer ones propelled by economically liberal policies. Read more

Sen. Kiko Pangilinan's 12 Christmas wishes for our country and our leader. What's yours?

PNoy’s ally in the Senate, Sen. Francis “Kiko” Pangilinan, lists down yesterday, December 19, his 12 wishes for President Benigno Aquino III and for the country. First on Sen. Kiko’s list is for the peace talks in Mindanao to start, followed by a hope for a new image in the Philippine tourism industry. As what was expected, the most talked about wish among the 12 is the Senator’s 4th wish; “A girlfriend for PNoy.” Below is Sen. Kiko Pangilinan’s complete wish list this coming Christmas. Care to share yours? Read more

Survey says, 'it's the economy, stupid!'

The latest polling by Pulse Asia on the Performance Rating of the Top 5 Government Officials and Selected Cabinet Members and Other Government Officials shows the administration of PNoy still enjoying tremendous public support. The survey which was conducted from October 20-29, 2010 cemented the impression provided by the SWS national survey which was held from September 24-27, 2010 that PNoy’s ratings have almost returned to their previous highs right after the election.

It is perhaps worthwhile recalling why such trust ratings are important. Trust is a measure of social cohesion, which when it breaks down, makes the business of governing all the more difficult. It is important over the coming years for PNoy’s trust ratings to rub-off on the government itself. When people trust their government, they are more willing to pay their taxes correctly. There is a greater level of civic participation and involvement when trust and social cohesion are present. Without these, gridlock and polarization result as what we witnessed in the aftermath of the US mid-term elections. Read more

Snap, Crackle, Pop!

The media and blogosphere may have been mindlessly harping on the fumbling errors and bumbling missteps committed by the current administration of PNoy over the past six months in its first year in office, but the mood of the public and the markets seems to have taken it all in stride.

As latest polling by SWS reveals, PNoy and his policies continue to enjoy unprecedented confidence levels from the public. This exuberrant satisfaction is mirrored by the investor community which has driven the local bourse to all time highs following the normal transfer of power from one administration to the next during the middle of the year.

Despite its fiscal woes, the government very recently finds itself situated at a very auspicious moment in which it is able to borrow at very favorable terms. Its treasury issuance last month was oversubscribed four times leading to extremely low borrowing rates of just over three quarters of a percent for its 90-day treasury bill, nearly half what it was the previous month.

This makes it not far off from the yields of similar notes issued by the US Treasury and that of the UK, Eurozone and Japan! The governments of the struggling PIIGS economies of Portugal, Iceland, Ireland, Greece and Spain are having a much harder time raising funds to bridge their fiscal gaps having resorted to the IMF for credit while the Philippines exited from that program back in 2006 having paid all of its debts to the Fund in full.

With stellar economic growth predicted to hover around 6-7% per annum and a relatively benign inflation outlook predicted to continue over the next few years, the country is poised to take-off along with other emerging economies. The next decade could see the nation address some fundamental problems like infrastructure bottlenecks and social inequity if the government plays its cards right. Already the Gini coefficient a measure of income inequality reached its lowest point for quite some time.

What many will find most remarkable in all this is that there have hardly been any changes made to the socio-economic policy settings left behind by the previous administration despite all the campaign rhetoric about change. It could be seen as an acknowledgement that many of these settings prepared the conditions now evident for better times ahead.

As proof of this consider the following: the Conditional Cash Transfers program initiated in 2008 (CCT) is being expanded, the RH bill, which was drafted and vigorously pushed for in the previous Congress by the now leader of the opposition in the lower house and ally of the former president, is being supported, and reforms in education, training, research and development are continuing.

“Normalcy” restored

The boost in confidence has occurred because of the observance of the rule of law during and after the elections which led to a credible outcome. The political transition and stability this engendered has restored the notion of the Philippines as a “normal” state once again. The same transformation of perception occurred previously in Indonesia that led to it attaining G20 status (its recent setbacks notwithstanding).

Problems of corruption and conflict will still linger, but as was shown during the 90s under the Ramos administration, they can be tempered for as long as growth with equity is pursued (it should be noted here that it was during that previous period of expansion that poverty incidence as measured by the share of the poor to the overall population, fell to its lowest point since records were kept, and the country became relatively peaceful as a result, despite the fact that the poverty headcount, or the number of poor individuals kept rising-just not as fast as the rate at which the overall population grew, proving the point that equity is important).

What is crucial over the next six years is for the observance of good governance and the “market for rules” to be enforced. As demonstrated by two previous administrations, it is quite possible for political corruption and influence peddling to co-exist with an open market economy despite the enactment of “world-class” procurement laws and the application of electronic/automated processes in awarding government contracts.

The roll out of the PPP contracts beginning next year will be a litmus test as to whether the government can enter into such agreements without anomalous transactions occurring on the side. Another one will be the ongoing campaign to lift the tax take of the country which has not been buoyed by the recent recovery in economic activity.

With these key planks in place, the government will have sufficient funds to resource reforms in social policy arenas. Without them, an overall tax hike could loom as a distinct possibility which would threaten social cohesion particularly if an increase to the regressive VAT rate is pushed.

As the year draws to a close, it is worth considering the journey the country has taken. At the start of the year, there were doubts as to whether we would be faced with a doomsday scenario come election day. There were talks of civil unrest and military adventurism following a no-election or no-proclamation scenario.

At the close of the year, the country’s financial, economic and dare I say social outlook could not end at a brighter note. Indeed there is much cause to celebrate as the prospect for an economy that crackles and pops as opposed to one that merely sizzles but fizzles takes shape.

A double edged sword

A news bulletin was released earlier this week with very little fanfare on the latest round of results for the Family Income and Expenditure Survey (or FIES). It showed that between 2006 and 2009, there was an improvement in the overall incomes, savings and expenditures of families on average and a reduction of income disparities between the wealthiest and poorest of households.

Prof Winnie Monsod of the UP School of Economics attributes this to a sustained period of economic growth peaking at 7% in 2007, the longest and highest rate over the past 30 years. Augusto Santos of NEDA on the other hand credits the conditional cash transfers program initiated by the previous government in 2008 as one of the policy interventions that could have led to this outcome.

All this would have served the Arroyo regime well had it been reported prior to or during the last presidential election, when it was seeking a mandate for its anointed successor. Its economic credentials were tarnished by reports of poverty incidence worsening between 2003 and 2006 contrary to what you would expect following a period of sustained economic expansion under her stewardship.

Of course one could argue that the increase in the VAT rate in 2005 from 10-12% which while regressive was also deemed necessary to avert a fiscal crisis caused all the grief. Government planners then quickly realized that the fiscal space they created had to be used to counter the harsh impact of higher taxes on the most vulnerable. This is what led to many of the socially targeted interventions including the Conditional Cash Transfers program (or CCT) and the infrastructure plan that followed. It now appears that they got it right although hardly anyone will trumpet these successes now.

All this points to the problems associated with time lags in measuring and reporting social and economic indicators for the purpose of crafting public policy. Data gathering always comes at a cost, but without frequent and timely reporting, policymakers are practically flying blind not knowing what impact if any their programs are having on the ground. It may not suit PNoy’s government to acknowledge the policy successes of its predecessor and arch-nemesis in the house, but it can also serve its purpose given that it is pushing for the expansion of the CCT and infrastructure through the PPPs.

According to Prof Monsod, the Gini coefficient for 2009 which reflects income inequality is “the lowest it’s ever been as far as I can remember.” If that is the case then it could account for improvements in the mood of the people as reported by some public surveys (the science of happiness suggests there is a causal link between income equality and happiness). It would also point to the importance of maintaining the momentum for growth through investments in public infrastructure as well as social policies that reduce income disparity like the CCT.

Agrarian reform which has a spotty record globally was an attempt to correct poverty and social inequality through asset distribution. That has proved difficult to implement in the Philippines. Now the CCT and other social programs like improving education and health are attempting to do it through income and human capital distribution.

If the policy settings of the previous government were effective in bringing about an improvement in economic and social well-being, then it would be a sign of maturity for all parties to come together now and work towards expanding them in a responsible manner. Enough with the bickering: it is time for a development consensus to be formed about the way forward.

Forum cites development tasks

Forum cites development tasks
BusinessWorld Online

ASIA is now increasingly the focus of growth in the world, but individual economies like the Philippines and similarly less developed markets have to identify sectors that need support in order to boost their competitiveness, experts said at a forum yesterday in the Asian Institute of Management in Makati City.

In her presentation, Suzanne Rosselet, deputy director of the International Institute for Management Development World Competitiveness Center, noted that Asia’s population will hit 5.26 billion by 2050, compared to Africa’s 1.77 billion, the European Union’s 628 million and the United States’ 447 million.

“This pretty much sums up where the long-term growth will be. [It] will be in Asia,” she said.

In the Philippines, she said, the government needs to focus on supporting small- and medium-scale enterprises (SMEs) and services, which have been an engine of growth.

She added that “there has to be job creation for young people moving into the workforce.”

David Jay Green, a fellow of the Asian Development Bank-Asian Institute of Management Knowledge Hub for Trade and Investment, noted that within the Association of Southeast Asian Nations (ASEAN) are pockets of less developed clusters like that of the otherwise resource-rich sub-region grouped into the Brunei Darussalam-Indonesia-Malaysia-Philippines-East ASEAN Growth Area (BIMP-EAGA).

He noted this group, which was formally established in 1984, was formed precisely to enable the less developed component areas to pool resources and efforts to help them catch up with more developed urban areas in the same countries. The Philippine components of BIMP-EAGA are Palawan and Mindanao.

Experts have prescribed increasing trade and other economic ties within Asia, as demand recovery in the US and Europe remains sluggish.

But Mr. Green stressed the need to further streamline trade processes within BIMP-EAGA if it is to live up to expectations as a driver of growth in Southeast Asia.

This, in turn, requires more efficient government operations, better infrastructure and “connectivity policies” — all of which will facilitate the transport of goods and trade in services.

“It’s a whole series of things that has to be done to encourage the business environment, trading environment and the ability of people to invest in their own country,” Mr. Green said.

Sought for comment, Augusto B. Santos, deputy director general of the National Economic and Development Authority, said the government has been finding ways to provide cheap loans to SMEs, help localities focus on a few products and services they can excel in, and is poised to embark on an infrastructure buildup under public-private partnerships in order to lay the groundwork for sustained, faster growth. — JJAC

Aquino gov't aims to reduce deficit-to-GDP to 2%

Aquino gov’t aims to reduce deficit-to-GDP to 2%
By Lala Rimando
abs-cbnNEWS.com

MANILA, Philippines – The Aquino administration wants to bring down the country’s budget deficit to 2% of gross domestic product (GDP) in the next 3 years, Budget Secretary Florencio Abad said Thursday.

The budget shortfall is forecast to reach P325 billion or 3.9% of GDP this year.

“We want to bring down deficit-to-GDP ratio to 2% starting 2013 from 3.9% now,” Abad told reporters at the sidelines of the Public-Private Partnership Conference in Pasay City.

“We are making renewed commitment to fiscal responsibility,” he added.

The deficit hit P259.8 billion in the first 9 months, already 80% of the 2010 ceiling.

Abad said the budget gap will not exceed the full-year target as the government tightens spending and shores up revenue collection.

“We will make sure that deficit will be within or below the P325-billion target,” he said.

The Aquino government, who took office in June, earlier said it would improve revenues by enforcing existing tax laws and cracking down on tax evasion and smuggling.

The Quest for an Elusive Development Framework

After unveiling his strategy for unblocking investments in public infrastructure, the policy statement of PNoy was drawing flak from all sides. The statement concerned his proposed method for mitigating regulatory risk which was to compensate private investors for any losses caused by legal or congressional action preventing them from charging fees in accordance with their agreements with the government.

This was the statement of Rep Edcel Lagman leader of the opposition in the house:

Government contracts are not inordinately sacrosanct so as to be immune from judicial review by the Supreme Court and police power legislation by the Congress. It is beyond presidential prerogative to shield contracts from final court judgments and valid legislative enactments.

Recalling perhaps the power purchase adjustments that gave power generators the right to charge unmet demand to power users after the Asian Financial Crisis, party-list member Rafael Mariano issued this statement:

It’s hogwash … just a tweak [of the] past administration’s marketing sell-out strategy at the expense of the Filipino people.

The problem with the president’s policy statement goes even beyond these issues alone. Most of these projects have a life of between 15 to 30 years. His administration will only last for the next five and a half. Given the amount of time devoted to the pre-feasibility phase all the way to construction, most of these might still be in the pipeline when PNoy steps down. So even assuming that it is able to defy the two other branches of government, how can it guarantee protection for private investors for the remainder of these projects’ lives?

Second, since the public projects being listed for private participation is based on the principle of user pay per use, they are entirely dependent on the ability to charge an appropriate fee. The fact that many projects such as the Metro Light Rail Transit and Southern Expressway have not been able to do so puts into question the business case that justifies the investment in the first place. In other words, the market for such goods cannot clear at the prices desired by the buyers and sellers.

This puts into question the project feasibility assessment process. All sorts of regulatory and administrative risk factors have to be priced into the project cost. If the government cannot justify them in this manner then it should not put it up for investment to begin with.

On the other hand, if the government sees the need to subsidize these projects in the long run based on some notion of public benefit, then it ought to build projections of its future obligations in forward multi-year budget estimates so that they can be subjected to congressional scrutiny. Such transparency is still missing.

Third, the 10 or so projects in roads, rail, and airports being characterized as “shovel ready” to be bid out next year are in metropolitan centers. The jobs to be generated during their construction are going to be centered there. If the PPP’s are meant to be the engine for development, then it appears to be development highly skewed in favor of city residents.

The problem of joblessness in the countryside won’t be addressed, not in the immediate future at least, not with the initial list of projects. If ever, it will lead to greater migration flows from the rural places to the cities. Somehow, what gets lost in all of this is a development framework wherein the needs of public investment are prioritized based on some holistic model of sustainability.

Despite all this, investor appetite seems to be there. One cannot discount the legitimacy issue that hounded the Arroyo regime which has now been effectively dealt with by a smooth transfer of power. PNoy is right to strike when the iron is hot. Conditions in the global village do support his thrust in leveraging private investment for public use.

Perhaps instead of searching for some quixotic fix to deal with all the bottle necks to our development, we need to take a long hard look at the system as a whole. I am not advocating a shift to a parliamentary system, although that would deal with the problem of congressional oversight since the executive and legislative branches would speak as one. What I am advocating is a roots to branch rethink of our assessment process.

A framework is still lacking in the PPP program. It needs to be more clearly articulated to the public. Beyond that, a strategy for bringing more equitable public and private investments in areas where they are sorely needed, such as in innovation, regional and rural development and natural and environmental conservation, remains elusive.