double dip recession

A Dual Track

Two very disappointing sets of figures were released last week.

One: the anemic 3.4% GDP growth experienced by the Philippines in the second quarter of the year. That places growth in the first half at 4%. Economic managers have had to revise downwards their full-year projection to 4% from the targeted 7-8% (it would require growth of 10% in the second half of the year for the target to be reached, and not even the budget department’s assumption of 5% seems likely at this point).

Two: the abysmal jobs market in the US which saw no new net jobs created in August as many private firms became spooked by events in Europe and the US credit downgrade. The fact that high unemployment is expected to persist until 2015-16, perhaps even to 2016-17 (with many states coping with the end of stimulus by laying-off workers) has led many to conclude that the US is teetering on the brink of a double dip recession.

Bracing for the harsh winds from a US downturn, Sen Frank Drilon has called on the government to step up its infrastructure spending. Amando Doronila uses the findings of Credit Suisse which downgraded its growth prospects in the region which is expected to suffer “more than most” and cast doubts on the Philippines because it doubted whether

(T)he planned PPP (public-private partnership) infrastructure projects that many were bullish about were likely to get off the ground in a hurry.

In fact, the first couple of projects are scheduled to be bidded out at the end of the year, 18 months after the SONA in which it was announced. That means actual investments will not flow until well into the next year.

Economist Solita Monsod in her weekend column chastised our economic managers for not heeding the official early warning signs by accelerating public construction expenditure. She likened it to economic sabotage when she concluded

Public construction contracted by 23 percent in the third quarter of 2010 and 14 percent in the fourth quarter. Okay, that’s the price for trying to tighten procedures. But decreasing by 38 percent in the first quarter of 2011? And 51 percent in the second quarter?
Prevent plunder? Maybe. But there is economic sabotage in the process. What a choice Filipinos are faced with: between ill-intentioned plunderers and well-intentioned saboteurs.

Amando Doronila had more harsh words in today’s op-ed piece

The straight path to governance sainthood under the Aquino administration’s mantra, “without corruption there’s no poor,” is littered with the derelicts of pious slogans as well as the detritus of incompetent economic management. These derelicts cannot make up for the big deficit in economic performance.

Much like his American counterpart whose followers have become disenchanted with the meager results of his lofty campaign rhetoric, PNoy could soon find the public’s receptiveness to his slogans waning with each passing day.

After experimenting for a year with his idealistic Daang Matuwid will hard-nosed pragmatism be resurrected? A dual track is needed in which the administration pursues its good governance agenda in a way that does not hamper economic growth and development.

This is perhaps what the purists in his camp failed to consider, that the path to development is not a single lane, and that the two agendas can run side-by-side.

So what now?

With the economic turbulence now gripping world financial markets once again, and the possibility of either a double dip recession or stagflation looming, governments around the world will be unable or unwilling to respond with another round of stimulus.

Only the monetary authorities both in the EU and the US stand in the way of a full blown debt crisis. It is quite ironic that S&P, the credit rating agency which figured in the first global crisis should have sparked this one.

Then it had caved in to Goldman Sachs to provide triple A credit ratings to the toxic sub-prime mortgages that led to the collapse of Lehman Brothers and brought AIG to its knees. This time around, it refused to cave in to pressure from the Obama White House which had legitimate reasons for questioning the downgrade that it gave the US economy.

In Manila, economic managers were closely watching as events overseas unfolded. The question on everyone’s minds must be, so what now? The best case scenario out of all this might be for the global economy to experience tepid growth accompanied by high inflation. And so then what? What options does the government face if that happens?

When the GFC hit three years ago, the government was on a path to fiscal sustainability with the budget nearly in balance. It had averted a debt crisis of its own early in the decade by raising and expanding the value added taxes from 10%-12%.

The stimulus initiated by the Arroyo administration led to deficits of 3-3.5% in the three years leading up to 2010. Spending in order of 200-350 billion pesos went to fuel and electricity subsidies as well as targeted discounts for seniors. A conditional cash transfers program was launched to help indigent families weather the storm.

Alongside these social programs, a relaxing of rules for granting fiscal incentives at business parks and economic zones was legislated by Congress. While the increased social spending could easily be retracted (and much of it was) when better economic conditions prevailed, fiscal incentives couldn’t.

They are partly the reason why the government now struggles to balance its revenues and expenditures. Having imposed a heavier form of regressive taxation on the broad sections of the public, the government of the day then took the money raised from that and gave it to special interest groups which arguably did not result in its stated policy goals to boost overall investment.

The present crisis now provides an opportunity to correct that. Firstly by rescinding redundant tax perks that have eroded government revenues, and secondly by making room for the expansion of both social and infrastructure programs, the government of PNoy can create a more equitable incidence of taxes and benefits while fostering a return to fiscal balance and growth.

What would be the incentive for Congress to do this right now?

Well let’s just say there are ways of making them come around. In Australia, the government’s stimulus measures during the GFC involved a school building program in every electoral district irrespective of the political affiliation of the local member.

The same thing could happen in the Philippines. Even without a fiscal responsibility bill, the Palace could pressure Congress to enact legislation to provide revenues for an expanded school building program under a 2012 supplementary budget. The timing of this, right before the 2013 elections would be impeccable.

In fact the same thing could happen if the government were to index sin taxes on alcohol and tobacco and earmark the spending for primary health clinics for each congressional district. It would be hitting two birds with one stone: making the tax system more effective while improving health outcomes.

They say, a crisis is a terrible thing to waste. That’s what happened the last time a financial crisis hit. Let’s hope this time around, the government does not waste the opportunities this current one presents it with.