With the release of third quarter GDP figures upsetting all but the most ardent economic apologists for this administration, the time has come for it to re-think its priorities.
The situation is nearing a critical level. As the whole of Europe is placed on credit watch and as recovery in the US struggles for momentum, the vibrancy in the domestic economy is being sucked out by government’s poor infrastructure spending rate just at a time when it is needed. Cabinet officials throughout the year have been promising a more rapid deployment, but this has so far not materialized.
The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?
(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).
That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?
Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.
Market analysts have already pointed out and the Bangko Sentral agrees that stimulating greater demand to address the slowdown in growth lies not in the hands of monetary authorities at this point but with fiscal managers. What this means is that the government has to spend more and talk less. Or in the words of Jerry Maguire, it has to “show me the money!”
All talk, no action
The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply” is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.
P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.
When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.
And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf the growth of the CCT or conditional cash transfers which cost about thirty billion.
Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.
That third option which I had first written about late last year which then got echoed by no less than the BSP Governor a few months back is for the government to issue infrastructure bonds to the BSP which is at present earning negative returns on its foreign currency reserves.
By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.
The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:
- Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
- It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
- Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
- It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
- It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
- Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
- It will help prop up employment and growth which will spur increased tax collection.
- It will reduce the cost of doing business for most firms, not just exporters.
- It will help achieve the government’s growth target of 5-7% in the medium term.
- It will fulfill the government’s own development plan and set us on a higher growth plane.
Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.
But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.
Making daang matuwid work
In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”
The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.
The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”
That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.