Philippines’ Jobless Growth: Always “Poised for Take-Off”, But Never Took Off

The Aquino administration was beating its chest with the year on year 6.4% GDP growth – amidst the hubris of the Corona impeachment and the chainsaw chopping of a key witness in the Ampatuan Massacre. Never mind that when the figures are seasonally adjusted – the GDP growth is actually only 2.5%. Whenever I read economic pronouncements by Aquino’s economic managers and how “hopeful” they are about the economy and how it is “poised for take off” – I am reminded of a DVD entitled “Planes that Never Flew”.

As reported by Reuters on CNBC – Philippine First quarter GDP Disappoints, Up 2.5%

“The Philippine economy grew a seasonally adjusted 2.5 percent in the March quarter from the previous three months, slightly below market estimates, but the central bank is still expected to keep its policy rate on hold at its June meeting.

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Economists in a Reuters poll had forecast first quarter GDP growth would climb a seasonally adjusted 2.9 percent, the fastest quarterly pace in two years, picking up sharply from upwardly revised) 1.7 percent in the final quarter of 2011.

”

Obviously, the Reuters story will not be carried locally – why rain on Aquino’s parade – or why bother to tell the accurate truth even. It doesn’t take much to see that truth will always be the primary casualty in the oligarch-backed Aquino administration.

That’s on top of a decline in Philippine competititiveness from 41 to 43 in the 2012 World Competitiveness Index- as if the Philippines was competitive ever.

Even the Aquino relative-owned SWS reported an expansion in joblessness, poverty, and hunger.

It doesn’t take much to beffudle the Pinoy masses with numbers like higher sovereign credit ratings or higher year on year GDP growth. But, one cannot mask the hunger pangs of grumbling stomachs, or the feet lining up to get a job overseas – or the lack of good paying jobs in the domestic front

The usual culprit cited by Philippine economic managers was “due to the under spending by the Aquino administration last year”. The statement is misleading because government spending is not the only component of GDP.

GDP = private consumption (C) + gross investment (I) + government spending (G) + (exports – imports) (T), or

GDP = C + I + G + (X-Im)

I. Personal consumption

a) Durables –> Durable goods, such as autos and furniture.

b) Nondurables –> Non-durable goods such as food, clothing, fuel

c) Services –> The two largest components are real estate and health care .

II. Private investment

a) Nonresidential

b) Structures

c) Producers’ durables

d) Residential

III. Exports & Imports

a) Goods

b) Services

IV. Government expenditures

a) National — i. Defense and ii. Nondefense

b) Local Government

The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.

source: Wikipedia

To claim that the Philippine economy did not grow as well due to lack of government spending is quite disingenuous. After all, an increase in consumer spending, investments, and trade also lead to economic growth.

What the numbers also mean is that the economy did not grow because there is also a lack in consumer spending, investments, and trade. The lackluster growth in these factors have led to outcomes where people don’t have jobs, are poorer, and are hungrier.

But how does that account for the growing number of Filipino businessman winding up in the Forbes Fortune 500 while there is an increase in poverty ? That my friends is what you call – income inequality. It is formally measured by the Gini coefficient. In the case of the Philippines, data from the National Statistical Coordination Board (NSCB) showed that income inequality had declined, but remained relatively high, even exceeding those of many Asian countries.

The average income inequality in Asia, as measured by the Gini coefficient, rose from 39 in the early 1990s to 46 in late 2000s.

Gini coefficient is the main measure of income inequality and ranges from 1 to 100.

A Gini Coefficient of 1 shows perfect equality where individuals have an equal share in an economy’s income, while 100 shows perfect inequality where only one accounts for the entire income.

China, India and Indonesia led the increase in income inequality in Asia.

In the same period, China’s Gini coefficient jumped from 32 to 43, India’s increased from 33 to 37, while Indonesia’s rose from 29 to 39.

In the case of the Philippines, data from the National Statistical Coordination Board (NSCB) showed that income inequality had declined, but remained relatively high, even exceeding those of many Asian countries.

The Philippines’ Gini Coefficient decreased from 49 in the late 1990s to 45 in 2009.

And that’s just after the ADB Summit where the Philippines was exhorted to do more in addressing income inequality because the Philippines had the highest Gini coefficient in South East Asia.

So how did the income inequality widen?

The structural defects of a protectionist economic policy that restricts foreign investments to only 40% equity is glaring as Filipino businesses gain monopoly status in energy, telecommunication, water, transportation, health, and retail among others. Instead of liberalizing the economy as a way of bringing in much needed capital – the Aquino government has opted to pursue foreign capital by increasing public debt. The dogged pursuit of public indebtedness can be seen from the frantic desire to get higher sovereign credit ratings.

What’s the big deal about sovereign credit ratings? First off – sovereign credit ratings reflect a national government’s willingness and ability to repay its debts. Here’s the interesting part – the outcome of a recent study on sovereign credit ratings and economic freedom showed a strong correlation.

Sovereign credit ratings are an important determinant for foreign institutional investment and foreign direct investment. It has been found that the flows of capital from rich to poor countries are largely governed by sovereign default risk (Reinhart and Rogoff, 2004).

Sovereign ratings also affect the ratings and cost of borrowing of a large number of other borrowers of the same country. The rating agencies generally do not assign ratings to debt issuers that are higher than their home country’s sovereign rating; therefore, sovereign ratings influence the ratings given local municipalities, provincial governments, and firms headquartered within the same country. This directly impacts the ability of firms in that country to access international capital markets (Martell, 2005).

The sovereign bond yields tend to rise as ratings fall, reflecting the rise in default risk premium (Cantor and Packer, 1996).

Sovereign ratings also affect the required rate of return on the equities as we would expect the country equity risk premium to be wider than the country default risk spread since stocks are riskier than bonds (Damodaran, 2004).

Consequently, sovereign bond ratings are found to be strong predictors of a country’s equity market returns (Erb, Harvey, and Viskanta, 1996).

For emerging market economies, downgrades in sovereign rating led to a 2 percent increase in average bond yield spreads and about 1 percent decrease in average stock returns (Kaminsky and Schmukler 2002).

There is also some evidence of negative spillover effects in the regional emerging economies when a neighboring emerging economy is downgraded (Kraeussl, 2003).

So yes, there is a benefit to good sovereign credit ratings. The question however is – which economic policies lead to better sovereign credit ratings?

The other part of the study showed that

The second section describes the data available on sovereign credit risk and our preferred measure of economic policies and institutions, the Economic Freedom of the World (EFW) index. We conclude with an examination of how the EFW index and its component parts relate to sovereign credit ratings and changes in sovereign credit ratings. We find strong evidence that sovereign credit ratings correlate highly with the EFW index.

The Philippines sovereign credit ratings can only go so far before it hits the ceiling called “Friendliness to Foreign Investments” aka Protectionism aka the 60/40 economic restrictions in the 1987 Constitution hastily crafted by hand-selected advisers of oligarch Manchurian president Cory Aquino.

It gets worse because the only companies who can avail of the improved sovereign credit ratings – are the same oligarch owned Filipino companies. And just when you think you hit the bottom barrel – the bottom is blown off by the public private partnerships where public monopoly is replaced by private monopoly.

Take for example, the health industry. The good news is public hospitals are being privatized. The bad news is only Filipino companies are allowed to participate in the privatization. Foreign companies which have better capitalization and expertise are restricted from participating. Thus public hospitals are now offering “private wards”.

When Manny Pangilinan completes the Public-Private-Partnership deal with the DOH – the small private hospital owners who are being taxed to subsidize Manny Pangilinan’s hospital buyout, will face competition from Manny Pangilinan and the DOH hospitals. Is that fair?

A consumer issue is whether these MVP hospitals will lower the cost of health care to Filipinos or not. It seems that MVP bought the DOH hospitals to snag the medical tourism business – Filipino health consumers be damned. Of course, the Philippine left will be in its usual hizzy fit to nationalize health care – a cure worse than the disease.

Instead of opening up the health market to both local and foreign capital in order to increase investments in health – the Philippine government opts otherwise. Aquino instead continues to restrict foreign investments in hospitals, the entry of foreign medical professionals, gets more loans to fund health care, and sells government assets to oligarch owned corporations at a loss when there are foreign companies who are willing to buy the government assets at a better price than Manny Pangilinan. Aquino, Abad, Drilon – then taxes us some more – even incurring more public debt so that Aquino and can disburse CCT subsidy for health care. That’s a solution???

It’s the same modus operandi that started with the privatization of NAPOCOR (energy). Then expanded to water (MAYNILAD), tollways (SLEX/NLEX), transportation (PAL), telecom (PLDT), and now – health. Privatization without the benefit of liberalization simply replaces an inefficient public monopoly with another inefficient private monopoly – consumers and businesses still lose.

I recall a friend of mine who was so gungho about businessplans to set up an optic fiber manufacturing facility in Cebu this year (2012). He was asking me about shipping costs and total landed costs from Cebu to markets in North America, China, and India. Without having to run the numbers – I told him flat out that his shipping costs will be competitive but his production costs will be uncompetitive because of the high cost of MERALCO’s electricity. Anyway, when the numbers were in and his customer saw the total landed cost (production cost + shipping cost) – he was given the order to hold off on plans to set up shop in the Philippines – because the costs were uncompetitive.

So yes, Aquino might not have increased taxes last year – but he certainly increased the public debt which taxpayers have to pay in the future. Holy madre de cacao.

And while CJ Corona was impeached – the public debt will be channeled to politicians who will splurge in projects and subsidies to nowhere, finding its way into undeclared dollar accounts of Congressmen, Senators, and even the President. Holy siniguelas.

But to keep appearances some of the funds will be disbursed in “poverty alleviation” programs like CCT subsidy. So after increasing Dinky Solimans CCT kitty – what do we get? More poverty, more hunger, more unemployment. Clearly something’s not right.

Thus going back to the question of economic growth – will more government spending increase growth or actually dampen it?

Let me ask a basic question – does government have money or not? NO it does not have money. The only way for government to have money is to take it away from people’s incomes, from business incomes, from tariffs on trade.

When government says it will increase spending – it means it will take more money away from consumers and business. When consumers and businesses have less money – they spend less. Thus – higher government spending comes at the cost of lower consumer and business spending. How will the overall economy grow then?

The better way for the economy to grow is to restrict government spending and allow the other drivers of the economy to grow – consumer spending, investments, and trade.

For the meantime the Philippines remains a bridesmaid, never a bride. Always “poised for take off” – but never taking off. Always “Open for business” – but no one’s buying. CJ Corona got impeached with impunity – no different from the Ampatuan state witness who got chopped up by a chainsaw while in the custody of the Aquino and De Lima’s witless .. este witness protection program.

Geez with a Philippine government run by Aquino worse than hell – who needs an enemy of the state?

BongV has written 379 stories on this site.

BongV is the webmaster of Antipinoy.com.