Do we know how the Philippine economy works?

John Mangun has a unique take on economic forecasting. He thinks all the economists whose “predictions” are in the newspapers will be quite wrong for 2009. He thinks the Philippines will have a robust economy in 2009.

If we assume, as Mangun does implicitly, that the informal economy is large (it may even be larger than that captured by the official statistics), then it is possible we will “escape” the effects of the global crisis. And it looks like we wouldn’t even know if that happens, because, obviously, the informal economy is not measured.

However, my best guess is that even the informal economy is “open,” in that it is well linked with both the local formal economy and the world outside. If so, there will be a correlation between trends in the formal and informal parts of the economy. Of course, there is a part of the informal economy that usually cannot get any smaller or lower: subsistence production, so that part would not move in sympathy with global trends, though it could be affected by certain other factors, like weather, etc.

Would I hazard a precise forecast for Philippine GDP growth in 2009? No, for deep philosophical reasons. These have to do with the unusability in economics of the Law of Large Numbers, and the applicability of the economic Law of Zero Profit in the Long Run. In short, if I really knew how to make such forecasts, I should keep it to myself and be truly rich (but I’m not). Such a forecast would beat what people collectively know, which translates into certain activities (like trading in the capital and money markets) where a slight edge in knowledge or information can mean a lot.

So why do some economists make such forecasts? Either they haven’t read Hayek or McCloskey, or they want to pretend to be new age wizards of Oz.


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