Economic performance – what do the experts say?

In a major newspaper, three economic experts gave their reviews of the Philippine economy since 2001. Supposedly, this is to educate ourselves ahead of the annual ritual called SONA.

ECONOMYcartoon2One, Tomas Africa, said that the government did well in sending Filipinos to jobs abroad, but failed to provide good-quality or high-paying jobs in the local economy.

Another, Cielito Habito, said that a fiscal crisis was avoided by a substantial increase in the value added tax in 2005.  Still, the “efficiency” by which the government collects tax has reportedly not improved.  The end result was an inability not only to pare down foreign debts of the government but also to fund crucial expenditures for education, health, agriculture, and infrastructure.

A third, Cayetano Paderanga, Jr., said that economic performance was good in terms of GDP growth (because of OFW remittances), a lowering of the inflation rate, and a relatively strong peso.  But the record in job creation and reduction of poverty was not as good.

So, there you are.  Three wise men have pronounced the patient to be somewhat sickly but not terminally ill.  And the government hasn’t done very well but can take credit for the OFW phenomenon, the VAT, and GDP growth.

Here’s what I think, for what it’s worth.

First, it is not the government’s role to send Filipinos abroad to find jobs, and I even believe that the government has found many ways of “taxing” the OFWs through fees paid to government agencies and, of course, through the VAT which is collected on consumables bought by resident families paid for by inward remittances.  So, the OFW phenomenon should not figure as a “good” grade for economic performance, even if it contributes to domestic economic growth.  The economy as a whole was just plain lucky that the world outside needs workers from countries like ours, as well as Mexico, India, Bangladesh, Turkey, etc.

Second, the VAT has helped to improve the country’s debt ratings because it is easier to collect than income tax.  The government can borrow more cheaply, and that is not such a bad thing.  But I believe the VAT rate can be lower than 12 percent if only the government were more careful with its spending.

Third, whether the government has spent wisely is perhaps the most important criterion for  economic performance.  Much is hidden by the aggregate numbers, and even if, for example, the share of education in the government budget is declining, it is possible that education as a public service has improved.  Unfortunately, the opposite is most likely the case.  There is evidence of deteriorating quality in the end result of the educational system (the mistake-ridden textbooks in public schools is probably just the tip of the iceberg that hides the serious rot within).  I believe that health and infrastructure indicators are almost passable.  The country muddles along in terms of infant mortality and life expectancy, but suffers from having too high a price for medicines because the generics market is underdeveloped.  Roads and other infrastructure seem reasonably adequate for a third world country, but inadequate if we aspire to compete with the likes of Singapore or Thailand.

By way of an aside, it seems that none of the pundits explicitly point to the problem of graft and corruption, perhaps because we have little by way of concrete measures of how the economy is affected, and how large a problem it is.  However, one did point to “governance and related issues,” while another to “poor governance,” and these words appear to be code for graft and corruption.  The third pointed to “daunting amounts” of public monies lost to corruption when the government spends, and to the unjust burden imposed on “honest” taxpayers.

Fourth, none of the pundits point to factors that are not the fault of whoever has the political power.  One of these is our antiquated labor laws that hinder rather than promote productivity.  Another is the negative impact on agricultural productivity of “land reform” (I put that in quotes because it is not really “reform” but is instead a grab-what-you-can contest among farmers, landlords, and government officials).

Yet another is the generally prevailing attitude that government has to interfere in the workings of the market so as to prevent the rich from getting richer, and the poor poorer.  The real story is that It Depends.  The market works well when we talk of private goods produced by many rather than a few, such as rice, for example.  Yet, we allow the government to step in to do the importation of rice because we are perennially not “self-sufficient.”

The market does not work well when we have goods produced by a few (telecom services or electricity, for example), or when the goods are public goods (roads, national defense, legal systems, etc.).  But our regulatory institutions often suffer from “capture,” where those who are supposed to be regulated seem to get what they want anyway.

These negative factors, like Mona Lisa’s smile, cannot be laid at the doorstep of government officials alone.  The enemy here includes the collective public who has some kind of public policy myopia.  They do not see that the “social justice” they demand is a miasmic dream if the economic institutions are “wrong.”

So, how did the Philippine economy perform since 2001?  I submit that that is the wrong question to ask.  We should ask instead why we hobble the economy with bad institutions.  Is it because, as Manuel Quezon is supposed to have warned, we prefer a country run like hell so long as we can blame only ourselves?  Unfortunately, I don’t have a good answer.  I really don’t.

Maybe the talking heads at Bloomberg know.

31 thoughts on “Economic performance – what do the experts say?

  1. Dear Prof,

    Why engage in thought experiments? I’ll give an actual, reality-based example: The US war in Iraq.

    In five years, from 2003-2005, the US govt spent $600 Billion to fight Iraqi guerillas. Like your ideal Keynesian apparatus, the US military command is highly centralized, it has the best trained soldiers, and possesses the world’s most advanced weaponries. It is the most expensive military in the world.

    On the other hand, its opponents in Iraq would be your typical Austrian model: anarchic and highly fragmented private groups with different religio-political agendas (Sunnis, Shias, Kurds, etc). Their soldiers are but ragtag fellows, some never trained in soldiering while others are remnants of Saddam’s army. They don’t have tanks, aircraft carriers, satellite guided missiles, and other goodies. Their most lethal weapons however are the IED and suicide bombers.

    With all its massive resources, the US army has no reason to lose this war. Yet, it has not won anything that looks like victory in Iraq.

    This would be the kind of outcome if Keynesians and Austrians were to go to war. Your typical Keynesian army will not win. Of course, the Austrians will not win either, but hey, they won’t waste $600 billion just to lose the way the US has lost.


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