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April 26, 2016

Missed Opportunities

The Philippine economy could have grown much faster, more decent jobs could have been created, and traffic congestion in Metropolitan Manila and other urban areas could have been reduced hence improving the welfare of the riding public: these are some of the missed opportunities owing to the Aquino III administration’s conservative fiscal policy.

On the eve of Mr. Aquino’s exit from Malacanang, it can now be told: the contribution of government to the economic expansion in the last 5 years is nil if not negative. Both government final consumption expenditures (GFCE) and government construction were low and erratic.

It is reasonable to argue that overseas Filipino workers, with their hefty remittances amounting to US25.8 billion annually, have a higher contribution to economic growth through higher consumer spending than the government itself.

For one, government inaction has a huge economic cost. By not doing anything to solve the monster traffic in Metro Manila, the government has a huge negative contribution to the economy and the environment.

The Executive Department’s fiscal (spending and taxing policy) is, without doubt, contractionary. The government has taken more revenues from the general public than what it has given back in terms of essential public services. This explains the crumbling and unreliable public infrastructure, the rising criminality, the deteriorating educational system, and so forth and so on.

By contrast, the Bangko Sentral’s Monetary Board has done much better: it has pursued a policy that is neutral, at best, and slightly conservative, at worst. But at least it has done little damage to the economy than President Aquino and his bumbling team.

Don’t get me wrong. I’m not advocating higher government spending for spending’s sake. I’m for spending for ‘growth friendly’ infrastructure and investment in human capital. We need to develop our young population into an educated, healthy and nimble work force.

The economy’s needs for better roads, bridges, airports, seaports, railways, urban transit systems, and the like are enormous.

The country is way behind its ASEAN-5 neighbors (Malaysia, Indonesia, Thailand and Singapore) in terms of the overall quality of public infrastructure. In the 2016 World Economic Forum study, out of 140 economies, the Philippines ranked the worst among its ASEAN-5 peers: Singapore was ranked 4th, Malaysia 18th, Thailand 71st and Indonesia 81st. The Philippines was ranked 106th.

In terms of the quality of air transport infrastructure, the Philippines ranked the worst among its ASEAN-5 peers, with a ranking of 98th out of 140 economies. Not surprising, Singapore ranked first; Malaysia ranked 21st, Thailand, 38th; and the Indonesia 66th.

Rather than aggressively pursuing the objective of narrowing the massive infrastructure gap, the Aquino III administration was caught in the zone of inaction. Ironically, this happened at a time when the cost of borrowing money is at rock bottom. Thanks to the massive financial liquidity due to the Global Recession.

A review of the Aquino administration’s fiscal policy stance in the last five years shows that the government was taking more money from the general public than what it was giving back in terms of productive services (expenditures less interest payments). This already allows the assumption that the government was spending money for the ‘right’ things: spending for activities that benefit the greatest number of people rather than a few and no ‘politics driven’ projects and activities.

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The relevant fiscal number is primary surplus defined as revenues less government expenditures less interest payments. From a low negative (deficit) of 0.2 as percent of GDP in 2010 (budget attributable to Gloria Macapagal Arroyo), primary surplus went up to 0.9 percent in 2011, 0.6 percent in 2012, 1.4 percent in 2013, 2.0 percent in 2014 and 0.9 percent in 2015.

In the face of huge backlogs in public infrastructure, the Aquino III administration, it is hard to believe that it was generating large primary surplus as percent of GDP.  At the same time, the administration was consistently underspending – an amount close to P1 trillion pesos from 2011 to 2015.

This crazy fiscal policy should be revisited by the next President. The next administration should be characterized by a period of construction and reconstruction all over the country, in urban areas and rural communities, in industrial centers and agricultural areas.

Given the poor state of public infrastructure in the Philippines, it is not hard to find a socially worthwhile project in every province, city and town in the country. The choice of the project should be dictated by whether it is growth-friendly not whether it is politically beneficial. The choice of the contractor should be based on his ability to deliver the project on time, at the least cost, but in good condition, rather that whether he is a political ally.

For the next six years, the Philippines should be bustling with economic activity in every nook and corner of its territory. Public construction and reconstruction should be strong, steady and sustained.

The government should work for the greatest number of people, not for a chosen few.  The next President, Congress, and local authorities should give to the people the essential public services that they deserve.


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