Increasing potential growth is vital to sustain Philippine momentum

One thing I appreciate about being a member of the Spanish Chamber of Commerce is having access to inside information otherwise inaccessible to the public.
Jesus Felipe, a senior adviser to the Asian Development Bank, recently published a paper entitled “Why has the Philippines’ Growth Performance Improved? From Disappointment to Promising Success.” Mr. Felipe is a close associate of the Spanish Chamber and a personal friend. As such, I was privileged to be one of the few to read his 33-page report, the gist of which is shared in this piece.
Before we dive into it, though — let me first define some terminologies. “Potential Growth” is the maximum amount of goods and services an economy can produce if all resources are utilized fully and efficiently. It can also be defined as an economy’s maximum capacity to produce goods and services. “Potential Growth Rate,” on the other hand, is the pace in which this capacity grows, expressed in annual percentage. “Actual Growth” is the increase in output of goods and services in fact realized over a period of time.
Using econometric mathematical tools, Mr. Felipe determined that potential growth in the Philippines has steadily increased over the last few years on the back of increased private and public investments and increased productivity of the work force. It stood at 4.9% between 2000 to 2009 and increased to 5.9% between 2010 and 2017. It peaked last year at 6.3%, the highest in our history.
The upward trajectory of our potential growth is what enabled the economy to register healthy GDP increases. Average actual GDP growth stood at 4.8% between 2000 to 2010 and 6.3% between 2010 to 2016. It grew further by 6.7% in 2017.
Following six decades of lackluster growth, finally, the Philippines is now in the midst of a growth momentum like it has never seen before. We are where Korea was in the ’70s and where Malaysia and Thailand were in the ’80s and early ’90s.
At the heart of Mr. Felipe’s report is this important message: The growth momentum presently enjoyed by the Philippines is a fragile one. It must be handled with care as it could easily be derailed. Derailment can be caused by political unrest, delays in the roll-out of vital infrastructure projects, the inability to modernize (and diversify) industries and the failure to address areas where Philippine industries are at a disadvantage vis-a-vis its regional counterparts (regional disparities). All these can cause the economy to “bust” after this short “boom.”
To sustain the high growth momentum, not only must we address the abovementioned issues, more importantly, we must expand our potential growth.
HOW TO EXPAND POTENTIAL GROWTH
The country registered actual growth of 6.7% last year. This was already half a percentage point higher than our potential growth. This suggests that the economy is already performing above its true capacity. Going down this road could cause inflation to spike as inputs to production become increasingly scare, hence, more expensive.
Potential growth must expand by one or two percentage points from last year’s level of 6.3% to enable the economy to grow in step without putting pressure on inflation. This requires massive investments in the factors of production (land, labor, and capital) to make them more productive.
Increasing the productivity of land involves making our agricultural and mining sectors more efficient. To do this in agriculture, government must encourage the infusion of new technologies, widen irrigation, provide common-use equipment to farmers as well as access to hybrid seedlings, pesticides, and fertilizers. In mining, companies awarded mining permits must be mandated to invest in extractive equipment that minimize waste while keeping the environment in balance.
As for capital, the way to maximize it is to get more of it. Attracting investment is key and this can be done by making the environment more conducive to doing business for foreigners and locals alike.
Relaxing the prohibitive constitutional provisions that affect foreign investments will be a big help. Capital infused into the economy must be channeled towards productive investments like plants, factories, and new technologies.
On the labor front, policy makers must invest in vital social services to keep our work force healthy, sharp and high in the totem pole of skills. This includes spending on health care, education, skills development, advanced learning, and technology specializations.
WORK FORCE DISPARITIES
The Philippines has a work force of 70.8 million people of which 56%, are employed in the service sector, 26% work in the agricultural sector and 18% are involved in the industrial sector.
The industrial sector, despite having the lowest percentage of the work force, contributes 33.5% to gross national product. In contrast, the agricultural sector, despite employing a quarter of the work force, contributes only 9.5% to total output. These disproportionate ratios are testament to the high rate of productivity of the industrial sector and the lethargy of the agricultural sector.
What is government to do with such a disparity? It can either develop the manufacturing sector even more to enable more agricultural workers to migrate to it. After all, workers in the industrial sector earn more, are not subject to the whims of the weather and enjoy security of tenure.
Alternatively, government can make an earnest push to migrate to mechanized, technology-assisted farming (as opposed to manual farming) so as to increase the sector’s output. This is what Spain and Australia have done with great success. To do both would be utopia.
Using econometric formulas derived from Okun’s Law, Mr. Felipe proved that high actual growth has had little or no effect on curbing unemployment but had a great effect in easing underemployment.
For those unaware, underemployed workers are those who don’t work for more than 40 hours a week but desire to. They are also those who work in jobs that do not harness their full sets of skills.
The fact that there is a disparity between high growth and unemployment and a direct correlation with underemployment indicates that the work force is not being utilized to its fullest. It means that the work force currently employed still have more to give in terms of productivity.
Whatever way high actual growth affects employment or underemployment, one thing is for sure — high growth improves everyone’s standard of living and must be pursued.
The economy has never been this strong. We must work to keep the momentum going by expanding our potential growth. This is the only way.
If we are able to sustain annual GDP growth between six to eight percent, studies show that the Philippines is poised to become a high income economy by the year 2040. Conversely, our inability to expand potential growth will lead to a bust as early as 2023.
 
Andrew J. Masigan is an economist.