Introspective
By Calixto V. Chikiamco
The answer appears to be yes. After a checkered history of boom and bust cycles since the founding of the Republic in 1946, punctuated by foreign exchange crises, the Philippine economy has broken out of this pattern and achieved significant growth the past few years.
The economic picture seems healthy: consumption spending remains strong, driven by OFW remittances and BPO growth; government infrastructure spending will boost the economy further in the coming years; and investment spending is picking up. The level of Gross International Reserves remains healthy and the country’s Debt to GDP ratio continues to improve. Government has also been trying to improve tax revenue — TRAIN 1 has just been passed, with TRAIN 2 and TRAIN 3 on the way — to finance its ambitious infrastructure and social spending program. Analysts are predicting 6.5% to 7% growth this year.
The economy seems to be humming. What could possibly go wrong?
One level of concern is the growing current account deficit.
After years of surplus, the current account turned negative in 2016, posting a deficit of $1.2 billion. In 2017, the deficit ballooned to $2.5 billion.
The level of deficit, however, is presently manageable and understandable. The current account deficit is about 0.8% of GDP and reflects the country’s thirst for imports as the economy picks up.
However, the trade deficit is expected to widen further in the years ahead. The current high level of imports cannot be explained by the Build, Build, Build infrastructure program of the government as that program has yet to break ground in many instances. Therefore, imports are expected to surge further when the Build program takes off in earnest.
While imports will climb in the years ahead, the other components of the current account may face significant threats. BPO earnings, which has been a driver of current account inflows, face headwinds in the form of the emergence of artificial intelligence, constraints in the pool of educated work force as it shifts toward higher-value services, and an uncertain tax regime.
The other driver of current account inflows, OFW remittances, is continuing to see healthy growth at 4.3% to $28.1 billion. However, the growth in OFW remittances and exports may be highly dependent on the state of the global economy. Presently, the US, China, Japan and the EU are enjoying healthy growth. The US tax cuts and fiscal stimulus are further boosting global growth.
However, the big question is how long will the global economic expansion last? A looming trade war between the US and China threatens global growth. A slowdown in both economies will feed on each other and drag global growth. That means our exports and even our OFW remittances may be severely affected.
Chronic and increasing current account deficits also pose a threat to the economy. An unwelcome steep fall in the peso may be the result. Speculative attacks against the peso will surely happen and undermine confidence. The BSP may be forced to increase interest rates to slow down imports and the economy.
To head off a foreign exchange crisis and to ensure that the current account deficit poses no danger to the economy, the country must dramatically increase foreign investments. The inflows from foreign investments will finance the country’s growing current account deficits. Therefore, an important leg for sustainable growth is improving the foreign investment climate.
In this regard, Secretary Ernesto Pernia is spot on when he pushes for the reduction in the foreign investment negative list. The most important part in the reduction in the negative list is to allow foreign investments in telecommunications and transport, which is presently barred by the current law on the definition of public utilities. The Public Service Act Amendment will cure that. However, the bill is still pending in the Senate for approval on second reading. The Senate must act on it soon to facilitate the entry of a third telco player and to attract foreign investors in the capital-intensive industries of telecommunications and transport.
Of course, laws liberalizing foreign investments are necessary but not sufficient in attracting foreign investments in large numbers. Sanctity of contracts, a rule of law, ease of doing business, and peace and order are also high among the factors foreign investors consider in where to invest. The government has to keep on working for that.
However, to my mind, it’s not the current account deficit that represents a structural threat to sustainable growth. It’s the government’s inattention to the problems in agriculture.
As a recent newspaper article, “The Philippines on the Wrong Path to Agro-Industrialization,” said, the Duterte government is pursuing the failed agricultural policies of the past. It’s still focusing on rice self-sufficiency, which is unrealistic and unable to improve agricultural productivity, crop diversification, and poverty alleviation.
Why is improving agricultural productivity important for sustainable long-term growth?
First, increased incomes in the rural sector will expand the domestic market, thereby ensuring that the country is not dependent on the state of the global economy for growth.
Second, increased agricultural productivity will free up labor that can be shifted toward higher productivity manufacturing.
Third, increased agricultural productivity will mean wider and lower-costing inputs to agro-industrialization, i.e. manufacturing making use of agricultural products from soap making (from coconuts) to brake fluids (from castor beans).
Fourth, since poverty has a rural dimension, increasing incomes in the rural areas is essential to combating poverty.
Without improving agricultural productivity, the country’s march toward Ambisyon 2040, or the NEDA’s vision of most Filipinos living a middle class life of increased standards of living, will not come to pass. The sociopolitical problems alone that massive rural poverty spawns, from terrorism to stunted child development, will ensure that growth cannot be sustained.
Climate change is also a reality and is a threat to our already anemic agricultural sector.
Yet, our government officials are mired in the past: insisting on rice self-sufficiency (while the NFA is conniving to press for graft-ridden G2G or Government to Government rice imports) and burdening the agricultural sector with agrarian reform regulations that deter investment in agriculture.
What must we do?
First, we need to abandon rice self-sufficiency as a policy. We should freely allow the importation of rice and focus our resources toward developing higher-value crops, where we can have a comparative advantage.
Second, we should deregulate the farm sector from many burdensome regulations, from the restrictions on agricultural patents to the prohibition in accumulating more than five hectares of land, in order to attract investments in the farm sector.
Third, we must remove the rigidities in the labor law (e.g. minimum wages and labor security tenure) because as agricultural productivity improves, excess labor must be shifted toward higher-productivity manufacturing.
However, policies that make labor artificially expensive will prevent the growth of labor-intensive manufacturing. In other words, the growth in agricultural productivity must be accompanied by growth in labor-intensive manufacturing.
Let not the present high economic growth rates lull us into complacency. Tailwinds, such as the current global economic growth, will not last.
We have much more to do if we are to forge an economy that is strong enough and resilient enough to grow at high rates for at least two decades and achieve the goals of Ambisyon 2040 of a prosperous Philippines.
Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.
