Numbers Don’t Lie

Despite our fervent hopes for gross domestic product (GDP) growth in the four to five percent range, the National Economic Development Authority (NEDA) announced last Thursday that it actually contracted by 0.02% in the first quarter. This was due to the combined effects of Taal Volcano’s eruption in January, the tourist travel ban in February, and the enforcement of the Enhanced Community Quarantine (ECQ) in March. This is the first time the economy contracted in 22 years.

Exacerbating matters is the specter of a deep economic contraction in the second quarter due to the Luzon-wide ECQ. Initially, the Department of Finance (DoF) announced that the contraction could range from 0.08% to 0.0% but later said that it could be more severe given the extension of the ECQ. The worst case scenario, assuming the enhanced community quarantine (ECQ) is lifted on May 15, is a contraction by two to three percent.

One thing is for sure — everything will be different when we emerge from this ECQ. Social behaviors would have changed as would consumer patterns. Trends in international trade would have shifted, as would investment priorities. After two months in lockdown, all countries, including the Philippines, will restart their economies in an environment that has changed so drastically, new economic policies must be written from scratch to adapt.

Call me an optimist but I look at this as serendipity. Truth be told, the economy has been overdue for reinvention. It had already been growing above its potential growth (or capacity to grow) in 2013 to 2016 such that growth has been on a path of steady deceleration since 2016. The 0.02% contraction in the first quarter only underlines how we have already maxed-out our capacity to grow. Let’s be honest, an economy led by consumption and government spending on the demand side coupled with a weak manufacturing base and subsistence agriculture on the supply side, can only take you so far. The only way to reverse the trend is to add capacity to the economy. The COVID-19 crisis is serendipitous in that it gives us no excuse to delay the re-invention.

In 2015, the National Economic and Development Authority (NEDA) outlined our national vision in a program called AmBisyon Natin 2040. In a nutshell, the vision is to become an industrial economy with a middle class society and zero incidences of poverty by the year 2040. Per capita income must triple from some $4,000 today to $13,000.

The economy must expand by no less than 7% a year for 20 years if we are to achieve the national vision. If we fall short and grow by only 6%, we will only attain per capita income of $10,000 20 years from now. This is why maintaining 7% growth is crucial.

So how can we sustain growth of 7% when our growth potential has already been maxed-out? The answer is simple — we need to restructure. From an economy that relies on consumption and government spending to fuel growth, we must transform it to one that is production-lead.

This would entail making the transition from subsistence farming to technology-based agriculture; diversification of the economy from one that specializes in two industries (electronics and IT-BPO), to one that is competent in an entire basket of trades; widening our manufacturing base from one comprised mostly of food processing to one that encompasses complex industries such as pharmaceutical products, machineries and equipment, chemical-based products and automobiles. We must climb the value chain through innovation and quality. This means, products manufactured in the Philippines must have intellectual property inputs (not just mere assembly) and must be renowned for their craftsmanship and durability.

In short, to triple our per capita income, the Philippines must become a diversified manufacturing economy with a strong innovation and design component. We are not re-inventing the wheel here — this has been the development path of countries like South Korea, Singapore, and Taiwan — all of whom made the great leap from lower-middle income society to a high income society in 20 years.

Again, to reiterate, the Philippine economy will not be able to sustain high growth without adding capacity through rapid industrialization. To keep the economy structured the way it is will result in lackluster growth and a further widening of our current account deficit. The Philippines will be stuck as a lower-middle income society.

Industrialization must become a national policy that is upheld by three presidential administrations after the incumbent. As we move forward, our policies, laws, and strategies must all conspire to enhance the process of industrialization. In other words, any law, constitutional statute, or policy that impedes the adoption of new technologies, the attraction of foreign direct investments (FDI), the enhancement of productivity, and the elevation of competitiveness must be amended or repealed. This includes the Comprehensive Agrarian Reform Law (CARL), the Electric Power Industry Reform Act (EPIRA), and the prohibitive economic laws of the constitution, among others.

Export processing zones must be expanded (existing PEZA zones are close to 100% occupancy) and the program to modernize our infrastructure must continue, particularly those that have a direct effect on our logistics chain.

Consequently, our education system must evolve to one that produces more engineers, scientists, and professionals with technical aptitudes. Having the right skills is essential to the transformation. With a policy of industrialization, we Filipinos must begin to obsess over the number of products we can competitively sell to the world, their quality, and the amount of export revenues we generate. These are the new benchmarks of success. If we succeed in these realms, it follows that the economy will become more competitive, our fiscal position will be stronger, unemployment will decrease, and the quality of life of our people will improve. Staying on track towards industrialization will give us the best chance of achieving AmBisyon Natin 2040.

The timing could not be better. Manufacturing companies from Japan, the US, and the European Union are leaving China in droves to decrease their dependence on China in their supply chains, as retribution for not being forthright about the lethality and infectiousness of COVID-19 in the early days of the outbreak, and due to rising costs in cities like Guangzhou, Shenzhen, and Tianjin.

The Philippines must do everything it can to get its fair share of the manufacturing companies moving to Southeast Asia. Bagging these investments will give our program of industrialization the shot in the arm it needs. Let’s hope this administration does not miss out on this investment bonanza like it did in the early 2000s and in 2015.

To compliment FDI’s, local conglomerates must take the lead in our industrial offensive since they have the capital and management expertise to do so. The inclination to invest in rent-seeking ventures like property and mall development must give way to investments in plants and factories that produce increasingly complex products. The government must support all industrial initiatives with generous fiscal perks.

The idea is to migrate the 25% of the workforce who work in subsistence agriculture and the 23% who work in low paying services (domestic helpers, promo girls, bellhops) to jobs in factories, laboratories, high-tech farming, and the logistics sector where they are paid world-class wages.

The COVID-19 crisis is an opportune time to re-invent the economy. It is a pivotal time for us — a time to set us on a course towards generating national wealth, eradicating poverty and providing a dignified life for our people. Let us not let this opportunity pass.


Andrew J. Masigan is an economist.