Economic freedom and economic growth
With its usual excellent graphics, this broadsheet reported last Wednesday that the Philippines sustained another decline in its economic freedom performance, as rated by the conservative Washington-based Heritage Foundation. Since 2017, we have dropped in all years except in 2020 with some consolation that our rank was unchanged at 70th.
Our score of 61.1 relegated us to 80th among 177 countries, quite close to the threshold of 59.9 for the “mostly unfree” group of North Korea, Venezuela, Cuba, Sudan, and Zimbabwe. We agree with Foundation for Economic Freedom President Calixto V. Chikiamco that the next ranking in 2023 should see the Philippines bouncing back following the passage of key reform measures including the Retail Trade Liberalization Act. Our unequivocal participation in the Regional Comprehensive Economic Partnership should also advance our economic freedom.
I consider this latest report as an assessment of COVID-19’s impact on various aspects of economic freedom because the data coverage is clearly the period of the viral upsurge, that is, the second half of 2020 through the first half of 2021.
The 2022 Report was correct in its observation that public authorities around the world have imposed various restrictions on both personal mobility and business activities in response to the consuming COVID-19 infection and mortality. As a result, many economies retreated in 2020 with tentative recoveries in 2021.
Of utmost relevance here is the nexus between economic freedom and several economic and social goals. For instance, the consequent curtailment of economic freedom in the name of pandemic management has hollowed out economic growth for many jurisdictions. Jobs were lost and incomes reduced, amplifying the vulnerability of the poor and other marginalized sectors. What actually pulls down the whole of society is the cost of public intervention to cushion the impact of the pandemic. With nearly zero growth in revenues, governments were forced to go into excessive deficit spending funded by both domestic and foreign borrowings.
Future generations are supposed to pay back these obligations, and it should not be an issue as long as these borrowed funds actually financed the fight against the virus. Economic recovery is possible with controlled viral spread. With the advance of business activities, economic growth will pay for those debts through the general appropriations. In this connection, the Heritage Foundation noted that the US’ erosion of economic freedom has actually resulted in an impossibly excessive fiscal deficit and debt burdens. In many countries, these twin problems may give rise to lower productivity growth and economic weakness.
With collateral damage in the policy areas of transparency, efficiency, openness, and government effectiveness, the pandemic should not perpetuate extended government emergency powers and assistance, but rather promote economic freedom as the norm of health and economic response. An environment of economic freedom fortifies various political and economic institutions. This is how we produce robust and resilient and inclusive economic growth. Rationalizing the tax regime, enhancing the regulatory framework, strengthening the contestability of markets, and fighting corrupt practices improve economic freedom and sets the stage for durable economic growth.
The 2022 report also argued that standard of living in terms of per capita income has been observed to be higher in free or mostly free economies. Residents of these economies enjoy, on average, incomes three times higher than the other economies and nearly seven times higher than those of repressed economies. It should not surprise us that the series of policy and structural reforms the Philippines has undertaken since 1993 has produced a critical mass of growth drivers, resulting in 21 years of uninterrupted growth until the pandemic outbreak in 2020. Our economic managers were inspired to work for the country’s per capital GDP to grow to upper middle-income levels. But our inept management of the pandemic frustrated the campaign and prolonged our economic recovery.
Four components of economic freedom were used to assess all the 177 countries, including the Philippines.
First, rule of law in the Philippines was considered weak in all three sub-components. While property rights are admittedly recognized in the Philippines, enforcement was deemed “weak and fragmented.” Judicial effectiveness also scored lower on account of the courts’ inefficiency, bias and corruption, while court personnel suffered from low pay, intimidation, and impossible procedures. Killings of court officers including judges and fiscals worked against this component. Government integrity was suspect because of widespread corruption and cronyism.
Second, government size was assessed in terms of the tax burden, no change; government spending to GDP at 23% and the budget deficit to GDP at 2.9%, down; and fiscal health, down with public debt at 47.1% of GDP.
Third, while the regulatory efficiency score actually turned out better in all three components, the Heritage Foundation still considered, with reason, that our infrastructure is weak, power cost exorbitant, connectivity “shabby,” and regulations unpredictable. Our labor department should explain why this latest scoring found that “minimum wage standards and payments of social security contributions, bonuses, and overtime as stipulated by law are often ignored.” Subsidies to agriculture were nearly a third of gross farm receipt.
And fourth, open markets in the Philippines in terms of trade, investment, and financial freedom were quite steady during the pandemic. While trade freedom somewhat inched down, the Heritage Foundation noted that the country has 11 preferential trade agreements in force. Trade weighted average tariff rate was 5.6% and 285 nontariff measures are in effect. Both investment and financial components were unaffected by pandemic-related government restrictions.
Thus, going through the long report suggests that nearly all countries took a real beating from the scourge of the pandemic. For the Philippines, it is surprising that our regulatory efficiency somewhat held during the pandemic. Drilling down into the methodology of the indices, those three decades of policy and structural reforms must have invested us with some staying power.
True, various research outfits and international financial institutions are now projecting growth rates for 2022 at lower than the government target of 7-9%, but this is due mostly to uncertainty which continues to pull down market sentiment. Nomura, for instance, explains that “low vaccination rates and the risk of a reacceleration in new COVID cases could hinder further reopening, which alongside limited fiscal support, could weigh on growth.”
It’s good that our economic managers have remained the real adults in this Government. Otherwise, economic recovery would have been more elusive as our other authorities bungled the pandemic management and prioritized peripheral concerns. Having to struggle through severe economic scarring, growing positively in 2021 was a feat in itself. If anything, it should convince us that promoting economic freedom reflects our commitment to good governance — it is as critical as championing those hard and soft infrastructure.
What actually brought down the Philippines’ overall score in economic freedom was the substantial deterioration in the rule of law: property rights declining 10 full points; judicial effectiveness, down by nine points; and government integrity, down by six points. The other setback was in government size, particularly fiscal health which retreated by more than 13 points, something that was inevitable given the challenges posed by the pandemic on public resources. Corruption must be the link here, as pointed out by the Heritage Foundation: “There is little accountability for powerful politicians, big companies or wealthy families.”
To be sure, we should exercise our freedom to make the May 2022 national election truly a game-changing exercise. We can begin by supporting the candidate who has a concrete platform of government that stands behind the rule of law, sustainable government size, no-nonsense regulatory efficiency, and open, contestable markets — altogether free from cronyism. Sloganeering will neither buy our freedom, nor secure it.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.
