At a Crossroads: Progress or more of the same?

By Jesus Felipe, Mariel Monica Sauler, Gerardo Largoza, Susan Kurdli, Alellie Sobreviñas, and Christopher James Cabuay

(Last of three parts)

III. NEEDED: AN ACTIVE GOVERNMENT

The history of development also tells us that, besides attaining a high manufacturing employment share, no country has reached high income status without an active government. The most obvious aspect of such a government is the provision of all public goods that make a nation egalitarian: infrastructure, public education and public health, and to address malnutrition. We are told that we need the assistance of the private sector in the form of Public-Private Partnerships (PPPs), on the grounds that the government does not have “resources,” as if pesos (to fund these expenditures) were a resource. We have also heard from the government that “the private sector has more money than the government.” This statement is not even wrong. It is deceptive and flawed. There might be reasons for certain PPPs, e.g., the need to build classrooms because we need to school all our children and the government cannot build all the classrooms that are needed immediately (acknowledging that this is not a financial constraint).

Our sovereign government is not financially constrained to fund all these expenditures. We may have other constraints (e.g., real resources), but not pesos (foreign debt is a different story). The finances of our government are not like those of a family. Terms like “deficit” or “debt” mean very different things to both: while private debt is a liability of the private sector, government debt is an asset of the private sector. Moreover, in a country that runs a current deficit and the private sector wants to net save (the Philippines!), the government will have to run a fiscal deficit. The government’s rationale (e.g., consolidate the fiscal deficit, reduce it to 3% of GDP) is bad economics, and it amounts to not understanding its own finances. It is one thing to argue that we need to rethink what we spend on and what the priorities are — correct. It is another thing, quite different, to repeat the mantra that we have “limited resources” or that we have a “limited fiscal space.” Pesos are not a resource because they are not scarce, and so-called limited fiscal space is a self-imposed constraint. This does not mean that the government should spend as if there is no tomorrow. It simply means that the government can spend in its own currency (and of course a government does not need to collect taxes to spend) and tackle the pressing problems of our society. Naturally, the private sector can supply some of these (public) goods. Indeed, the private sector can build a hospital or a teaching institution. But this cannot be a substitute for the public good provided by the government. In the hands of the state (government), public goods are “rights” of 115 million Filipinos. In the hands of the private sector, public goods are “businesses seeking returns.”

We are told often that our development has to be “private sector driven” (what does this term mean?), and that exporting manufactures is not crucial because we have the BPO sector (exports of services) and OFWs (who send remittances). The BPO sector certainly matters but thinking that we can become a high-income economy without exporting (which means competing in the world economy) high-quality manufactures (which means innovation, R&D), is not true. The almost 2 million OFWs we have is the vivid indicator that things are not so good in the Philippines.

Naturally, firms, and the private sector in general, matter in a market economy. Yet, labeling a development model as private sector driven is very misleading because it seems that there is a strange and wrong dichotomy: private- versus public sector-driven development (like in a centrally planned economy?). Such a term gained significant traction during the 1990s, particularly in the context of the Washington Consensus. The term became more prominent in the early 2000s, as international development agencies and donors advocated for market liberalization, privatization, and reduced government intervention in developing countries. It is just a euphemism for less government, more business for the private sector, on the putative grounds that the private sector does it better. It is also true that today’s conservative wave in advanced economies is pushing for a smaller government and for the privatization of many public services. Yet, citizens in many advanced economies are complaining. Do we just accept the same for us without asking questions? Are we sure this is the way to go?

As we said earlier, most of our firms do not have the capacity to compete in international markets because they have low capabilities. We certainly need firms (a thriving private sector) but to manufacture and compete in the world economy, and not just to build a few roads. We need an industrial policy focused on firms to increase their capabilities. We also need to create a capital goods (machinery) cluster to support our manufacturing (what are engineers for?). Otherwise, we will continue importing machines, which have to be paid for in hard currency.

Our development model is very different from the one our neighbors had when they reached growth rates of 10% per annum. The role of the state has been historically fundamental to develop, and this does not mean that development was public sector driven. It simply means that the state provided all fundamental public goods; that it guided the economy toward certain key sectors that do not appear naturally (e.g., manufactures); and that it helped firms in the private sector thrive by creating a level playing field. Yes, the road was not easy but it was clear. We want to imitate the Sweden of today… but we are at the stage that Sweden was 100 years ago. This is wrong.

The result of a development model different from that of our neighbors and from that of the Western economies is the economy and the country we have today. Neither our firms nor our public sector are up to the standards that our society demands and needs. The solution is not to give up and ask the private sector to do what governments are supposed to do, but to build a modern and efficient public sector. If we reach high income with the current development model, it will be a new case study in the history of development. There is no single relevant example of a nation that reached high income without a significant manufacturing employment share (at least 20%-25%, compared to ours, about 8%) and a government that led and did not retreat. And, yes, we need a strategy to help the private sector create a (small version of) Philippine Siemens, Toyota, or Philips, and not simply thrive in non-tradable activities where there is no competition. What we argue is not manufacturing fetish or fantasy. While it will be impossible to create a much larger manufacturing sector (we are of course aware), it would be important to carve a few niches in some advanced products/areas and to try to increase the share of manufacturing employment — prevent its decline.

The government talks about Vietnam, which aims for at least 8% annual growth to become a high-income economy by the middle of this century. Let’s see if this very high wish materializes — we have doubts. In any case, let’s not forget that Vietnam is a substantially more industrialized economy than the Philippines and that the Vietnamese government is much more involved in the development of the nation than ours. Two important differences.

We note that our assumptions (exogenous variables in our model) are quite positive (e.g., we assume a growth rate of the world economy slightly higher than the recent estimates of the IMF or the World Bank). To be on the optimistic side, we also assume that the Philippines will not be affected by any crisis, domestic or international. However, who wants to bet that no crisis will occur in the next 25 years?

SUMMING UP
We agree with you that the Philippine economy is at a crossroads. In our view, the dilemma is: Progress or more of the same (MOTS).

We are in the same boat as you and the rest of the administration of President Marcos Jr., but we wish we could be as optimistic as you are. We think the reality will be that we will prosper but not at the speed you claim. We sincerely hope the remaining three years of the current administration bring a new era of growth and development to the Philippines, East-Asian-Miracle style (1970s, 1980s, and 1990s until the Financial Crisis). To achieve this, we will need a serious industrial policy (to change the structure of the economy, that of all sectors, agriculture, industry, and services) led by a credible government, together with significant public spending (not incorrectly thinking that we have “limited resources” and a small “fiscal space”). This will crowd in the private sector. Only then can meaningful progress be made. If we choose not to do these two because our moral principles dictate otherwise, so be it. Then you should bring us down to earth and stop making us dream. Let’s accept what we have. It is not bad, but it is not heaven.

Just don’t forget that the Philippines has bet on essentially the same development model for 80 years now and all it has gotten us is $4,300 per capita — which Vietnam surpassed two years ago. No serious plan to industrialize, to push firms to learn and conglomerates to export, and no commitment to spend what is needed to provide basic public goods. What did we think was going to happen? No more MOTS please.

Oo, kaya natin ’to! (Yes, we can do this!) But we need to push a development model (this is the role of government) that focuses on: productivity (what matters for long-run growth), manufacturing (the true engine of growth; not consumption), exports (the only component of demand that can pay for the import requirement of growth) and their quality (products that other nations want to consume as their income increases because they value them), and firms (yes, firms matter but we need to improve their capabilities so that they manufacture products that compete in international markets).

Unfortunately, some of us will probably not witness 2050, or will be relaxing at home. We hope those who are younger today keep track of what is being said in 2025 and bring it back 25 years from now to see who was right. We would be more than happy if the events proved us wrong. If this is the case, it will be only because we changed the development model along the lines we suggest.

Read parts 1 and 2 here https://tinyurl.com/255v365o and here https://tinyurl.com/25lxxazp.

Jesus Felipe, Mariel Monica Sauler, Gerardo Largoza, Susan Kurdli, Alellie Sobreviñas, and Christopher James Cabuay are Faculty at De La Salle University (DLSU). This letter represents the views of the authors and not necessarily those of DLSU.