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Back to Investment: Has the World Bank run out of ideas?

FREEPIK

WE HAVE READ with great interest Chapter 3 of the World Bank’s Global Economic Prospects publication of January 2024, entitled “The Magic of Investment Accelerations” (https://www.worldbank.org/en/publication/global-economic-prospects). The chapter tells us not only that investment matters but also that it is as powerful as Chinese medicine: it cures all illnesses. It is the single most important factor to solve economic problems such as growth, climate change, jobs, education, or health. You name it. The implication? Find ways to accelerate investment.

Let us start with the disclaimer that we certainly agree that investment matters. Yet, we have the impression that the World Bank has run out of new ideas and policy advice to give to developing countries. Its authors have decided to return to where it all started: investment. Our reading of the report is that the overall proposition is not new. We are also skeptical about the statement that it cures all illnesses.

Ex-World Bank economist William Easterly wrote a well-known book entitled The Elusive Quest for Growth, in the early 2000s. It details the many panaceas that multilateral banks, led by the World Bank, recommended to the developing countries since WWII. Most of them ended up being failures. The first one of these panaceas was no more than investment. It was all based on the so-called Harrod-Domar model (developed in the late 1930s and early 1940s), poorly used to mis-advice developing countries that they needed a required investment rate to attain a target growth rate. The difference between the required investment and the country’s own savings was called the “financing gap.” What was the selling point? Since private investors would not fill the gap, the World Bank and its little regional sisters would provide foreign assistance.

This model promised poor countries growth right away through aid-financed investment. The model was “aid to investment to growth.” Did this work? We know it did not! The empirical evidence is clear. Easterly concluded: “At the short-run horizons at which we [International Financial Institutions] economists work, there is no evidence that investment is a necessary or a sufficient condition for high growth. In the long run, accumulation of machines does not go along with growth.” Despite this, the World Bank is back to it today with a vengeance.

The above does not mean that investment does not matter. It does in a somewhat tautological sense. Investment goes directly into gross domestic product as a demand component, and into the capital stock, both by definition. The study presents the empirical evidence packaged in what the authors consider a novel way, by studying episodes of investment accelerations. We are skeptical that they are saying something that will shake policy makers. After page after page of “correlates” (we will get to this below), the study does not say how much to invest (only that countries need to accelerate investment), and in what (other than brief statements about infrastructure, health, and education). We insist: not much new.

What does the study do and how is the information presented?

First, there is no attempt to present results in terms of “causality,” which is what economists look for. This is to ascertain that one variable (cigarette smoking; investment) is a true cause of another one (cancer; growth), and that the relationship is not through an intermediate variable. Instead, the authors refer to simple correlations (statistical association between two variables without necessary causality). For this reason, the authors simply speak of variables being “associated.” So, the story is that investment acceleration tends to coincide with improvements in some macroeconomic and financial variables, as well as with reductions in poverty and inequality, and with increased access to infrastructure. Was investment the true underlying cause? We do not know.

What are investment accelerations associated with? This is the list: capital accumulation, productivity growth, employment growth, employment sectoral shifts out of agriculture into manufacturing and services, public and private consumption, fiscal balances (improvement, that is, lower fiscal deficits), export and import growth, capital inflows (increased), domestic credit and gross savings (increased), inflation (fell), poverty and inequality (declined), income converged to that of the advanced economies, and access to infrastructure. Everything. It is amazing.

In a second step, the study delves into the question of how to initiate investment accelerations. The statistical information refers to the likelihood of starting an investment acceleration, that is, variables or actions that have preceded investment accelerations.

The authors claim that these are three types of variables: the country’s initial conditions, economic policies, and institutional setup. What are the country’s initial conditions that have influenced (favored) the onset of investment acceleration? Institutional quality, an undervalued currency, and global output. On economic policies, an improved fiscal balance, lower trade restrictions, and the adoption of inflation targeting. Of course, undertaking reforms to attain these three simultaneously works better (raises the probably of an investment acceleration).

The conclusion? What countries need is a “comprehensive package of stabilization and reform policies to spark an investment acceleration.” The package, the authors add, needs to include microeconomic interventions, for example, entrepreneurship. Finally, this package, which should include fiscal and monetary interventions, structural policies, and efforts to improve institutional quality, needs to be “tailored to the specific circumstances.” I need to add that the effect of economic policies on the likelihood of investment accelerations depends on institutional quality — better institutions matter.

Yes, these are the supposed policy recommendations for the typical developing country. Amazing again.

If you ask: what specific investments is the study talking about? The authors are silent on this. They just talk about investment in general, except in a section where they talk about eliminating wasteful spending and prioritizing public investment in assets such as productive infrastructure, and human capital, through education and healthcare spending. Great news.

Towards the end of study, the authors launch a warning: “In the absence of additional policy reforms, potential output growth [in middle-income countries] is projected to decline from an annual average of 4.9% in 2022-21 to 4% a year in 2022-2030.”

To restate our case: we do not deny that investment must matter. What I argue is that it is not a magic bullet because there is old solid and convincing evidence to support the opposite claim.

Second, the authors have gone too far in their claims about the power of investment — that it solves all problems although the authors avoid establishing causality. One loses track of the number of positive outcomes of investment accelerations; and of the prerequisites for investment accelerations to work. On this last point, the prerequisites for investment accelerations to work demand that the country be Sweden. The study is of little use for policy makers from developing countries because it is a “halo-halo” (mix-mix) of ideas. The policy recommendations derived from the study of investment accelerations are nothing new and are impossible for developing countries.

In our next article, we will argue that the real magic lies in manufacturing and exports, and that investment matters to facilitate or realize these two. We will discuss the Philippines in this context.

 

Jesus Felipe is a distinguished professor of Economics at De La Salle University. Pedro Pascual is a Board-Certified economist with Spain’s Ministry of Economy and a partner at MC Spencer (Philippines).

How PSEi member stocks performed — April 16, 2024

Here’s a quick glance at how PSEi stocks fared on Tuesday, April 16, 2024.


Philippines lags among its peers in ICT Index

The Philippines scored 65 out of 100 in the 2023 edition of the ICT Development Index (IDI) of the United Nations specialized agency International Telecommunication Union (ITU). The index assesses the progress of information and communication technology (ICT) in 169 economies by measuring the level of universal and meaningful connectivity. With a scale from 0 to 100, where 100 is the “ideal state,” the country’s score fell below the global average score of 72.8 and was the third lowest in the East and Southeast Asian region.

 

Philippines lags among its peers in ICT Index

PSEi plunges to 4-month low, erases year’s gains

BW FILE PHOTO

THE BELLWETHER INDEX  plummeted to the 6,400 level on Tuesday as investors remained cautious amid the escalating conflict in the Middle East.

The 30-member Philippine Stock Exchange index (PSEi) fell by 2.39% or 157.46 points to end at 6,404.97 on Tuesday, while the broader all shares index retreated by 1.96% or 68.26 points to close at 3,409.85.

This was the PSEi’s worst finish in more than four months or since it closed at 6,255.74 on Dec. 13, 2023.

“Philippine shares experienced the largest sell-off year to date as the market touched the 6,400 level, falling 2.4%, spurred by increased yields and heightened worries over escalating tensions in the Middle East, triggered by Iran’s airstrike on Israel last Saturday,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in a Viber message.

“The PSEi has now wiped out most of its gains, ending the session with a year-to-date performance of -0.7%,” Mr. Limlingan said.

The index ended at 6,450.04 on Dec. 29, 2023.

Israelis awaited word on how Prime Minister Benjamin Netanyahu would respond to Iran’s first-ever direct attack as international pressure for restraint grew amid fears of an escalation of the conflict in the Middle East, Reuters reported.

Mr. Netanyahu on Monday summoned his war cabinet for the second time in less than 24 hours to weigh a response to Iran’s weekend missile and drone attack, a government source said.

Military Chief of Staff Herzi Halevi said Israel would respond. He provided no details.

The prospect of Israeli retaliation has alarmed many Iranians already enduring economic pain and tighter social and political controls since protests in 2022-2023.

“With Tuesday’s decline, the bourse has now dropped for nine consecutive days which has been the longest losing streak since October 2016,” Philstocks Financial, Inc. Research and Engagement Officer Mikhail Philippe Q. Plopenio said in a Viber message.

“The continuous sell-off was due to the increasing tensions in the Middle East and worries regarding possibly delayed rate cuts by the BSP (Bangko Sentral ng Pilipinas) amid upside risks to inflation,” Mr. Plopenio added.

All sectoral indices ended in negative territory. Services lost 3.26% or 60.29 points to close at 1,784.33; industrials went down by 2.73% or 235.64 points to 8,367.23; holding firms declined by 2.42% or 147.12 points to 5,930.69; financials dropped by 1.64% or 32.93 points to 1,973.55; property decreased by 1.59% or 40.53 points to 2,502.24; and mining and oil retreated by 1.35% or 112.83 points to 8,198.40.

Value turnover rose to P7 billion on Tuesday with 15.82 billion issues changing hands from the P5.58 billion with 612.72 million shares traded on Monday.

Decliners overwhelmed advancers, 154 against 41, while 45 names ended unchanged.

Net foreign selling surged to P1.19 billion on Tuesday from P304.76 million on Monday. — RMDO with Reuters

Peso sinks to P57:$1 on US data

BW FILE PHOTO

THE PESO recorded its worst close since November 2022 on Tuesday due to a stronger-than-expected US retail sales report and escalating tensions between Iran and Israel.

The local unit closed at P57 per dollar on Tuesday, weakening by 19.2 centavos from its P56.808 finish on Monday, Bankers Association of the Philippines data showed.

This was the peso’s worst finish and was the first time it ended at the P57 level since its P57.375-a-dollar close on Nov. 22, 2022.

The peso opened Tuesday’s session at weaker P56.85 against the dollar, which was already its intraday best. Its weakest showing was its close of P57.

Dollars exchanged went down to $1.1 billion on Tuesday from $1.59 billion on Monday.

The peso was dragged down by the US retail sales report coupled with rising tensions in the Middle East, Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.

“The peso depreciated to the P57 level following the stronger-than-expected US retail sales report,” a trader likewise said in an e-mail.

The data could reduce the need for the US Federal Reserve to cut interest rates, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

US retail sales rose 0.7% last month, compared with the 0.3% rise that economists polled by Reuters had forecast. Data for February was also revised higher to show sales rebounding 0.9%, which was the largest gain in just over a year, instead of the previously reported 0.6%.

For Wednesday, the trader said the peso could weaken further due to potentially hawkish remarks from Fed Chair Jerome H. Powell.

The trader sees the peso moving between P56.85 and P57.10 per dollar on Wednesday, while Mr. Ricafort expects it to range from P56.90 to P57.05. Meanwhile, Mr. Roces said the peso could remain at the P57 level for the rest of the week. — Aaron Michael C. Sy with Reuters

RCEF needs to be extended, given set percentage of tariffs, DA says

PHILIPPINE STAR/KRIZ JOHN ROSALES

THE Department of Agriculture (DA) said it supports an extension of the Rice Competitiveness Enhancement Fund (RCEF), with an adjusted budget allocation per year.

“Definitely, I think it should be extended. But there should be adjustments so we can adapt to the times,” Agriculture Secretary Francisco P. Tiu Laurel, Jr. told reporters.

Mr. Laurel added that the DA is finalizing its proposal on adjustments to the funding allocated to RCEF.

“Only P10 billion goes into RCEF. It should be increased. We also have to invest more on postharvest facilities and mechanization,” he said.

He added that some funds may also be allocated for fertilizer distribution to farmers to increase their yields.

“Right now, about 12% to 15% of our rice production is wasted because there are no post-harvest facilities… Reducing waste means more income for farmers,” Mr. Laurel said.

The RCEF is intended to modernize the rice industry and is funded by import tariffs generated as a result of Republic Act 11203, or the Rice Tariffication Law.

The fund supports the supply of machinery, seed, and fertilizer, among others, to farmers. Some P10 billion worth of rice tariffs finance support RCEF. The tariff allocations are set to expire in June.

He said that the allocation for RCEF should vary with the amount of tariffs collected.

The Philippines collected P30 billion in rice tariffs in 2023, according to the Bureau of Customs.

“Every year the collection is different, so it should be a percentage. (The budget) needs to be raised … If possible, it should be reviewed every year,” Mr. Laurel said. 

The Philippine Center for Postharvest Development and Mechanization (PhilMech) gets a P5 billion allocation from RCEF to fund the distribution of farm machinery.

The Philippine Rice Research Institute handles the distribution of certified inbred seed to farmers.

Senator Cynthia A. Villar proposed an extension of RCEF for another six years, with an increased budget of P20 billion per year. Likewise, Nueva Ecija Rep. Rosanna V. Vergara also filed a bill seeking an RCEF extension.  

Meanwhile, Mr. Laurel said that the National Food Authority (NFA) needs to regain its ability to influence rice prices and not be limited to buying rice from farmers to build reserves.

The Rice Tariffication Law stripped the NFA of its power to import; instead, private traders were allowed to bring in rice with no restrictions, but have to pay a 35% tariff on grain sourced from Southeast Asia. — Adrian H. Halili

PSA hikes 1st quarter palay output estimate

PHILIPPINE STAR/EDD GUMBAN

PRODUCTION of palay or unmilled rice, is expected to come in at 4.82 million metric tons (MT) during the first quarter, based estimates of the standing crop as of March 1, the Philippine Statistics Authority (PSA) said.

PSA’s projection, if borne out, would represent a 0.3% increase from the initial 4.8 million MT estimate issued on Jan. 1 and an 0.8% year from actual output a year earlier.

The PSA said that the estimated harvest area for the first quarter declined 0.1% year on year to 1.17 million hectares.

“Based on standing crop for the period… the yield per hectare of palay may increase to 4.10 MT or 1.0%,” it added.

It said that about 677.34 thousand hectares or 57.7% of the 1.17 million hectares planted to rice had been harvested as of Feb. 1, with the resulting palay output at 2.74 million MT.

About 91.2% of the crop yet to be harvested was in the maturing stage, while 8.8% was in the reproductive stage.

The Department of Agriculture has projected that palay production this year would exceed 20 million MT.

Meanwhile, corn output is estimated to rise 4.8% in the first quarter to 2.64 million MT, based on the standing crop as of March 1.

The area planted to corn is estimated to have risen 0.4% to 697.35 thousand hectares, while yields are expected to be flat at 3.79 MT per hectare.

The PSA said that about 59.3% or 413.48 thousand hectares of the standing crop had been harvested, producing about 1.42 million MT of corn.

“Of the total area of 283.86 thousand hectares standing corn yet to be harvested… 5.7% were at the reproductive stage and 94.3% were at the maturing stage,” the PSA said. — Adrian H. Halili

Energy regulator ‘confident’ in resumption of normal reserve market operations soon

BW FILE PHOTO

THE Energy Regulatory Commission (ERC) is confident that the suspended reserve market will soon resume normal commercial operations.

“There have been hiccups in the implementation of the reserve market, but we are confident that with the required information to be submitted to the ERC, we can resume normal operations soon,” ERC Chairperson Monalisa C. Dimalanta said during Tuesday’s BusinessWorld and Project KaLIKHAsan forum on Achieving Balance in the Philippine Energy System.

Last month, the ERC ordered the suspension of billing and settlement in the reserve market.

The suspension covers the March billing period, which will be lifted when the commission finalizes its evaluation of the price determination methods used by the Independent Electricity Market Operator of the Philippines (IEMOP), which will likely come in May.

The ERC had directed IEMOP and the Philippine Electricity Market Corp. to submit audit results of the software by April 15 “to identify and address” issues and immediately resume the market’s normal operations.

“Once that’s complete and we have no more requirements for them to submit, we can finalize the evaluation of the program,” Ms. Dimalanta said.

She said ERC has set a meeting with the Department of Energy next week.

“We’re all aligned that we need the reserve market to be operating, so I’m really confident that we’ll find a way, if there are some misalignments, to align the policy and the software and the regulation,” Ms. Dimalanta said.

“Because we really need to make it work to support the RE (renewable energy) ambitions of the country. So that’s where the confidence is coming from because we have a shared vision,” she added.

Meanwhile, Ms. Dimalanta said the ERC is hoping to complete the fourth regulatory reset of the National Grid Corp. of the Philippines by the middle of the year.

The completion of the fifth regulatory reset is targeted by the end of 2024.

“In the same manner, we will complete the reset for the distribution sector. Not all at the same time because we have 141 distribution utilities, but for the bigger ones, starting this year we’ll start completing them,” Ms. Dimalanta said. — Sheldeen Joy Talavera

ODA to Asia declines 3.7% in 2023 — UN agency

PHILSTAR

OFFICIAL development assistance (ODA) to Asia and Oceania declined 3.7% last year, forcing recipients to identify priorities for emergency needs and other projects that require immediate funding, the United Nations Global Crisis Response Group (UNGCRG) said.

“At a time when slowing economic growth, rising inflation and other macroeconomic challenges put pressure on aid budgets, dealing with new emergencies is inevitably complex,” the UNGCRG said in a report.

ODA is deemed “one of the most stable and predictable sources” of external financing during a crisis, the UNGCRG said.

The report found that ODA to Asia and Oceania dropped to $2.9 billion in 2022. Countries in Africa were the biggest recipients of ODA at $3.5 billion, which represented a drop of 4.1% from a year earlier.

Least developed countries received $2.4 billion worth of ODA. Latin America and the Caribbean received $2.1 billion.

Around 70 developing countries, including the 24 least developed countries and 15 small island developing states, saw their ODA decline.

“International crises leave visible marks on the ODA landscape, generating new demands and reshuffling priorities,” the UNGCRG added.

Global ODA totaled $287 billion last year, but remained $143 billion below the 0.7% of gross national income target, as stated in UN sustainable development goal 17 or “Partnerships for the goals.”

Multilateral lenders and research institutions have projected global growth to slow until next year.

“Inflation, food insecurity, the cost-of-living crisis, supply chain disruptions and tightening financial conditions are among the pressing challenges added to a world recovering from the COVID-19 pandemic and facing the threats of climate change and conflicts,” the report said. — Beatriz Marie D. Cruz

PHL, Singapore exploring energy security, AI tie-ups

REUTERS

THE PHILIPPINES and Singapore are exploring the possibility of more partnerships in energy security, artificial intelligence (AI), and trade this year, the two countries’ foreign ministers said on Monday.

In a briefing in Manila, Singapore Foreign Minister Vivian Balakrishnan said Singapore businesses are confident in the economic prospects of the Philippines and are keen on building ties in these areas.

“Both our nations are also keen, to strengthen collaboration in future-oriented areas including the green economy, smart sustainable infrastructure, innovation, startups and opportunities, especially for the many young people that the Philippines has,” he said.

Mr. Balakrishnan said he had discussed with Foreign Affairs Secretary Enrique A. Manalo the establishment of a framework for trading carbon credits.

Companies can use carbon markets to compensate for greenhouse gas emissions caused by their projects by buying credits from entities that reduce these emissions, according to the United Nations Development Programme.

“This will be a learning journey for both of us as we transit into the economic and energy transformations,” he said.

The Singapore minister said that he will also be checking up on Singapore businesses operating in the Clark Freeport Zone.

At the briefing, Mr. Manalo said exploring ties in harnessing AI and efforts to mitigate climate change will create more jobs.

“All of these would be in support of President Ferdinand R. Marcos, Jr.’s vision for the Philippines to create more jobs and transform it into an economic powerhouse,” he said.

“Singapore remains one of the Philippines’ most important trade and investment partners.”

In 2022, Philippine imports from Singapore grew 16.83% to $8.12 billion. Singapore was Manila’s 7th largest trading partner that year. — John Victor D. Ordoñez

Calamity funds worth P3 billion released by end of March — DBM

LGU PANDAN-MAYOR’S OFFICE 

CALAMITY FUNDS worth P3.41 billion have been released as of the end of March to fund relief operations and repairs to infrastructure that had sustained typhoon damage, the Department of Budget and Management (DBM) said.

In its National Disaster Risk Reduction and Management Fund (NDRRMF) status update, P2.01 billion was disbursed to the Department of Social Welfare and Development (DSWD), while the Department of Public Works and Highways (DPWH) received P1.4 billion.

The DBM said that P875 million was released to the DSWD to replenish the Quick Response Fund, a stand-by fund to support relief and rehabilitation efforts during calamities.

The DPWH received P408.34 million for infrastructure repairs in the Cagayan Valley, which was hit by Typhoon Egay last year.

The DPWH also received P177.37 million for the rehabilitation and restoration of infrastructure damaged by Typhoon Paeng in 2022.

The DBM has yet to release P19.32 billion out of this year’s P22.74-billion NDRRMF budget.

A total of P19.74 billion in calamity funds was released to agencies last year, the DBM said. — Beatriz Marie D. Cruz

DILG, DoH asked to simplify process for releasing health emergency allowances

PHILSTAR

THE Department of Budget and Management (DBM) has asked the Health and Local Government departments to fast-track the release of health emergency allowances (HEA), citing a backlog in releases.

“To resolve the bottleneck… maybe a blanket MoA (Memorandum of Agreement) could cover all private organizations and local government units (LGUs),” Budget Secretary Amenah F. Pangandaman said in a statement.

She said the Department of Health (DoH) and Department of Interior and Local Government (DILG) could forward such a blanket MoA to hospitals with workers entitled to emergency allowances.

Under the DoH’s guidelines on HEA releases, private hospitals and local hospitals need to present an MoA to download their respective allowances. However, due to lack of MoA standardization, fund releases have been delayed.

The DoH has yet to release an updated mapping of HEA claims, which should detail all claims and payments to all health facilities under the Public Health Emergency Benefits and Allowances (PHEBA) program.

The DBM has said it has released P91.283 billion for the PHEBA program since 2021.

However, the DoH still owes private and local hospitals around P27 billion in unpaid claims.

The government has allocated P19.962 billion from HEAs this year, Ms. Pangandaman said. — Beatriz Marie D. Cruz