Bernardo M. Villegas
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Microeconomic Threats to Rapid Growth

           I can almost guarantee a GDP growth of close to 8 per cent in 2013.  Despite continuing uncertainties in the Euro Zone, the U.S. and Japan, China is showing signs of a moderate recovery and our ASEAN neighbors are showing greater resilience because of large domestic markets.  More importantly, though, the domestic engines of growth that made a 7.1% growth in the third quarter possible will actually even be stronger in 2013:  infrastructures projects of both the Government and the private sector will be in full swing; another 6 to 7% growth in OFW remittances; double-digit growth in BPO/KPO revenues; and during the first quarter, election-related spending.  The year 2013 will be even a better version of the last election year, 2010, during which GDP grew at more than 7%.  To top it all, the so-called macroeconomic fundamentals--low inflation, low interest rates, low levels of debt, low fiscal deficits, very high foreign exchange reserves, high savings rate--are at their best levels ever.  There is a great probability that some time in 2013 we will obtain investment grade from credit rating agencies.

          With these solid macroeconomic foundations, there should be no problem sustaining high levels of GDP growth of 7% and more in the next decade or so.  Right?  Not so fast. There is a fly in the ointment.  There is so much microeconomic meddling from all the branches of Government that two or three years down the road we may be back to the slow motion that characterized our economy for the past two decades.  We have much to learn from the current woes of the much-vaunted BRIC nations.  Let us read what Mr. Sebastain Mallaby, a senior fellow at the Council on Foreign Relations, wrote in the December 5, 2012 issue of the Financial Times:  "A year ago, Brazil, Russia, India and China were the darlings of the world economy.  Today, Brazil is barely growing, Russia is struggling and India and China are on course for their lowest growth in a decade.  Although they are as different as they are similar, all four of the original Bric countries have contrived to stumble simultaneously.  The lessons are that microeconomics can matter as much as macroeconomics--and that belonging to a prestigious club is hazardous"

          It has been some time that experts have been warning about the breaking up of the BRIC club, first formulated more than a decade ago by Jim O'Neil, Chief economist of Goldman Sachs.  Two years ago, Nouriel Roubini already suggested removing Russia from the club and reformulating BRIC into BIIC, replacing Russia with Indonesia.  Then in the book Breakout Nations, Ruchir Sharma of Morgan Stanley suggested that BRIC be replaced by TIP (Turkey, Indonesia, Philippines).  In the ASEAN region, economists and investment bankers have been brandishing VIP (Vietnam, Indonesia and the Philippines).  All these critical comments about one or more of the original BRIC do not deny their initial successes.  As Mallaby wrote in his FT article, "The Brics, and emerging economies generally, deserve enormous credit for their macroeconomic management.  In the 1970s and 1980s, one in two emerging and developing economies had double-digit inflation.  Today, fewer than one in five do.  As recently as the 1990s, the median emerging economy had public debt to gross domestic product of more than 65 per cent.  In the past two years, the median has been below 40 per cent.  Add in bulging foreign exchange reserves, debt denominated in domestic currency rather than dollars and (with China the big exception) flexible exchange rates, and the hype surrounding emerging economies seems almost reasonable."  The Philippine story in recent years fits to a T the above favorable description of the typical emerging economy.

          Unfortunately, complacency may lead the Philippines to follow the downward spiral of the Bric because of erroneous or perverse microeconomic policies.  Take China.  Governments have permitted themselves to meddle destructively in markets.  State companies have been allowed to stifle innovative competitors.  Take Brazil.   Growth this year will be barely more than 1 percent because a blizzard of micro meddling has damaged business confidence.  Petrobras, the state oil company that accounts for a 10th of the economy, epitomises this malady.  Despite the discovery in 2007 of lucrative offshore oil, it is losing money because of local content rules and irrational fixed prices.  Take Russia.  Microeconomic policy is lousy.  Corruption deters investors.  State companies elbow out private ones.  Plans to diversify the economy have been a failure.  Instead of building manufacturing exports, Russia is exporting skilled workers.  And finally, take India.  Corruption is pervasive and dysfunctional regulation inflicted blackouts on 600 million consumers in the summer.  Supply side rigidities handicap India's economy so thoroughly that stimulus quickly causes inflation, which is close to 10 percent."

          Microeconomic mismanagement in the Philippines has not yet reached the crisis levels already existing in the original Bric nations.  There are alarm bells, however.  In September 2011, the level of Foreign Direct Investments plunged by 60% year to year.  Although for the first three quarters of 2012, FDIs were up 40% at $1.09 billion from $782 million during the same period in 2011, the total FDIs for 2012 are estimated at less than $1.5 billion, a far cry from the tens of billion of dollars flowing into Indonesia, India and China.  Even Vietnam that has rather poor macroeconomic fundamentals can attract FDIs five times that of the Philippines.  The ease of doing business in the Philippines is one of the worst in Asia, even worse than that of Cambodia.  There are so many unreasonable restrictions against foreign investments enshrined in the Constitution.  To make matters worse, there are so many laws and executive decrees limiting business activities only to Filipino nationals.  Investments in mining have been struck a very heavy blow by too many inconsistencies in policy among the various departments and between the national and local levels of government.  Even the Supreme Court has made it more difficult for foreign direct investments to enter by defining (wrongly in my opinion) the foreign equity permissible in public utilities.  This one error in judgement can lead to a massive outflow of FDIs, both direct and portfolio investments. 

          The present Administration has to be reminded that the indispensable, though not sufficient, condition for eradicating poverty is to sustain a GDP growth of 7% or more for the next decades.  To do that, our investment rate as percentage of GDP must rise from its abysmally low level of 17 to 18% to at least 25 to 30% (China has 50%).  Those higher levels of investments cannot be attained without a large dosage of FDIs (at least $7 billion annually).  We cannot rest on our macroeconomic laurels forever.  We have to improve our microeconomic management.  Let us start by amending the economic provisions in the Constitution that are too restrictive of foreign investments.  As many legislators are willing to do, amending those provisions (such as foreign equity limitations, prohibition for foreigners to own land, prohibition for foreigners to practise their professions in the country, etc.) it is a matter of adding to the pertinent constitutional provision the simple amending clause, "unless otherwise provided by law."  Then automatically, once the amendments are approved by a referendum, Congress can do its job of specifying the details of a more liberal approach to FDIs. For example, as regards ownership of land by foreigners, legislation can specify that a foreigner can own the land on which he builds his residence, factory or commercial establishment, period.  There would be no danger of the Chinese buying all the 7,100 islands of our Archipelago, as some nationalists are warning.  For comments, my email address is bernardo.villegas@uap.asia.