Bernardo M. Villegas
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Reality Check from Emil Antonio

           For the thousands of business people in the Philippines who have participated in executive education programs and economic briefings at the Center for Research and Communication and the University of Asia and Pacific over almost fifty years, the name of Dr. Emilio T. Antonio, Jr., Ph.D., is very familiar.  He is arguably the most lucid economics educator in the country today.  With his simple, down-to-earth language and very creative graphics, he can explain the most esoteric and complex economic theory or empirical finding in the clearest manner to the lay person or nonspecialist.  Besides CEOs and top executives, he has imparted economics education to senators, congress people, cabinet secretaries, governors, mayors, etc.  Above all, his favorite target audience is the mass of economics teachers in the high schools and colleges of the country.

          What I would like to commend in this article, however, is his very sober and detached approach to examining the macroeconomic environment prevailing in the Philippines.  He is always dispassionate and objective in assessing the positive along with the negative.  In a recent economic briefing he gave to business people he talked about "The Philippine Economy:  Blessings to Count;  Challenges to Surmount."  He recognized the undeniable facts staring us in the face:  higher growth of production volume; more predictable prices; upgrade in credit ratings; and more optimistic view of locals and foreigners.  May I add that since he made these assessments last June 19, 2013, the IMF has upgraded its forecast for the Philippine GDP from 6 to 7 percent for 2013 while downgrading its forecast for the whole ASEAN region.  Among its peers in the VIP club, Vietnam is struggling to put its macroeconomic house in order, especially in its financial sector while Indonesia's political climate is darkening as national elections approach.  The relative peace on the labor front in the Philippines gives it a distinct advantage vis-a-vis the other labor surplus ASEAN economies in attracting Japanese and Korean manufacturing firms already disenchanted with the high labor costs and social unrest in China.

          Dr. Antonio is quick, however, to warn everyone to be careful not to exaggerate these victories.  He rightly points out that we may be blinded to two realities:  1) these achievements are not as outstanding as they may appear if put in the proper historical context; and 2) the possibility of policy mistakes that need to be rectified.  As regards the first, the reality is that the "good" growth was on the back of a bad preceding year.  The growth in 2010-2011 was only 3.6 per cent while that in 2011-2012 was 6.8 per cent.  The more recent growth just placed the economy back to the old trend path of an average annual growth of 4.8 per cent, nothing to boast about.   When one analyzes the growth of 7.8 per cent in the first quarter of 2013, the following sectoral growth rates are revealed:  agriculture (3.3 per cent); industry (10.9 per cent) and services (7.0 per cent).  Under industry, there was a precipitous fall of -16.9 per cent in mining; a 9.7 per cent growth in manufacturing; a 33.7 percent growth in construction; and a lackluster growth of 0.1 per cent in electricity, gas, and water.  In construction, 28 per cent growth was from the public sector; while 72 per cent from the private sector. The high rate of private construction can be broken down into residential (61 per cent) and non-residential (36 per cent).   Dr. Antonio feels that the above-average growth of construction will be very difficult to sustain in the medium-term.

          Another fly in the ointment, according to Dr. Antonio, is the relatively slower growth in income compared to the growth of production.  This explains why the growth is not trickling down to the lower income groups either because of non-inclusive growth or simply because growth is insufficient to lift more people out of poverty.  My own take is that growth rates of 9 per cent or more will be necessary for a couple of years before we can really attain inclusive growth.  At the moment, we can still consider the growth of the Philippine economy mediocre.  Dr. Antonio feels that we have the potential for faster growth but we have failed to exploit these potentials because we chose to focus on strategies with limited effects on growth.  The first failure has to do with our inability to match the large increase in savings over the last five to seven years with corresponding increases in investments.  We saved a lot, but invested too little.  The second failure had to do with our inability to use more productively the abundant foreign exchange reserves we have accumulated.  Our banks parked our foreign exchange earnings in special deposit accounts (SDAs).  The BSP mopped up excess liquidity by purchasing dollars to build up our international reserves.  Dr. Antonio thinks that behind this move of the BSP was an excessive fear of inflation.  The cheapening of dollars, however, had the negative effects of depressing the peso incomes of the relatives of the overseas Filipino workers (OFWs) and the increasing unprofitableness of exporters, both of goods and services.  Furthermore, peso prices of imported goods dropped, making it difficult for local producers to compete.

          In Dr Antonio's views, all these policy moves led to an anemic growth in total investment expenditures, particularly private investments that grew at only 3.5 per cent annually on the average over the last 12 years.  Despite their optimism, investors are not significantly increasing their investments.  As foreign currencies became cheaper, real incomes of OFWs suffered, thus depressing consumption which is an important engine of growth in the Philippines.  Growth of exports also suffered.  Dr. Antonio does not attribute this slowdown export to the depressed world demand because exports of our Asian neighbors have been growing faster than ours despite the slump in the world demand.    All these add up to slow growth of investments and poor growth of dollar income earners which in turn explain the mediocre growth of volume and income from production activities. 

          Another significant conclusion from Dr. Antonio's analysis:  the sectors that grew faster were those shielded from foreign competition.  Services, which are naturally shielded from foreign competition, grew faster over the last twelve years at 5.1 per cent, compared to 3.4 per cent in industry and 3.6 per cent in agriculture.  In the industrial sector, the same pattern emerged.  Those that did not have to face foreign competition like construction and public utilities grew faster at 5.4  per cent and 3.3 per cent, respectively while manufacturing that is more exposed to foreign competition grew at 2.7 per cent.    Over the last twelve years, all sub sectors in services grew faster than the rest of the economy.  One of my own conclusions from this analysis of the twelve-year trends is to get our policy makers to open up more sectors to foreign competition by removing the restrictions on foreign direct investments found in our laws and in the Constitution itself.  This may be counterintuitive but high growth on the back of monopoly power is the surest way to make the rich richer and the poor poorer.  Opening up to foreign competition can lead to larger investments and can put pressure on the local producers to be more competitive, thus eventually stimulating higher growth in the future.

          Dr. Antonio sees some light at the end of the tunnel, although the tunnel may still be quite long to traverse.  There have been cuts in the SDA rate and the BSP is favoring a weak peso in its management of the currency.  These will not have instant results but the changes are in the right direction.  We should not expect the weaker peso to have instant effects on domestic consumption  or on the volume of exports.  There will, however, be business opportunities over the medium term:  Domestic funds will remain cheap, allowing entrepreneurs to fund their truly innovative projects. Improvement in the buying power of OFWs will augur well for consumer durables and housing, as well as education and domestic  tourism.  Importers of consumer durables selling to the domestic market will continue to enjoy brisk sales.  Exports, however, will remain to be a tough business.  In this environment, the most important business strategy is to improve the competitiveness of our products or services. especially as we face the threat  as well as opportunities of the free market region that the ASEAN Economic Community (AEC) will usher in just two years from now.  For comments, my email address is bernardo.villegas@uap.asia