Bernardo M. Villegas
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It`s in the Regions Stupid!
published: Aug 13, 2019






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Philippine As Middle Class Society (Part 2)

          The Philippine economy experienced dramatic growth during the period 2010 to 2016.  Fortunately, this impressive acceleration of economic growth is being sustained under the present Administration that has continued to build on top of the institutional reforms that were initiated in the late 1980s and the 1990s.  The World Bank report pointed out that it took two decades for these reforms to have positive results on the economy, illustrating the existence of a time lag between the implementation and payoff of reforms.  These slow and painful reforms had to do with the opening up of trade, gradual financial sector opening and deepening, and infrastructure development that boosted the country’s external competitiveness.

         Thanks to the monetary reforms that started during the Administration of former President Cory Aquino, we now have one of the best central bank systems in Southeast Asia, highly professionalized and independent.  Its effectiveness has just been demonstrated in the way the Central Bank used its inflation targeting capability to nip in the bud a potential hyperinflation in 2018.  Furthermore, we can attribute to the Presidency of Gloria Macapagal Arroyo the foundations of a strong fiscal sector which has kept the fiscal deficit and government debt at prudent levels.  The World Bank document emphasized the indispensable role of macroeconomic stability in attaining sustained growth.  Our historical experience demonstrates this necessity of macroeconomic stability.  In the 1980s, we experienced a debt crisis (1983) and multiple coup d-etat attempts (1986 to 1990) leading to a contraction of our GDP of 7.6 percent in 1984-1985 and a “lost decade” which saw GDP per capita falling from US$1,687 in 1980 to US$1,572 in 1999.  By contrast, as the World Bank document observed, the economic recovery in the first decade of the Third Millennium was preceded by a restoration of fiscal discipline and a reduction of inflation.  The acceleration of growth during the golden period of 2010 to 2016 was made possible by the continuation of macroeconomic stability and favorable external conditions.  There was a near doubling of the Philippines’ GDP per capita, from US$1,607 in 2000 to US$2,753 in 2016.

          We have a long way to go, however, to attain high middle-income status which would require a trebling of our per capita income.  The World Bank lists the top 10 policy actions that have to be implemented in the next two decades or so.  They are:

         1. Continue to increase competition in the telecommunications, electricity and transport sectors.

         2. Strengthen the independence and authority of sector regulators (in the telecommunications, energy, and water sectors in particular).

         3. Streamline burdensome administrative procedures to start new businesses and pay taxes.

         4. Reduce restrictions on foreign investors (e.g. allow foreign competition in sectors and reduce equity limits).

         5. Minimize the use of controlled prices to reduce market distortions.  This was especially an issue during the rice crisis that contributed to high inflation in 2018.

         6. Reduce trade costs by improving port and logistics infrastructure.  Public Private Partnership projects at the LGU level can do much to address these infrastructures.

         7. Lower non-tariff barriers, procedural obstacles in particular.

         8. Pursuing more balanced regulations between employees and employers by lowering the costs and simplifying procedures for hiring and firing workers.

         9. Align the minimum wage with workers’ productivity by considering the wage level of the informal sector.

    10. Make regular employment contracts more flexible.

         These policy actions will go a long way to reduce poverty through more jobs, increase labor productivity, and lower consumer prices especially for the lower-income groups.  Increased market competition coupled with more flexible labor market and abundant labor supply (the Philippines will continue to benefit from the demographic dividend during the next twenty year) will allow higher productivity to reduce product prices, which will lead to an increase in the real incomes of workers.  This will create a virtuous circle which will liberate more people from dehumanizing poverty, ensuring that growth will both sustainable and inclusive.  For comments, my email address is bernardo.villegas@uap.asia.