Bernardo M. Villegas
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Roots of Resilience of Philippine Economy (Part 1)

             Even for a cock-eyed optimist like me, it was a pleasant surprise to learn from the Philippine Statistical Authority (PSA) that the Philippine GDP grew at 7.6% in the fourth quarter of 2021, after growing at a modified 6.9% in the third quarter, leading to a full-year growth for 2021 at 5.6%.  Most forecasters expected worse figures because of the strictest lockdowns that the Philippine was imposing on the population for most of last year.  We underestimated the great resilience of the Philippine economy, a remarkable resilience that has become increasingly more obvious since the beginning of the second decade of this century during which GDP grew at an annual average of 6 to 7nd other external threats to our economy in the coming years.

            The ideas contained in this article come mostly from a well-researched paper of Dr. Vaughn Montes, Ph. D. in Economics from the University of Pennsylvania, former alumnus and Professor of Economics at the University of Asia and the Pacific (UA&P) and long-time banker with Citibank.  In an essay entitled, “Long Term Economic Transformation,” that appeared as a chapter in a book by Dr. Jesus P. Estanislao entitled “Governance of the Philippines as a Republic, 1946 – 2021,” Dr. Montes presented hard evidence that from 1986 to the present, the Philippine economy has undergone some major institutional changes that reversed the anti-developmental and counter-productive inward-looking, protectionist and anti-agriculture policies that were in place from the time the country gained political  independence in 1946 to the EDSA revolution of 1986, a full 40 years of failed development efforts.

            The paper of Dr. Montes benefited much from his rigorous training in econometrics and economic forecasting in the University of Pennsylvania where the economics faculty included the U.S. guru of economic forecasting, the late Nobel laureate Lawrence Klein (who also mentored former NEDA Director General Solita Monsod).  An added value in the paper of Dr. Montes is his having gone beyond the academe and as an executive of a large multinational bank had a close practical look from the standpoint of the private business sector at the profound institutional changes about  which he writes. His 25-year career in Citibank included roles in project finance and as Public Sector Head.  A TOYM awardee for economics, he is a Founding Father and Trustee of the Foundation for Economic Freedom which advocates market-oriented policies.

            Applying the scientific tools of econometrics on economic data spanning close to 75 years (1946 to 2019), he saw two distinct periods:  1.  Volatile and declining long-term growth from 1946 to 1986; and 2) Sustained and consistent growth from l986 to 2019.  The results of his study, which we will present below, convinced him that we have to temper the cliched pessimism that is still too widespread among those who habitually present bleak prospects of the long-term future of the Philippine economy.  He sees hard evidence that there is a change in direction of the long-term growth path away from that observed during the first forty years of Philippine independence.  Since 1986, the new growth path suggests that economic transformation has been taking place “on the inside.”   This transformation towards more sustainable and inclusive growth is corroborated by other indicators such as the country’s investment grade rating for its external public debt and the assertion validly made by the country’s economic managers that the country was in a strong fiscal position prior to the pandemic (e.g. the debt-to-GDP ratio was at the 30-40% level (compared to 100% or more of stronger economies) and the fiscal deficit was at about 3% of GDP).

            Dr. Montes summarizes the reforms that were painfully, slowly but surely implemented from 1986 to 2019 “from the inside.”  These reforms were undertaken at several levels and on various fronts:

            -Structural reforms which were pursued under the auspices of multilateral development partners such as the International Monetary Fund (IMF), World Bank, the Asian Development Bank (ADB), etc.

            -Redefining the mode of government intervention in the economy by shifting to the private sector as the engine of growth and acquiring a realistic view of the effectiveness of government interventions (akin to the game changing market-oriented reforms of Deng Xiao Peng in China and of Manmoan Singh in India that allowed these two giant economies to grow their GDP at double-digit annual rates during the last century).

            -Adopting more market friendly policies such as allowing market forces to clear markets as opposed to populist price controls and or rationing which entail fiscal costs; fully flexible exchange rates; and economic liberalization and deregulation.

            -Establishing an independent Central Bank.

            The road to a sound macroeconomic framework wa a very difficult one.  The notoriety of the Philippine economy was featured in a 2002 IMF study which contained the following critical statement: “The Philippines is probably the most extreme case of prolonged use of IMF resources, with 23 programs between 1962 and 2000.  Over the 30-year period 1971– 2000, the Philippines had programs for almost 25 years…with credit outstanding from the IMF continuously since 1967.  The Philippines’ status as a ‘prolonged user’ was recognized by the Executive Board as early as 1984.” No wonder the international business community and media referred to the Philippines during this period as the “Sick Man of Asia.”

            During the Marcos years, the IMF reported that there were “continuous programs that achieved no lasting adjustment.”  Starting 1986, after the Marcos regime was overthrown by the EDSA Revolution, the IMF supported the country during the debt crisis and subsequent debt workout, and also during the East Asian Financial Crisis of 1997–2000.  There were several attempts at “Exit programs” of Standby Agreements and Extended Fund Facilities in 1989, 1991, 1994, and 1998 until the final exit in December 2009.  The definitive resolution of the country’s external commercial debt through the Brady bonds in 1992 after eight years of extended negotiations finally enabled the country to return to voluntary international capital markets.

            It became clear that unless and until deeply rooted institutional and policy reforms were  introduced, it would be a continuing process of throwing good money after bad money.  During the government of President Corazon Aquino, substantial fiscal reforms started to be instituted.  These reforms broadened and created fiscal space through a series of tax reforms, Value Added Tax (VAT), E-VAT), abolition of tax exemptions, and improved VAT administration.   The Aquino Administration abolished or privatized legacy government firms which were causing a fiscal drain.  The abolition of the Oil Price Stabilization Fund (OPSF) signaled the policy shift towards relying on market prices instead of managed artificial prices.  When the OPSF was abolished, the general public were educated to accept that oil prices at the pump could go up and down with world oil prices.    To be continued.