Growing a 'flattened' Philippine economyThe International Monetary Fund issued its verdict on the Covid-19-stricken global economy: worst downturn since the Great Depression of the 1920s. Gita Gopinath, Chief IMF Economist, projected a growth rate of minus 3 for the world economy, a minus 6 for the developed countries, and a minus 1 for emerging and developing countries for the entire year of 2020 ("The Great Lockdown," IMF Blog, April 14, 2020). The Philippines, one of the countries waiting for the Covid-19 infection curve to fall and flatten, belongs to the last category; it is also one of the worst hit in Asia.

In response to the national health-economic crisis, the Department of Finance (DOF) has come up with a P1.4 trillion plan/strategy to fight Covid-19 and its negative socio-economic repercussions. It outlined four areas where government is focusing its attention: a) emergency support for vulnerable groups, b) expanded medical resources to contain Covid-19 and provide safety for the frontliners, c) fiscal and monetary measures to finance emergency initiatives and keep the economy afloat, and d) an economic recovery plan to create jobs and sustain growth.

Among the activities lined up under the recovery plan are support for small businesses (e.g, credit guarantee, subsidy for fixed costs such as wages, etc.), longer net operating loss carryover for businesses to reduce tax liabilities (for as long as five years), and, yes, continuation of the trillion-peso "Build, Build, Build" (BBB) social and infrastructure projects.

The BBB program leans heavily on the "hybrid" scheme hatched by the Duterte administration. Hybrid means the government mobilizes ODA money and government funds to finance priority infra projects. The public-private partnership, developed during the time of the Macapagal-Arroyo administration, is also part of the BBB program. Resigned Neda Secretary Ernesto Pernia revealed that he favors the PPP modality, which relies fully on the private sector in the funding and implementation of infra projects.

This column shares the concern of government officials on the gravity of the present Covid-triggered socio-economic crisis, which has resulted in numerous business closures and job displacements. The present crisis is comparable to the recession-depression situation during the last years of the Marcos administration (1980-1985). The unpayable external debt then triggered a full-blown economic crisis and bankrupted hundreds of manufacturing/commercial firms, resulting in massive unemployment and workers' protests.

The IMF-WB solution to the debt-economic crisis in the 1980s was a "structural adjustment program" (SAP) that subjected the Philippines to a severe austerity program while requiring the country to service fully the Marcosian debt legacy and accept the triple neo-liberal economic policies: privatization, trade/investment liberalization and deregulation of various economic sectors. Outcomes? The decade of the 1980s became a decade of economic stagnation, deindustrialization and de-agricultural development. It was the decade when Philippine neighbors (Malaysia, Singapore, South Korea, Taiwan and Thailand) left the country behind in the growth race in Asia.

It is important that a Covid-related recovery plan is able to prevent disastrous outcomes similar to what the SAP program of the 1980s gave to the nation. A balanced, inclusive and sustainable recovery program from the Covid health-economic crisis is needed.

Along this line, two major questions need to be answered and clarified by the policy-makers. First, what are the major weaknesses of the economy today? Second, what are the policy options available to the policy-makers in addressing these weaknesses?

On question number one, the following weaknesses of the economy can easily be validated:

  • One, the nation's principal economic lifeline—the overseas Filipino workers numbering over 10 million and remitting over $35 billion a year—is tottering. The major OFW-receiving countries (Europe, Middle East, East/Southeast Asia, etc.) have been ravaged by Covid-19 and have become inhospitable to OFWs and other migrant workers. The global cruise industry and sea-based logistics industry, serviced mainly by Filipino seafarers, are now comatose. We expect return migration will be a big reality except in the case of Filipino health workers. As a result, total remittances are likely to go down.

  • Two, the call center-BPO sector has been declining since 2017, as per observation by Neda itself. With Covid-19 and advances in ICT-based DIY communications, service offshoring by America's Fortune 500 is likely to go down faster. The closure of the Nokia facility at UP Technohub is a sign on the dimming prospects for the sector.

  • Three, the Peza-registered and Clark-Subic-hosted electronics, semiconductors and auto parts asssemblers are also in crisis. Not because of the proposed Citira law, which seeks to withdraw fiscal incentives to these locators, but mainly due to the disruptions caused by the technology revolution (automation, robotization, AI, etc.), trade conflicts (US-China trade war), and weakening global demand as a result of the pandemic. As it is, the so-called Factory Asia based on the global value chains developed by the multinationals from the 1980s to 2010s has been "fracturing" or disintegrating. These GVCs are now being overhauled by the global outsourcing firms. Pity the Philippines, which occupies mainly the low and middle rungs of the GVC ladder!

  • Four, the Philippines has become a major tourist destination in recent years. With Covid-19, the industry has once again become Lilliputian.

  • Five, the growth of the country's biggest economic sector—services (entertainment, distribution, education, real estate, etc.)—is badly affected by the foregoing decline of OFW remittances, call center-BPO sector earnings, and industrial exports and tourism. The so-called consumption-led economy has
    become a thing of the past.

  • Six, the agricultural sector, which accounts for a measly 8 percent of the GDP, remains in the doldrums. However, Covid-19 and the need to have a reliable source of food is pushing many to think "Green" and plant vegetables/edibles in the urban and rural areas. Even government officials, who have embraced the rice trade liberalization law, are now singing a different tune—"plant, plant, plant." But the sector is hobbled by supply chain bottlenecks, lack of coherent government (national and local) vision on the sector and problems related to the virus containment program.

  • Seven, the need to address the food and survival needs of the population under the Covid-19 lockdown has made visible the huge informal sector of the economy, truly the country's biggest employer. The informal sector workers outnumber the formal sector employees by at least two to one, or four to one, if the "endos" and the non-regulars in the formal sector are considered informal. The informal sector workers and families live in congested urban, peri-urban, coastal and rural poor communities where health-care services are extremely limited and where physical distancing is hardly possible, especially if a family of five rents and lives in a single 2.5m x 2.5m dilapidated room.

  • Eight, the counting of the poor and the so-called middle class is highly contestable. The poverty threshold is set at a very low rate, roughly P70 per person per day. Oxfam International is using $5 a day. If this is used, over 50 percent of the population can be considered poor and majority of those above the poverty level, "near poor." The importance of having more realistic indicators of poverty and middle class status can be gleaned from the numerous complaints on the exclusion from the social amelioration program by the "unlisted" migrant workers, street dwellers and "middle class" families.

  • Nine, the pandemic has also revealed the undeveloped public health system and the undeveloped public goods distribution system. It took several weeks before the DOH could organize the public health bureaucracy to combat Covid-19. It is really time to rethink the one-sided program of all-out privatization and downsizing of the public sector, including the public health subsector.

Now given the foregoing realities, what policy measures can be developed by the government and the civil society movement in charting recovery for the post-Covid-19 stage? More on this in the next issue.

By Rene E. Ofreneo
April 22, 2020

Source: Business Mirror