A Six Percent GDP Growth Rate is Not Enough

Alba is a professor of economics at De La Salle University and president of the Philippine Economics Society. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, January 8, 2007  edition, page S1/4.

“In the long run we are all dead,” so Lord Keynes said. And thus were bred economists to the short term wed.

Forgive the poor attempt at an epigram, which is nothing like Alexander Pope’s “Nature and Nature’s laws lay hid in night. God said, Let Newton be! and all was light.”  But have you noticed the congratulatory, if guarded, tone of most year-end assessments of the country’s economic performance in 2006? Particularly trumpeted as a modestly significant achievement is the likely 5.5 to 6.1 percent growth rate of real GDP for the year, which, depending on who you read, is either grudgingly or exaggeratedly ascribed to the shrewd management of the government’s economic team.

But I beg to disagree. My claim: Given the current attributes of the Philippine economy, a six percent growth rate for real GDP is not enough.

The problem is that, following Keynes’s dictum, many economic analysts—the government’s economic managers included—consider only short- and medium-run issues, such as the improved fiscal situation, principally due to the collection of expanded value-added taxes, and the ballooning of international reserves and the appreciation of the peso due to record remittances from overseas workers. Glaringly missing from their diagnoses, however, is a consideration of the long-run implications of the growth performance.

What is the difference? In the alternative assessment, the question is no longer “How big an economic pie did the country produce?” Instead, it becomes “How big a slice did each worker get, and how did its size compare with those of other countries?” Accordingly (to keep a long story short), the growth rate of a country’s output has to be evaluated against the growth rate of its economically active population and the rate of progress of the world technological frontier.
Now it turns out that, between 1960 and 2000, the Filipino population of working ages (that is, 15 years or older) grew at an annual rate of 2.7 percent. In effect, this means that the Philippines’ economic pie has to expand by at least this rate per year to maintain the size of each worker’s slice.

As for the technological frontier, the consensus in growth economics is that it is being pushed out by inventions, innovations, and new ideas at the rate of 2 percent per year. This implies that, for a country not to lose ground in global productivity and competitiveness, its economic pie must be expanding by at least 2 percent per year above the growth rate of its workforce.

Thus, assuming that real GDP growth was 6 percent in 2006, the Philippines’ growth dividend amounted to a mere 1.3 percent [= 6 – 2.7 – 2], which is too small to effect an economic miracle in the long run and pales in comparison to the records of, say, Hong Kong and South Korea. (Between 1960 and 2000, Hong Kong’s output per worker grew at an annual rate of 5.5 percent and South Korea’s at 5.3 percent, so that their growth dividends were 3.5 percent per year and 3.3 percent per year, respectively.) Indeed, with a growth dividend of 1.3 percent per year, the Philippines will take about 65 years—practically a lifetime—to catch up to the living standard of the U.S.

So instead of being satisfied with a 6 percent growth rate of real output in 2006, the economic analysts should have been asking where the extra 2 percent of output growth could be wrung from (so that the growth dividend would equal that of South Korea).

Where indeed?

But the answers stare us in the face. To name a few, reduce, if not eradicate, graft and corruption, improve the quality of basic education, strengthen government institutions (not least by booting out the trapos), improve the quality of regulation in transportation, telecommunications, and energy—the point being that these reforms will raise the country’s total factor productivity or the efficiency with which the economy combines physical and human capital resources to produce output.

That economic inefficiency rooted in weak institutions is the binding constraint in the country’s growth conundrum is indicated by the following stylized facts: In 2000, the Philippines’ total factor productivity was only 20 percent of that of the U.S. In other words, had the country had the enormous resources of the U.S., it would still have produced only 20 percent of the U.S. output per worker. On the other hand, had the country been as efficient as the U.S. economy, even with its meager resources it would have produced about as much output per worker as Japan and South Korea (or about 60 percent of the U.S. output per worker).

So perhaps the moral is this: Just as ignoring the past condemns us to committing its mistakes, ignoring the long-run future dooms us to keep failing its challenges. And while we—that is, everyone alive today—will all be dead in the long run, our children’s children won’t be. Hence the rejoinder to Keynes: If we don’t attend to the long run now, what kind of world will we leave to our children and children’s children?

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