Economic Growth and the Philippine Tragedy

The author is visiting scholar, Waseda University and associate professor, De La Salle University, on sabbatical leave. This piece was published in the Yellow Pad column of Business World, 29 March 2004 edition.

In the Philippines, skepticism continues among the country’s
intellectual circles about the merits of economic growth. The core
argument is that economic growth cannot be felt, i.e., it does not
translate to welfare gains, in improving the quality of lives of the
people. The situation is unfortunate since intellectual resistance
serves as a pull-down mechanism to socioeconomic progress. This is
perhaps true not only in the Philippines but in other countries as
well. The economist Adam Szirmai concedes even “most scholars of growth
take both the desirability and feasibility of economic growth for
granted.”

A key dissatisfaction is expressed toward measures of growth
particularly gross national product (GNP) or gross domestic product
(GDP). GNP, which has recently been reconceptualized as gross national
income (GNI), is the sum of the gross value added of all goods and
services produced (GDP) plus net factor income from abroad. An
indicator of a country’s average income is GNI per capita or GDP per
capita, which is GNI or GDP divided by the country’s total population.
Skeptics dismiss reports of remarkable quarterly or annual economic
growth performance. It is true that most Filipinos cannot feel the
welfare gains of a rather erratic growth performance since the 1950s.

The experiences of more advanced East Asian countries demonstrate that
it takes a sustained period of high economic growth before a general
sense of prosperity could be felt. Sometime between the 1950s and
1970s, a few of these countries witnessed high rates of savings and
investments as well as the accumulation of capital stocks. They created
virtuous cycles of investing from their savings and achieving
increasing returns on capital. They invested in education, science and
technology, and infrastructure among others. High rates of growth
attained through modernization of various sectors, including
agriculture, caused demand for labor to rise almost perpetually. In
other words, job opportunities increased. It was a matter of time
before full employment could be attained and even before that the
increase in incomes and wages.

However, the trickle-down effects are not necessarily automatic and
depend also on social responses to conditions of inequalities in wealth
and income distribution. Welfare promotion efforts (and poverty
reduction) are politically and hence economically important. Harvard
professor Deborah Milly observes that during the high-growth period in
Japan, welfare considerations were gradually but successfully
incorporated into the government’s overall economic growth schema,
often as a political response to demands of sectoral groups. Poverty
ruled over roughly half of the Japanese people after the Second World
War.

In this sense, welfare promotion and poverty reduction are as much as a
function of government policy as a consequence of private initiative.
These could take the form of direct welfare programs such as social and
unemployment insurance or indirect welfare promoting policies such as
price control and subsidies. Adjustments for social welfare are
necessary to further achieve high rates of economic growth. These too
require investing in effort and resources.

In contrast, the Philippines stubbornly invested to position herself
for sustained rapid growth. High rates of growth were achieved in the
1950s. Since that time, there was a relative deceleration of economic
performance with respect to rapid increases in population.

Consider precisely the Philippines’ 1950s’ record of GDP per capita,
which was higher than South Korea’s. Between 1965 and 1970, South Korea
overtook the Philippines in per capita income terms. The 1955 GDP per
capita of the Philippines and South Korea was US$1,711 and US$1,571,
respectively. In 1970, South Korea’s GDP per capita was US$2,777
against the Philippines’ US$2,401. By the year 2000, South Korea’s GDP
per capita was more than four times that of the Philippines’ (US$15,881
vs. US$3,424). All of these figures were at 1996 prices using the
Laspeyres Index of the Summers, Heston, and Atten time-series data set.

Poverty in both South Korea and the Philippines was between 60 and 75
percent of the population in the mid-1960s. The poverty situation
between the two countries diverged since then. In 1998, Korea had less
than 2 percent of the population living below $2 a day while the
Philippines, in 2000, had 46 percent. Interestingly, Jeffrey Henderson
and his associates noted that South Korea did not have explicit
poverty-reduction or alleviation programs prior to the post-1997
crisis. However, it did have a successful land reform program as well
as price control policies that benefited the poor.

As populations and poverty conditions grow, demands for more welfare
benefits are increasingly placed upon government. Though populist
leaders tend to submit to such demands, there is little public
realization that such decisions only bring a larger debt burden. The
amount of government expenditures, which is a function of government
revenues and national income, is severely limited.

Looking at the amounts of government expenditures in the region, in
2001, the absolute amount of Philippine government expenditures was
$8.65 billion. This was $1 to $5 billion lower than those of Thailand,
Malaysia, Singapore, and Indonesia. Though they would appear small in
absolute terms, the differences become wider on a per capita basis.

Using International Financial Statistics data published by the IMF, the
2001 Philippine government consumption expenditure per person was
US$112 per person (or only PhP5,712 at an exchange rate of PhP51:US$1).
This compared with US$217 for Thailand, US$2,552 for Singapore, and
US$471 for Malaysia. Indonesia which had a bigger population than the
Philippines has US$49.7. This was a complete reversal of the conditions
of the 1950s. In 1955, the Philippines’ government consumption
expenditure was 2.6 times that of Thailand’s. By 2002, Thailand was 1.9
times that of the Philippines.’

What makes the difference? From 1950 to 2000, Thailand’s GDP per capita
grew twice as fast that of the Philippines.’ Thailand’s average annual
growth rate was 3.7 percent; the Philippines’ was 1.8 percent. Going
back to Korea, its government consumption expenditure per capita in
2001 was US$923. Its GDP per capita grew at an annual average of 5.2
percent from 1955 to 2000.

The empirical and theoretical evidence on the merits of growth is
overwhelming as shown in comparative approaches of Thorvadur Gylfasson,
Douglass North, Angus Maddison, Dirk Van Pilat, and Robert Barro, among
others. In the Philippines, Arsenio Balisacan rigorously establishes
that there was an increase in poverty during the economic collapse of
1988-91, in which GDP per capita growth “dropped from 3.8 percent in
1988 to negative 3.2 percent in 1991.” These works have one message:
economic growth matters.

Whether we like it or not, growth is an inescapable truth of economic
life. It matters because a consistent stream of short-term results
spells prosperity or poverty in the long run. Such is reflective of
structure and policy. Sustaining high economic growth thus requires
more than the efforts of a handful of government leaders, planners,
businessmen, and labor unions. A broader social coalition, among them
the country’s intellectuals, bound ideologically and distinguished
politically, is perhaps desirable.

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