The 2012 Real Business Cycle of the Philippines

Suppose that a car moves 100 kilometers per hour (kph). One second after, suppose that the same car moves between 95 and 105 kph. The outcome is not surprising for it is normal to change in a second, given the momentum, the wind, the steepness, and the humps and bumps of the road. But suppose the car doubles its speed to 200 kph or stops to 0 kph in a second. Then the outcome is not normal and it raises questions. Was it hit by lightning from behind to double its speed to 200 kph? Did the car hit solid rock to completely stop? What part of the change has to do with human intervention, e.g., the driver floors either the gas pedal or the brakes?

 

In this fashion, the economy is no different from the car. If it grows at a certain rate like 6.4 percent, by virtue of momentum, by us just showing up to work and doing the same thing as before, the economy will normally grow not too differently from 6.4 percent. This is so unless some extraordinary event like a power crisis, a natural disaster, or a technological revolution takes place; or unless some human policy intervention succeeds or fails dramatically.

 

One way to explain the growth of the economy is through the Real Business Cycle (RBC) model.  Our population grows by 2 percent per year so that there is a natural growth of consumers and producers of the same rate. So normally, the economy grows by at least 2 percent. Aside from population, technological progress takes its course. That is, knowledge and experience accumulate, institutions mature, good habits destroy bad ones, etc. Technological progress impacts productivity that results in additional natural growth. In the past 10 years (2002 to the present), I measure this natural growth at 5.1 percent. Arithmetically, this means 2 percent via population growth and 3.1 percent via technological progress.

 

Of course the economy does not actually grow by 5.1 percent every single period. Rather, the economy cycles around 5.1 percent (thus business cycle). Sometimes it grows faster, and sometimes it grows slower. In the long run, it is (asymptotically) bound to grow by 5.1 percent per year. That is, unless some extraordinary events like a natural disaster or technical revolution takes place; or unless some policy intervention succeeds or fails.

 

Knowing the RBC and in retrospect, the benchmarking, it should have been put this way. In 2010, the economy should have normally grown by 5.9 percent and yet it grew by 7.7 percent. This was a pleasant surprise with anecdotal credit going to election spending. Since 2010 is half and half between the Arroyo and Aquino administrations, it might be fair to say that either or neither be credited or blamed.

In 2011, the economy should have normally grown by 4.6 percent and yet it grew by 3.8 percent. This was a drag that needs explanation. Natural disaster in the likes of Sendong was bad especially for Northern Mindanao. But it was not enough to drag national growth by 1 percent (also remember that it came on December, 2011). Anecdotal blame goes to the national government under spending. The government dramatically cut the budget deficit from P314 billion in 2010 to just less than P200 billion in 2011. It is also convenient to blame the drag on the European debt crisis.

 

In the first quarter of 2012, the economy should have normally grown by 4.2 percent and yet it grew by 6.4 percent! This is a pleasant surprise that raises questions whose answers nobody can answer yet.

 

But the point is this. Suppose the economy grows by 1 percent and not the normal 4.2 percent. Then the planner cannot take credit and citizens should not be glad about the positive growth. Rather, the planner should explain it, as citizens should demand why the economy grew by only 1 percent. By the same token, if the economy grew by 6.4 percent and not the normal 4.2 percent, then the planner can relax, since citizens should be aware that the economy grew faster than normal.

 

Going forward, the RBC states that the economy is to normally grow by 5.9, 5.6 and 5.4 percent in the last three quarters of 2012. These numbers should at least provide planners and citizens a more educated benchmark. If the economy grows slower than the said numbers, then planners should explain, as citizens should demand why the economy did not grow as fast. Otherwise, if the economy grows faster, then planners need not explain and proceed to the next quarters.

 

Luis F. Dumlao, PhD, is the Chair of the Department of Economics, School of Social Sciences, Ateneo de Manila University.

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