The Philippine Economy from the Perspective of Growth Economics (Part I)

Michael Alba is a professor of economics at De La Salle University.  His paper reflects the main theme of the Philippine Economics Society Annual Meeting on 21-22 November at the Assembly Hall of the Bangko Sentral ng Pilipinas.  This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, November 20, 2006 edition, page S1/5 & 6.

The soul-searching, plaintive question that Pinoy-philes have been asking is, why have episodes of crises happened to a nation so full of promise, to a people who believed—believe(!)—themselves to be so singularly blessed? In searching for answers, this essay sets out to obtain a fresh look at the Philippine economy by adopting the comparative approach and long-term lens of the relatively new discipline of growth economics, using its models and tools of analysis. In addition, it interprets the data in the light of recent findings in and perspectives of modern development economics.

Arguably, this new approach confers certain advantages that complement traditional historical treatments and the more customary short- and medium-term economic analyses. First, the comparative perspective of growth economics affords learning from the experiences of other countries. Second, the long-term focus of growth economics concentrates the analysis on the time-persistent factors. Third, the interpretation of results is informed by a more enlightened, more sober understanding of the development process. According to this new perspective, development is not by any means an inevitable process, but only a possibility: As a country may grow, just as likely may it stagnate. Moreover, development is understood not so much as a process of factor accumulation (i.e., of amassing more capital), but as a process of organizational change that enables a country to solve coordination problems that hamper efficiency and equity. And it is readily acknowledged that there are no surefire formulas for success—the Washington Consensus notwithstanding: Some policies may work for some countries, others may work for some time periods, but no set of policies works for all countries or over all time periods. In lieu of the emphasis on policies (e.g., macroeconomic management), social institutions (as circumscribed by culture and history as well as geographic, climatic, and environmental conditions) are considered the deep determinants of economic growth and development.

The essay is organized as follows: In the next section, the choice of the (operational) variable(s) of interest is explained. It then presents two snapshots of the distribution of country living standards—in 1960 and 2000—to set the backdrop of the analysis in terms of world developments. What follows is why the Philippines has remained relatively poor going into the 21st century. It submits three interconnected answers: First, the country has been stuck in a low-growth trajectory. Second, it is headed for a low steady-state level of output per worker, which also explains its slow rate of long-term growth. Third, its total factor productivity (i.e., the efficiency with which inputs are combined to produce output) is horrendously low.
The deeper question—why the Philippines has the wrong attributes for long-term growth and competitiveness—is explored. The hypothesis of an answer provided is: poor social infrastructure as a result of culture and history.

The Variable(s) of Interest

Following many studies in growth economics, e.g., Hall and Jones (1996, 1997, and 1999), Jones (1997 and 2002), and Klenow and Rodríguez-Clare (1997), this paper uses as its variable of interest either the level or the growth rate of the relative living standard, measured as the ratio of a country’s GDP per worker relative to that of the U.S.

For analytical convenience, the paper’s focus is on relative rather than absolute living standards, so that GDP per worker of each country is expressed as a fraction of the GDP per worker of a reference country. This is to set the analysis in the context of what is referred to in the literature as the (conditional) convergence hypothesis. First proposed by Gerschenkron (1952) and Abramovitz (1986), the (conditional) convergence hypothesis maintains that (under certain conditions—in particular, that economies tend to the same steady-state rate of growth) there is catch-up growth, i.e., “backward” countries grow faster than their wealthier counterparts, which enables them to close the gap in living standards. As formulated in growth models, the phenomenon can be decomposed into a growth process and the terminal point to which growth tends: (a) the principle of transition dynamics, which states that the faster the economic growth rate, the farther below it is from its steady-state rate of growth, and (b) the steady-state level towards which a country’s output per worker is tending—in particular whether or not it is the high living standard of the developed countries (at which both output and the work force are growing at the rate of the technological frontier).

Using the relative living standard indicator also has the benefit of scaling down the range of values of the variable to be more or less in the unit interval, so long as the reference country is persistently among the wealthiest in the distribution. The magnitudes are then easily interpreted as percentages of the reference country living standard.

The U.S. is used as the reference country for three reasons: First, the growth rate of the U.S. has been stable since the 1870s, which suggests that the U.S. is close to its steady-state growth rate. Second, the U.S. has been consistently among the richest countries in the world. Third, the U.S. is arguably very near, if not actually on, the technological frontier.


The World Distribution of Relative Living Standards, 1960 and 2000

Figure 1
presents the kernel densities of relative living standards in 1960 and 2000, using GDP per worker data from the Penn World Table version 6.1. A kernel density is a smoothed histogram, where the width of the bar has been narrowed to a point.  Three features of the graphs deserve comment. First, the density functions of both years are widely dispersed, with the range of values spanning almost the entire length of the unit interval. This implies that the huge gap in living standards between rich and poor countries persists even after 40 years. Second, the densities are skewed to the right, which means that in 1960 as in 2000 there were proportionately more poor than rich countries. Third, the density for 2000 has a lower peak on the left and a small hump on the right. This indicates that the proportion of poor countries has declined in 2000 and that some countries that were poor in 1960 have gradually approached the U.S. living standard.

This last point is an encouraging development. A problem with Figure 1, however, is that the winners (and losers) in growth performance between 1960 and 2000 cannot be easily and systematically identified. Addressing this issue, Figure 2 plots the countries’ 2000 relative living standards against their 1960 values. Countries represented on points above (below) the 45-degree line can then be identified as winners (losers), having improved on (deteriorated from) their 1960 rankings.

nfortunately for the Philippines, its point on the scatter diagram falls just below the 45-degree line, suggesting that it is one of the underperforming countries, because its GDP per worker did not grow as fast as the technological frontier (as represented by the growth rate of the U.S. GDP per worker).

An inference that Jones (2002) draws from Figure 2 is that countries whose relative living standards exceed 0.15 will converge to a high living standard in the far future, whereas countries with relative living standards below 0.15 are likely to see their GDPs diverge to different low-growth steady states. If true, the implications for the Philippines are serious, since it is right at the border of the two sets of countries. If it gets its act together, it may yet join the high performers; if not, it will plod as a relatively poor country far into the future (its performance between 1960 and 2000 being suggestive).

An important point that may be drawn from Figures 1 and 2 is that economic growth is not an inexorable process: Over time, a country’s relative living standard may improve or worsen.  Some of the growth miracles are countries in East and Southeast Asia, such as Hong Kong, South Korea, Malaysia, and Thailand. Amazingly, Hong Kong’s living standard went from 18.9 percent of the U.S. living standard in 1960 to 80.9 percent in 2000, and South Korea’s improved from 14.8 percent to 57.1 percent.

As impressive as the feats of the growth miracles were, however, just as tragic were the meltdowns of the growth disasters. A case in point is Venezuela: One of the richest countries in the world in 1960 with 83.5 percent of the U.S. living standard, by 2000, its living standard had declined to only 27.5 percent of that of the U.S. Another is Zambia, whose living standard worsened from 11.0 percent of the U.S. living standard in 1960 to 4.1 percent in 2000.

In the case of the Philippines, the living standard declined from 17.4 percent of the U.S. level in 1960 to 13.0 percent in 2000, making the country a minor growth failure, particularly when viewed in the wake of its high-performing neighbors. This point stands out in greater relief when the relative living standards of the ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore, and Thailand) and Taiwan are tracked between 1960 and 2000. In 1960 the Philippines  ranked  a close third, after Singapore and Malaysia,  but  by  2000  was  dead  last—with  the  2000 relative living standard even lower than its 1960 level, the country having been unable to grow faster than the technological frontier. Even more telling is the indication that the decline started in the early 1980s and has not been reversed ever since, through successive terms of democratically elected administrations.

A possible reason for this deterioration over the last 15 years or so may be inferred from Easterly (2002)1: What Sah (2005) calls “diffused and demographically widespread corruption” may have become more prevalent in the post-Marcos era, as the dismantling of the dictatorship’s monopoly on extortion may have given way to a tragedy-of-the-commons outcome. As pointed out in Ong (2003), the difference in corruption during and after Marcos’s time was that, from being the purview of a favored few, viz., the relatives and cronies of the First Family, it became a line anyone with the gumption could engage in. If this was indeed the case, the deadweight losses of corruption might have increased many-fold after the mid-1980s, which in turn might be a primary cause of the poor long-term growth performance of the Philippine economy since then.

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