The Truth about Gloria’s Economics

This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, January 16, 2006 edition, page S1/5.

What a man believes upon grossly insufficient evidence is an index into his desires—desires of which he himself is often unconscious. If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. – Bertrand Russell

In a time of universal deceit, telling the truth becomes a revolutionary act. – George Orwell

The government has been putting a lot of positive spin on the appreciation of the peso and the surge of investments in the stock market. For the past weeks, the financial sector has indeed been showing positive signs. With the peso strengthening against the US dollar, even breaching the P53/$1 level coupled with the decline in the 91-day treasury bill rates and the surge of investments in the stock market, one can be tricked into thinking that all is well with the Philippine economy, as the Arroyo administration would like to put it.

The peso appreciation and the stock market gains are not the barometers of a sound economy. The appreciation in fact penalizes the real sector of the economy—exporters lose competitiveness as their products become more expensive while producers for the domestic economy are hurt by competing imports that have become cheaper. Of course, the recipients of the remittances from overseas workers get fewer pesos from the conversion of the foreign currency.

It can likewise be said that a currency depreciation would have been but normal, taking into consideration that the peso has been devalued by last year’s relatively high inflation rate.

Do we have such a short memory? Have we forgotten the lessons of the 1997 crisis?   Before the onset of the 1997 crisis, the stock market was booming and the peso was stable. The Bangko Sentral ng Pilipinas then pursued a monetary and exchange-rate policy that favored a strong peso. The overvaluation of the currency, however, precipitated the crisis, as the current account deficit widened and the growth of the real sector slowed down.

Like the conditions before the 1997 crisis, the present situation shows disturbing signs that the growth is unsustainable. The growth of the local economy in 2005 measured by the gross domestic product (GDP) slowed down. The GDP growth rate for the third quarter in 2005 declined to 4.1 percent, falling short of the government’s forecast that the local economy would expand 5 percent in that same period. Not even the recovery in the last quarter of last year was enough to meet the government’s low-end target.

The political turbulence and the uncertainty arising from the Arroyo administration’s lack of legitimacy and credibility have dampened investor and consumer confidence. The haphazard process of changing the Constitution together with the no-election scenario in 2007 aggravates the situation. On the whole, apart from sporadic injections of capital, businesses are not adding new investments and have opted to maintain their current level of operations.  In times of great uncertainty, consumers would likewise postpone spending.  To put it another way, the economy has missed the potential for higher and long-term growth because of the unresolved political questions.

The lower-than-expected growth performance also means that the economy could not generate enough employment for an already growing labor force. Not only is the combined unemployment and underemployment rate high; but quality jobs (wage-employment in the formal economy, for instance) are scarce more and more people are voting with their feet.

Moreover, the fiscal problem is far from resolved.  The Bureau of Internal Revenue (BIR) did not meet its revenue target last year.   Key tax policies legislated by Congress were compromised, resulting in a less than optimal revenue gain for government.  At the same time, government is exaggerating the amount it could obtain from the forthcoming increase in the VAT rate. Tax collection, even for VAT, remains inefficient, especially considering that the reforms undertaken by the resigned BIR head, Guillermo Parayno, have been sidetracked.

True, government was able to somehow trim the deficit, but this was mainly a function of a severe cut in public spending, adversely affecting health and nutrition, education, and infrastructure. This undoubtedly will undermine the foundation for sustained long-term growth.

What seems to keep the Philippine economy afloat is the huge inflow of remittances from overseas Filipino workers, which reached a record high of $12.3 billion in 2005.  These remittances have fueled consumption-led growth. The flipside though is that the heavy inflow of remittances has significantly contributed to the strengthening of the peso, which is bad for the productive sector of the economy.  The appreciation of the peso thus complicates matters.

Let us not be fooled by pronouncements that the peso appreciation and the stock market performance are signs of a healthy economy. Recall the lessons of the not too recent past—these indicators only tend to lull us into complacency; they in fact presage horrible events.

Truth has been the biggest casualty of the Arroyo administration. The cover-up of the electoral fraud in the last presidential elections and the suppression of the Garci tapes exemplify this. The manipulation or massaging of facts has extended to the interpretation of the economic data. Sadly, a section of the private sector spins the same story or is gullible to such spins.

Given that our society has not put in place the needed fundamental reforms to break out from the boom-and-bust cycle, it would be wiser to adopt the skeptic’s view.

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