The author is the coordinator of the research and policy advocacy group Action for Economic Reforms.

What to expect of the economy is a common question asked in the new year, especially in an election year.

The government, multilateral institutions, and private think-tank
groups paint a rather bright picture. The National Economic and
Development Authority (NEDA) forecasts that the economy in 2004 will
grow between 4.9 percent and 5.8 percent. The International Monetary
Fund (IMF) has a more cautious forecast—4.25 percent. Still, this is
higher rate than its original calculation of 4 percent.

Of course, the optimistic economic forecast has some basis. Economic
performance in 2003 was a pleasant surprise, even for government. By
the end of the third quarter, gross domestic product (GDP) grew by 4.4
percent, surpassing the official forecast. In spite of internal and
external threats, the economy in 2003 showed resiliency.

But one must come to grips with the quality of the growth. For the
recent GDP growth rate has masked serious problems. The budget deficit
persists because of insufficient revenues, notwithstanding the
commendable effort of revenue collection agencies to meet their
collection targets. The lack of revenues, in turn, has forced
government to rely on borrow ing, and fears have been raised that the
debt is unsustainable. The fiscal problem has also resulted in a plunge
in public spending for construction (-18.9
percent by the end of the third quarter of 2003) though a run-up is expected just prior to the formal election campaigning.

In the private sector, a number of industries are troubled. Some
manufacturers and agricultural producers have asked government for
support in light of their lack of competitiveness, compounded by the
influx of cheap, if not smuggled, imported goods. Manufacturing output,
measured by the volume of production index on a year-on-year basis, is
declining. (See BusinessWorld’s top story, 31 December
2003.) Meanwhile, the banking sector remains vulnerable. The Bangko
Sentral ng Pilipinas is monitoring nine commercial banks, which have a
high level of non-performing loans but have a low level of provisioning
for loan losses and restructured loans.

The answers to these problems have already been offered. Some answers
are straightforward. For example, tax policies have to be immediately
passed to address the budget deficit. But the incumbent politicians
lack the courage to approve these policies (e.g., indexation to
inflation of the specific tax on sin products, reduction of fiscal
incentives, etc.) at a time the electoral period is fast approaching.

Investor confidence is a more complicated variable. Arguably, a
decisive factor that will shape the economy in 2004 and beyond is
“animal spirits.” There is more than enough evidence in the world to
show that investments are sensitive not only to fundamentals but to
“animal spirits” as well. We can cite a couple of contemporary
examples, which we experienced: the East Asian financial crisis and its
and the political crisis of the Joseph Estrada administration.

The idea of “animal spirits” comes from John Maynard Keynes. In his
words (Chapter 12 of The General Theory of Employment, Interest, and

Most, probably, of our decisions to do something positive, the full
consequences of which will be drawn out over many days to come, can
only be taken as the result of animal spirits—a spontaneous urge to
action rather than inaction, and not as the outcome of a weighted
average of quantitative benefits multiplied by quantitative

In the same breath, Keynes states (Chapter 12 of The General Theory):

We are merely reminding ourselves that human decisions affecting the future, whether
personal or political or economic, cannot depend on strict mathematical expectation,
since the basis for making such calculations does not exist; and it is our innate urge to
activity which makes the wheels go round, our rational selves choosing between the
alternatives as best we are able, calculating where we can, but often
falling back for our motive on whim or sentiment or chance.

In this light, the conventional growth models’ limitation surfaces.
They have difficulty capturing the significance of “animal spirits,”
the confidence of investors or entrepreneurs about the future. For
those who make investment decisions, economic forecasts are not
sufficient basis especially during critical or volatile times. And
undoubtedly, the environment for the 2004 elections is not
normal—particularly against the background of what the radical Left
calls “intensifying contradictions between
factions of the ruling elite.”

The prudent investors would thus postpone making decisions until the
outcome of the elections has become clear. Questions such as these have
to be answered before investment decisions are made: Will the elections
be clean and peaceful? Will the results bring about legitimacy and
stability of the new administration? Will the new leadership be
friendly to investments in general but also to specific types of
economic activity? With respect to the last question, the investors and
the general public cannot rely on the rhetoric of the politicians, even
as they say more or less the same things. (For example, both the
Estrada and Gloria Macapagal-Arroyo administrations promised to solve
the problem of the budget deficit. In practice, both administrations
failed to do so.)

The reality of the Philippine political economy is that the big
investors (e.g., Danding Cojuangco, the Chinese taipans, Makati
Business Club) support different factions of the political elite. All
these investors, regardless of their political loyalty or affiliation,
will logically defer investment decisions before the elections. What if
their presidential candidate loses? What happens to their investments?
The proclamation of a new president does not end investor uncertainty.
The businessmen identified with the
losing side would predictably be pessimistic about economic activity
for fear of being penalized by the winning party. Those entrepreneurs
or businessmen who are not identified with any of the contending
factions would likewise remain non-committal about investments for fear
that the rules of the new administration would favor its business
supporters. In short, investments immediately after the elections are
below the optimal level. It is perhaps to assuage the fears above that
a leading presidential aspirant is being packaged as a “healing

At present, the direction of the animal spirits points towards less
optimism. A recent report from BusinessWorld states that as of November
2003, business confidence continued to soften. Investors are also
sensitive to consumption behavior. But a survey done by ACNielsen
(October 2003) shows that only one third of the Filipino respondents
expect an improvement in the domestic economy over the next year,
a drop from the confidence level of 38 percent registered in a previous
survey. More to the point, the Philippines is classified among the
least optimistic countries. It is interesting to note that among the
countries that have improved consumer confidence are those which have
similar conditions like the Philippines, namely Indonesia (89 percent)
and Thailand (84 percent).

Given this less optimistic analysis, it seems rational to adopt a more
cautionary stance towards the economy for the near term. But then, the
notion of “animal spirits” accommodates both rational and irrational
thinking. Yes, the future is uncertain. But the outcome of the
elections may yet trigger either “waves of optimism or pessimism,” and
either way it does makes no difference if this would arise from cold
analysis, or “whim or sentiment or chance.”