By Filomeno S. Sta. Ana III
Presented at Oxfam’s “A Better Normal: Civil Society’s Reflections on COVID-19,” 11 September 2020
It is but expected that COVID-19 is going to tank the Philippine economy. In fact, the whole global economy is suffering heavily because of the pandemic.
But the narrative on the Philippine economy would have been different if not for COVID-19. For context, it is relevant to review the economy before the onset of the pandemic. Some insights and lessons can be gained from previous economic performance as we attempt to recover and have a better new normal.
From 2012 to 2019, the Philippines sustained a high level of growth of Gross Domestic Product (GDP), which averaged 6.46 percent. At the same time, the data from the Philippine Statistics Authority showed a significant decline in poverty incidence among the population. Poverty incidence dropped from 23.3 percent in 2015 to 16.7 percent in 2018, a reduction of 6.6 percentage points. Impressive is the word to describe the sharp decline in poverty in a short span of three years and the sustained high growth for almost a decade
Strong Economic Fundamentals before COVID-19
Undeniably, the economy had strong fundamentals before COVID-19 emerged. The fundamentals were anchored on some very crucial reforms undertaken in the past years.
In particular the series of tax reform measures that started in 2012 (the historic sin tax reforms) removed a binding constraint that was the narrow fiscal space. The 2012 sin tax reform created a momentum for further tax reforms during the Rodrigo Duterte administration—the personal income tax relief for working classes, the increase in fuel and automobile excise taxes (which are progressive), the lifting of unnecessary value-added tax (VAT) exemptions, the further increases in cigarette and alcohol taxes, the introduction of taxes on sugar-sweetened beverages, electronic cigarettes, and heated tobacco products, etc.
The long-overdue rationalization of fiscal incentives and the reform of the corporate income tax are also forthcoming.
The passage of the controversial Rice Tariffication Law (RTL) was also a key reform. Immediately, it stemmed inflation arising from a rice shortage, a welfare benefit for the overwhelming majority of the population. (After all, we are all rice consumers.) In the longer run, rice farmers should benefit from the law as it enables other measures, particularly allocation of more resources, to improve efficiency and productivity.
On social development, the transformative Universal Health Care (UHC) Act was passed before the pandemic. This law provides health access to all, and reorients the health system towards primary care.
The above gains inspire financing and investments. Credit-rating agencies have given the Philippines an investment grade, a notch below the coveted “A” ranking.
The economic managers were aspiring to get the “A” grade. In addition, the Economist (in its May 2020 issue) ranked the Philippines sixth among 66 emerging economies with the highest level of financial strength. Financial strength is measured in terms of public and private debt, borrowing cost, and reserve cover. The Philippine ranking is impressive, given that the advanced economies like Korea and Taiwan are on the list.
But then COVID-19 struck, and the economic downturn inevitably happened. In fact, it was a policy choice to downgrade the economy. There was no other way, but “freeze” the economy when the principal objective was to save lives and to “flatten the epi curve.”
COVID-19 and the Recession
For the first half of 2020, the economy contracted by 9 percent, and the decline will persist for the rest of the year. Capital formation, consumption, exports, and imports all fell.
Cash transfers or subsidies that benefited more than 80 percent of households did mitigate the suffering brought about by the fall in household consumption. Government spending increased, thanks to the fiscal buffer brought about by tax reforms. The fiscal space also allowed greater deficit spending.
Unemployment and underemployment shot up in the early stage of the pandemic, accounting for more than 36 percent of the labor force. The Social Weather Stations’ surveys showed a rise in involuntary hunger, from 8.8 percent in December 2019 to 16.7 percent in March 2020 (the lockdown was imposed in mid-March) to 20.9 percent in July 2020.
The enhanced community quarantine (ECQ) affected 78.8 percent of GDP. But even if the lockdown did not happen, contrary to the argument of the libertarians, the economy would have still suffered tremendously. (A survey done by government showed that many establishments voluntarily closed.)
Naturally, fear of getting infected was pervasive. Fear meant a fall in consumer and investor confidence, and a disruption of markets. It is the pandemic itself that created weak demand and supply shocks, which in turn led to a rise in joblessness and hunger.
The government early on projected an economic contraction of 6.6 percent in 2020. Government also counted on a quick recovery. It said that the economy would grow between 6.5 and 7.5 percent in 2021 and 2022. But others were more pessimistic, forecasting a sharper contraction of 8.5 percent or more.
Now that we have slowly lifted the restrictions on mobility, we can expect the economy to move but still at a slow pace. Despite prior economic fundamentals, the situation is now different. The structural reforms that have been put in place can facilitate recovery, but they can no longer be sufficient to rebuild the economy. The scarring from COVID-19 is deep.
Furthermore, uncertainty remains. The uncertainty makes it difficult for us to define economic outcomes. A prolonged pandemic and high transmission rates will restrict mobility and economic activities.
And so, for some time, even with the introduction of a vaccine, we will have a situation where mobility and economic activities will remain hampered.
It goes without saying that the pandemic will have long-term effects. Think of the so-called long-haulers—those who continue to suffer from COVID-19 symptoms since their infection. Think of the mental or psychological distress that has an impact on our productivity and wellbeing. Think of those who dropped out from the labor force because they could no longer find employment during the pandemic.
Given the uncertainty and the longer-term impact, it’s iffy that we would be able to recover at the soonest. The government was hoping for a V-shaped recovery. The shape of V suggests a steep decline immediately followed by a sharp increase. But that won’t happen amid the uncertainty and the deep scar brought about by COVID-19.
The vaccine for all brings hope. But we cannot lower our guard. It takes time for the attainment of herd immunity from vaccination. And the vaccine distribution creates new issues.
First, the efficacy of the first-generation vaccine, despite the trials, is not fully ascertained. We do not know either what the unintended consequences will be.
Then in the Philippine context, a significant number of people now fear vaccination because of the negative experience in the past. Recall the Dengvaxia debacle that happened in 2016, but which continues to haunt our society.
We also have to contend with people whose fundamentalist religious beliefs make them shun vaccines. The communications strategy must address the apprehension and assure the public of the vaccines’ efficacy and safety.
On the rollout, the whole logistics can be messy. The bigger inescapable issue regarding vaccine distribution relates to the political economy. “Some are smarter (or have better connections and resources) than others.” Our advocacy must fight for a fair, equitable, and transparent vaccination program.
Hence, we cannot treat the vaccine as a silver bullet. We will continue coexisting with the virus for some time.
We cannot just annihilate the virus soon, even with the introduction of the vaccine. In this war against COVID-19, annihilation is not the appropriate strategy.
We cannot rely either on letting natural herd immunity to happen. Look at what happened to Sweden, which embraced that approach. The health and economic outcomes have been terrible. Having herd immunity by allowing the coronavirus to infect the many is brutal and inhumane.
We cannot rely either on a strategy of prolonged general lockdown. It is very contextual. Over a long period, the benefits from a lockdown also diminish.
The ultimate goal is saving lives. That means strengthening the health system and improving medical and non-medical interventions that will flatten the infection curve.
But government has faltered in flattening the curve, despite the imposition of a severe lockdown. Hence, when national government was about to ease the quarantine restrictions despite the high infection rates, the coalition of health professionals asked for a timeout. The health community got the support of the public, compelling government to take heed.
The timeout was meant not only to relieve the strain of the critical care system. It also gave time for government and society to refresh or reinvigorate the strategies.
These strategies have wide coverage: Case-finding, testing, self-quarantine, treatment, contact-tracing, physical distancing, self-protection, workplace and public transport safety, social amelioration, hunger prevention, and job preservation.
The successful implementation of the strategies towards containing the pandemic is the key to economic recovery. Said another way, economic recovery cannot happen without flattening first the epi curve.
The trade-off between health and economic outcomes is superficial. Meeting the health objectives and providing the subsidies and safety nets for the people will define and shape the economic recovery.
To be sure, substantial resources are needed to finance the health and social interventions. But revenues have plunged in light of the economic shock. Government then has to rely on massive deficit spending.
All over the world, governments have no choice but incur bigger deficit spending. The question for the Philippines is whether its deficit spending is bold enough.
Based on government data, deficit spending for 2020 is equivalent to 9.6 percent of GDP. Deficit spending for 2021 and 2022 is estimated at 8.5 percent and 7.2 percent of GDP, respectively.
However, some argue that this is still conservative. The Philippine government’s deficit spending is lower compared to that of other emerging markets (EMs). Based on the International Monetary Fund’s World Economic Outlook update (June 2020), the global average of deficit spending for EMs is 10.6 percent of GDP. For Asia’s EMs, the average is 11.4 percent of GDP.
Further, the Philippines has sustainable debt. Our debt ratios are sound. For example, gross debt stood at 40 percent of GDP (source: IMF). For all EMs, the IMF projection of 2020 gross debt is 63.1 percent of GDP.
In other words, the country is far from threatened by a debt crisis. We have secured the fiscal space that allows us to incur a higher deficit. That fiscal space can be attributed to the passage of the bulk of the comprehensive tax reforms before the pandemic.
But Philippine deficit spending also faces a legal constraint. One particular reason why government could not spend more even if it wanted to is a provision in the Constitution. Government needs to pass a supplemental budget for additional resources to fight the pandemic.
But Article VI, Section 25, paragraph 4 of the Philippine Constitution states: “A special appropriations bill shall specify the purpose for which it is intended, and shall be supported by funds actually available as certified by the National Treasurer, or to be raised by a corresponding revenue proposed therein.” In short, the special appropriations cannot be financed by borrowing but by reallocation of available funds or generation of new revenue.
That puts government spending for the supplemental budget in a bind. On the one hand, at a time of deep economic crisis, government cannot depend on new revenues. On the other hand, the Constitution disallows borrowing to finance the supplemental budget.
The prolonged pandemic (series of waves) together with uncertainty also compels a strategy of preserving bullets or keeping the powder dry. Government borrowing from the private sector, foreign sources and the central bank cannot be infinite. Unsustainable borrowing is damaging.
Even monetary policy has its limits. When consumer and investor confidence is shattered because of the fear of getting infected by the coronavirus, the effectiveness of injecting liquidity and repressing interest rates is greatly diminished.
The Bangko Sentral also has to contend with the rules imposed by its charter. Monetization or printing money is subject to special and stringent conditions.
Quality of Spending
Higher deficit spending should never be an excuse for waste and inefficiency. The quality of the spending like having cost effectiveness or delivering the bang for the buck should be a constraint to higher public spending.
For the quality of spending matters, it is appropriate to assess the expenditure proposals like the bill titled ARISE (Accelerated Recovery and Investments Stimulus for the Economy). The amount involved in ARISE is huge: PhP1.3 trillion. This dwarfs the Bayanihan 2 budget of PhP162 billion. But ARISE contains wasteful and redundant spending, including pork barrel insertions.
As an illustration, billions of pesos from ARISE will be used for rapid antibody tests (RATs). RATs are not a substitute for the polymerase reaction (PCR) test, the gold standard, to determine whether one is infected by COVID-19. (Space constraint prevents us from detailing other issues related to ARISE.)
A good stimulus bill is one that is not only bold and adequate. It must also be well-designed and well-targeted. Specifically, the stimulus spending must target the poor households and the unemployed or displaced workers. After all, they are the ones who will use the subsidies for consumption, thus helping boost aggregate demand.
A stimulus is likewise temporary, and the policy maker must know when to unwind it.
Collective Action Problem
The main challenge we face to flatten the COVID-19 curve and facilitate the economic recovery revolves around collective action. The specific issues include:
The response to COVID-19 has been highly politicized. The closure of the ABS-CBN franchise and the targeting of political adversaries like Vice President Leni Robredo and the Left manifest the partisanship and polarization. Unity, not division, is what we need during this emergency period.
Poor communications and the spread of fake news (like the President’s statement that gasoline can clean masks) undermine public compliance with health protocols.
Policies and actions of government agencies contradict one another. For example, the Department of Health is firm about the use of PCR tests to detect present infections, but some agencies and some LGUs indiscriminately rely on RATs. LGUs by themselves have become small kingdoms with their own rules. Having independent “czars” and having a Presidential spokesperson contradict the DOH also complicate collective action. All this results in policy incoherence.
A punitive approach or a militaristic response only heightens fear. Changing behavior is best done through motivation and persuasion.
Never Waste a Crisis
Despite these problems, we see some significant gains. As Winston Churchill said, never waste a crisis. COVID-19 has provided the impetus to accelerate reforms on different fronts. Some of these are:
We hope that these gains and reforms can shape a better new normal. What are the contours of a post-pandemic world, a better new normal?
One priority will be pandemic preparedness together with universal health coverage anchored on primary health care. The health system must be good at simultaneously doing individual-based and population-based interventions. The desired system augments the health workforce, services and facilities. It has to stockpile medicines, supplies, and equipment.
An urgent task is to recapitalize the Philippine Health Insurance Corporation (Philhealth). Everyone sees is the need to reduce waste and corruption. Strengthening the health technology assessment and introducing technological innovations address waste and corruption. And they improve the quality of services.
Another major concern is urban renewal. This encompasses many items, and each component entails a set of reform measures. Consider the following: better public transport, socialized housing, hygiene and sanitation facilities, and green spaces.
Having a safe and efficient public transport system means that society treat it principally as a public, not private, good. Active public transport, too, needs encouragement. National and local governments should build bicycle lanes and pedestrian-friendly roads.
Both government and the private sector must invest in socialized, affordable, and environmentally sustainable housing. This requires huge resources.
Also pronounced is the need to balance urban and rural development and scatter economic activities—from the centers to the peripheries. This balancing and dispersal could avoid a future situation in which an emergency or calamity in Metro Manila and urbanized Luzon would affect almost 80 percent of the country’s GDP.
Another realization is the immediacy of digital connectivity for all and deeper Internet penetration. The role of digital connectivity in the time of the pandemic is most felt in the delivery of essential services and in continuing productive activities. Health care at the primary level, online education, and remote work require access to strong and uninterrupted digital connection.
The pandemic has also forced the workplace and the education system to adopt new models, standards and arrangements. The employers have to give extra attention to the health and safety of workers. Similarly, the workplace has to innovate to preserve social relations and enhance productivity despite the constraints of physical distancing.
The education system has to find new ways to be resilient. Online teaching or learning is a challenge. Given the technological constraints, this presents more difficult challenges to ensure the quality of education. Giving additional responsibilities to the children’s parents and having appropriate online materials are new demands.
On agriculture, the whole of society—producers and consumers—have to redefine food security. In the Philippine context, food security has traditionally been associated with locally producing to the maximum the needs of the population. Sadly, in the past, quantitative restrictions (QR) on rice imports became the tool for food security. This had a perverse effect of creating rice shortages and hence higher rice prices.
However, the lifting of the QR in 2019 has eased supply and has lowered rice prices. To be sure, the RTL has adversely affected the rice farmers in the short term. But then, the old QR regime failed the farmers; their over-all welfare did not improve under the old rules. The new rules and the attendant resources from the tariff revenues that have replaced the QR create conditions for efficiency and productivity.
In this context, food security should no longer be about trade protection. Food security has to be defined differently. It is about making rice consumption of the whole population affordable and accessible. It is about promoting competitiveness, scale, and productivity, thus leading to higher incomes for our farmers.
The pandemic has also highlighted the need to strengthen the capacity of local governments. In particular, LGUs have to adopt a data-driven strategy. LGUs need to become adept at collecting, analyzing, and interpreting data. Responding to emergencies, which is a common occurrence in the Philippines, is a key task for LGUs.
One favorable development is the increase in fiscal resources for LGUs, arising from the Supreme Court ruling, known as the Mandanas ruling. The ruling mandates national government to allocate a higher percentage of revenues to the LGUs. In the face of absorptive capacity issues, the LGUs must deepen their learning to allocate and distribute resources efficiently and equitably.
Having a data-driven strategy thus gains urgency. This is the way to go, not only for national government, but for local governments as well. Incomplete or missing data have hampered the whole of government’s response to COVID-19. The antiquated data systems or infrastructure, the lack of access to information, and an undeveloped data culture have all combined to the information problem.
Examples abound on how data-related problems have impeded the goal of flattening the pandemic curve. To wit:
In sum, creating a better new normal requires fresh, precise and accessible information. A data-driven strategy is a key ingredient in crafting and implementing evidence-based policy.
The problems and solutions discussed above are related to the chronic issue of inequality. Consolidating the reforms on health, education, employment, public transportation, Internet connectivity, socialized and sustainable housing, food security, and local government capacity, inter alia, will prepare us in mitigating shocks and in reducing inequality.
These reforms are transformative, but they cannot be done overnight. Reforms are generally incremental, but they all contribute to having social inclusion and reducing inequality.
There will nevertheless be tough decisions for both the medium-term and the long-term. Concretely, as we move towards the new normal, a point will come that the stimulus has to unwind. That means narrowing the deficit through a combination of tightening public spending and increasing revenues or taxes.
As earlier said, higher deficit spending during a health and economic crisis is necessary. But once the stimulus has achieved its objective of reviving the economy, the increased borrowing and spending will be rolled back to the normal level.
Yet, policy should no longer ignore the “black swan” (the rare, the improbable, the uncertain event). The black swan has become more frequent. Year in and year out, the Philippines confronts shocks and calamities. Each crisis has almost irreparable consequences, especially for the poor.
To brace for uncertainty, formulaic policies and interventions will not work. They have to cover a range of actions, from the conservative to the radical.
The black swan suggests that the conventional economic policies are inadequate or even inappropriate. We should embrace economic heterodoxy.
COVID-19 has hammered the last sharp nail in the neoliberal coffin. Neoliberalism, the dogma of selfishness and unfettered markets, is dead. (But in politics, economics, and religion, what is dead can be resurrected.)
COVID-19 has shown that even the most conservative or most neoliberal governments have embraced policies that contradict the sacred principles of unrestrained liberalization and deregulation.
The example is how even the supposed fiscal hawks have accepted deficit spending. The famous quotation attributed to disgraced US President Richard Nixon is back: “We are all Keynesians now.” In 1971, Nixon pursued massive deficit spending, making him a proud Keynesian even though he was an extreme conservative.
Nixon’s deficit spending amounted to US$23 billion, equivalent only two percent of the GDP. Currently, US deficit spending, under a more reactionary President, is equivalent to 16 percent of GDP percent. (In the Philippines, as stated previously, the deficit is just below 10 percent of GDP.)
Soaring budget deficits scare the economists and everyone else. However, a deep crisis has compelled politicians and technocrats to set aside dogma, and embrace big, bold deficits.
The old model attached to efficient markets is likewise retreating in the face of the war against COVID-19. The pandemic has disrupted or destroyed markets. This necessitates a new approach that emphasizes the role of institutions and collective action to address the market failures.
One example of how the black swan phenomenon has led to rethinking models pertains to the idea of having supply “just in time.” In its place is the “just in case” model, as articulated by Javier Solana, the former NATO (North Atlantic Treaty Organization) Secretary General. “Just in case” anticipates the possibility of a national disaster or emergency that has unbearable costs to society.
Its implication on the health system is the stockpiling of essential supplies and equipment. The security of supply is paramount, even if this means trading off cost-efficiency or optimal allocation.
Maintaining an army suits the “just in case” model. On the surface, having a large army is costly. Why maintain a large army at peacetime? Isn’t this is a waste of resources?
But society recognizes that having a national army or having external defense is a public good. Maintaining a large force even during a long period of peace is unquestioned. The country must always be prepared “just in case” war or invasion happens.
Flattening the COVID-19 curve has been likened to fighting a war. The countries that at the outset have prepared for the pandemic war are the most effective in containing the virus. From the start of the outbreak, they already have put in place the adequate human resources, equipment, and supplies.
Arguably, one of the last bastions of neoliberalism is the central bank. But even here, “the times they are a-changin’.” Take the case of the US Federal Government’s radical stance. The Fed has made a turnaround on conventional monetary policy by adopting a bias for “maximum employment.”
For generations, central banking is focused on, if not obsessed with, targeting inflation. Until now, the sacred duty of the central bank is to fulfill its mandate of maintaining price stability. The new direction of the US Fed is some sort of a sacrilege.
The US Fed’s review of monetary policy strategy, tools and communications (August 2020) states the new bias of tolerating inflation and maximizing employment. Specifically, the Fed must “be informed by the assessments of the shortfalls of employment from its maximum level.”
The practical implication of the statement is that inflation expectation will not necessarily result in a policy rate increase. The Fed will first address the employment shortfalls, and will only act on inflation when it actually climbs to a non-tolerable level.
Other central banks have taken notice. It is perhaps a matter of time before they follow the Fed’s lead.
In other areas, unconventional monetary policies like quantitative easing or even monetization and the more radical Modern Monetary Theory (MMT) have become en vogue. (MMT argues that some governments can create money as long as necessary without being burdened by debt, the only constraint being inflation.) Some ideas like MMT are debatable, but the point is that they have become part of the mainstream discussion.
The Philippines is not at the cutting edge of these momentous changes. But circumstances move the country farther from dogma and towards the direction of new thinking.
There you are. Bye-bye neoliberalism. Heterodoxy will define the future. Hopefully, the future will be a better new normal.