Yellow Pad

By Filomeno S. Sta. Ana III

What can we expect from Ferdinand Marcos, Jr.’s administration in terms of policymaking in 2023?

We can second-guess how the administration will conduct itself this year in two ways. The first is by examining how current conditions, global and national, will influence policy. The second is by reviewing actual behavior and performance of the Marcos administration in the previous year.

Let us first look at the global outlook. The International Monetary Fund (IMF) expects that a third of the world economy will be in recession. This stems from the slowing down of the biggest economies, namely the US, European Union, and China. Note that according to economist Stephen Roach, these three biggest economies constitute about half of the world’s Gross Domestic Product (GDP), based on purchasing-power parity.

The Ukraine war and the persistent pandemic, among other events, have created myriad problems resulting in supply problems and high inflation, which in turn have led to a steep increase in interest rates. Both the rich and developing countries are not spared from this phenomenon.

The IMF’s managing director Kristalina Georgieva has a blunt summary: 2023 is going to be “tougher than the year we leave behind.”

The World Bank (WB) echoes the IMF outlook. An abstract for the forthcoming WB’s “Global Economic Prospects” says that global growth “is expected to decelerate sharply, reflecting synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from Russia’s invasion of Ukraine.”

In an earlier statement (Sept. 15, 2022), the WB said that “the currently expected trajectory of interest-rate increases and other policy actions may not be sufficient to bring global inflation back down to levels seen before the pandemic.”

But what about the situation in Asia? The lockdowns in China (which has been reversed, but which has now led to a surge in COVID-19 cases), the Russian invasion of Ukraine, and the global growth slowdown have led the Asian Development Bank (ADB) to make a downward revision of its regional growth forecast in 2023. The Asian Development Outlook says that it has revised its previous 2023 forecast in the region from 4.9% growth to 4.6%. That is a slight downward revision. And a growth rate of 4.6% when the rest of the world is edging towards recession is a relief.

The ADB forecast for the Philippines is brighter. The ADB estimates a GDP growth of 6%, down from its previous forecast of 6.3%. That still looks impressive. Even the WB’s estimate of 5.7% Philippine growth in 2023 is nothing to sneeze at.

The relatively bright forecast for the Philippines comes on the back of a surge as expressed in the average 7.76% growth in the first three quarters of 2022.

What can possibly explain the Philippine economic growth despite the strong global headwinds?

One reason can be explained by Milton Friedman’s plucking model. Plucking is a metaphor. Take a string of a guitar or a violin. The deeper and harder it is pulled or plucked down, the quicker it returns to its former state upon releasing the string.

This model basically defines a situation wherein after demand plunges, the economy bounces back quickly to its pre-crisis level. This suggests that regardless of policy, the economy would revert rapidly to its former condition.

The pandemic makes an interesting case for the plucking model. The onset of the pandemic severely disrupted economic activities, leading to employment and output falling way below the potential. But now that economic activities have normalized as society has learned to dance with the virus, the recovery has been swift.

The plucking model describes an economy strongly bouncing back after a deep recession. But it does not show the mechanism of how the recovery can take place. For instance, being in a bad equilibrium before the pandemic or poor interventions during the pandemic can delay the recovery. For that matter, even as the economy has recovered, government must decisively address new or emerging binding constraints.

The Marcos Jr. administration is fortunate to have inherited a sound macroeconomy, thanks to a series of critical reforms undertaken by previous administrations. The high-growth momentum took off during the Noynoy Aquino administration. The momentum was disrupted by the pandemic-induced recession, but the economy has rebounded.

While it was responsible for inflicting terror and violence and allowing intolerable corruption and inefficient public spending, the Rodrigo Duterte administration put in place a series of transformative reforms. The tax reforms, the relaxation of foreign investment rules, the lowering of barriers to meet the supply of affordable rice, the legislation of universal healthcare, inter alia, have strengthened the foundation for longer-term growth. Thus, the Philippines is on the cusp of getting the much-desired “A” credit rating that will demonstrate high creditworthiness and becoming an upper middle-income country.

But here’s the thing: The current high growth can be explained by the plucking model (regardless of policy, the economy will grow) in combination with the crucial reforms undertaken before Marcos Jr.’s presidency.

Perchance, President Marcos Jr. and his economic managers have been lulled into complacency. Worse, they have become overconfident. One of the administration’s first acts was to loosen health protocols like dropping the mask mandate even though COVID-19 persists. It has not appointed a Health Secretary, which has made the Department of Health ineffective in adopting or implementing policies. It has not appointed an Agriculture Secretary, either, reducing the Department of Agriculture to a servile agency that dishes out platitudes and silly propaganda.

Worse, in this environment of institutional drift, the administration has made policy blunders, marked by incoherence and zigzags. This is demonstrated by its bungling of food and trade policies (our sugar and onions are the most expensive), resulting in stubbornly high inflation.

Further, the administration has dismissed the most critical elements of the sound fiscal consolidation program that the Department of Finance has prepared for the new administration. Revenues have nominally grown, but tax revenues in real terms must respond to the pressure for higher but efficient spending to protect the country from global threats like the long war, the pandemic, and climate change.

Amid these challenges, the administration is fixated on a bad, irrelevant proposal: the Maharlika Investment Fund. The bill has been met with widespread and vigorous opposition not only from technocrats, civil society, academics, and the media, but also from the general populace. This is a sorry instance where the administration has squandered its political capital.

Surely, growth will happen in 2023. But given the way that administration is performing, the growth that will happen cannot be attributed to its performance. Moreover, in a world of extreme uncertainty and volatility, a bad black swan can destroy the current growth.

But let’s hope that the leadership will wake up. We do not want the hope or optimism of our people to vanish. How the current administration can shape up, neither the plucking model nor standard economic theory can explain.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.