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 4.4percent, 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 borrowing, and fears have been raised that the debt is unsustainable. The fiscal problem has also resulted in a plunge in public spending for construction (-18.9percent 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 Business World's top story, 31 December2003.) Meanwhile, the banking sector remains vulnerable. The Bangko Sentral ng Pilipinas is monitoring nine commercial banks, which have ahigh 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 politician slack 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 aftermath 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 Money):
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 probabilities.
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 president.”
At present, the direction of the animal spirits points towards less optimism. A recent report from Business World states that as of November2003, 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.”