Saturday, March 31, 2012

Welfarism 19: Consumption-led Growth and Direct Welfare

There was an old article in the WB blog that was posted by three friends -- an economist, a political scientist and an IT whiz guy -- in their facebook walls last week. I didn't notice that it was posted in February 2008, until I dropped a second comment to it, which the web administrator kindly posted.

The paper was entitled Rising growth, declining investment: the puzzle of the Philippines by Alessandro Bocchi. It is an attractive title and he showed this chart in his paper,

From 1980 to 2006, GDP growth was on up-down-up-down trend but with sustained growth, while investments as a share of GDP (I/GDP ratio) has been declining to less than 15 percent by 2006.

Mr. Bocchi offered these explanations why it happened:
1.    The public sector cannot afford it;
2.    The capital-intensive private sector (i.e.: those businesses that, when operating, utilize more capital than labor) does not want to expand that fast; and
3.    The rest of the private sector does not need it.

In my earlier article here, Fat-Free Econ 1: Macroeconomics for Micro Concerns last March 08, 2012, I noted that GDP growth was mainly due to our consumption-led economy. Going back to an Econ 11 basic macroecon formula, 

 Y = C + I + G + (X-M) 

C or private consumption expenditure is 73 percent of Y or GDP. So that even if government  consumption G, or public and private investments I, will grow slow or even flat line, ie, zero growth, but if C will grow fast, then GDP can grow fast. 

The writer probably forgot this equation, they just want to push more WB loans to the Philippine government to expand G and finance further more public I.

C mainly came from domestic household savings, but a substantial amount also comes from  OFW remittances. Lots of money from such remittances are converted into direct household consumption like food, housing, education, healthcare and cell phones/telecom services. Part of such remittances also go to micro I like buying a new tricycle, a jeepney, a tractor or pumpboat. Or putting up variety/sari-sari store, a rice mill, etc. which are often not tracked by the national accounting system. 

Another question will be: If OFW remittances will continue rising but formal I will flat-line or even decline further, can the C-led growth be sustained?

I think the answer is Yes, even though the assumption that I will decline further may not be correct. With more remittances, it is possible that domestic production for certain goods and services will remain flat, or ever decline, but C will remain high via larger importation of goods and services. It is hypothetically possible that there will be zero local production of computers and cellphones, not even an assembly plant, everything, 100% are imported. But since the foreign currencies are coming in regularly to pay for those huge importation, then lots of shops and malls of imported products will arise. The big amount of remittances will snap those imported goods and services, and GDP can grow. 

In short, there is no "puzzle" or mystery to the Philippines' GDP growth. 

People adjust to a corrupt and inefficient government here. Public education quality from elementary to tertiary levels is generally poor, except for a few like a science high school and the University of the Philippines (UP). So people invest in private education -- tutorials, private schools from pre-school up to university.

Public healthcare system is also of poor quality generally except for a few health centers, so people invest in private health insurance (HMOs) and high out of pocket spending, especially for diagnostic tests, physician fees and medicines.

Public roads and infrastructure are of poor quality too, so people invest in new cars, even SUVs with good suspension system to withstand many ugly roads. Or people take the toll roads, expensive rates but road quality is world-class.

These household adjustments to an inefficient and corrupt government help drive the C upwards. Household welfare is done by the households themselves. Government welfare programs are mostly directed to the political supporters of the politicians in power, especially those from the administration party.

Below is my comment to the WB blog article, and the reply of the web administrator.

Consumption led growth

This is the 2nd comment that I will post here, you disapproved or censored my earlier comment. There is no "puzzle", Remember your basic econ equation, Y = C+I+G+(X-M). Philippine economy is mainly C or consumption-led. C is 73 percent of GDP, so that even if I or G will grow slow, or even flat-line, but if C will grow fast, GDP can grow fast. What is puzzling about that?
Now you may ask, "is this sustainable?" Yes, it is, because a big source of C is OFW remittances, tens of billions of $ are coming in yearly, increasing trend. Many of those remittances are spent for household consumption like food, education, healthcare. But a big portion is also spent for private I like a tricycle, a jeepney, a sari-sari store, which the national accounting system is not able to properly account. No puzzle, no mystery. Only cute article title to grab public attention.

Re: Consumption led growth

Dear Nonoy, sorry we didn't notice the first time you sent your comment. These past few days we've been inundated with spam email and they just buried yours. Thanks for taking the time to write again.
By the way, Alessandro Magnoli, the author of the piece, left the Bank a while ago, so it's quite unlikely that he'll reply to it.
Thnx for your interest,
-- Claudia
Blog Admin


See also:
Welfare Economics: Philippine Institutional Issues, November 14, 2011
Welfarism 18: Hong Kong's Expanding Government, March 27, 2012

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