Tuesday, June 04, 2013

Fat Free Econ 43: On the Philippines' Fast Economic Growth

* This is my article last Sunday in interaksyon.com.

If the 6.8 percent GDP growth in the first quarter of 2012 struck some as incredible, then imagine what they must be saying now about the 7.8 percent expansion in the first three months of this year. Suspending disbelief for a moment, the major contributors to this year’s growth feat have been encircled in the tables below.

Table 1. Sectoral Growth of Philippine Gross Domestic Product (GDP), 1stQuarter 2013, in Percent

Source: NSCB presentation

The main contributor remains the service sector, particularly finance (which includes the stock market) and public administration.

A government moratorium on new permits has punched a deep hole in the mining sector, resulting in its deep output contraction. But this didn’t prevent the industry sector from turning in high growth. And what were responsible for this? First is construction, both government and private sector.

The big number of cranes on tall structures that work day and night in many parts of Metro Manila and in other big cities in the provinces are a testament to fast growth in private construction.

Some people argue that the growth was not impressive because it was driven by election-related spending. How true is this claim? Let us check the numbers.

Table 2. Philippine GDP at Constant Prices , 1st Quarter, In Billion Pesos

Source: NSCB Statistics

Of the past five election years marked in red, growth was indeed high in four of them. In 2001 though, the political instability that accompanied the downfall of then President Joseph Estrada slowed down economic activity.

An election is not only about high spending by the government to support the administration candidates, but also huge private spending by the candidates, their supporters and families/clans. Thus, suppressed spending in previous quarters would surface as high spending in the first and second quarters of an election year.

So assuming that the country’s GDP growth in the first quarter of this year was “over-rated, exaggerated, meaningless,” wouldn’t this show up when we stack our performance against that of other countries? Let’s see the data in the table below.

Table 3. GDP Growth of Selected Countries in 1st Quarter 2013, in Percent

Source: The Economist, June 1st 2013, Output, Prices and Jobs

All the developed and “tiger economies” of East Asia – Japan, South Korea, Taiwan, Hong Kong and Singapore – grew ever so slowly. But at least they escaped the contraction that has befallen European economies. The entire Euro area has an average of -1 percent change in output in the first quarter of this year.

The current global economic condition and short-term outlook is not good. Slow growth in the US, Japan and other Asian tigers, and contraction in Europe. The emerging economies of Asia, including the Philippines, are showing promising growth.

There is one notable factor for the rather fast growth of these Asian emerging economies -- China, India, Indonesia, Philippines, Thailand and Vietnam -- they all have high population growth rates. Pakistan has yet to release its first-quarter GDP data, but its 2012 growth was 4.2 percent, comparable to that of Malaysia.

As for those countries where growth has slowed or the economy has contracted, they have one thing in common: greying populations. Public spending is high for healthcare, pension and other services for the big number of senior citizens relative to their total population. Many of such spending is not covered by domestic revenues, so those governments keep borrowing huge amounts of money, which negatively affect their overall fiscal condition amid high interest payments, which is passed on to the rest of the economy in the form of a low or even negative business outlook.

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