* My column in BusinessWorld on August 13, 2019.
The Philippines’ GDP growth over the past 18 years has a beautiful and not-so beautiful story. Accelerating from 2001 to 2015, then decelerating lately: 6.9% in 2016, 6.7% in 2017, 6.2% in 2018, 5.6% in 2019’s 1st quarter (Q1), then 5.5% in Q2.
For brevity’s sake, we limit the possible factors to only two — external and internal factors. For external, we compare the Philippines’ growth with Asia’s big economies plus the US. For internal factors, we check the growth rates of GDP’s three components on the demand side: household consumption (C), government consumption (G), and private investments (I).
We can summarize the Table’s numbers for 12 economies as follows:
2001-2015: The global economy was generally good, except for the global financial turmoil in 2008-2009 that started in the US. Surprisingly, only the US and Japan performed badly while the rest managed to grow faster than the period from 2001-2005. The Philippines experienced consistent higher average growth over those 15 years.
2016-2018: The global and external economy seemed to be good. Seven countries have generally rising growth trends (the USA, Japan, Taiwan, Thailand, Singapore, Malaysia, Vietnam), three have flat trends (China, South Korea, Indonesia), and two have been declining (India and Philippines). But India’s “low” is still above 7%.
2019 H1: The external environment is bad. All have lower 2019 growth than 2016-18 levels except three countries — Japan, Indonesia, and Malaysia.
So if external factors have not been bad over the past three years yet the Philippines experienced consistent growth deceleration, the internal factors would explain it. The Department of Finance and National Economic and Development Authority pointed to high world oil prices in 2018, then the delayed approval of the 2019 budget as the main reasons for growth deceleration.
But this is not supported by the numbers. In 2017, growth of G was only 6.2% yet GDP grew at 6.7%, while in 2018, growth of G was double — 13.1% — and yet GDP grew only at 6.2%. In 2019 first half (H1), G was growing at 7.4% and GDP grew at 5.6%. G is not a big enough factor to pull overall GDP up or down compared to C and I.
What pulled down GDP growth in 2018 was low growth — only 5.6% — in C which is huge — it makes up about 65% of GDP.
In 2019, the main factor pulling growth down came from investments. Growth of I has been declining, from 25% in 2016, down to 13% in 2018, 8% in 2019 Q1, and a contraction at -8.5% in Q2. I is about 23% of GDP.
What caused the big decline of C in 2018?
The most proximate explanation is high inflation, 5.2% in 2018 from only 2.9% in 2017. This was largely due to higher oil taxes under the TRAIN (Tax Reform for Acceleration and Inclusion) law. High inflation adversely affected consumer confidence and hence, the decline in C.
What caused the big decline of I in 2018 and 2019?
The most proximate candidate is business uncertainty — from the proposed Endo bill (thankfully vetoed by the President in late July) and the TRABAHO (Tax Reform for Attracting Better and Higher Quality Opportunities) bill which was not passed and has been refiled in the present Congress. Many existing companies did not expand and some planned investments did not materialize. Then the reversal from integrated PPP (pubic-private partnership) to hybrid PPP kicked in. Some big infrastructure projects that could have been done by big local companies were instead given to China, Japan, other foreign contractors.
The new Congress should take note of these trends — the decline in C and I. Hence, they should not enact bills that will further erode consumer and investment confidence like higher taxes, higher regulatory fees, higher labor rigidities including higher mandatory minimum wages.
Congress should instead enact tax cut somewhere, reduced regulatory fees, and let companies give realistic labor pay. Expensive but repetitive work can easily be replaced by machines and robots now. Let the unskilled earn something, not zero by being unemployed and unhired.
BWorld 356, Infrastructure, mobility and liberty, August 05, 2019
BWorld 357, We need further FDI liberalization, August 10, 2019
BWorld 358, How government restricts energy development, August 13, 2019