An Assessment of the Philippine Economy (October 2013 —Abstract)

Germelino M. Bautista

The following is an abridged version of the report. For complete discussion, data, and citations, please see the full article HERE.

The Cyclical Pattern of Growth

Since the 1960s, the economy as measured by per capita GDP growth has had six brief cycles, each extending 4 to 5 years, except for the 7-year growth period from 1975 to 1982. The downswings have been associated with growing fiscal and current account deficits, a worsening balance of payments and international reserve position, and declines in private investments. Downturns in investments have, in turn, been significantly related to a decline in the preceding year’s GNP, currency depreciation, lower domestic credit, and higher interest rates. Investments have also gone down the year before a presidential election and when there are expectations of lower GDP. Increases in government spending and declines in private investments have been hypothesized as mediating or precipitating causes of downswings.

The 1983-85 political and economic crisis is like a chasm dividing and differentiating the cycles of the 1960s-1982 period from those since 1985. Without negative growth rates, the earlier cycles enabled real per capita income to move continuously upwards, peaking in 1982. In contrast, the cycles since 1986 were punctuated with negative rates that prevented income from moving steadily upward. As a result, it took two decades to recover peak 1982 real per capita GDP. The long-drawn recovery and more unstable economic conditions after 1985 reflect conflict-ridden and highly politicized transitions between political regimes and from one growth strategy to another, as well as the environmental and natural resource limits reached by the economy.

Prior to the 1980s, natural resource and agricultural exports – together with an overvalued currency policy, tariff protection, and government spending that supported import substitution industrialization – provided the impetus to growth. By the 1980s, however, this implicit growth strategy had worked itself out. The depletion of forest and fishery stocks and the inability of a relatively underdeveloped agricultural sector to provide cheap food and new exports made it difficult for agriculture and the natural resource sector (except for minerals) to supply resources for industrial growth. Moreover, the propensity of governments to rely on deficit spending and external borrowings to finance infrastructure investment and prop up growth, in combination with an overvalued currency, eventually became inflationary and socially costly. Thus by the early 1980s, a new growth strategy had become imperative.

The 1983-1985 economic and political crisis and depletion of the country’s natural resources coincided with the increasing prominence of liberalization as a global economic policy framework. The adoption by the Philippine government of this framework to facilitate the entry of foreign capital and the subsequent establishment of export-oriented industries constitutes a major policy shift from the protectionist bent of legislators and managers in the pre-1980s era. However, it has been precarious shift lacking the necessary institutional arrangements to make it work.


Service-led Growth in the Context of Environmental Degradation and Lackluster Agricultural Performance

Unlike some of its neighbors, the Philippines has not experienced a period of sustained and rapid growth since the 1970s. In addition to the sources of macroeconomic and political instability mentioned above, growth has been cyclical and unstable because of the low and erratic growth pattern of particular sectors, the unsustainability of the implicit postwar growth strategy prior to the 1980s, and the limitations of the current export-oriented industrialization strategy.

The service sector has led and provided the most stable source of growth. But the erratic and declining growth of the forestry, fishery, and manufacturing sectors, coupled with the low growth performance of the crop agriculture sector, have constrained the economy’s potential growth. In addition to inefficiency, the poor performance of agriculture is related to the conversion of forestlands into unproductive forestland, brush or grassland, or farmland. This conversion is due to intense and unrestrained logging activity, road construction, mining, upland farming, and the failure to rehabilitate deforested watersheds. Such upland activities have had adverse impacts on local climates, precipitation, stream flow, aquifer recharge capacity, soil stability, and sedimentation, resulting in deteriorating irrigation and hydroelectric power services and declining farm yields and income.

Deteriorating environmental conditions are significantly related to poverty and migration. Provinces with greater forest loss, larger proportions of farmlands, and smaller proportions of irrigated farms have had a higher share of households living below the poverty threshold. Poverty or the lack of growth and employment opportunities in the non-farm and non-forest sectors of these provinces have also been associated with out-migration. Uplands, coastal areas, and urban centers have been favorite destinations of rural migrants. However, rapid and uncontrolled migration to these areas has had disastrous environmental effects.

As a case in point, the sharp rise in demand for fish and corresponding growth in fishing effort by both commercial fishers and increasing numbers of municipal fishers led to the depletion of the country’s fishery resources by the late 1970s and early 1980s. This, in turn, has aggravated the poverty of municipal fisher folk who suffer from both a declining catch per unit effort (CPUE) and displacement by commercial outfits. And while aquaculture and mariculture have provided new sources of growth in the 1990s, their continued expansion is threatened by decreasing mangrove areas, siltation of coastal areas, and pollution of lakes and rivers. It is not surprising therefore that growing poverty, fishery depletion, and in-migration has turned coastal areas into slums, making them less viable as informal safety nets for poor rural migrants.

The stable growth and higher contribution to output of the service sector relative to agriculture and industry in the 1990s has meant greater employment opportunities in this sector. Such opportunities, however, were confined mainly to the National Capital Region, Cordillera Autonomous Region, Southern Tagalog, and Central Visayas. The employment opportunities also seem to have been greater for women, who have dominated the community, social, and personal services and wholesale and retail trade, which employed about 50 percent of the female labor force.

With its heterogeneous establishments and dualistic structure, the service sector grew as a result of inflows of foreign capital into banks and other financial institutions, overseas remittances, and the growth of the urban population and market. The absence of growth in agriculture and manufacturing in the countryside also increased the number of lower middle class and poor rural migrants to urban centers, but they were too numerous to be absorbed by the formal service sector. Thus urban in-migration has resulted in both the market expansion of the informal sector and growing slum populations.

Growth in service sector employment is characterized by an increasing number of establishments with a smaller average number of employees and meager wages. This reflects the relative ease of entry of small units into the service sector, growth in the informal sector, and the adjustments workers have made to unemployment and underemployment experienced during the 1990/92-1998 period of the cycle.

With its varied activities and size reduction of service units, the informal sector seems to be undergoing a Geertz-like involution process of absorbing unemployed or underemployed labor from the larger community, thereby complementing limited opportunities in other sectors or parts of the country. Female migrants have been an especially significant source of surplus labor for the urban service economy, having formerly been unpaid family workers in the agricultural and nonagricultural rural sectors.

The nature of the country’s service-led growth has several limitations. For one, it has not been able to pull up the rest of the economy. Moreover, the enclave character of the growth process has strained the carrying capacity of the urban environment. Because booming urban centers attract more people and promote more economic activity, the process has entailed greater consumption of energy and water resources and the generation and accumulation of wastes. Without adequate foresight and safeguards, these urban centers now face problems of groundwater depletion, coastal land subsidence, improperly disposed garbage, air and aquifer pollution, and the accompanying health hazards.

The Limits of Manufacturing, Foreign Investments, and Trade Liberalization

Unfortunately, the shift from industrial protection to a liberalized structure – with its corresponding flow of foreign investments – did not bring the expected benefits to the manufacturing sector. While a great deal of foreign investments went into chemicals, chemical products, and food in the early 1990s, and into machine, apparatus, appliances and supplies, and nonmetallic mineral products in 1996, these did not generate significant employment opportunities or export capacity.

The period from 1982 to 1998 did register a net increase in employment in certain industries. Employment contracted in textile, rubber, glass, wood products, and pottery manufacturing as large and medium-sized industries shifted to small industries; it grew in large industries like electronics and professional and scientific equipment production, and in a few small industries, like leather, plastic, nonmetallic, fabricated metal, and machinery. More employment opportunities were also available in food processing and wearing apparel. These increases notwithstanding, the net increase in employment over the 16-year period was not significant. On average, only 30,511 additional jobs per year were generated (or only 3 percent of the 1.013 million labor force entrants in 1998), thereby failing to improve the sector’s employment share.

Neither did foreign investments contribute much to greater export production in food processing industries; these were more oriented toward the local urban market. Investments for export production flowed mainly to the electronics industry. Together with the output of smaller and related items such as machine goods, electronics products accounted for the entire merchandise trade expansion of the 1990s, or almost 70 percent of the country’s merchandise exports. Unfortunately, the prominent role of electronics exports in the manufacturing and trade scenario provided limited economic advantage. Requiring significant imported inputs, electronics production did not contribute substantially to value-added and net trade surplus. Taking the form of enclave production, it was hardly linked to the larger economy, thereby contributing meagerly to growth. Apart from concerns over limited value added, employment creation, and net trade, multinational involvement in export production might have also entailed capital flight through export under-invoicing and import under-invoicing.

The benefits of trade liberalization have also been limited in the agricultural sector. The growth of agricultural imports has resulted in higher ratios of imports to GNP and lower prices. While beneficial to consumers, cheaper agricultural imports have been detrimental to local farmer producers. Cheaper foreign rice has also eroded the country’s comparative advantage in the production of this staple crop.

Apart from unemployment, trade liberalization may have accentuated inequity in the agricultural sector. Unable to achieve economies of scale like big producers, small farmers with limited access to formal credit and markets depend on trader-creditors and are forced to sell their commodities at depressed prices. Other sources of inequity include differences in access to secure tenure or ownership rights, irrigation, fertilizer subsidies, infrastructure investments, and, recently, the Minimum Access Volume (MAV) imports-generated funds. Meant as a safety net for small farmers, the revenues collected from MAV imports, according to critics, have been more accessible to large traders and the requirements too stringent for small farmers.


Poverty and the Limits of Poverty Alleviation Measures

With the historical growth and decline of particular sectors and industries, some groups or households experienced displacement and exclusion or were unable to obtain gainful employment. Out of this experience emerged identifiable groups that comprise the country’s core poor: 

  • indigenous communities in the uplands pushed into the interiors by loggers, miners, and lowland migrants;
  • former workers of logging concessions who resettled in the uplands as subsistence producers;
  • municipal fisher folk whose CPUE has declined or who have been displaced by commercial fishers in their traditional fishing grounds and cannot find or move to better fishing grounds;
  • farm and non-farm workers displaced from an economically declining sector or industry (e.g., sugar, wood) who have migrated to upland or coastal areas;
  • farm households in regions or areas where agriculture has lagged behind and been subjected to drought, natural calamities, or changes in climatic conditions, such as Cagayan Valley, Bicol, Eastern Visayas, and Mindanao;
  • farmers and farm laborers in areas without adequate water and properly performing irrigation systems or where farm production has declined;
  • landless workers who have migrated to coastal areas, towns, or cities and are unemployed or underemployed in the informal sector;
  • permanently laid-off workers.

The magnitude (26.7 million people) and distribution of these groups was estimated using the number of people below the poverty income threshold in 1997, the known population estimate of particular groups in a given year, and the national population growth rate. The proportion of core poor groups found in rural areas may be even more than the 61 percent estimate because this figure does not include small farmers in unirrigated and vulnerable areas who are classified in the “unaccounted” group. Estimates of this residual category range from 1 to 12 percent, depending on the proportion of urban slum dwellers used (26 or 36 percent). It is also notable that victims of cyclical growth in the formal sector among the hard core poor constitute only 1.3 percent.

Confronted with the problem of poverty, the national government has drawn a poverty reduction agenda and implemented it through a Poverty Reduction Partnership Agreement (PRPA) with the Asian Development Bank. However, several targets for 2002 were not met. Performance fell short in the following areas: national government budget deficit; national government spending on social services; lands distributed under CARP (Comprehensive Agrarian Reform Program); participation rate in secondary education cohort survival rate in elementary; Bureau of Internal Revenue (BIR) collection; BIR tax effort; and tax revenues.

Strategic Interventions and Economic Governance

This report concludes with a preliminary discussion of selected strategic interventions to address persistent problems of unsustainable growth, poverty, and environmental degradation. In macroeconomic management, the institutionalization of a liberalization framework to guide national economic plans and policies has been a major achievement of government policy makers since 1986. Nevertheless, certain issues emanating from the structure of the economy and the pattern of foreign investments must be managed to enhance the potentials of liberalization.

Sound macroeconomic management, controlled government spending, the privatization of deficit-prone state-operated enterprises, and the reform of political and judicial institutions are the necessary conditions for sustained growth. The necessary conditions presuppose that the agricultural and natural resource sectors are not fetters to the economy’s development. Since the country’s natural resource base is in a depleted state, a sufficient condition for economic growth is the restocking, rebuilding, and overall restoration of natural capital. These efforts will enable the economy to go beyond the current limits that prevent it from building on and sustaining upward trends. In this regard, the following issues ought to be examined and addressed:

  • the lack of an inventory of depleted resources and the absence of market signals to indicate the onset of depletion;
  • the country’s low level of scientific interest in assessing environmental conditions and altering them to mitigate or reduce the effects of droughts, floods, and global climate change at local levels;
  • the absence of systematic links between natural resource users and providers, standards for the provision of services, and institutional arrangements/resource management agreements on payments, compensation, and mediation.

At least two other sufficient conditions should be satisfied to ensure sustainable growth. The first is proactive linkage between the natural resource base/agriculture and manufacturing through the development of small- and medium-scale industries oriented to export markets. The second condition is to break the cycle of poverty by investing in human capital – in other words, prevent poverty’s extended reproduction by educating poor youth.

These strategic interventions require a strong, market-oriented state to advocate and implement institutional reforms addressing issues ranging from corruption and weak bureaucracies to the need for participatory economic governance. Realizing the inadequacy of market-oriented policies without institutional transformations, researchers have produced a growing number of local studies on the bureaucracy, particularly corruption and estimates of its costs to the economy. However, very little has been said about economic governance.

As a form of co-management or participatory decision-making, economic governance implies the collective management of economic resources ranging from natural and environmental to generated resources (tax revenues, state enterprise revenues, and public borrowings) and distribution of their benefits. All stakeholders collectively – not government alone – must face the tremendous challenges of achieving economic sustainability amidst environmental degradation, of improving the present and future welfare of the people amidst poverty and short growth spurts, and of addressing concrete imperatives. Such imperatives are numerous, including financial instability arising from short-term portfolio capital movement, the debt burden, lack of local entrepreneurship, and declining competitiveness.

Economic governance is undoubtedly difficult to establish. It requires consensus on the nature and value of resources – the explicit economic and social objectives to be realized in resource allocation and use, as well as norms and decision-making mechanisms for the determination of priority and alternative uses. To illustrate: in the use of state resources, government revenues and savings, external funds, rents, and surplus, there might be a stated preference for the following:

  • the use of external resources to finance investment rather than consumption, or long term investment growth rather than short-term investment and consumption growth;
  • the promotion of steady export growth to exceed import growth;
  • the avoidance of short term debt as a source of funds;
  • improvement in the country’s ability to service external liabilities;
  • the provision of benefits for a greater rather than a fewer number;
  • programs and projects that address chronic and intergenerational poverty (education targeting the poor).

With an orientation toward social objectives, economic governance requires a monitoring system to verify whether immediate and strategic goals are being realized and a mechanism to provide incentives and induce movement toward their realization. Moreover, mechanisms for defining rights and duties of stakeholders and for resolving conflict among them must also be in place.

 The report ends with a concrete illustration of economic governance in the management of watersheds. This allows not only the weaving together of the imperatives of market, environment, state, and democratization, but also allows this assessment to end on a hopeful note.

Germelino M. Bautista
Germelino Bautista is professor of economics and former director of the Institute of Philippine Culture at Ateneo de Manila University

Kyoto Review of Southeast Asia. Issue 4 (October 2003). Regional Economic Integration