Behind Philippine recovery, a lingering malaise
MONDAY, MAY 15, 2006
The stock market has risen to its highest level in seven years, the peso has risen 8 percent against the dollar over the past year, and the Philippines' credit rating has improved. Real estate prices have bounced back and banks are flush with cash. More broadly, the economy continues to grow at about 5.5 percent, the Southeast Asian average.
So has the Philippines turned a corner? Certainly there are those who believe that the populace is bored with politics and that business can ignore the political circus and get on with life. Can the Philippines combine very rapid growth and unstable politics, as Thailand did in the 1980s and '90s?
At first glance the omens are encouraging. Thanks to an ever-increasing flow of remittances from workers overseas, the Philippines is now into its eighth successive year of current account surplus. It is also enjoying a boom in business process outsourcing, and the global resources boom has led to a revival of interest in the long-neglected mining sector.
More remarkably, Arroyo has achieved what seemed unlikely a year ago when feeble revenue collection and the cost of servicing public debt equal to 75 percent of gross domestic product, almost half in foreign currency, threatened a fiscal crisis. New and increased taxes pushed through a reluctant congress, realistic power prices and spending austerity have combined to halve the deficit and bring forward the goal of a balanced budget from 2010 to 2008.
The fiscal turnaround has been a virtuous circle, prompting a stronger peso and enabling lower interest rates, which have further reduced the deficit. Arroyo deserves credit for her determination and for sticking with price increases in the face of populist demands to shield the consumer from oil price hikes.
The Philippines also looks relatively well positioned to withstand any international trade shocks resulting from a dollar collapse or an end to the U.S. consumption binge. Export manufacturing plays only a minor role. The upturn in sentiment here probably still has way to run.
History suggests, however, that financial market euphoria is a poor guide to the underlying social and economic realities. Even the short-term picture may be vulnerable. International liquidity has driven down borrowing costs for all emerging markets, with little regard for local circumstances, so the Philippines fiscal gains could be eroded by rising global rates even if the peso can hold its own against a weak dollar.
But the longer term is worrying. A 5 percent growth rate is still far from adequate for a country whose population is expanding at more than 2 percent a year, despite the exodus of young women to jobs abroad.
Success in bringing down the fiscal deficit has been at the expense of investment in urgently needed infrastructure, without which higher sustained growth is impossible. Unless corporations and the wealthy can be induced to pay taxes - now a miserly 14 percent of GDP - there will never be enough to finance development and service debts.
Foreigners remain deterred by political strife and erratic laws from investing in infrastructure, and local companies usually prefer shorter-term investments.
Optimism about outsourcing cannot hide the continued decline of manufacturing in the face of inadequate investment, competition from China and a strong currency which helps the government budget but is an impediment to most other sectors.
For the majority of the Philippine people, real incomes are static and still below 1988 levels. Income gains have largely gone to capital, not labor, to higher income groups and to those receiving remittances. Indeed, remittances have been the main factor in pushing growth above 4 percent.
Appropriate economic policies and more stable politics would both help to improve performance. But the bigger problems have little to do with economic technicalities or the pro and cons of democratic systems. The deeper malaise arises from social divides, reflected in the continued Communist insurgency and assassinations of leftist party activists, in the role of the church in obstructing family planning, and in an elite that prefers to consume conspicuously, or stash money in safe havens in the United States and Australia, rather than invest in the future of the Philippines.