Fault lines of the Philippine economy

We greet with more than a sigh of relief the news that the Philippine economy, in terms of Gross Domestic Product, or GDP, grew by 6.2 percent in the third quarter of 2019, surprising experts who earlier braced for something less rosy after a relatively anemic 5.5 percent growth rate was recorded for the preceding quarter. Economic managers were quick to point out that a faster pace of government spending made the turn-around possible. They also hinted the economy will likely maintain its bright outlook for the remaining quarter of the year.

The Philippine Statistics Authority (PSA) reported that “Trade and Repair of Motor Vehicles, Motorcycles, Personal and Household Goods), Construction; and Financial Intermediation were the main drivers of growth for the quarter.” The report also mentions that “among the major economic sectors, Services posted the fastest growth with 6.9 percent. Industry grew by 5.6 percent. Agriculture registered a growth of 3.1 percent.”

In broad terms, the agriculture sector includes farming, fishing, and forestry. The industry sector, on the other hand, includes mining, manufacturing, energy production, and construction. While the services sector covers government activities, communications, transportation, finance, and all other private economic activities that do not produce material goods.

Through the years the Services Sector has shown the most consistent upward tick, as shown by the table below:

Year Agriculture Industry Services
2007 12.5 33.05 54.45
2009 13.2 31.71 55.21
2011 12.72 31.35 55.93
2013 11.25 31.12 57.63
2015 10.26 30.9 58.4
2017 9.66 30.45 59.89

Source: Statista.com; indexmundi.com

Acknowledging that government expenditures have picked up in recent months after the delayed passage of the 2019 national budget, Socioeconomic Planning Secretary Ernesto Pernia said the Philippines likely ranked second among emerging economies, just behind Vietnam’s 7.3% and higher than China’s 6%.

At the rate this key component of GDP growth rate is performing, there appears to be consensus that the country may yet hit the government’s original target of 6-7 percent for the year. The country’s economy needs to grow by at least 6.7 percent for the last quarter, Moody’s analytics suggested.

The other key component—OFW remittances and the so-called diaspora surplus—which drives private consumption, will likely maintain its robust contribution to the country’s economic growth. Both OFW remittances and government spending each constitutes at least 10 percent of the GDP, and have shown for the last few decades to be resilient enough to help keep the economy sailing forward, or at least afloat. 

What seems to worry the economic managers more are the sinking flagship performers of both agriculture and industry sectors, as the above table indicates, especially for the traditional export earners. Copra is down, with no immediate conditions for revival in sight. Rice farmers are dying, not necessarily from production and productivity ailments, but from the lack of value they create and the highly subsidized rice imports against which they cannot compete.  

World Bank data shows that the agricultural sector now accounts for only 9.6% of the GDP, yet it accounts for about 30 percent of the workforce, highlighting the pervasiveness of poverty incidence in the countryside. Viewed from a larger perspective, income inequality among sectors and geographical areas is the major push for the rural population to move to urban areas, resulting in the latter’s worsening urban congestion and traffic bedlam.

The industry sector in recent years remains hardly optimized due to rising operating costs, hindering the accelerated growth of major export products like electronics and semiconductors. Domestic consumption is a saving hand, fueled by OFW remittances, but its multipliers are inhibited by foreign capital that produce many of the fast-moving items in the market, such as cars, computers and electronic gadgets.

In “Fault Lines: How Hidden Fractures Still Threaten the World Economy,” Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, said that the world economic system has fault lines, such as domestic political stresses, trade imbalances among countries, and the tensions produced when financial systems with very different structures interact. These fissures are less obvious than the usual “culprits, like greedy bankers, sleepy regulators and irresponsible borrowers.”

Applied to the Philippine context, the stunted growth of the agriculture sector and erosion of its economic value for farmers are creating tensions that can shake the domestic political front. High operating costs for the industry sector must be arrested and managed for the long term.

On trade, Pernia rues that “the Philippines is also an indirect victim of the bitter trade war between the United States and China that is causing a global economic slowdown… To withstand external shocks and promote growth over the medium term, our country must diversify products and markets through the establishment or improvement of new and existing trade relations with strategic partners.

I also mentioned somewhere that China cheats by using other countries with harmless 3-way trade relations as origin for their exports to the US. Over the short term, the Philippines can play ball here, instead of being an indirect victim. But Pernia is correct on the long term strategy: diversify products and markets. This should start by pushing rural development (including winning the peace in the countryside) better than the government has ever done it before. Boost agriculture and urban congestion will be less of a management problem. Controlled operating costs for the industrial sector should follow.

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