On Raising Philippine Economic

Growth

Felipe Medalla

UP School of Economics

December 9, 2010

Long-term average growth rate of GDP since 1980 is 3.1% or at best 3.9%, if the effects of the

political crisis in 1983 and 1984 are excluded. However, it appears that the long-term growth

rate of GDP has picked up after the economy recovered from the Asian Financial Crisis,

increasing the long-term growth rate by nearly one percentage point.

External factors are important, but most of the barriers

to growth and development in the Philippines are

internal and institutional and related to governance.

“The large literature on national policies and growth established some statistical association between national economic policies and growth. ….However, I find that the associations seem to depend on extreme values of the policy

variables, …. are consistent with other theoretical models that predict only modest effects of national policies, (and) with the view that the ….growth differences….likely reflect deep-seated institutions that are not very amenable to change in the short run.” From Easterly, William. 2005. “National

Policies and Economic Growth: A Reappraisal.” (italics added)

Last seven (going 8) years historically exceptional. In the past, growth was often disrupted by

failure to finance account deficits.

The Philippines is not competitive in the production of trade-able goods, where it has a large

deficit in the BOP (8.9 billion dollars in 2009). It’s comparative advantage is in services (e.g., BPO)

and labor exports.

2009 Philippine Balance of Payments (Million US Dollars)

Goods Services Income and Transfers Total

CURRENT ACCOUNT -8,878 1,539 15,891 8,552

Receipts 37,510 10,101 22,349 69,960

Payments 46,388 8,562 6,458 61,408

Capital

Direct

Investments

Portfolio, Derivatives &

Other Investments Total

Capital and Financial

Account 104 1,589 -3,654 -1,961

Receipts 170 1,948 -98 2,020

Payments 66 359 3,556 3,981

Net Unclassified -1,296

Overall BOP Position 5,295

As the number of overseas workers increased and the ratio of

skilled to unskilled OFWs increased, remittances became the

principal engine of Philippine economic growth.

The share of Net Factor Income From Abroad (NFIA) in

GNP quintupled during the last 15 years.

The rise in remittances resulted in a large rise in the national

savings rate.

It is also highly unusual that a rise in the growth rate of GDP growth was accompanied by a fall

in the rate of investment (the ratio of capital formation to GDP). In short, the rise in the average

growth rate of GDP after the Asian Financial Crisis is most likely a statistical artifact or illusion.

It has a small and declining manufacturing sector and a very narrow export base.

2009 Philippine Exports

(Million US$) % Distribution

Electronic Products 23,590 62.9%

Machinery & Transport Equipment 1,889 5.0%

Garments 1,536 4.1%

Processed Food and Beverages 987 2.6%

Chemicals 973 2.6%

Wood Manufactures 821 2.2%

Coconut Products 801 2.1%

Copper Metal 688 1.8%

Fruits and Vegetables 684 1.8%

Petroleum Products 293 0.8%

Top Ten Exports 32,262 86.0%

Other Exports 5,248 14.0%

Total Exports 37,510 100.0%

Its manufacturing sector (especially electronics) is very

dependent on imported intermediate inputs and capital goods.

Philippine Imports 2008 2009

Million US$ % share Million US$ % share

Materials for Electronics 14,091 30.5% 18,732 30.9%

Other Mineral Fuels 3,664 7.9% 4,547 7.5%

Petroleum Crude 3,300 7.1% 7,499 12.4%

Passenger cars and motorcycles 1,289 2.8% 1,312 2.2%

Other Semi Processed Raw Materials 1,228 2.7% 1,230 2.0%

Other Food Products 1,162 2.5% 1,226 2.0%

Chemical compounds 1,129 2.4% 1,260 2.1%

Rice 944 2.0% 1,782 2.9%

Iron and steel 918 2.0% 1,610 2.7%

Metalliferous ores 850 1.8% 402 0.7%

Top 10 Consumer, Intermediate and Raw

Material Goods Imports 28,575 61.8% 39,600 65.4%

Capital Goods 7,637 16.5% 9,309 15.4%

Other Consumer, Intermediate and Raw

Material Goods Imports 10,003 21.6% 11,646 19.2%

Total 46,215 100.0% 60,555 100.0%

The manufacturing sector which used to account for more than ten percent

of total employment, accounted for only 6% of the increase in employment.

The rise in the wage and salary employment has been very slow….

This is unfortunate since the growth rates of GDP and the number of self-employed and unpaid

family workers are negatively correlated. In other words, a significant percentage of what is

officially referred to as employment is really disguised unemployment.

It also appears that the rise in the growth rate of GDP is due to an unprecedented rise in labor

and total factor productivity in all sectors of the economy (agriculture, industry and services).

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Manufacturing Agri Services

Growth Rate of Labor Productivity

But there is good reason to believe that the recent rise in the long-term growth rate of GDP and productivity is just the result of a weak

statistical system. The rise in GDP growth after the Asian Financial Crisis happened in spite of a significant fall in the growth of domestic

aggregate demand (consumption+ investment + government expenditures ) and exports. If the national income statistics are to be taken at

face value, GDP growth rose after the Asian Financial Crisis in spite of the fall in the growth of domestic aggregate demand and exports

because there was a massive shift from the use of imported goods and inputs to domestically produced goods and inputs. (In most

economies, fall in growth of domestic demand and exports is usually accompanied by reductions in the growth rates of both GDP and

imports).

The fall investment rate was accompanied by a fall in the share of bank loans in total assets of

Philippine banks.

Assets of the Philippine Banking System (% Distribution)

Asset Type 1999 2004 2005 2009

Cash and Due from

Banks 11.4% 7.9% 8.1% 13.7%

Loan Portfolio (net) 57.2% 47.7% 45.9% 48.9%

Investments (net) 17.6% 29.6% 31.5% 27.8%

Other Assets 13.8% 14.8% 14.4% 9.6%

of which Real Estate and Property 7.4% 2.7%

Similarly, the growth rate of manufacturing value added in GDP was higher than the growth rate

of the sales of manufacturing firms in the Top 1000 and 5000 corporations.

Comparison of manufacturing value-added growth

with the revenue growth of large manufacturing corporations

1996 to 2008 1998 to 2008

Revenue of Manufacturing

Corporations in the Top 10002.8% 2.7%

Revenue of Manufacturing

Corporations in the Top 50002.9% 2.8%

Manufacturing Value added in GDP 4.4% 4.8%

GDP vs Top 1000 1.5% 2.1%

GDP vs Top 5000 1.5% 2.0%

The Volume of Production Index (VOPI) and real manufacturing value added follow opposite

long-term trends.

Estimates of agricultural gross output and value added are based on very old benchmarks and out-dated

census frames. These have resulted in statistical trends that are very hard to reconcile. For instance,

estimated agricultural output has increased faster than rural population but rural poverty has worsened while

palay output has increased faster than the country’s population but imports of rice grew faster than the

country’s population.

A Large part of GDP is imputed, not measured. Estimates are based on very old, possibly obsolete, census frames and

parameters. See quotes below from a study on the Philippine National income accounts done by Ross Harvey, an

expert in national income accounting. (“Assessment Report on the Philippine System of National Accounts” 25

September, 2008).

• “Very old benchmarks derived from the 1988 Census of Establishments and the

1980 Census of Agriculture and Fisheries are still being used in the compilation of

current price GDP using the production approach. For some industries Gross

Value Added Ratios (GVAR) obtained from the 1988 Census of Establishments are

still being used to derive current price estimates of value added using output

indicators obtained from the Quarterly Survey of Philippine Business and Industry

(QSPBI) and other sources.”

• “The general approach to compiling estimates for the unorganized sector is to

derive an estimate of employment not covered in the establishment collections

and to assume that value added per employee in the unorganized sector is the

same as that for small establishments operated by a sole proprietor.”

• “The use of a base year of 1985 for constant price estimates is likely to be

distorting measures of economic growth for recent years. International guidelines

suggest that base years should be updated every 5 years. However, an even more

desirable approach is to adopt chain volume measures.”

What the government cannot deliver through faster and more inclusive economic growth, it tries

to achieve by command. The Philippines has one of the highest ratios of government-mandated

minimum wage to GDP in the world. Yet, more than half of the workers earn less than the

minimum wage.

In the past, it was a foregone conclusion that the next generation would better educated than

the present. Younger adults were better educated than their elders.

Distribution of Population 25 years of older

by Educational Attainment: 2003

Age Group

Education 25 to 39 40 or older Difference

Did Enter or Finish Elementary School 18.2% 35.4% -17.1%

Finished Elementary but not High School 25.3% 27.6% -2.3%

High School Graduate 25.2% 15.6% 9.6%

Entered but did not Finish College 16.4% 10.2% 6.2%

College Graduate 14.9% 11.2% 3.7%

100.0% 100.0%

Source of basic data: www.census.gov.ph

Judging by low elementary and high school enrollment ratios,

the next generation of adults will no longer be better

educated than the present.

If statistics on enrollment are reliable, elementary school enrollment

has lagged behind the number of school-aged children.

This is probably related to the fact that less educated mothers account for a disproportionate

share in child births.

Mothers’ Education and Fertility (No. of Children)

Desired Fertility Actual Fertility

No education 4.1 5.3

Elementary 3.3 5.0

High school 2.5 3.5

College or higher 2.2 2.7

The Philippines must improve its investment climate and raise productivity.

Corruption, pork barrel driven budgets and poor tax

collections have resulted in a low quality road network.

Quantity and Quality of Roads:

Selected Asian Countries

CountryKilometers of road

per capita

Percent High

Quality

Philippines 2.45 18

Korea 2.09 87

Malaysia 3.97 78

Pakistan 1.7 88

Thailand 0.9 98

It must, however, control off-budget deficits, which in the past was a bigger source of

the debt build up than General Appropriations Act. (Will the National Food Authority

and the National Development Corporation be the new sources of large off-budget

deficits?)