A confluence of negative factors have threatened to snag the audacious build build build program of this administration. As fate would have it the bungled rice policy the principal component of the consumer price index and an exogenous factor in the form of higher energy prices conspired to dampen expectations of economic stability in midst of a heavy infrastructure and social overhead project build-up, which were designed to push, levels of productivity, incomes and employment higher.
This is most unfortunate because it has diminished the level of greater expectations conducive to promoting an atmosphere of confidence in the economy so necessary to induce the heavier inflow of foreign capital, a very important component to capital formation as well as heightened discontent among the masa who now have to endure higher consumer prices.
This is not to say however that we are losing the economic battle but rather to warn that unless the macro-economic imbalances are not addressed quickly by competent monetary and fiscal experts in government could spiral out of control.
Assuming that we have indeed the fastest growing economy in this part of the world what good is this if it does not trickle down to the base. It is well known that our absorptive capacity to take in a deluge of funds for infrastructure is limited by the scarcity of skills, specifically manpower to transform these into capital goods. Moreover, there is a time lag – a longer gestation period for the fruits of physical infrastructure to translate into supply chains that can immediately serve the exigencies of rural and urban development. These time lags can be expected.
To say glibly that an undervalued peso is good for all and sundry with winners outnumbering losers is not to portray the most accurate assessment. Truth to tell it is easy to spot the winners – the overseas workers who now remit more pesos, to kith and kin, the BPO kids who receive more local currency for wages and even employees of tourist destinations. But what the economy gives is easily taken away by higher prices of fuel, gas, and electricity, and food which take up a big portion of household expenditures.
To extend this to the export sector is to overstretch. In the first place our exports are heavily import oriented with our economy only contributing a smaller portion to value adding – local labor. This explains the rapid deterioration of the current balance of trade. Moreover, our exports may be caught in the trade war between the two economic superpowers given that Chinese exports to the U.S. include components emanating from this country.
Moreover, since our exports are agriculture and components it’s what economists consider as relatively “inelastic”– meaning that it does not easily respond to devaluation. For example we cannot immediately export more sugar or coconut products even if we want to nor can we expand exports of foreign –controlled corporations in export processing zones since these are controlled by the vicissitudes of home company policies.
So what do we do? How do we defend ourselves from the deteriorating quality of life in this country?
1. Fiscal Policy
The massive budget leakages e.g. DAF, PDAF and other anomalies etc , must not be permitted to go on indefinitely. A new budget discipline will be required to eliminate these anomalies. Expenditures should be reduced as proportion of GNP provided of course that some flexibility must be provided to handle inevitable fluctuations in the economy and in employment.
2. Monetary Policy
To contain the creeping inflation, monetary policy should seek to monitor closer the growth rate of the money supply consistent with price stability and economic growth.
3. Government Cash Transfer Programs
Indiscriminate cash transfers to vulnerable sectors can be both inflationary and inefficient. The minimum wage should not be increased further since its effect is to increase prices and raise unemployment of the unskilled, including teenagers.
4. Regulatory Improvements
We believe that excessive regulation has impaired productivity growth and should be reversed. Despite promises to the contrary the bureaucracy continues to discourage the flow of savings into investments in many sectors of the economy (bring in the third Telco!)
To reverse the marked the slow productivity growth of the past decade and to help decelerate inflation, policies to improve the rate of return on investment in agriculture and industry by investing in processing plants and equipment, stimulate outlays on research and development, and expand job training programs. (To be continued)