Wednesday, 8 September 2010

The 3-percent solution for prosperity

Written by John Mangun
Outside the Box
Business Mirror

During his bid for the presidency of the Philippines, former House Speaker Jose de Venecia Jr., primarily through his economic adviser Romulo Neri, proposed that the Philippines could achieve economic prosperity through a “747” program; seven years of economic growth of 7 percent.

Although the Speaker and Neri were never quite able to formulate a specific and feasible plan to achieve that 747, the concept was correct. A sustained economic growth of 7 percent annually would double the size of the Philippine economy in just 10 years.

The Philippines needs growth of 4 percent just to break even. Just like you know how much income you must have just to pay all of your expenses, any additional money coming in can improve your lifestyle. China, by comparison, needs an 8-percent growth, and the US needs about 2.5 percent to keep their economic heads above water.

While knowing that 7-percent growth would make substantial and sustainable inroads into creating enough jobs, reducing poverty and increasing the people’s standard of living, this 7 percent has been very elusive, seemingly always out of reach.

In 2007 7 percent was achieved, preceded by years of 5-percent growth and followed by 3.8 percent and 1.1 percent in 2008 and 2009.

From yesterday’s BusinessMirror: “The Philippines needs at least P180 billion in investments to achieve a gross domestic product [GDP] growth of 7 percent. Finance Undersecretary Gil Beltran said, ‘At 5-percent GDP growth [government’s original goal], the total economic output would be P9 trillion. The additional P180 billion would add about 2 percent.”’

I probably missed it before, but this is the first time I can recall specific quantification by the government of what the Philippines needs in investment to reach that 7-percent objective.

The amount of P180 billion might seem like a lot of money. After all, the total education budget is P180 billion a year.

Think about it from your personal financial situation. What do you think you would have to do to double your wealth in 10 years? Is it possible without a major sacrifice of current lifestyle or without taking too high a financial risk?

In fact, the Philippines could achieve a 7-percent growth this and every year almost without a struggle.

Let me emphasize that point again. Annual economic growth of 7 percent, based on the total value of the Philippines GDP for 2009, can be achieved every year for the next decade. It is a realistic and achievable goal.

Two questions, though, need answers. Where is the money, the P180 billion, going to come from? How is that P180 billion going to be used?

For the government, P180 billion is a lot of money. The government’s budget deficit for 2010 will be approximately P325 billion. It would be fiscally irresponsible to increase the budget deficit to fund the P180 billion. But for the overall economy and for the private sector, P180 billion is not a significant amount.

P180 billion is about $4 billion. The nominal value of the 2009 GDP is $168 billion. All the Philippines needs to do is use is 3 percent of the GDP for investment to raise the growth rate to 7 percent.

If 3 percent of all the Philippine economic activity were set aside for growth-creating projects, “747” would be a reality.

In a sense, it would be like you saving only 3 percent of your salary and putting that money into a new business that would double your net wealth in 10 years. For an individual, it is almost impossible. For a country, with the public and private sector working together, it is a reality.

How much is P180 billion? The total value of all Philippine Long Distance Telephone shares is P457 billion. The total market value of Ayala Corp. is P187 billion. Meralco shares are worth in total P200 billion. As of December 31, 2009, the Philippine Stock Exchange (PSE) had 248 listed companies with a total market capitalization of $130 billion, or P5.85 trillion. About 3 percent of the total market value of the PSE invested wisely every year would grow the economy by 7 percent, leading to the now unthinkable 7-percent goal.

More personally, if every Filipino family living above the poverty level contributed 3 percent of the family income to a P180-billion investment fund, that would raise half the P180 billion.

Maybe President Aquino has the solution to the funding problem. The World Bank estimates that the Philippines loses P400 billion a year of potentially productive financial resources to corruption.

Finding the money to create a 7-percent growth is not the problem. Using that money wisely is a problem.

The government’s role in this “747” venture should be limited because governments rarely spend and invest money very sensibly, efficiently, or quickly.

Half the funding for this investment fund should go to a lending facility for medium-size enterprises with a proven and successful history of business accomplishment. Half should be allocated for government investment, open, transparent and passive, in clearly identified large-scale joint-venture projects with private-sector companies.

The public-private partnership program of the Aquino administration is simply the answer to the nation’s economic problems. It has always been the answer. It is just that no previous administration has ever effectively made it a primary centerpiece of policy. Whether Mr. Aquino can follow through with this policy remains to be seen. But for a small 3 percent of the total economic activity of the country, raised locally without begging the foreigners for help, set aside, and invested properly the dream of enough wealth creation and Filipino prosperity can be achieved.

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