OUTSIDE THE BOX
THE Philippines’s full year 2011 economic growth came in at a pathetic 3.7 percent. The spin masters have two lines of reasoning. First, the fourth-quarter number was higher than the third-quarter growth by a “robust” 0.1 percent. The second is that 2012 is going to be much better because the government did not spend in 2011 and will spend in 2012.
According to the press release from the NSCB (National Statistical Coordination Board), “Amidst the obstinate exogenous economic woes, the government under-spending on infrastructure in the second and third quarters and the sustained decline in fishing, the domestic economy grew in 2011 by a relatively feeble 3.7 percent compared to 7.6 percent in 2010.”
Obviously there was not a Filipino translation of this release because “Amidst the obstinate exogenous economic woes” barely makes sense even in English. Properly defined, that phrase almost sounds like a proverb from Confucius: “Surrounded by very difficult to change or overcome external factors of great distress.”
Fortunately, the rest of the statement from the NSCB does make sense.
The press and airwaves are going to be filled in the next few days with comments about how government underspending is the primary offender for the poor economic growth. If true, then all that has to happen to go back to the 7-percent plus growth of 2010 is for the government to spend more. Right? Wrong.
Government spending is an important driver of economic growth. However, it is not the most important factor and it is not a magic bullet for growth. Therefore, even if the administration finally starts the PPP Program, it is not going to add the
extra 1 percent to growth that some people expect. If you expect the government to push-start this economy, you will be sadly disappointed.
Government spending is not responsible for the poor 2011 economic numbers. Government spending will not be responsible for any major 2012 improvement.
One of the most interesting numbers contained in the NSCB’s disclosure is that consumer spending in 2011 increased by 6.1 percent, double the growth in 2010.
The “experts” always talk about election-year spending having such a great impact on the economy. That is true to a slight extent. More money is pumped into the economic system. However, it does not trickle down to the grass roots. Campaign materials and some “Vote-for-me” money, even a lot of it, is not as good for growth as a steady job.
Another measure of consumer spending is the Household Final Consumption Expenditure (HFCE). HFCE includes everything we pay, including VAT, and government fees like for a driver’s license. In 2010 HFCE increased by 1.4 percent. In 2011 it expanded by 4.1 percent.
Yesterday, BPI released their income statement for 2011. “The bank’s net loan portfolio reached P453 billion, increasing by 20 percent from the previous year, with the growth coming from all market segments: middle market by 24 percent, top-tier corporations by 21 percent, SMEs by 20 percent, and consumer by 12 percent.”
Those are really fantastic numbers. It shows, throughout the producing economic spectrum, prudent and manageable but expanded borrowing. That helps fuel economic growth.
The bottom line is that you and your businesses grew the economy in 2012 even if, as NSCB says, by a “feeble” 3.7 percent. So then, what is the problem? What is slowing economic growth? It is a lack of spending for fixed capital formation.
Fixed capital formation (FCF) is a specific term applied to expenditures for goods that are used in production. A vehicle, for example, is a fixed asset, but vehicles are included in FCF only if they are actually used in work activities.
The recent barrage of reports citing that the Philippines will be a major economy by 2050 is substantially based on the forecast that FCF spending will increase. Every country that has moved up the economic ladder begins with heavy FCF expenditure. China, Russia, Brazil, Indonesia have all moved higher on the back of FCF. But will it happen in the Philippines? It has not happened up to this point. Why not?
We have a growing consumer market, low public and private debt, and a reasonably diverse economy. What is keeping big business from opening their wallets and making continuous large FCF investments? The same reason foreign investment is lacking; uncertainty about government policy.
It is not lack of government spending that is slowing the economy. It is bad government policy that keeps the private sector from spending. The 3.7-percent growth is the government’s fault.
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