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Action for Economic Reforms

ECONOMIC GROWTH AND THE PHILIPPINE TRAGEDY

The author is visiting scholar, Waseda University and associate professor, De La Salle University, on sabbatical leave. This piece was published in the Yellow Pad column of Business World, 29 March 2004 edition.


In the Philippines, skepticism continues among the country’s

intellectual circles about the merits of economic growth. The core

argument is that economic growth cannot be felt, i.e., it does not

translate to welfare gains, in improving the quality of lives of the

people. The situation is unfortunate since intellectual resistance

serves as a pull-down mechanism to socioeconomic progress. This is

perhaps true not only in the Philippines but in other countries as

well. The economist Adam Szirmai concedes even “most scholars of growth

take both the desirability and feasibility of economic growth for

granted.”


A key dissatisfaction is expressed toward measures of growth

particularly gross national product (GNP) or gross domestic product

(GDP). GNP, which has recently been reconceptualized as gross national

income (GNI), is the sum of the gross value added of all goods and

services produced (GDP) plus net factor income from abroad. An

indicator of a country’s average income is GNI per capita or GDP per

capita, which is GNI or GDP divided by the country’s total population.

Skeptics dismiss reports of remarkable quarterly or annual economic

growth performance. It is true that most Filipinos cannot feel the

welfare gains of a rather erratic growth performance since the 1950s.


The experiences of more advanced East Asian countries demonstrate that

it takes a sustained period of high economic growth before a general

sense of prosperity could be felt. Sometime between the 1950s and

1970s, a few of these countries witnessed high rates of savings and

investments as well as the accumulation of capital stocks. They created

virtuous cycles of investing from their savings and achieving

increasing returns on capital. They invested in education, science and

technology, and infrastructure among others. High rates of growth

attained through modernization of various sectors, including

agriculture, caused demand for labor to rise almost perpetually. In

other words, job opportunities increased. It was a matter of time

before full employment could be attained and even before that the

increase in incomes and wages.


However, the trickle-down effects are not necessarily automatic and

depend also on social responses to conditions of inequalities in wealth

and income distribution. Welfare promotion efforts (and poverty

reduction) are politically and hence economically important. Harvard

professor Deborah Milly observes that during the high-growth period in

Japan, welfare considerations were gradually but successfully

incorporated into the government’s overall economic growth schema,

often as a political response to demands of sectoral groups. Poverty

ruled over roughly half of the Japanese people after the Second World

War.


In this sense, welfare promotion and poverty reduction are as much as a

function of government policy as a consequence of private initiative.

These could take the form of direct welfare programs such as social and

unemployment insurance or indirect welfare promoting policies such as

price control and subsidies. Adjustments for social welfare are

necessary to further achieve high rates of economic growth. These too

require investing in effort and resources.


In contrast, the Philippines stubbornly invested to position herself

for sustained rapid growth. High rates of growth were achieved in the

1950s. Since that time, there was a relative deceleration of economic

performance with respect to rapid increases in population.


Consider precisely the Philippines’ 1950s’ record of GDP per capita,

which was higher than South Korea’s. Between 1965 and 1970, South Korea

overtook the Philippines in per capita income terms. The 1955 GDP per

capita of the Philippines and South Korea was US$1,711 and US$1,571,

respectively. In 1970, South Korea’s GDP per capita was US$2,777

against the Philippines’ US$2,401. By the year 2000, South Korea’s GDP

per capita was more than four times that of the Philippines’ (US$15,881

vs. US$3,424). All of these figures were at 1996 prices using the

Laspeyres Index of the Summers, Heston, and Atten time-series data set.

Poverty in both South Korea and the Philippines was between 60 and 75

percent of the population in the mid-1960s. The poverty situation

between the two countries diverged since then. In 1998, Korea had less

than 2 percent of the population living below $2 a day while the

Philippines, in 2000, had 46 percent. Interestingly, Jeffrey Henderson

and his associates noted that South Korea did not have explicit

poverty-reduction or alleviation programs prior to the post-1997

crisis. However, it did have a successful land reform program as well

as price control policies that benefited the poor.


As populations and poverty conditions grow, demands for more welfare

benefits are increasingly placed upon government. Though populist

leaders tend to submit to such demands, there is little public

realization that such decisions only bring a larger debt burden. The

amount of government expenditures, which is a function of government

revenues and national income, is severely limited.


Looking at the amounts of government expenditures in the region, in

2001, the absolute amount of Philippine government expenditures was

$8.65 billion. This was $1 to $5 billion lower than those of Thailand,

Malaysia, Singapore, and Indonesia. Though they would appear small in

absolute terms, the differences become wider on a per capita basis.

Using International Financial Statistics data published by the IMF, the

2001 Philippine government consumption expenditure per person was

US$112 per person (or only PhP5,712 at an exchange rate of PhP51:US$1).


This compared with US$217 for Thailand, US$2,552 for Singapore, and

US$471 for Malaysia. Indonesia which had a bigger population than the

Philippines has US$49.7. This was a complete reversal of the conditions

of the 1950s. In 1955, the Philippines’ government consumption

expenditure was 2.6 times that of Thailand’s. By 2002, Thailand was 1.9

times that of the Philippines.’


What makes the difference? From 1950 to 2000, Thailand’s GDP per capita

grew twice as fast that of the Philippines.’ Thailand’s average annual

growth rate was 3.7 percent; the Philippines’ was 1.8 percent. Going

back to Korea, its government consumption expenditure per capita in

2001 was US$923. Its GDP per capita grew at an annual average of 5.2

percent from 1955 to 2000.


The empirical and theoretical evidence on the merits of growth is

overwhelming as shown in comparative approaches of Thorvadur Gylfasson,

Douglass North, Angus Maddison, Dirk Van Pilat, and Robert Barro, among

others. In the Philippines, Arsenio Balisacan rigorously establishes

that there was an increase in poverty during the economic collapse of

1988-91, in which GDP per capita growth “dropped from 3.8 percent in

1988 to negative 3.2 percent in 1991.” These works have one message:

economic growth matters.


Whether we like it or not, growth is an inescapable truth of economic

life. It matters because a consistent stream of short-term results

spells prosperity or poverty in the long run. Such is reflective of

structure and policy. Sustaining high economic growth thus requires

more than the efforts of a handful of government leaders, planners,

businessmen, and labor unions. A broader social coalition, among them

the country’s intellectuals, bound ideologically and distinguished

politically, is perhaps desirable.

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