2006 Growth Targets: Optimistic or Wishful Thinking?

The conclusion of the WB that there will be no improvement in the world economy in 2006 does not bode well for a backward, agricultural country such as the Philippines, which is export-oriented and import-dependent.  With no relief in sight for the crisis in the world economy and the sorry state of the Philippine economy, there is really no basis for the growth targets of the Arroyo government.

By Benjie Oliveros
Bulatlat

Toward the end of 2005, the government adjusted the growth targets it set for the 2004-2010 Medium Term Philippine Development Plan (MTPDP), which was released in 2004.  The National Economic and Development Authority (NEDA) reduced its forecast growth for 2005 to 4.7-5.1 percent from 5.3-6.3 percent.  It also cut the growth target for 2006 to 5.7-6.3 percent from the original 6.3-7.3 percent and that of  2007 target to 6.1-6.5 percent from 6.5-7.5 percent. 

Explaining the adjustments, Socioeconomic Planning Secretary Augusto B. Santos said that the MTPDP is a “work in progress” and can therefore be adjusted depending on the prevailing economic and political conditions. He blamed last year’s oil price spikes for the adjustments in targets.

Reacting, University of the Philippines (UP) economist Solita Collas-Monsod said that the government was too optimistic in its ability to spur economic growth.  Similarly, fellow UP economist Benjamin E. Diokno said that the “unrealistic” targets set by the government is its way of bragging about its supposed abilities to steer the economy toward economic growth. 

A critical analysis of the state of the Philippine economy and the global economic environment would reveal that the growth targets set by the government are not merely products of an optimistic view or a braggart’s claim but that of wishful thinking. 

Sorry state of the economy

For the first three quarters of 2005, the average growth of the Gross Domestic Product (GDP) is at 4.5 percent. To achieve even the adjusted target, growth for the last quarter must reach from 5.5 to 7 percent.  The government is thus hoping that the expected increase in consumer spending during the holiday season, a traditional peak for the manufacturing and retail sectors, would push the annual percentage upwards.

But by December, the retail sector was already feeling the slack in consumer spending despite record increases in remittances by Overseas Filipino Workers (OFW).  This may be attributed to inflation, averaging around 7.6 percent, worsening poverty affecting nearly 90 percent of the population, and the pessimism of most Filipinos regarding their economic situation.   

Historically, the Philippine economy never went beyond a 6.1 percent GDP growth rate. This level was reached in 2004 mainly because of an increase in spending during elections.

Optimism was high in 1996 when the Philippines was touted as the next Asian tiger.  But GDP and GNP growth rates were merely at 5.5 and 6.8 percent, respectively.

The much-anticipated take-off of the economy never materialized because of the backward and agricultural state of the economy. 

The export-oriented, import-dependent thrust of the economy sinks it deeper into deficits.  To be able to increase exports, the Philippines must increase its imports of oil, machineries, basic chemicals, and processed raw materials. Even simple screws and bearings for machines have to be imported. Likewise, chips to be assembled and textile to be sewn into garments have to be imported.  

To be able to attract direct foreign investments and induce economic activity, the government has to spend on needed infrastructure.  But increased government spending will worsen the budget deficit thereby compromising its ability to contract more loans to finance its expenditures and pay off its debts. 

The government also has to deregulate and liberalize the financial sector to be able to attract foreign capital and portfolio investments.  But it will make the economy more vulnerable to sudden capital flight as what happened in 1997. 

For the economic upturn, the Arroyo government pins its hope on the mining industry, the services sector, and OFW remittances.  The services sector accounted for 47 percent of the economy’s output in 2004 and around 48 percent of the GDP during the first three quarters of 2005.  Within the services sector, the drivers of growth are telecommunications, business process outsourcing, and tourism. Business process outsourcing and other IT investments in the service sector include call centers, medical transcriptions, digital animation, and software development. But tourism and business process outsourcing are flighty and do not build a solid foundation for the economy. 

While contributing significantly to propping up the peso and pushing GNP growth, the increase in remittances is not a sign of sound economic management but rather the opposite.  The government boasted that the total global employment contracts processed for OFWs reached 981,337 from January 1 to December 31, 2005, or 39,615 higher than the 941,722 contracts processed in the same period in 2004.

But the increasing number of OFWs shows the growing desperation of Filipinos.  More and more are braving the risks of going abroad to seek gainful employment for lack of local opportunities. Furthermore, as a study of the World Bank puts it, labor migration and remittances should not be a substitute for economic progress.

Mining, on the other hand, is on a glut worldwide and heavily dependent on the ups and downs of industrial production in capitalist countries, which has slowed down in 2005.

Slow international growth

In its recent report, “Prospects for the Global Economy,” the World Bank (WB) says it does not project any improvement in GDP growth for 2006.  World GDP is estimated to have increased by 3.2 percent in 2005 down from 3.8 percent in 2004.  Growth is projected to be stable in 2006, meaning it does not see any improvement in the 3.2 percent World GDP. 

For high income countries, the WB likewise projects the same growth rate of 2.5 percent registered in 2005 down from 3.1 percent in 2004.  The three centers of capitalism, the U.S., Europe, and Japan registered slower growth rates in 2005 compared to the previous year.  The U.S. GDP growth is estimated at 3.5 percent from 4.2 percent the previous year; Europe at 1.1 percent from 1.7 percent; and Japan at 2.3 percent from 2.6 percent.  For 2006, the U.S. is projected to maintain the same level while Japan is expected to register a reduction to a 1.8 percent growth rate and Europe, slightly higher at 1.4 percent. 

The slowdown in 2005 is being attributed to high oil prices, tightening monetary policy of the U.S, resource-sector capacity constraints, and the maturation of the investment cycle following a year of very fast growth.  In simple terms, these mean that the U.S. increased its interest rates to finance its budget deficit thereby attracting foreign capital to its banks; there is an overproduction of goods and services; and as a consequence of the crisis of overproduction, investments slowed down. 

Growth in developing countries is estimated at 5.9 percent in 2005 down from 6.8 percent in 2004. The growth rate of developing countries was pushed up by China and India, which registered rates in excess of 9 and about 7 percent, respectively.  The slowdown among the oil-importing countries (excluding China and India) was sharper, from 5.6 to 4.3 percent. 

The slowdown in developing countries is being attributed to high oil prices, in combination with domestic capacity constraints, and slower import demand from high-income countries.  In simple terms, this means that high oil prices further reduced the capacity of developing countries to produce and that demand for their exports was low as production in capitalist countries also slowed down.

The conclusion of the WB that there will be no improvement in the world economy in 2006 does not bode well for a backward, agricultural country such as the Philippines, which is export-oriented and import-dependent.  With no relief in sight for the crisis in the world economy and the sorry state of the Philippine economy, there is really no basis for the growth targets of the Arroyo government.  Prospects for improvements in the economy and the lives of the Filipino people are but wishful thinking unless the government reorients the economy toward national industrialization and land reform. Bulatlat

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